BAT's New Category Surge: Driving Accelerated Growth and Margin Expansion in a Challenging Market

The global tobacco industry is undergoing a seismic shift as consumers move away from traditional combustible products toward modern alternatives. British American Tobacco (BAT) has positioned itself at the forefront of this transformation, leveraging innovative products like Velo Plus and Vuse Ultra to drive growth and profitability. Despite regulatory headwinds and illicit market disruptions, BAT's strategic focus on New Categories is yielding tangible results—and investors should take note.

The Rise of New Categories: A Growth Engine Ignited

BAT's recent performance underscores the power of its New Category strategy. In the U.S., the launch of Velo Plus has been a game-changer, delivering triple-digit revenue growth in H1 2025. Modern Oral products like Velo now command an 11.9% share of the U.S. market, up 550 basis points year-on-year, fueled by strong trial and retention rates. Meanwhile, in key markets such as Scandinavia and Poland, Velo's dominance in the AME region (Africa, Middle East, and Eastern Europe) continues to bolster its global leadership.

The glo Hilo rollout, though nascent, has already shown promise. Early trials in Serbia saw doubled trial-to-conversion rates, hinting at its potential to accelerate H2 revenue. While Japan's competitive landscape poses challenges, strategic reallocation of resources to high-margin markets like Poland and Spain is stabilizing glo's performance.

U.S. Market Resilience: Combustibles Stabilized, New Categories Lead

In the U.S., BAT is navigating a combustibles market contracting at a 9% annual rate with discipline. Brands like Natural American Spirit and Lucky Strike have stabilized BAT's total volume and value share, even excluding the volatile deep-discount segment. Crucially, New Categories are now the growth driver:

• H1 2025: Low-single-digit New Category revenue growth, hampered by illicit Vapour products in the U.S. and Canada, which caused a 15% legal industry volume decline.
• Full-Year 2025 Outlook: Excluding U.S./Canada Vapour headwinds, growth could hit double digits, with the U.S. market returning to revenue and profit growth by year-end.

The phased rollout of Vuse Ultra in H2 aims to reverse the Vapour segment's decline, leveraging premium innovation to reclaim share from illicit competitors.

Margin Improvement: Quality Growth in Action

BAT's Quality Growth mantra is paying dividends. By prioritizing high-margin segments and streamlining costs, New Category contribution margins have improved significantly. Adjusted profit from operations (APFO) is projected to grow 1.5–2.5% in FY2025, despite FX headwinds. Key levers include:
- Cost discipline: Allocating resources to markets with the highest returns (e.g., AME's premium Modern Oral segments).
- Deleveraging: A target of 2.0–2.5x net debt/EBITDA by end-2026, supported by strong operating cash flow (>90% conversion).

Navigating Regulatory Challenges

BAT is not immune to regulatory risks. Bangladesh's excise tax hikes and illicit trade in the U.S./Canada have pressured margins. Japan's competitive glo market and Australia's regulatory hurdles also loom large. However, the company's proactive measures—such as phasing out legacy products and focusing on profitable geographies—suggest it can mitigate these risks.

Why Investors Should Act Now

BAT's H2 pipeline is packed with catalysts:
1. Velo Plus: Continued U.S. momentum and expansion into new markets.
2. Vuse Ultra: A premium counter to illicit Vapour, set for a full-scale rollout.
3. glo Hilo: Scaling into key markets post-Serbia trials.

With a £1.1bn share buyback and progressive dividend policy, BAT is returning capital to shareholders while deleveraging. Its 2026 targets—3–5% revenue growth and 4–6% APFO growth—are now within reach, supported by its New Category dominance.

Final Analysis: A Strategic Buy at This Inflection Point

BAT is no longer a traditional tobacco stock—it's a next-generation consumer goods company. The data speaks volumes: triple-digit revenue growth in core products, margin expansion via cost discipline, and a robust capital return plan. While risks persist, the company's agility in navigating regulatory and market challenges positions it to outperform peers.

For investors seeking exposure to the tobacco sector's transformation, BAT offers a compelling risk/reward profile. With H2 set to deliver on its growth promises, now is the time to act.

This article is for informational purposes only. Investors should conduct their own research or consult a financial advisor before making decisions.