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TOBACCO BUSINESS
SEPTEMBER/OCTOBER 2013
The following remarks were taken from the
company’smid-year report.
How has the company performed over
the first half of the year?
Very well. Despite the fact that we are
facing a very difficult economic environment,
forex headwinds, and some industry decline
in some markets around the world, we have
delivered our high single-digit EPS growth
as per our strategic metric. The GDBs are
growing. Our market share is very robust;
pricing is also very solid. So it was a very
good first half of the year.
Industry volumes seem to be coming
under pressure. How do you see this
developing over the year?
2013 has been a very tough year, as I said
before, because of the current economic
climate that we are facing. Industry is
declining around 2.5 percent to 3 percent.
Our volume—underlying volume for the first
half—if you exclude one-off trade inventory
movements in Brazil and the GCC and leap
year is 2 percent. We are having a better
performance than the industry because we
are growingmarket share.
Brands&markets
How are you performing in your T40
markets?
The performance in top 40 markets has
been very good. We are growing market
share—a strong market share growth. And
more importantly, we are growing market
sharewhere it matters. If we look at our share
in our premium segment, it's growing 0.7
percentage points. And I mentioned, I think,
that some months ago in the same interview
with you guys, [I talked] about some markets
thatwewere facingsomeheadwinds in, such
as Indonesia and South Korea, and I’m very
glad to say thatwe aredoingverywell inboth
markets [now]. You look at South Korea—
we have eight months of consecutive share
growth, and in Indonesia we have stabilized
market share; it’s starting to grow again on
the back of [the] outstanding performance of
Dunhill Kretek.
And how are your GDBs performing, and
will they continue to grow faster than the
rest of your portfolio?
Well, the GDBs, the underlying
performance of the GDBs in the first half,
is 3.5 percent. In a market that is declining
[by] 2.5 percent to 3 percent, it’s a very solid
performance. It’s not all on the volumes; it’s
also on the share sides. Out of the four GDBs,
three out of four are growing market share
strongly: Dunhill, Lucky and Pall Mall. And
the share on Kent is stable. It is a very solid
performance. I see the GDBs outperforming
our portfolio in the coming years on the back
of our innovation pipeline.
Illicit trade seems to be accelerating.
What’s behind this?
Well,everytimethatyouseeadeterioration
of the economic situation; every time that
you see unemployment going up [and]
disposable income coming down, there is an
opportunity for illicit trade to settle. Some of
the markets have seen substantial growth of
illicit trade.
But on the flipside, we also see markets in
theworld inwhich illicit trade iscomingdown,
which is good news; places like Canada, like
Pakistan or likeMexico. Overall our reading is
that illicit trade is going up 1 percentage point
on a global base, which is a very relevant
number, but iswithin the historical figure.
Doyousee this as a threat to the industry,
or as an opportunity for it?
I see this as an opportunity for BAT, no
doubt about that. There is consumer interest
on the e-cigarette segment. But it’s a very
small category. If you look atWesternEurope,
for example, that’s thebiggestmarket outside
the United States. The size of e-cigarettes
is 0.5 percent to 0.8 percent of the overall
tobacco segment. So it’s very small, but it
is something that, as I said, consumers are
demonstrating interest in. So we want to
play there. And we are playing there—we
launched in [the] UK our e-cigarette brand
Vype. We have big hopes for the product.
It’s a very good product. If you look at our
competition in themarket, I think thatwehave
a superior product. And this is part of our
long-term strategy to manage this category.
Two years ago, we created Nicoventures.
Last year we bought CN Creative. So that’s a
category thatwewant toplay in, andwe think
that we have all the tools that we need towin
there.
But let’s put it into perspective: it’s a very
small segment. I don’t think there’s going
to be a huge source of profitability for the
organization in the coming years. But that’s
something for the future, andwewant toplay
there.
Regulation& Excise
What impact is plain packaging having
in Australia? And do you see this kind of
regulation spreading?
Well,theonlycountrythathasimplemented
plainpackagingregulationhasbeenAustralia.
Weknowthat [the]UKandNewZealandhave
decided to postpone implementation until
having the hearing at the WTO. And I know,
as well, that Ireland is drafting regulation to
submit to the Parliament next year. But so
far, the only country that has introduced plain
packaging regulation is Australia. Let’s look at
Australia after seven, eight months that it has
been introduced. The impact so far has been
none. The industry has beendeclining [at] the
same rate that it usually declined [at] before.
The only thing that I’m seeing there might be
some down-trading. But that’s something
that we saw in Australia before, more as a
result of the competitive pricing inAustralia in
the ultra-low segment, than anything else. So
the impact in Australia, so far, frommy point
of view is none.
Howare you feeling about the full year?
We have delivered a very good first half of
2013. I think that we are in a good space. Our
brands are growing, our market share is very
strong, as I said, not onlyoverallmarket share,
but premiumshare; that’s quite important for
our business. And I think that we’re in a good
place to deliver a high EPS growth according
to our strategicmetrics.
TB
BAT Sees Potential—
Albeit Small—in E-cigs
Excerpts from British American Tobacco CEO
Nicandro Durante’s performance report
