The chief executive of British American Tobacco Plc told investors Wednesday that the manufacturer has experienced limited impact from COVID-19.
“We are fortunate that our business is resilient and is supported by a geographically diversified supply chain from both a manufacturing and distribution standpoint,” Jack Bowles said.
There has been analyst speculation that BAT, in particularly Reynolds American Inc.’s 2-million-square-foot manufacturing plant in Tobaccoville, might face a production slowdown in response to the coronavirus.
That’s whether from a sanitizing standpoint from making traditional and electronic cigarettes consumed by use in the mouth, or from a sharp decline in demand as millions of Americans lose their jobs temporarily or permanently, or face reduced wages.
However, with the recent decline in gasoline prices in most of the U.S., analysts say smokers may have extra money to pay for their habit.
Bowles acknowledged that sales of both traditional and e-cigarettes are likely to be down at least through the first half of 2020.
Bowles said revenue growth in the “new generation” categories of e-cigarettes, heat-not-burn traditional cigarettes and snus “will be difficult.”
“Although supply chains in China are recovering, we have postponed certain launches and we are seeing some disruption in activation.
“Nevertheless, in 2020 we expect to make further progress towards our ambition of ($5.75 billion) in new category revenue in 2023/24,” Bowles said.
Bowles said that while any shrinking in consumer demand for traditional cigarettes has been slight, “we continue to monitor the situation closely.”
Cowen & Co. analyst Vivian Azer said cigarette manufacturing “remains uninterrupted for the time being.”
“Manufacturers are still producing at normal rates with products continuing to shuffle down to wholesalers.
“As it relates to cigarettes in particular, the retail channel should be more insulated, even in the event of a prolonged impact from COVID-19, as both the grocery and convenience and gas station channels will remain open.
“There is the potential for tobacco outlet stores that don’t sell food or provide a service to shutter temporarily, which would partially impact sales.”
The COVID-19 economic downturn is different, Azer said, because “lower income consumers and hourly wage workers are the most at risk cohort for being out of work, which would clearly trump the benefit of lower gas prices and impact per capita consumption.”
She said discount traditional cigarette manufacturers could benefit, as they typically do during a recession, from smokers “downtrading” in price and quality.
“British American Tobacco and Imperial Brands LLC have more exposure to discount and deep discount cigarettes, relative to market leader Philip Morris USA,” Azer said.
Azer cautioned that COVID-19 “represents a wild card” in the vaping industry as manufacturers large and small prepare for the Food and Drug Administration’s May 12 deadline for submitting premarket tobacco applications for their products.
Pro-vaping advocates have complained that for most vape shops, the premarket application process is too costly — estimated to be between $500,000 and several millions of dollars per application — and too cumbersome.
They predict the majority of shops will go out of business shortly after the May 12 deadline unless Congress or the FDA amends the new regulatory requirements.
“With many employees working from home, this creates a potential bottleneck on them being able to meet their deliverables,” Azer said.
“Conversely, the current COVID situation should presumably create disruption with the FDA processing these filings.
“Whether the FDA will allow for an extension remains to be seen.”