Imperial Brands must invest in new, safer heating products to compete with tobacco giants

Tracey Boles
Smoking May Become A Habit Only For The Wealthy In New York
Analysts say Imperial Tobacco is under pressure to invest in a tobacco heating device (Source: Getty)

Imperial Tobacco's failure to invest in safe new products could hit future profits, City analysts have said.

The tobacco giant's reluctance to develop reduced risk materials could impact on long term growth after rival firms have poured billions into developing safer cigarette technology.

British American Tobacco (BAT), Philip Morris International (PMI) and Japan Tobacco International (JTI) all have safer heat-not-burn brands, with BAT investing over £1bn in the last five years in the development and launch of next generation products.

Read more: An e-cigarette expert has warned development in the field is stalling

Imperial are under pressure to embrace new heat-not-burn smoking technology that is said to significantly reduce damaging toxicant emissions.

These claims rest on the premise most toxicants and carcinogens are formed by the actual burning of tobacco. New products reduce this by heating the tobacco rather than actually burning it.

BAT's Vype brand is now established in the UK. It has also developed a nicotine inhaler called Voke that can be licensed as a medical product in Britain, but it is not yet on the market.

Last month, PMI launched a product in the UK called IQOS, already launched in Italy, Japan and Switzerland after a £1.5bn research programme. This product also heats tobacco rather than burning it.

Now, leading City analysts have begun to question Imperial's stance.

Christian de Roualle, equity analyst in global tobacco at Redburn said:

We are also concerned about Imperial management’s reluctance to consider investing in heat-not-burn products. The successful launch of IQOS by PMI increasingly suggests the category has genuine international growth potential. Thus, the decision not to invest today could weigh on Imperial’s mid- to long-term growth.

Adam Spielman, head of European consumer staples equity research at Citi said:

There is a considerable chance that by 2018, Imperial will be facing important new challenges that won’t be addressed by the current program.

Read more: BAT is using vaping robots to run tests on e-cigarettes

Jonathan Leinster, equity research analyst at Berenberg said:

Imperial Brands has stated that it will not invest in "heat-not-burn" or "heated tobacco" technology but will concentrate its efforts on the vaping segment.

Given the success of PMI’s IQOS product in the Japanese market, and its widely expected success in other markets, many investors appear to view this as a mistake, or at the very least a risk, that could lead to a further loss of market share as "heat-not-burn" grows in western Europe and the USA.

The growth of "heat-not-burn" in the western European and US markets is clearly a potential negative for Imperial.

Celine Pannuti, equity analyst at J.P.Morgan added:

Longer-term, our view remains unchanged and we continue to believe Imperial will struggle to defend profits once heat-not-burn gains traction.

A spokesperson for Imperial Brands said the company continues to monitor heated tobacco, but is progressing with its Blue e-vapour brand through its non-tobacco subsidiary Fontem Ventures.

Blu is a powerful brand, and we're investing to build this brand equity further still. We're also focusing investment on technology and believe that the launch of our third generation product Blu Max in the coming months will further improve the consumer experience.

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