The Smokeless Shift: Why Oral Nicotine is Outpacing BAT's Heated Tobacco Struggles

The global tobacco industry is undergoing a seismic shift. As health-conscious consumers and regulators push for safer alternatives, British American Tobacco (BAT) finds itself at a crossroads. Once a leader in heated tobacco, BAT now faces declining sales, regulatory headwinds, and a growing preference for modern oral nicotine products like pouches and strips. For investors, the writing is on the wall: the future of nicotine lies not in heated devices but in discreet, less controversial alternatives.

The Decline of Heated Tobacco at BAT

BAT's heated tobacco division, centered on its Glo brand, has struggled to maintain momentum. In 2024, heated tobacco sales fell by 11.6% in volume and 7.6% in revenue, driven by the loss of Russian and Belarusian markets. Even in core regions like Europe, volume share dropped by 90 basis points in top markets, with Japan's fiercely competitive landscape and the phase-out of legacy products exacerbating the pain.

Regulatory challenges compound these issues. In APMEA, excise tax hikes in Bangladesh and Australia have squeezed margins, while the U.S. and Canadian vape markets—key for BAT's Vuse brand—suffered a mid-teens revenue decline due to illicit product disruptions. BAT attributes 70% of U.S. vape sales to illicit trade, though it hopes the Vuse Ultra launch will stabilize its position in H2 2025.

Yet the biggest threat to heated tobacco isn't just competition—it's reputation. BAT's youth-oriented marketing tactics, including Formula 1 sponsorships, social media influencer campaigns, and sleek device designs resembling tech gadgets, have drawn fire. Studies reveal heated tobacco users in Italy are younger, with non-smokers 5.8x more likely to transition to cigarettes after trying these products. The World Health Organization (WHO) warns that such products act as “gateways” to smoking and exploit youth through lifestyle marketing.

The Rise of Oral Nicotine: BAT's Silver Lining—or Someone Else's?

While heated tobacco stumbles, BAT's modern oral nicotine (MON) products, like its Velo brand, are thriving. In the U.S., Velo now commands an 11.9% market share, with triple-digit revenue growth. MON's discreet nature, lack of combustion, and FDA-approved reduced-risk claims (e.g., Camel Snus) position it as a safer alternative to cigarettes and heated tobacco.

BAT's “Quality Growth” strategy prioritizes high-margin non-combustible products, aiming for mid-single-digit NC revenue growth in 2025 (excluding U.S./Canadian vape issues). The company also seeks to deleverage to a net debt/EBITDA ratio of 2.0–2.5x by end-2026, underpinning its dividend yield of over 6.75%.

But here's the catch: BAT isn't the only player in the MON space. Swedish Match, the pioneer of nicotine pouches, and Japan Tobacco's Ploom TECH are among competitors capitalizing on the trend. BAT's late entry and reliance on a controversial heated tobacco portfolio may leave it trailing.

Regulatory and Market Risks: Heated Tobacco's Achilles' Heel

Regulators are tightening the screws on heated tobacco. The EU's 2023 flavor ban for HTPs forced BAT to pivot to its veo product—a tobacco-free stick infused with rooibos and nicotine. While veo has gained market share (e.g., 50% in Czechia), EU states like Latvia are closing loopholes, classifying such products as tobacco substitutes.

In Japan, once a growth engine for HTPs, local governments are expanding smoking bans to include heated tobacco. Meanwhile, litigation risks loom: Italy's €6 million fine against BAT for misleading glo Hyper ads signals a trend of regulatory scrutiny.

Oral nicotine, by contrast, faces fewer hurdles. While flavor bans and FDA approvals pose challenges, MON's lower health risks and dual-use potential (used alongside cigarettes or vapes) make it a more palatable compromise for regulators and consumers alike.

Investment Implications: Pivot to Oral Nicotine, Avoid BAT's Smoke

For investors, the path forward is clear:

1. Favor oral nicotine leaders: Companies like Swedish Match (SMAB.SS), with its dominant Zyn brand, or Japan Tobacco (2914.T), which combines MON with premium cigarettes, are better positioned to capitalize on shifting preferences.
2. Beware BAT's reliance on heated tobacco: BAT's stock has underperformed peers like Swedish Match by 15%+ over 12 months due to heated tobacco headwinds. Its dividend, while robust, is not immune to margin pressures.
3. Monitor regulatory trends: The EU's potential crackdown on veo and FDA decisions on reduced-risk claims will determine which companies thrive in the MON space.

BAT's struggles highlight a broader truth: the nicotine industry is bifurcating. While heated tobacco battles reputational and regulatory demons, oral products are quietly rising as the safer, socially acceptable alternative. Investors who follow the smokeless shift will find richer rewards.

Final Take: Shift your portfolio toward oral nicotine innovators and steer clear of BAT's heated tobacco legacy. The future belongs to companies that embrace safer, less controversial products—and the regulatory environment is finally catching up.