Golden nugget

| January 1, 2017

With the introduction of Pebble, BAT steps up its commitment to next-generation products.

By Stefanie Rossel

BAT"s Vype store in Milan

BAT”s Vype store in Milan

Milan’s hip Navigli area provided a fitting backdrop for the opening of British American Tobacco’s (BAT) first Vype-branded retail outlet. Inaugurated on Dec. 1, the flagship store features 150 square meters of brightly illuminated space coolly styled in black and white with street art elements. A wall of wood panels displays the company’s latest product, Pebble, which comes in a variety of vibrant colors.

BAT calls the most recent addition to its Vype family a “game changer,” not only because of its minimalist, unusual design but also because of its user-friendliness. To get the device going, the user simply attaches a leak-free e-liquid cartridge. The vaping process is initiated with the push of a button; when not in use, the device switches off automatically.

With typical usage, a battery charge lasts all day. Developed in collaboration with the U.S. design company Creata, Pebble is accompanied by a range of six flavors, including “Golden Tobacco,” “Smooth Vanilla” and “Wild Berries.” Each of them is available in four different nicotine levels, starting with zero.

The company says it has composed its e-liquids with a high vegetable glycerin content for a richer, smoother, satisfying vapor. The Pebble starter kit retails at £17 ($22.74); a set of refills containing two cartridges costs £5.99. According to BAT, one refill package allows for up to 700 vapes. While the e-liquids are produced in Europe, BAT has chosen a Swedish company based in China to provide high-quality hardware for the vaping device.

“We chose Milan for our first flagship Vype store because it is the world capital of trends, fashion and design—so it sets the bar high,” said Kingsley Wheaton, BAT’s managing director for next-generation products (NGPs). “If you want to test yourself against competition there, you need to tell a better story and have a better product.”

In addition to driving awareness about the fledgling vape segment, the Milan store will support brand-building and marketing efforts for the Vype family, which was launched in Florence, Italy, in 2015 and is now present in Bologna and other Italian cities, where the products are being sold through retailers. Vype is also available online.

Italy is a good place to launch new vapor products because, after a period of waning interest due to low-quality offerings, Italian consumers have found their way back to e-cigarettes as the marketplace is increasingly regulated and cleaned up, according to Andrea Conzonato, president and CEO of BAT Italy. “Italian consumers want high-quality vape products; dual use of combustible and e-cigarettes is very common,” he said.

BAT's Pebble

Pebble is a ‘game changer,’ according to BAT

Gathering retail experience

BAT’s Milan store opening coincided with a similar event in the U.K., where Philip Morris International (PMI) inaugurated its first iQOS-branded store in London while launching its tobacco-heating product (THP) nationwide.

In late 2015, BAT acquired the Chic Group, Poland’s market leader in the vapor segment, which gave the company not only a 65 percent market share but also more than 800 retail stores. In April 2016, BAT took over Ten Motives, which came with six retail stores in and around Manchester, U.K.

BAT’s and PMI’s moves into the retail sector illustrate the vast difference between the manufacture and marketing of conventional cigarettes on the one side and those of alternative nicotine-delivery products on the other.

Unlike traditional smokes, reduced-risk products require continuous research, innovation and spending. Most of the new products also need explanation. Often, consumers must get thoroughly acquainted with them in order to convert.

Therefore, closeness to the consumer is key. “Next-generation products are a consumer technology business, with the consumer as the anchor,” said Wheaton. “It is very exciting and also changing BAT from the inside out. Creating NGPs creates a positive tension—how many times in history does a new consumer goods category come along?”

To provide a clearer distinction for consumers, BAT has divided its NGPs into four categories. Apart from vapor products such as the Vype Pebble, the company offers THPs such as Glo; hybrids such as iFuse; and licensed medicinal products, a category that includes the company’s nicotine inhaler Voke. “We want to be the world’s leading NGP business by 2020,” Wheaton stated. “As consumers are different and have different needs, we think the best way to achieve this goal is to offer a large range of reduced-risk products.” Over the past five years, the company has invested $1 billion across all NGP categories.

BAT describes itself as a multicategory company. Thus far, it has made the greatest headway in the vapor segment, with Vype being well-established. Wheaton estimates that the global NGP market will be worth £15 billion in the next five years. “At the moment, the global vaping market has a value of £6 billion,” he said. “We see vaping as the bigger market in the future. While the profitability of tobacco-heating products may be higher than that of vaping products, THPs will be a much smaller market, we believe, though they might become big in certain markets, such as Japan.”

THPs, he added, were for “proximate consumers,” who look for an experience close to that of combustible cigarettes. “Vapers, in contrast, want a whole new world. The secret is to offer a comprehensive portfolio that caters to all needs.”

Wheaton does not expect to see a world without combustible cigarettes in the next 20 or 30 years. “But consumers should have the choice,” he said.

Kingsley Wheaton

A Japanese phenomenon?

When it comes to THPs, BAT is lagging behind its rival Philip Morris International, whose iQOS is currently available in 10 markets, among them Switzerland, Italy and Germany. Reportedly more than 1 million cigarette smokers have switched to iQOS since its initial pilot launch in 2014. On Dec. 6, PMI filed an application with the U.S. Food and Drug Administration seeking modified-risk tobacco product status for iQOS.

Growth rates of iQOS have been strongest in Japan, though, where it leads the THP market with a share of more than 5 percent. The device was rolled out nationwide in Apri 2016. BAT entered the Japanese market last month with its Glo, which it introduced in the city of Sendai. Glo, which comes with Kent-branded “Neostiks” consumables, will at first retail exclusively at convenience stores and tobacco stores. In December, BAT opened a Glo-branded flagship store in Sendai. Like the recent Vype shop, it shall be the first in a series. “We have taken time with Glo to get it right,” Wheaton explained. “We may not be the first to launch a THP in Japan, but we have the right product in the right place. Our top priority for Glo in Japan is to test and learn.” The company has plans to go national as soon as possible; a rollout beyond Japan is planned for 2017.

Japan is a unique market for THPs, as its consumers are extremely interested in the latest gadgets and technologies. The Japanese are also highly socially considerate and concerned about the impact of their behaviors on others, Wheaton said.

Besides, while Japan treats vapor-producing products that use tobacco leaves as pipe tobacco, it heavily regulates nicotine liquids, reducing competition from alternatives. Therefore, Wheaton believes that Japan offers most of the opportunity for THPs, representing perhaps as much as 40 to 50 percent of overall potential demand. “Heat-not-burn may become big in certain markets, but vapor offers more opportunity in Europe and the U.S.,” he said.

Innovation is key

Outside the U.S., BAT is already the world’s largest vapor business, according to the company. Its vapor products are currently present in 10 markets, among them the U.K., where they have a market share of 35 percent; Germany (8 percent); and France (5 percent). BAT aims to be in 30 to 40 markets by 2020.

The proposed acquisition of Reynolds American Inc. would make BAT an NGP market leader in the U.S. as well.

In Europe, meanwhile, Chic has reported double-digit growth since its acquisition by BAT. Chic could eventually be used as a hub to enter other European markets, with Chic’s production center in western Poland providing exports of its own successful Polish brands under the BAT umbrella, in addition to the Vype range.

The latter will soon get yet another line extension: The company announced that it would release a new product, Vype Raptor, in the second half of 2017. According to BAT, Vype Raptor will use a new technology to atomize and vaporize e-liquids.

Apart from that, the company continues to work on its recently launched products. In late 2015, BAT introduced iFuse, a hybrid vaping device, which was originally launched in Bucharest and then extended to broader Romania. The product has high trial rates and could gain a market share of 0.3 to 0.4 percent, said Wheaton. “We are currently substantially improving the performance of the product and will launch the second generation of iFuse in about a year.”

 

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Category: Also in TR, Editorial Archives, Vapor

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