Can the tobacco industry tackle digital disruption?
Tobacco shares are often considered reliable investments, but how will the industry fare with the growing threat from e-cigarettes?
Earlier this year, The Telegraph named British American Tobacco (BAT) as one of ten shares “you should be able to hold forever”. In the article, Bruce Stout, Senior Investment Manager at Murray International Trust, explained that even though sales of tobacco products are generally in decline, BAT in particular was still “able to raise prices because of the strong names in its stable” such as Dunhill and Lucky Strike.
Longevity lost?Stout may have explained why tobacco shares are known for their remarkable long-term performance, but will that always be the case? The industry landscape is starting to change, with an increasing number of smokers switching from traditional products to something either smokeless or less harmful to health in the form of an e-liquid or e-cigarette.
At present, most of the companies selling e-cigarettes are relatively new entrants into the smokers’ market. Taking the attitude of ‘if you can’t beat ’em, join ’em’, a number of long-established tobacco firms are starting to expand into this area and offer similar products. But simply joining this burgeoning market may not be enough for these firms to maintain the level of profits to which they and their shareholders have become accustomed.
“The disruptive element of e-cigarettes is that they were not developed by the tobacco companies, and they lost control of the narrative a little bit,” explains Shane MacGuill, Senior Analyst – Tobacco at Euromonitor International, a London-based market intelligence firm. “Their initial reaction to e-cigarettes was dismissive; they were regarded as something of a fad, that there was no way they could satisfy smokers like regular tobacco can, and so on. But due to the amount of smokers taking up these products in the last couple of years, I think the attitude has changed dramatically.”
Reacting to change“In terms of revenue for e-cigarettes within the tobacco industry right now, you’re talking minimal – around 1%,” says MacGuill. “So the industry is looking into it, not because it’s taking a hit, but due to the current popularity and the potential trajectory.”
The tobacco industry’s solution is to buy up the smaller e-cigarette manufacturers, says MacGuill, in an effort to gain “control of the product, the distribution channels and the ecosystems. They want consumers only buying their products, and that’s difficult with the range of new ones coming out of China”.
Get agileMatthew Hopgood, London-based Vice President at Sapient Global Markets, which provides services and solutions to the capital and commodity market, emphasises that a digital transformation has to go beyond technology if it is to truly succeed. He explains: “You also have to change the attitude and the culture so that the organisation has agile thinking and adaptability at the core of what they believe.”
In an evolving world where new advancements can send shockwaves through any business, even those as organic as tobacco, things can change very quickly. Since there’s no way to halt disruptive technologies, perhaps it’s time, as Hopgood suggests, to instead inspire an acceptance of change throughout organisations. Encouragement to consider and take new opportunities can allow staff to forge and lead new markets, rather than get left behind. In a time when new technology can go from exceptional to everyday quicker than ever, their survival could well depend on it.
The original version of this article was published in the December 2015 print edition of the S&IR.