1. Business
March 16, 2021

Diversification among Big Tobacco is rife as players eye alternative markets

By MarketLine

With cannabis seen as a less-harmful alternative to cigarettes and a hugely lucrative market, investment amongst tobacco companies has been on the rise in recent years.

This trend has only become more prevalent as legalization efforts have accelerated, particularly in the US which is currently harboring the most attention. On a global scale, over 30 countries have taken steps toward legalizing medicinal marijuana but only a few, such as Canada and Uruguay, have given the green light on recreational use.

On March 11, 2021 British American Tobacco (BAT) stated that it will buy an almost 20% stake in Canada-based cannabis producer Organigram, for approximately GBP126m ($175.81m). The deal with Organigram will give BAT access to R&D technologies, product innovation and cannabis expertise and is the latest in the string of investments which have taken place in the last few years.

In June 2018, Imperial Brands invested in UK based Oxford Cannabinoid Technologies, a biotech company which is licensed to research, develop and license cannabinoid-based compounds and therapies.

Big Tobacco’s forays into the cannabis market have yet to pay off financially and momentum relies heavily on regulatory barriers being broken across the globe, as a result caution must be exercised.

Alternatives have provided hope for Big Tobacco firms

Big Tobacco firms have been gradually diversifying their businesses for a number of years, with the e-cigarette/vaping segment being the most prominent example.

The global e-cigarettes market continues to grow at a significant pace driven by the growing popularity of these products among the young generation who are willing to quit smoking or smoke merely for recreation.

BAT has revealed that, despite the pandemic, it has managed to increase volume share in both developed and emerging markets. By Q3 of 2020, the company had gained over two million new vape users compared to the same period of 2019.

Players report strong financials, despite cigarettes being on the decline

The percentage of the world population smoking cigarettes and other tobacco products has fallen dramatically over the past 20 years alone, from around 27% at the turn of the millennia to just 20% today, according to the World Health Organisation (WHO).

The diversification of tobacco companies therefore comes as no surprise, as companies plan for a business structure which can remain profitable, despite the decline in popularity of their primary product.

Despite the decline in smokers globally, the leading players in the market have still managed to attain strong financial performances. BAT reported revenues of GBP32.5bn ($41.6bn) for the fiscal year ended September 2020, an increase of 3.1% over FY2019. Altria also reported revenues of $26.1bn for the fiscal year ended December 2020, an increase of 4.2% over FY2019.

In addition to diversification, another strategy which the leading players have undertaken is pursuing the final frontiers of growth for the cigarette industry in low-to-middle-income countries, in regions such as South East Asia and Africa.

While this shift will help players sustain revenue growth for now, as government officials in these regions begin to impose greater tobacco taxes and follow the same steps as foreign anti-smoking initiatives around the world, demand will eventually peter off.