Several of the largest tobacco manufacturers have allocated significant financial resources to different harm reduction strategies either focused on organic growth or acquisitions of reduced-risk products.
Between 2017 and 2019, M&A expenditure accounted for about two-thirds of the total capital allocation in reduced-risk products. The largest contribution came from Altria Group Inc (Altria)’s minority investment in JUUL Labs, an e- vapor company, which was motivated by the company’s goal: “to prepare for a future where adult smokers overwhelmingly choose non-combustible products over cigarettes”. Another key activity, primarily realized as a high-risk investment, was British American Tobacco Plc (BAT)’s acquisition of the remainder of Reynolds American, Inc (Reynolds)’ shares. According to the company, the deal was made to create a: “stronger, global tobacco and Next Generation Products company”. Prior to the deal, Reynolds had presence in cartridges as well as offered NRT gums in the US.
Companies should focus on increasing the ratio of reduced-risk products in their R&D and capital expenditures so they can provide high-quality reduced-risk alternatives, increase distribution and support smokers to switch away from cigarettes.
Excluding the two highest value deals, most companies that committed to harm reduction have chosen to follow a strategy of organic growth. Philip Morris International Inc (PMI), Swedish Match AB (Swedish Match), and British American Tobacco Plc (BAT) invested the biggest shares of their R&D and capital expenditure budgets in reduced-risk products. During the review period, PMI spent more than USD1.0 billion building new plants, expanding capacity or converting existing cigarette factories into heated tobacco- oriented plants in Italy, Greece, Romania, Switzerland, and Russia. BAT also invested millions of pounds in increasing heated tobacco production, restructuring factories, and building innovation hubs around the world. Swedish Match has invested in property, plant and equipment related to snus and non-tobacco nicotine pouches for a total of SEK1265 million since 2017.
The growing commitment towards harm reduction is shifting companies’ resources away from high-risk products to reduced-risk alternatives. Although not a guarantee for success on its own, long-term investment in R&D, infrastructure, and M&A activity in reduced-risk product alternatives over high-risk products may help companies in the transition process. Companies should focus on increasing the ratio of reduced-risk products in their R&D and capital expenditures so they can provide high-quality reduced-risk alternatives, increase distribution and support smokers to switch away from cigarettes
Total Capital and R&D Investments in Reduced vs High-Risk by Company (%, Aggregation 2017-2019)
Source: Tobacco Transformation Index estimates derived from publicly available resources (including company financial and sustainability reports, quarterly and half-year updates, press releases, investor briefings, and company presentations); industry and financial databases (Euromonitor International’s Passport databases, Orbis, and Capital IQ); and interviews with industry experts.
Note: Capital Expenditure includes but is not limited to funds used by a company to acquire, upgrade and maintain physical assets such as properties, buildings, plants, equipment and intangible assets such as technology, software as well as developing networks including contract manufacturers. R&D Expenditure includes but is not limited to the funds used by a company associated with research and development of a company’s goods or services.