Disruptive Strategies Final Paper, 28 / 07 / 2021 How British American entered the e- market

Joseph Noujaim Executive Director - Digital Transformation Fine Hygienic Holding United Arab Emirates [email protected] https://www.linkedin.com/in/josephnoujaim/ Preamble

This is an educational paper only, not intended for any other purpose.

It is solely based on public resources, and a personal analysis of the e-Cigarette market under the lenses of the Disruptive Strategy Theories.

Neither (BAT), nor any other company mentioned in this study have been consulted for this paper.

Joseph Noujaim July 28, 2021 Definitions

BAT: British American Tobacco

Big Tobacco: is a name used to refer to the largest global companies

NGP: Next Generation Products (Reflecting the non-combustable devices)

Vype: First vaping device launched by BAT

VUSE: Second vaping device launched by BAT

GLO: Tobacco Heating Device

VELO: Oral Pouches

JTDB: Job To Be Done

Joseph Noujaim July 28, 2021 Description of the Company

British American Tobacco plc (BAT) is a “Founded in 1902, our company continues to British multinational company that manufactures go from strength to strength thanks to and sells , tobacco, and other nicotine market-leading brands, a successful strategy, products. The company, established in 1902, is talented people and our purpose to build A headquartered in London, England. As of 2019, it is Better Tomorrow™.” bat.com the largest tobacco company in the world based on net sales. British American Tobacco (BAT) has been in the e-Cigarette business since 2013, initially in the UK, BAT has operations in around 180 countries, and its then in the US, with its acquisition of R.J. cigarette brands include , , Lucky Reynolds and its parent company Reynolds Strike, Pall Mall, and Rothmans, and also include American Inc. (RAI). By 2019 its markets were New Generation Products like Vype , , and Glo. the United Kingdom (UK), Europe, Canada, and the BAT has a listing on: United States (US), with further global expansion ๏ The London Stock Exchange and is a underway or planned. constituent of the FTSE 100 Index. BAT created a new category called New Generation ๏ On the Johannesburg Stock Exchange. BAT plc Products (NGP), under which it manages all the ordinary shares non-combustible products, split into three sub- ๏ On the New York Stock Exchange in the form of categories: American Depositary Shares. ๏Vapor: VUSE ๏Tobacco Heating: Glo In this paper, we will focus on an innovation that ๏Modern Oral: VELO (Not part of the e-Cigarette disrupted the cigarettes market in the early 2000s: Market) e-Cigarettes

Joseph Noujaim July 28, 2021 Characterization of the Situation/Relevant Theories

Let’s take a at the rise of the E-Cigarettes Many efforts were exerted in this space, and many category and how BAT reacted to this innovation. patents and trials followed. Yet nothing ever really took off until 2003. Context Hon Lik, a Chinese pharmacist and inventor, who Since the 1950s, the world's major tobacco worked as a research pharmacist, is frequently companies have faced one setback after another. In credited with the invention of the modern e- 1951, tobacco was linked to disease. In the cigarette. Hon's invention was intended to be an years that followed, Western governments alternative to smoking. introduced increasingly punitive regulatory and Hon Lik registered a patent for the modern e- taxation regimes. The US banned TV advertising in cigarette design in 2003, and introduced it to the 1970. Cigarette logos gradually faded from Formula Chinese domestic market in 2004. The first 1 cars, and health warnings on packs proliferated in device to come to the market was called Ruyan. size and punch. In March 2015, the British Hon's translator explains the etymology. "Ru government followed Australia's example and means "likewise", and sometimes it even means introduced plain packaging. Tax now accounts for beyond, or better. Yan actually means smoke, about 80% of the price of cigarettes in the UK and and cigarette.” adult smoking prevalence is less than half its levels in 1974. Figure 1: Hon Lik, father of the first commercial e-Cigarette In parallel, a new innovation was in the making. In 1927, Joseph Robinson applied for a patent for an electronic vaporizer. The patent was approved in 1930, but the device was never marketed.

Figure 2: Anatomy of an e-Cigarette Joseph Noujaim July 28, 2021 Characterization of the Situation/Relevant Theories

Many versions made their way to the US, sold Recognizing the development of a potential new mostly over the Internet by small marketing firms. market that could render traditional tobacco e-Cigarettes entered the European and US markets products obsolete, Big Tobacco began to produce in 2006 and 2007. and market their own brands of e-Cigarettes and acquire existing e-Cigarette companies: With time, Vaping devices evolved, consumed less power, lasted longer, became stylish, ... the market ๏ 2012: Lorillard Inc. bought blu eCigs (The reached a point where demand for customizable largest e-cigarette company back then) e-Cigarettes grew, prompting manufacturers to ๏ 2013: British American Tobacco launched produce devices with interchangeable components Vype that the user could select. ๏ 2013: Imperial Tobacco buys the rights for e- Cigarette from Hon Lik Independent producers (Mainly start-ups) ๏ 2013: Lorillard Inc. bought SKYCIG, which was pioneered the e-cigarette business. The first rebranded as "blu" “e-Cigarettes" they produced were too basic, ๏ 2014: Altria Group bought Green Smoke complicated, and therefore not “Good Enough”. For ๏ 2014: launches VUSE a while Big Tobacco stood on the sidelines, content U.S. e-cigarette & vape market size, by product 2014: Philip Morris bought Nicocigs 2016-2028 (USD Billion) ๏ with the status quo. Soon, though, e-cigarettes ๏ 2015: bought US Logic improved and the market scaled up. In 2014, global e-cigarette sales accounted for $4-$5bn, a fraction of the ๏ 2015: Lorillard sold blu to Imperial Tobacco $722bn market that conventional cigarettes tallied in 2013, but still a significant sum. Pundits suggested that, in time, e-Cigarettes would change the way nicotine was consumed worldwide.

Joseph Noujaim Figure 3 (Top): M&A in the E-Cigarette market. Figure 4 (Down): E-Cigarette Market Size July 28, 2021 1 2003: The E-Cigarette was launched in China for the first time. It was a low-end / new-market disruption to the traditional cigarette market: ๏ Low-end, since it was simpler product, less harmful, Characterization of the Situation/Relevant Theories "Cigarette-Like", affordable, tackling the low end of the cigarette market (people who were looking to quit cigarettes, and would anyway be out of the cigarette market within few years). ๏ New Market, since it attracted young consumers (18+), PERFORMANCE which were beyond the reach of the Big Tobacco (Due to regulations) SURPLUS Big Tobacco didn't see a threat in e-Cigarettes and ignored this innovation.

2 2012: The E-Cigarette business grew rapidly, and an avalanche of start ups went on developing different parts of the e- cigarette business. Vaping attracted multiple audiences by catering for people looking to hire products for different jobs to be done. BAT and other Big Tobacco switched gears, acknowledged the disruption, and entered the market with "Good Money” as E-Cigarettes they were not in a hurry for quick returns. The Core SUSTAINING business (Cigarettes) was in good shape, bringing enough profits. Money was invested into new companies, adopting

3 emerging strategies. E-Cigarettes were still in the low-end / new market PERFORMANCE THAT disruption, but the performance gap was getting tighter.

PERFORMANCE CUSTOMERS CAN 2 LOW END UTILIZE OR ABSORB 3 Today: E-Cigarettes are on the verge of going into performance 1 surplus, and sustainability. Big Tobacco are the major PERFORMANCE players in this space, therefore the upcoming competition GAP will be on sustainability level: Who can create better products that attract customers in the mainstream markets who are willing to pay for improved performance. 2000 Joseph Noujaim TIME 2003 2012 2021 July 28, 2021 Characterization of the Situation/Relevant Theories Aligning with innovation and disruption What did BAT do. ๏In 2011, BAT invested in a small unit called "Nicoventure" to develop a nicotine delivery BAT quickly understood that they was late to the system. game, yet they knew that the party just got started. ๏In 2012, BAT acquires CN Creative Figure 5 (Down): Start Wards: The Empire Strikes Back They looked at their Core business and figured out ๏In 2013, BAT launches "Vype" (Vape) that creating and manufacturing e-cigarettes in- ๏In 2014, BAT partners with WPP (Advertising house would be costly and time-consuming. There Agency) to promote Vype Looking at the yearly report posted on BAT.com are many startups that succeed in breaking through ๏2014 to 2020, BAT acquired CHIC, Ten Motives, website, it’s noticeable how the E-Cigarettes in the nicotine / medical / tobacco business, and VIP, Twisp (E-Cigarettes start-ups) business (what BAT calls "Non-Combustibles", looking for capital. ๏In 2017, Bat acquired Reynolds American Inc "New Generation Products (NGP)”) has separate One logical option for BAT was to acquire a (RAI) results, with a separate budget, and a separate company with proven technology, inject it with in- ๏In 2017, VUSE is part of BAT (Through the RAI outlook than normal Cigarettes (or what BAT calls house select talents and"Good Money”, before acquisition) "Combustibles") going to market. BAT could therefore integrate such ๏In 2017, BAT launches Glo (Tobacco Heating) a venture by: ๏In 2019, BAT revamped its IT strategy and Today, BAT has been nearly 10 years in the 1.Using its Commercial Muscles, to push the created the "Information & Digital Technology e-Cigarette Market. It reached 13.5M consumers in e-Cigarettes through it's worldwide network. (IDT)" department, who's role is to drive digital their NGP, and aiming to reach 50M by 2030. This 2.Using its media / communication / PR power to transformation across the company. year, they are injecting 0.5B pounds in R&D for promote its e-Cigarette products. NGP only. 3.Investing money in R&D, for improving the Therefore, I believe BAT reacted appropriately and business model, and for improving the products ensured a place in the e-Cigarettes business, just in BAT is reaching the end of the Performance Gap, time. It didn't touch its core business; Instead, it and the beginning of the Performance Surplus. It BAT finally reacted to the rise of e-Cigarettes: bought a separate company, ran it as a separate should start focusing on sustaining innovation. entity, and empowered it with its commercial / marketing / PR muscles. Joseph Noujaim July 28, 2021 Characterization of the Situation/Relevant Theories Discovering the Job to be Done

When BAT partnered with WPP to promote Vype His solution is to disregard the lifestyle choice Despite this, it might not necessarily mean that this (The first generation of Vaping products by BAT), idea and the better alternative to smoking. is the "Right JTBD”, and the target audience might they did a thorough research and discovered that Instead, the line would be "simple, quality be different. We will revisit that in the e-Cigarette brands were either suggesting freedom vaping products". recommendations section. and excitement, like Blu, or offering a healthier alternative to cigarettes, like NJOY. BAT's Job To Be Done for their NGPs is therefore: "I need simple, quality vaping products" for BAT, The Job To Be Done had to be simple. ”I need simple, BAT had a point: The product is a novelty, the idea is Let's look at the below extract form an interview fresh, the consumer is still adapting to it. quality vaping with the WPP Digital Planning Director Malky Brown Consequently, it’s unclear where the “Money is”, and on Vype: most importantly, where it will be. Therefore, BAT products." played it safe, and aimed at smokers (Its existing "So, Vype? Which of those two [Freedom or customer base), offering them Vype as a new Functional: I need something to mimic the feeling Health] do we sit in?" Nicotine Delivery Device. BAT played a lot on Brand of traditional cigarettes, yet less harmful than Brown replies. "That's the question." Equity: If it’s a BAT product, it’s well studied, and cigarettes The answer, he insists, is neither. Brown most importantly compliant with regulations. Social / Emotional: I need to be part of the Vaping presents research suggesting smokers who Community might switch over to vaping are baffled. This would be a big win for BAT, since first adopters "There's this over here and people saying 'let's would be those who are looking to quit smoking. So just get one that looks like a cigarette' over their own customers might be retained in NGPs, while leaving the cigarette category. BAT would also here," he says. "Niche and unrecognised be able to attract consumers leaving other Big brands. Who do you trust, which one's good?" Tobacco. Their target audience is therefore clear. Joseph Noujaim Figure 6: VUSE Products July 28, 2021 Characterization of the Situation/Relevant Theories Discovering the Job to be Done

Purpose "Vype" = “Vape" + “Hype” Brand

Some activities were exclusively done outside the Core Business (Separate company), yet BAT had to integrate multiple functions like Finance, It's all built around consumer experience. BAT Logistics, Regulatory, Legal, IT, ... BAT had to make Integration understood that the only way to win is to meet sure the whole experience is nailed perfectly, fully the Job To Be Done perfectly. The Experience controlled by BAT. was key: ๏Brand Awareness Experience ๏Packaging ๏Purchase Experience ๏After sales service ๏How to YouTube Movie and reviews ๏… “I need simple, quality vaping products” Job To Be Done Vype had amazing consumer reviews.

Joseph Noujaim July 28, 2021 Characterization of the Situation/Relevant Theories Organizing for Innovation Profit Formula Therefore, e-Cigarettes have a completely different ๏BAT needs to inject "Good money" to build new Let's break down the "value chain" for profit formula than the core business. and sustain existing products "combustible" versus e-Cigarettes: With ๏BAT needs factories to develop the vape conventional cigarettes in the UK some 80% of the Process devices, pods, batteries, charger, packaging, ... price goes in excise and VAT (elsewhere in the From a process perspective: ๏BAT needs talented people to kick off a whole world taxes vary). Cigarettes shift rapidly and in ๏BAT is dealing with electronic products, refillable new category: Engineers, Marketers, Digital large quantities, though, so retailers will accept low pods, batteries, ... it's a completely different Experts, Sales, Logistics, … margins, and production cost is relatively low due to supply chain and operation. scale. Profit remains substantial: in 2013, BAT's ๏Digital marketing is key. e-Cigarettes do not global operating margin was 38.1%. By comparison, have the exact same strict regulations as the 10 largest carmakers worldwide averaged a 6% cigarettes. Therefore, digital marketing What BAT did is create a separate unit within the profit margin according to last year's Forbes's capabilities need to be built. company, dedicated to find "New Nicotine Delivery Global 2000 survey. ๏Digital Infrastructure: Machine Learning, A.I., systems". Years later, it bought a vaping company Customer Data Platform, E-Commerce platform, (Creators of Vype), and launched multiple With e-cigarette refills the picture is different. .... The infrastructure is crucial in this e-Cigarette e-Cigarette Brands into the market. Today, all these Product cost is higher, as is the retail margin, given business brands are consolidated under two: that sales are unproven. Yet for the time being there ๏Regulatory, legal, and maybe sales distribution VUSE (Vape), GLO (Tobacco Heating). Soon BAT is is no excise to pay, just standard VAT at 20%. BAT channels are to be shared with the core planning to consolidate everything under VUSE, a documentation suggests that, in the UK, a higher business of BAT; this is where there should be single device for Vaping, Heating, and Burning. profit margin is possible for e-cigarette refills than an integration. for cigarettes – more than 20% as opposed to less BAT decided to acquire a disruptor and run the than 10%. Resources e-Cigarette business as a separate company. Finally, from a resource perspective, it's a completely different game: Joseph Noujaim July 28, 2021 Characterization of the Situation/Relevant Theories Maintaining a Disruptive Scope

When looking at the e-Cigarette market, it's worthy By focusing on the Job To Be Done, understanding BAT may believe that the e-Cigarette industry is to note that today, it is split in two school of thought: the market dynamics, and looking at skating to going into a stagnation phase, before a new Interdependent vendors, and modular vendors. where with money will be, BAT is making sure to generation of e-Cigarette devices hit the market. maintain a disruptive path and switch to a ๏ Modular vendors that offer consumers flexibility sustaining strategy in the near future. They have invested GBP500M in R&D for NGPs, of mixing and matching different modules of some of which is going towards standardizing and e-Cigarettes, ending up customizing their own BAT is looking into the future and believes that by modularizing its NGPs. It’s surely eager to take over vaping experience. Start-ups and small 2030, it should reach a consumer base of 50M. the market. companies are leading this space. BAT's strategy to reach that goal is to consolidate different types of e-Cigarettes under a single ๏ Interdependent vendors that provide end-to-end device (Vaping, Heating, Burning) and under a finished products, like BAT (and most Big single brand (VUSE). One device is easier to sell, Tobacco): When you buy a product from BAT easier to support, easier to ship, easier to promote... (Like VUSE), it doesn't integrate with any other product in the market. Neither the power cable, BAT are thinking forward. They're thinking ahead nor the pods. It's a closed system. It's mainly a: and believe the future is in Nicotine, and in a single ๏ Functionality interdependence (Because all device (3 in 1: Vaping, Heating, Burning). This is VUSE Flavored Vape Pods parts have to be from BAT) where most e-Cigarette users will go. Therefore, ๏ Profit formula interdependence (Considering BAT drew a roadmap from now to take over the that you buy a device and buy the pods market in the near future. regularly). BAT is expecting this to be a long ride. That's why Yet, it gives the simplest solution and the best their 2030 goal of 50M consumers is not highly experience for the end user. ambitious. In 2021, BAT count 13.5M consumers VUSE Charging Cable under their belt. Joseph Noujaim

VUSE Vaping Device Vaping VUSE Figure 7: VUSE Package July 28, 2021 Characterization of the Situation/Relevant Theories Maintaining a Disruptive Scope

OPTIMIZATION 1 Optimize functionality and reliability of the Vape device. Offer an integrated end to end experience.

SIMPLIFICATION 2 Remove barriers like Battery life, BAT pod refill, and try to reach the perfect product for the JTBD.

3 PERFORMANCE SURPLUS

2

PERFORMANCE THAT 3 FLEXIBILITY PERFORMANCE

Adapt for high demand and fast PERFORMANCE Modularization CUSTOMERS CAN GAP 1 market changing conditions, UTILIZE OR ABSORB beware for disruption.

2000 Joseph Noujaim TIME 2012 2021 2030 July 28, 2021 Characterization of the Situation/Relevant Theories Managing the Strategy Development Process

BAT seem to believe that the e-Cigarette market is the business over the 9 years to come, to reach a going towards the end of the Market-creating goal of 50M consumers in 2030, i.e. more or less Phase, and the beginning of the Sustaining Phase. 5% of the total BAT consumers. This is a reasonable goal, achievable within a reasonable time scale. Most e-Cigarette vendors including BAT have still not figured out the best profit formula for this Looking at the profit formula, we understand that market segment. That's why so many brands, it's based on an FMCG model (increased profit devices in various shapes and forms, have been margin). Therefore, a key factor to win is to drive released in the market. All those competing iin this volume. That's why BAT's performance-defining space seem to be adopting emerging strategies, component in the upcoming Sustaining Phase is its looking for the winning formula. distribution business.

BAT decided to acquire a separate company, and launch a new product outside its the Core Business. They definitely went for an emerging strategy as they launched multiple brands, devices, consolidated devices, and did not hesitate to kill brands when necessary. It's clear that the company is still searching for the winning formula.

BAT Funded well its NGPs. It spent GBP1Bn so far. It attracted 13.5M customers between 2013 and 2020. In 2021, it is spending a further GPB0.5Bn. Figure 9: BAT Online Ad Looking into BAT's strategy, it seems that they are using "Good Money", as they are looking to develop Joseph Noujaim Figure 8: Various vaping devices July 28, 2021 VUSE Recommendations Cloud

The future of E-Cigarettes appears to remain They should invest in sustaining e-Cigarettes, unclear. The market is definitely evolving, yet it also especially in areas that require heavy investment. appears that no one to-date was able to put their Why: finger on the right Job To Be Done for this market ¥ This is the area where start-ups and medium- segment. size companies cannot compete in ¥ This is the area where Big Tobacco will be Different Brands are taking a different approaches: competing in the next 10 years. Blu -> Freedom NJOY -> Healthier than Smoking Looking outside the Nicotine products, BAT can BAT -> Safer Nicotine focus on the electronic sticks as an opportunity for growth. BAT is linking e-Cigarettes to Nicotine, and hinted Real-time instant identification that it is working on a device that combines 3 With the evolution of technology, e-Cigarette different nicotine delivery systems (Vaping, Heating, devices could eventually turn into a small Link to consumer profile (Auto detect Burning). computers, in the hand of millions of people. It would Age) become like an electronic wearable, that looks like a Vaping programs based on user preferences The theory suggests that BAT will soon plunge in a stick with different functionalities; among which, (Assistive Vaping) deliberate strategy, followed by a sustaining phase. Vaping. Jumping to this space will put BAT in a On-device BAT is pursuing its JTBD by delivering "simple, completely different market: The Wearables. Machine learning (A.I.) quality vaping products". What's interesting in this area is that big players like The consumer will decide if this product is worth Apple, Google, Samsung, etc... will not engage with hiring. anything that has to do with Tobacco. Therefore it's 5G Connectivity a blue ocean for BAT (and other Big Tobacco).

A recommendation for BAT would be not to focus Real-time Notifications solely on Nicotine related sustainability. VUSE infused with A Micro-Computer Joseph Noujaim (Prototype) July 28, 2021 Deliberate Strategy Recommendations

Effective Profit Strategy This open the door for endless opportunities, and sales of Flavoured Nicotine Pods, as it is the case at Formula BAT will be at the heart of it. This include the the moment. It could be in the device itself, and all integration with Blockchain, Cryptocurrency, E- the associated software services. Commerce, Voice Assistant, ...

There is much more to it than just vaping. Resource Allocation Actions Such an idea needs a completely different model Process than what BAT is currently doing. Once BAT spots where the Money will be, it should Its profit Formula would be based on many more invest “Good Money”, and start skating to where it services than Liquid Pods sales. In that case, the thinks where the money will be. performance defining component might be "Cloud Emerging Strategy Strategy should remain hybrid. Services", not Nicotine products. That’s why BAT It may be a concern that BAT focuses solely on the Deliberate strategy for the production of Pods for example, once more needs to be forward-thinking, and create Nicotine products and the 3 in 1 device, and jumps yet Emergent Strategy for the multiple small units, each dedicated to research, find, into a deliberate strategy to mass produce and development of the vaping device. develop, and roll out new solutions to market. The sustain too early. Doing that may lead BAT to miss aim is to stay on emerging strategy until BAT figures the opportunity to compete in what could be the out the potential of e-Cigarettes, consumer next race for the e-Cigarette industry. VUSE behavior, and the Resources / Processes / Profit Cloud Formula required.

Therefore, a Job To Be Done similar to: "I need a wearable device that is discrete and makes my life easier." will change the whole game. Nicotine, VUSE Vaping, Heating, ... all those will become features of APP this device, among many others.

BAT should therefore reassess where it thinks VUSE wearable devices with “Where the money will be”. It’s not necessarily in the VUSE Cloud Services Joseph Noujaim July 28, 2021 Conclusion

July 2021 on BBC:

https://www.bbc.com/news/business-57964253

Joseph Noujaim July 28, 2021 ¥ References

bat.com https://www.insider.com/history-of-vaping-who-invented-e-cigs-2019-10#the-e- wikiepdia.org cigarette-as-we-know-today-didnt-show-up-until-chinese-smoker-and-pharmacist- hon-lik-invented-it-in-2003-8 BBC.co.uk https://www.grandviewresearch.com/industry-analysis/e-cigarette-vaping-market https://www.newsweek.com/big-tobacco-fights-back-how-cigarette-kings-bought- https://en.wikipedia.org/wiki/Electronic_cigarette vaping-industry-327758 https://www.grandviewresearch.com/industry-analysis/us-e-cigarette-vape-market https://www.grandviewresearch.com/industry-analysis/us-e-cigarette-vape-market https://www.vuse.com/gb/en/subscriptions https://tobaccotactics.org/wiki/nicoventures/ Photos: https://www.newsweek.com/big-tobacco-fights-back-how-cigarette-kings-bought- vaping-industry-327758 Figure 1: Vaping Post Figure 2: Google Images https://tobaccotactics.org/wiki/e-cigarettes-british-american-tobacco/ Figure 3: University of Bath Figure 4: Grand View Research https://tobaccotactics.org/wiki/e-cigarettes-marketing/ Figure 5: Startwars.com https://www.bat.com/ecigarettes Figure 6: VUSE.com Figure 7: VUSE.com https://www.bat.com/group/sites/UK__9D9KCY.nsf/vwPagesWebLive/DO52AD6X Figure 8: Google Images Figure 9: Google Images https://www.vapingpost.com/2020/05/15/bat-unveils-business-strategy-focusing-on- alternative-products/ https://www.theguardian.com/business/2021/jun/08/vype-bat-vape-users-tobacco- non-cigarette Joseph Noujaim https://tobaccotactics.org/wiki/e-cigarettes-british-american-tobacco/ July 28, 2021