How the tobacco industry can accelerate transformation
By Clive Bates
In the unlikely event that I am appointed CEO of a large tobacco firm, this is what I would do to accelerate the transformation of the business.
First, I would ask if we really do want to transform the business and, if so, why. Until the board, thousands of staff, investors and stakeholders understand our rationale, what chance is there of bringing them on the journey? This is a more vexing question than it might appear at first sight. Perhaps we would be better off as we are? After all, we make terrific margins on cigarettes; we have tremendous pricing power courtesy of the tax authorities; we are embedded in a comfortable oligopoly that knows how to make money; and, of course, it helps that the product is addictive, and the customers are loyal to our brands.
In contrast, the transformation is toward a volatile and diverse market, intense competition holding down margins, the ever-present danger of being caught flat-footed by rival innovation, fickle customers pursuing the next new thing and the potential for illicit entrants flooding the market. Why would we want that? The answer is that we don’t get to choose. Even if we could join forces with all other tobacco companies, we cannot individually or collectively hold back this transformation and restore the situation as it was before 2010. This is because consumer preferences and competition from nontobacco companies drive it. The ship has sailed. Our only viable strategy is to compete ferociously for market leadership in the new product categories. We need to deepen our explanation of the drivers of transformation and set out our transformation rationale clearly and rigorously. For inspiration, we will look to the scholars of creative destruction, diffusion of innovation and corporate strategy: a little more Harvard Business Review and a little less New England Journal of Medicine.
Second, we need to sell high-quality, compliant products that people want to buy as alternatives to cigarettes and make good money by doing it. Apologies if this is a statement of the obvious, but it is the core function of businesses undergoing a market transformation. Everything else is froth. Fortunately, the impetus for this is all too clear: competition and the threat of rivals converting our cigarette smokers to their smoke-free products and, equally, the opportunity to convert their customers to become ours. Some in public health suspect that Big Tobacco would like to hold back innovation and slow down the rate of transformation. However, Big Tobacco is an imaginary construct comprising companies that compete intensely. A company that tries to hold back innovation will not fare well at the hands of its innovative rivals. The aggregate effect of all the companies pursuing competitive advantage in new product categories will be the primary driver of transformation. Ironically, the primary drag on transformation will be legislators, regulators and tobacco control activists intervening to throttle innovation and uptake of new technologies. Yet, it would be a mistake to rely on “useful idiots” to protect the cigarette business. Their attitudes and ideas could change with as little as the stroke of a philanthropist’s pen.
Third, we should engage with the environmental, social and governance (ESG) investing community. ESG is the new language for “ethical investment.” There are really three types of ESG investing: (1) taking stakes in virtuous companies that do not trigger exclusion criteria, of which “tobacco” would always be one. This route is closed. (2) To back emerging world-changing companies, though these are difficult to spot in advance and few in number. (3) So-called “engagement investing,” where ESG investors buy into companies with a significant problematic health, social or environmental burden and pursue improvements. By reducing negative footprints, this form of investing has the potential to do more material good for society than the other two. For tobacco companies, ESG engagement would endorse a transformation strategy with external validation and accountability.
Fourth, we must master the future of nicotine and its place in society. Nicotine is a popular recreational stimulant for a reason and not just because it is “addictive.” Tobacco companies have been understandably shy about discussing nicotine and why there is a demand for it. But companies are in the consumer nicotine business—it is the reason they exist and why they have a future. As consumer nicotine products are becoming smoke-free and far less harmful, the main deterrent to nicotine use—the health risks of smoking—is becoming weaker. The decades-long controversy about tobacco is shifting its focus from severe smoking-related diseases, such as cancer and chronic obstructive pulmonary disease, to concern about nicotine use and addiction. Most people understand and accept why there is a demand for alcohol and caffeine, and many understand the demand for cannabis. But who really understands the demand function for nicotine once this is no longer conflated with smoking? People use nicotine for pleasure and stimulation, to modulate mood, stress and anxiety, and for a range of cognitive improvements. Nicotine may interact beneficially with various health conditions, including attention-deficit/hyperactivity disorder and Parkinson’s disease. As a society, we should not be recommending or endorsing nicotine use, but we should surely have a better understanding of why people use it.
Fifth, to the extent possible, we should agree with other transformation-minded businesses on the optimal regulatory and fiscal approach. We routinely state that excise and regulation should be “risk-proportionate,” but what do we mean by that in more detail? How should we approach contentious issues, such as youth uptake? We should be (and be seen to be) leading the thinking and marshalling of the evidence base for risk-proportionate regulation. This requires some careful judgements: we must avoid erecting excessive barriers to entry to smaller players, or we risk looking (and being) predatory, and our approach will be dismissed as cynical and expedient and generate opposition among potential allies. The regulatory environment may evolve over time and may contain dependencies. For example, some of the stricter measures to address cigarettes must be accompanied by readily available and well-understood pathways to smoke-free products.
Sixth, we must be more assertive scientifically. Just as the industry’s science provides high-quality insights into tobacco harm reduction and reduced-risk products, it is increasingly excluded from conventional publishing platforms and scientific fora. The exclusion is not accidental or merely a misunderstanding based on historical industry malpractice. Nor is it likely to change. It is because a significant share of the academic community rejects the strategy of harm reduction and, therefore, the science that supports it. For many, it is seen as “the nicotine maintenance survival strategy of Big Tobacco” and thus to be opposed, whatever its benefits to health and welfare. The way to address this is to fully embrace the ideas and principles of the open science* movement. The industry could produce or sponsor publicly accessible scientific resources that are category-wide, such as living reviews of biomarker or toxicology studies or informative behavioral research. We should engage credibly, respectfully and systematically to challenge poor-quality science, misleading interpretations and policy recommendations that go far beyond the science that supposedly justifies them. The lack of accountability and redress in tobacco control science has created cavalier attitudes to scientific rigour that would not be acceptable within the industry. Consistent with an open science approach, we should acquire and release all relevant market data to the independent research community and allow them to interpret it. If substitution effects are real and a transformation is proceeding, this is the best form of validation.
Seventh, we may need an organizational vehicle to advance the transformation agenda for the industry as a whole. The tobacco industry is not homogenous. Many companies, notably the state-owned monopolies, are not interested in transformation and profit mightily, at least in the short term, from the prohibitions promoted by the World Health Organization and its fellow travelers. Yet, all the tobacco multinationals generally recognize the transformation imperative and decline to be seduced by the Bootlegger and Baptist implicit bargain with tobacco control activists. This group must find its voice—not as a conventional trade association but as a cross-industry body dedicated to an idea. It would delineate the territory of common category-wide interests (e.g., greater public understanding, a common regulatory agenda, marketing standards, environmental issues, scientific engagement, etc.) from inter-company competitive interests (pricing, product launches, etc.).
Finally, something we should not do. We should resist the temptation to use regulation for short-term gain by supporting regulation that helps us and hinders our competitors. Over the longer term, our opponents will selectively adopt the restrictive and reject the permissive measures we back. What appears to help us today may harm us a couple of years from now as we develop new products or acquire new businesses. Our goal should be an enduring fiscal, regulatory and communications environment that works for smoke-free categories as a whole. That will create a rules-based context for competition between companies and an attractive alternative to illicit trade.