Taking the Tobacco Out of Imperial Didn’t Fix Its Problems

(Bloomberg Opinion) -- Imperial Brands Plc’s Alison Cooper is stepping down in a cloud of raspberry scented smoke.

The timing isn’t surprising. It comes exactly a week after the British-based maker of Davidoff cigarettes and the Blu electronic device, lowered expectations for sales and profits after taking a hit in the U.S. vaping market. The warning brought to a head discussions about the company’s future leadership as the board conducts its search for a successor to Chairman Mark Williamson.

Change is clearly needed. The shares of the smallest of the world’s major tobacco companies are roughly back where they were at the start of Cooper’s 9-year watch, having lost more than half of their value since a 2016 peak.

Her successor faces a tall order. The new CEO will have to figure out how to make Imperial a strong force in tobacco alternatives. It currently ranks fourth in electronic smoking devices by units sold on a four-week basis. But in the heat-not-burn segment, its Pulze product is a relative newcomer in the Japanese market, where the products have taken hold more quickly than elsewhere. It’s important to have a clear strategy in each segment since no one really knows exactly where the market’s headed.

Finding the right path forward won’t be easy, given the crisis engulfing vaping in the U.S., which has prompted efforts by President Donald Trump to ban flavored products and nicotine pads while some retailers including Walmart Inc. have stopped selling e-cigarettes.

They must find a way through this. One option would be developing a boarder suite of tobacco alternatives alongside Imperial’s Blu vaping device. Stepping up development in heat-not-burn segment would also be wise.

Rival British American Tobacco Plc has hedged its bets, with a presence in both vaping and the heat-not-burn segment. This is a model that Imperial should follow. But this would likely mean more investment.

Duncan Fox, an analyst at Bloomberg Intelligence, says Imperial can afford to spend more. First of all, it’s core business of traditional cigarettes ­ — including local brands such as Winston in the U.S. — is cash generative. Plus, its 2 billion-pound ($2.5 billion) asset disposal program and decision to abandon its policy to increase its dividend by 10% annually should give it scope to act.

The new chairman must also address corporate governance issues. Bloomberg News reported that investors and analysts had voiced concerns about Imperial’s earnings calculations and strategy.

Imperial has long been seen as a takeover target, but it is now particularly vulnerable given the share price weakness and that industry consolidation is back on the agenda, even after Altria Group Inc. and Philip Morris International Inc. called off their merger talks.

Japan Tobacco Inc. is often mooted as the likely predator, although it would have to find a way to deal with competition constraints.

If the new chairman and chief executive don’t raise their game on alternatives, then someone else might light up even more radical change for them.

To contact the editor responsible for this story: Melissa Pozsgay at mpozsgay@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Andrea Felsted is a Bloomberg Opinion columnist covering the consumer and retail industries. She previously worked at the Financial Times.

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