Transforming Tobacco

David Waterfield, BAT EMEA Managing Director, outlines his vision of the future of vaping to Andy Marino

Vape Business has travelled across London to interview David Waterfield, the new Managing Director of British American Tobacco (BAT) in its Europe, Middle East, and Africa (EMEA) area. It’s an important, fresh promotion for Waterfield, previously MD for the UK.

At their newly opened offices in Chiswick a sheet of A4 paper bearing the company logo is sellotaped to the plate glass door in lieu of a more permanent shingle. It is indicative of a company positively on the move and wasting no time in attempting to cement its position as leader in the burgeoning UK vape scene: its Vype, Ten Motives and Cirro brands account for 38 per cent of the market.
But the vape industry – Waterfield calls it “vapour” – is catching its breath after a heavy few months of upheaval and disruption by panicked authorities around the globe.

Following a spate of sudden and acute illnesses and several dozens of deaths in the USA apparently linked to vaping, bans on vape products have been enacted in knee-jerk fashion in many places.
In some US states vape shops were forcibly shuttered by police and product confiscated – flavoured vape liquids were being blamed for an engineered youth “epidemic” of vaping ahead of the epidemic of poisonings and deaths and were summarily banned across the continent. In India citizens (and visitors) now risk jail if they dare to vape.

Those draconian measures, and lurid assumptions concerning the effects of vaping, fly in the face of scientific research and everyday experience. “Both in the US and here you’ve got over ten years of increasing numbers of people switching into and enjoying vaping,” says David. “And we haven’t seen these sorts of incidents that we’ve heard about in the US. That’s why it has to be something specific, it has to be something new, otherwise you would have seen these things previously in the last decade – and we have not.”

Such an unpredictable and shocking situation must have pointed toward something else. Sure enough, illegal black-market drugs were soon implicated in over 90 per cent of the cases.

“The UK sets limits and strictly enforces restrictions on age and advertising.”

“The American agencies – the FDA [Food and Drug Administration] and the CDC [Centers for Disease Control and Prevention] – are still investigating and concluding,” David explains. “But what they have said so far is that there seems to be a very strong correlation to the use of particular substances: substances like THC, which is the psychoactive part of cannabis, and oils, particularly vitamin E acetate oil [the lethal thickening agent that can provoke lipid pneumonia and claimed most of the victims].”

It was only in mid-November, not long after this interview, that President Trump finally lifted the intemperate US vape ban pending further research – a sign perhaps that cooler heads are prevailing as the poisoning incidents recede in the rear-view mirror.

We can only wonder what it must be like for the MD of an international tobacco company’s vaping division to be dropped directly into such a quagmire – something like a paratrooper jumping into a warzone, probably.

“The message that we are sending out to our customers,” says David unflappably, “is that there was a particular set of circumstances in the US, and that things are very different in the UK.”

Would he say the US vaping scene is – for want of a better phrase – a bit of a Wild West compared to here? For example, the UK sets limits on the concentrations of nicotine in vape liquid, and strictly enforces restrictions on age and advertising.

“You gravitate towards things you trust. That’s the role of brands.”

“We should have a lot more confidence about vaping in the UK,” David agrees. “The regulation is better, it’s more stringent, through the TPD [the EU Tobacco Products Directive, in place since 2014], which is a good piece of regulation.”

It is typical that UK companies have not only abided by but exceeded the EU rules in their careful planning of a new market they hope will eventually make smoking and its deadly consequences a thing of the past in the British Isles – and will also help the tobacco companies transform their businesses in the long term to ensure their own survival.

“As the number-one company in vapour in the UK, we go significantly further that what is required of us,” David says. “In terms of all of our research, our development of the products, the way we manage our supply chain, from suppliers to manufacturing and through to packaging and so on, we are much more stringent than we are required to be.”

It’s an exercise in brand-building and gaining the confidence of current smokers that BAT and its competitors hope to convert to vapour over the next decade. “Brands are very important for trust and reassurance,” David explains. “One of the issues with the market as it is today is that there’s so much that you just don’t know, although you want to gravitate towards things you trust. That’s the role of brands.”

It is true that the vape market is hugely multicoloured and confusing for retailers – something that we learned at the first Vape Business conference last summer, when it very quickly became clear that there was a vast hunger for guidance and information, and much hesitation on the part of retailers born from fear of investing in the wrong – perhaps illegal – cowboy products.

Of course, it is a developing market, characterised in its early days by pioneering entrepreneurs and “freestyle” vape products that catered for customers chiefly through specialist vape shops – a first stage before the big international tobacco companies spotted vapour as the way forward for their industry.

David sees the one of the keys to unlocking the real mass market – and converting the UK’s remaining seven million smokers to vapour – as reassurance and regularity.

“It’s really about getting that reassurance out,” he says. “Vaping itself in the UK has been one of the most profound developments in the UK market over the past five or more years.

The UK authorities are surprisingly enlightened in their approach to vaping.

Part of the reassurance is a heavy investment in research and development, especially white-coat science. Philip Morris International has its Switzerland-based laboratory nerve-centre; BAT’s is more local.

“I think we are the only one in the UK which has a large R&D and science capability for vapour, in Southampton. We’ve got about 50 toxicologists there, [under David O’Reilly, Group Scientific and R&D Director] studying everything from the ingredients to the battery and device performance to the vapour itself: thousands of hours of testing against this high standard that we pursue for our products,” David says.

The UK authorities are, in addition, surprisingly enlightened in their approach to vaping, with parliament abiding by the findings of Public Health England (PHE), which has declared vaping to be “at least” 95 per cent safer than smoking, even taking into account that there has not yet been enough elapsed time for long-term studies of vape effects.

“What you don’t know is what happens over time,” he accepts. “We have invested £2 billion over the last five years in R&D and science, and a lot of work is being published on the science that we do, so other agencies, other scientists independent from us can challenge it robustly in peer review.”

The idea that anything is zero-risk – including alcohol and fast-food – is a fantasy, but even so, presumably not a reason to ban everything people enjoy.

“As recently as a week or two ago when [PHE and ASH] were talking about reassuring people on vapour, they were saying there were no circumstances where, if a smoker was willing to move to vaping, that it would be a bad thing. They were fully encouraging it,” says David.

The results have so far been dramatic, with the numbers of UK smokers dropping by a quarter in recent years – “It is now below 15 per cent, and back in 2011 it was 20 per cent,” confirms David. The fear that youngsters would start vaping instead of simply never smoking has been continually confounded, with the vast number of vapers being transitioning or former-smokers.

“The only other country in Europe to see a better incidence level of lower smoking is Sweden,” he continues And the reason for that is they have an alternative.” The Swedes for decades have used snus – tobacco pouches – which are almost harmless and have virtually wiped out smoking, especially among the young (Sweden’s smoking level is around 11 per cent). “You have to give smokers a credible, potentially reduced-risk alternative that meets their needs, and they will move.”

The age of the closed system and the pod is almost upon us.

In the UK, where versions of Swedish snus are now starting to find their way onto the market, vapour is that life-saving alternative. “Vapour is the absolute focus in the UK market, and then we are also investing quite strongly behind the new generation of oral products,” he says. “So we do have Swedish snus with tobacco, but the platform that we really see great potential in is the nicotine pouches that don’t contain tobacco – it’s just nicotine.”

David says the other key to unlocking the potentially huge and profitable UK vape market is standardisation of products and convenience of use. The age of the closed system and the pod, which will have a much wider appeal to the ordinary smoker, is almost upon us. It needs scale to succeed, and that is where the vast manufacturing and marketing efforts of companies such as BAT can help normalise vaping across the UK’s smoking population, saving a potential one million lives over the next decade.

“That’s really the name of the game: how can we find out, from our smokers, what is really going to motivate them to move out of smoking? And can we offer them the portfolio of choice, really? That’s what it’s about. And then having a range of offers suitable for each market whatever their preferences are, happens to be the way forward,” Waterfield sums up what he calls BAT’s “risk continuum”, where the idea is to move people along as journey to safer products, with choices at each stage encouraging further choices.

“As you move along it there is a number of products which, based on all the information that we have today, we are convinced that they are significantly lower-risk than continuing to smoke,” from cigarettes to vaping, from tobacco snus to “white” products.
“Yes, white oral nicotine pouches,” David explains, “and that is something where we are seeing quite spectacular growth in the more traditional oral markets in Scandinavia – but also the US. And it’s something we are looking at here in the UK as well: we have lift in the market in the UK even though it’s in a very small number of outlets at the moment.”

It’s not only a new market but a new horizon without smoke and smoking deaths. But to return to the notion that this is an important time for retailers to learn about and start to concentrate more on vapour sales: what about this idea of a tipping point where the vape market suddenly becomes the mainstream market – especially next year with the ban on menthol cigarettes?

“Vaping has been improving, and the technology is getting better, more miniaturised. The science is developing year on year. One of the big developments in the UK market this year, for example, is that growth of the closed systems, or the pod-based systems” David says, because those smokers who rejected vaping as unsatisfactory when they first tried it, are far more likely now to make a switch (now that “the sensorials of vapour are close to what smokers are looking for”).

“The first half of this year overall vapour in the UK grew by 15 per cent.”

“For me this is another big step in the vapour market in the UK, because you are offering performance now in smaller devices which are much more convenient. And the evidence that we are seeing is their adoption by smokers, and also the movement of smokers from just trialling them and using them as part of a repertoire of what we call ‘dual use’. Or actually quitting smoking – we start to see an increase driven by closed systems in vaping use this year in the UK data.”

Naturally, this growth represents a threat to the markets not only for traditional cigarettes but for drugs used in quitting tobacco, for nicotine replacement therapies and also other competitors – and could partially answer the key question that arises from the recent vaping panic in the media: why now?

Is there a special place for convenience in the new vaping economics, and should independent retailers be putting vape in the forefront of their investment and revenue plans?

“Convenience for BAT is very important,” David begins. “If you think about the history of cigarettes, it was a daily purchase and people usually bought one pack at a time in the past. The first half of this year overall vapour in the UK grew by 15 per cent, but retail and a lot of that was Convenience – about 26 per cent in the same period. Because the closed pod system is more convenient, more similar to what smokers are used to purchasing in terms of the daily or weekly rhythm.”

The original growth was through specialist shops, but the consumer profile is changing from the hobbyist to the traditional daily (ex-)smoker, and that signals towards Convenience.

“For our most popular pod model, the Vype ePen 3, there must be now around 30k distribution points.”

“Convenience retail has a pivotal role to play in the future of this category,” Davis says emphatically. The simpler you can make it, and assuming the products deliver – which they do now – then you have to offer convenience as well. And that’s another way of getting these smokers across the line.”

And are the products, especially Vype, available through wholesale?
“Yes, and we also try to make it easier for Convenience retailers. We have a B2B website where they can access that quite easily. For our most popular pod model, closed system, the Vype ePen 3 there must be now around 30k distribution points. So a lot of your readers will be participating in this growth story.”

Despite rival producers’ claims, you would say you have the largest share of the market, correct?

“We have an overall value share of the market of 38 per cent and that’s made up of a number of things: Vype is around 11 per cent. Then we have Ten Motives, which is a cigar-like, which is around 18 per cent. And then we have the Cirro brand which is around nine, says David, adding with confidence: “I have no worries about competitors in terms of the quality and performance of our products and the way in which we can build the business with our customers.”

And who would he say is BAT’s – Vype’s – nearest competitor for market share amongst retailers? “One of the challenges in the vape area is to focus, and we are very keen to focus on the pods and the closed systems,” David answers. “That’s where we see the opportunity to grow the business. Amongst that cohort you do have quite a lot of big competitors that are all working hard and investing, so Juul would be the second biggest after us, and then you’ve got Logic PRO and myblu and so on. These are all the big companies trying to achieve what we are trying to achieve, which is to transform tobacco, so it’s going to be fun.”

Again, for retailers – they should stock vape not only because it is where the market is going, but also for the margins?
“The margins on tobacco are still good,” says David, “but obviously tobacco is a very simple product – we’ve optimised it over 100-plus years. You can get very efficient at doing one thing over a century, but there is scope for improvement in the margins in vapour. And that will come. What’s more important is that we build the business and we build the scale, and then with scale there comes the opportunity to get more efficient – it helps the supply chain.”
And what would your message about vapour be, in conclusion?

“The truth is, there are very few products out there that are zero risk, in many other categories,” says David. “And you are talking about providing nicotine through vapour as a stimulant – there has always got to be a bit of a caveat that nothing is completely risk-free. But based on everything we know, today, the absolute risk versus the cigarette seems to be very clear.”