Strategic Report Governance Report Financial Statements Other Information BAT Annual Report and Form 20-F 2020 41

Strategic management Short-Term Deliverables to Fuel A Better TomorrowTM Drive Value From Combustibles

Our Combustible Products We are focused on growing our strategic brands of , , Lucky Strike, , Rothmans, (US), (US) and (US) which now account for 66% of our combustible volume. Our combustibles business is founded on understanding and meeting the preferences of adult smokers in all parts of the world.

Highlights Lucky Strike to the US market, ensuring a Cigarette volume share grew 40 bps truly global footprint for the brand. This was in 2020, driven by Bangladesh, Mexico, – Strategic cigarette brands deliver against an industry that was estimated to Vietnam, Russia and Turkey which were value share growth of 40 bps. be up 1.5% driven by reduced consumer partly offset by lower volume share in – Group value share growth of switching to vapour, higher supply chain Indonesia and Saudi Arabia. In 2019, this inventories (due to the impact of COVID-19 was an increase of 20 bps due to growth 20 bps. and the timing of price increases) and an in Japan, Pakistan, Bangladesh, Mexico, – Strong pricing, with combustible extra selling day, and stronger consumption Ukraine and Russia. price/mix of 7.3%. trends resulting from the increase in fiscal stimulus and lower gas prices. Group cigarette value share increased 20 Proportion of combustibles bps in 2020 (2019: up 20 bps), driven by However, due to COVID-19, production or other revenue by region in 2020 the US, Mexico, Colombia, Turkey, Russia, supply chain restrictions affected sales in (£m) Bangladesh and Japan which offset a several markets, including Canada and Mexico. reduction in Indonesia and Saudi Arabia. In South Africa, a total sales ban of tobacco products came into effect from March 2020, In 2020, Group cigarette volume declined with sales recommencing in August 2020 4.6% to 638 billion sticks (2019: 668 billion), following the easing of lockdown restrictions. outperforming the total cigarette market While not a significant part of the Group, travel which was estimated to be down between restrictions due to COVID-19 have impacted our 5.0-5.5% (2019: 3.5-4.0%). Global Travel Retail (GTR) business, negatively In 2020, cigarette volume grew in Brazil impacting Group cigarette and THP volume (where enhanced border security and by an estimated 1.0%. Furthermore, volume restricted population mobility due to declined in Indonesia (due to the impact COVID-19 led to an increase in duty paid of tax increases and minimum retail price volume), in Turkey (driven by Kent and compliance) and in Pakistan where illicit trade the local portfolio), and in Bangladesh grew significantly following excise-led price (driven by the continued strength of the increases in prior years. 2020 2019 £m £m local portfolio). Group cigarette volume declined 4.7% in Developed markets have been generally 2019 to 668 billion sticks as growth in Japan, US 9,926 9,078 relatively resilient in 2020 with little the Middle East, South Africa, Romania and AmSSA 3,535 3,992 evidence of accelerated downtrading Poland was than offset by Russia despite the pressures of COVID-19. (partly due to the one-off stock reduction), ENA 5,356 5,544 Egypt (largely due to the change in local In the US, Group cigarette volume was up taxes impacting Pall Mall), Venezuela (due to APME 3,935 4,387 0.5% to 73 billion (2019: 73 billion), due to the the ongoing macro-economic challenges) Total 22,752 23,001 performance of the strategic portfolio. In the and the impact of market decline in the US, final quarter of the year, we reintroduced Indonesia, Pakistan and Ukraine. 42 BAT Annual Report and Form 20-F 2020

Strategic Management Short-Term Deliverables to Fuel A Better TomorrowTM Drive Value From Combustibles

The performance was underpinned by the The Group’s US domestic strategic strategic cigarette brands, with volume combustible portfolio performed well: Change in cigarette volume share in key share 30 bps higher in 2020 (2019: up 70 bps – Newport volume share increased 40 bps markets (bps) driven by migration in Brazil and Colombia, (2019: up 40 bps), while volume grew 2.3% or 30 bps excluding migrations): (2019: down 3.9%), with growth in both +40 bps – Dunhill’s overall volume share was the menthol and non-menthol variants; down 20 bps (2019: stable) as growth – Natural American Spirit performed well in Romania and Netherlands was more with volume share up 10 bps (2019: up 10 2020 +40bps than offset by declines in Saudi Arabia, bps). Volume was up 6.0% against 2019 2019 +20bps Indonesia, Brazil, South Africa and (2019: 0.5% increase); and Malaysia. Volume was 17% lower (2019: Definition: Annual change in cigarette volume share – being – Camel’s volume share declined 10 bps in the number of bought by consumers of the Group’s down 5.5%), largely due to the impact the US (2019: down 10 bps) with volume brands in key markets as a proportion of the total cigarettes of the tax increases and minimum bought by consumers in those markets (see page 274). up 1.2% (2019: down 6.0%). retail price compliance in Indonesia, the impact of COVID-19 on both South Africa Volume of other tobacco products (OTP) (where there was a temporary sales declined 1.7% to 20 billion sticks equivalent ban in the year) and our GTR business, (2019: 7.1% decline), being 3% of the Group Change in cigarette value share in key and the ongoing challenging operating portfolio (2019: 3%). markets (bps) environment in Malaysia; In 2020, revenue from combustibles – Kent’s volume share grew 10 bps (2019: was down 1.1% at £22,752 million +20 bps up 10 bps) as growth in Brazil, Saudi (2019: £23,001 million, growth of 4.2%). Arabia, Turkey and Russia more than offset lower volume share in Romania Higher pricing across the Group in 2020, notably in the US, Russia, Germany, 2020 +20bps and Japan. Volume was up 2.0% (2019: 2019 +20bps down 1.3%) as growth in Brazil, across Canada, Australia, Mexico and Pakistan, the Middle East (including Saudi Arabia), was more than offset by the impact of Definition: Annual change in cigarette value share – being the Russia and Turkey more than offset lower lower Group volume, partly related to the value of cigarettes bought by consumers of the Group’s brands impact of COVID-19 and a translational in key markets as a proportion of the total value of cigarettes volume in Japan; bought by consumers in those markets (see page 274). foreign exchange headwind of 3.7%. – Lucky Strike’s volume share grew COVID-19 was estimated to be a headwind 10 bps (2019: stable), as growth in on Group revenue of approximately 2.5%, AmSSA (particularly Brazil, Colombia largely due to the restrictions in travel and Argentina) and in Japan more than (impacting GTR) and due to the restrictions offset lower volume share in Indonesia, imposed in South Africa during the year. Spain and France. Volume declined 2.0% as the impact of the tax increases The growth in revenue in 2019 was largely and minimum retail price compliance in due to pricing, notably in the US (including Indonesia, and lower volume in France a reduction in discounting), Canada, and Spain, more than offset higher Kenya, Mexico, Nigeria and Saudi Arabia, volume in Brazil, Japan and Argentina. and an improved geographic mix as the 45 Lucky Strike was re-introduced in the performance in high value markets such US in the final quarter of 2020; as Japan, South Africa, Romania and Number of cigarette factories – Rothmans’ volume share was 20 bps Australia combined with reduced volumes in 43 countries higher (2019: up 50 bps) as growth in in lower value markets such as Pakistan and Brazil, Colombia, New Zealand, Malaysia, Egypt. This more than offset unfavourable Russia and Ukraine was partly offset by portfolio mix due to the relative growth of Pakistan and Turkey. Volume was 6.1% lower value products, such as Rothmans higher (2019: up 2.5%) as growth in Brazil, and Pall Mall, and lower total volume. Pakistan and Bulgaria more than offset After adjusting for the short-term impact lower volume in Ukraine and Turkey; and of excise on bought-in goods (impacting – Pall Mall’s volume share was stable 2019 and 2018) and the translational foreign (2019: up 10 bps) as growth in Pakistan, exchange headwind (2019: tailwind of 0.6%), Australia, Mexico, South Africa, Chile adjusted revenue from combustibles at and Canada was offset by lower volume constant rates of exchange was up 2.8% share in New Zealand, Saudi Arabia, the to £23,594 million. In 2019, this was an US and Argentina. Volume was down increase of 4.6%. 6.0% (2019: down 6.7%) largely driven by Pakistan, Saudi Arabia and South Africa. Strategic Report Governance Report Financial Statements Other Information BAT Annual Report and Form 20-F 2020 43

Short-Term Deliverables to Fuel A Better TomorrowTM Simplify the Business

Highlights In 2019, we announced ambitious plans The savings from Quantum are being used to fundamentally re-evaluate how we are to fund investment in New Categories, – Quantum enabled organised and a redesign of management leveraging new capabilities. We are £660 million gross savings layers to eliminate duplication and attracting new talent from a diverse range through organisational change entrenched accountability. We called this of industries globally, in areas such as: Project Quantum – designed to create new and productivity initiatives. – IP; capabilities and release valuable funds for – On track to deliver at least further investment in our growth ambition, – insights and analytics; £1 billion annualised savings ensuring the Group is stronger, faster and – product innovation; by end 2022. more agile. – design and technology; and – Revenue Growth Management In 2020, we realised the benefits of the – digital media. first phase of Quantum. Alongside greater and Marketing Effectiveness These skills are supporting our work into initiatives ready to be deployed. organisational speed and agility, Quantum drove significant cost savings, realising foresights beyond nicotine, 21st century – In-house ‘Ventures’ business £660 million of gross savings through brand building, direct-to-consumer created and operational. organisational change and productivity marketing and e-commerce, and advanced initiatives. However, further work on digital and data analytics. core processes and ways of working In addition, in 2020 the increased agility simplification is ongoing. brought about through Quantum and The second phase of Quantum will build on our diverse geographic footprint enabled this success with the organisation ready for us to quickly and effectively adapt and project roll-outs from the beginning of 2021, navigate the challenges caused by the covering areas such as: global pandemic. – further operational efficiency; At the end of 2019 we established our corporate venturing unit, Btomorrow – route-to-market focus; and Ventures (BTV) and made excellent – supply chain productivity. progress in 2020. During the course of the year, BTV made minority investments The key objective in 2020 was to finalise in eight small, innovative technology and the operational design of the second consumer businesses, providing us with an phase, running pilots in the second half of exciting capability ecosystem for the future. the year in a few strategically important geographies with the aim to use the learnings to fine-tune the design and methodology to support a successful wider roll-out programme in 2021 and beyond. We are well on track to deliver the target of £1 billion total annualised cost savings from Quantum by 2022, in addition to the benefits from our: – Revenue Growth Management; and – Marketing Effectiveness initiatives.