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April, 2008

U.S. Tobacco Cooperative

Stepping up to BAT

With much of the world tightening its belt in these tough economic times, British American Tobacco (BAT) decided to splurge a little with its purchase of Skandinavisk Tobakskompagni (ST) - a Danish company with roots that date back more than a quarter of a millennium - for a mere $4.1 bn. This purchase gives BAT the majority stake (60%) in the Scandinavian cigarette market. But perhaps more importantly, in a less immediate sense, the ST buyout is also expected to give BAT a foothold (not to mention, the knowledge for expansion) in the $2 bn snus market. This follows other BAT moves into snus, such as the preliminary launch of the du Maurier snus brand by subsidiary Imperial Tobacco Canada back in September, which has recently been expanded into other Canuck test markets. BAT has other snus test markets running in South Africa and Japan. With this changing tobacco landscape, many of the big (along with some medium and small) players are looking to snus (see accompanying story on p. 32), despite the fact that the product has yet to prove any market impact outside their great northern roots (and even that many anglo-tongued consumers have trouble with the fact that the word actually rhymes with “loose”).

The ST buyout also follows on the tail of BAT’s recent takeover bid for Turkey’s Tekel (the former state-run monopoly serving a population where 60% of adults smoke) for $1.7 bn. For those keeping track, this past year has had upwards of $42 bn in tobacco mergers. The mergers have led to less competition and rising prices in the shrinking and ever increasingly-regulated European markets.

Recent news aside, BAT’s plans for the future are built on moving their business into developing markets where more people smoke. This east- and southward strategy has contributed to (along with less competition) BAT tripling the worth of its stock over the past five years despite the dreary outlook on the company’s western front. On top of the geographic shifts, the company is continuing with its plans to achieve annual savings of £800 mn by 2012, including the shutting down of its UK plants, and going forward with plans to close a Dutch plant this year.

Time will tell if snus will achieve any kind of a foothold outside of Scandinavia. It’s a very different product that certainly provides a healthier and more socially-acceptable delivery system for nicotine, but at the same time, loses out on the social and ritualistic aspects of lighting-up and smoking that a cigarette or cigar provide. But regardless of the consumer hurdles to overcome with snus, BAT and others seemed poised and willing to make the jump.

- Evan D. Dashevsky


Tobacco International - April, 2008

SMOKE Magazine - Cigars, Pipes, and life's other desires


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