BAT Kenya is selling the machinery installed at its oral nicotine pouches factory in Nairobi which has been dormant for nearly five years as the government withholds a license for commercialisation of the new product.
The cigarette-maker announced the decision on Thursday in a commentary accompanying the financial results for the six months ended June 2024, in which net profit dropped by 24.3 percent to Sh2.14 billion on lower sales and higher finance costs.
BAT said it has accepted an offer to sell the machinery, in what signals an end to its push for a licence, an effort that started in 2019.
The firm had marketed the pouches as a safer alternative to its tobacco product that has been linked to increased risk of contracting diseases such as cancer.
“As a result of prolonged regulatory uncertainty, commercialisation of our oral nicotine pouch factory was impeded. To protect shareholder value, the company accepted offers for sale of the oral nicotine pouch factory machinery,” BAT said in a statement.
Giving up on the pouches business means BAT will continue to rely on the cigarette business amid falling numbers of contracted tobacco farmers, higher taxation and rising illicit market for the product.
Trading results released Thursday showed the 24.3 percent decline in half-year net earnings came on the back of a 10.7 percent drop in net revenue to Sh11.72 billion.
BAT said it also suffered significant foreign exchange losses from its exports after the shilling gained 22 percent against the dollar in the review period. The exchange rate movement also added Sh700 million to its cost of repaying loans.
“Gross revenue declined six percent to Sh19.6 billion, mainly driven by lower export sales volumes, consumers’ downtrading in the domestic market and suspension of modern oral nicotine pouch sales,” said the company.
The Nairobi Securities Exchange-listed firm had in 2019 introduced the pouches, then branded Lyft, but stopped marketing the product in 2020 after the government said it should be regulated as a tobacco product.
The company reintroduced the commodity –rebranded to Velo— in 2022 on a trial basis. It has been engaging the government to recognise the science behind modern oral nicotine pouches which it refers to as “scientifically substantiated, reduced risk alternatives” to tobacco cigarettes.
However, the regulatory uncertainty resulted in suspension of the oral nicotine pouch sales in the domestic market even as BAT continued to push for a license from the government.
BAT had intended to commercialise the nicotine pouch factory in Nairobi’s Industrial Area to unlock manufacturing for both domestic and export markets. This means the years of uncertainty have denied it a chance to grow and diversify its revenue, with capital tied up in the idle factory also counting as lost investment.
The cigarette-maker will be hoping to avoid a back-to-back decline in full year profit, given that it reported a 19.2 percent drop in net profit to Sh5.57 billion in the year ended December 2023 as sales reduced and consumption of illicit cigarettes rose. The drop in full year profit was the first since 2019 when earnings dipped by 4.9 percent to Sh3.89 billion.
Illicit cigarettes market continues to be a concern for BAT, which based on third party research, puts the market share of the illegal business in the country at 27 percent.
