How the BAT Group is transforming its business.
Faruk Yener, general director BAT in the sub–region of Russia, Turkey, Caucasus, Central Asia and Belarus, headed this division in January 2020 - on the eve of the coronavirus pandemic. But despite Covid-19, the company, according to Mr. Yener, managed not only to avoid a recession, but also to demonstrate growth. Today, when the world is once again on the verge of geopolitical changes, BAT does not plan to change its principles – the group is building ambitious plans for its transformation, plans to increase the production of alternative products and is among the leaders of the world ESG ratings. This is what we will talk about – how the BAT group copes with current challenges and what plans it is building for the future.
Faruk, we are meeting with you when the world is on the edge of a crisis: sanctions and economic recession, full–fledged military clashes in different parts of the world and even the emergence of new viruses are just the events of recent months. In addition, despite all the new strategies announced by the tobacco industry, the number of smokers around the world is declining, and the turnover of tobacco products is falling. Do you believe that your business will survive?
– Absolutely. Our business has a great future primarily due to the fact that it is no longer exclusively a tobacco company. We have transformed into a multicategory corporation, which has a large package of goods, including nicotine products without tobacco content. This is the basis of our A Better Tomorrow strategy – to switch our consumers to products with potentially lower health risks.
By mid-2022, the number of consumers of new products exceeded 20 million. By 2030, we want 50 million people to switch to alternative products. This is all part of our strategy. And based on these figures, I can say that the BAT company has a future. During the pandemic, we continued to show results. BAT is one of the few companies around the world that managed to maintain growth during this difficult period.
Nevertheless, the governments of many countries, including Kazakhstan, are trying to equate alternative tobacco products with classic ones. What are you planning to do against this background?
– In my personal opinion, the authorities should not do this. It is necessary to take a more careful approach to the regulation of goods of similar categories, taking into account their risk profile. There are traditional cigarettes that pose a health risk. And there are tobacco heating systems, for which there are many studies confirming their potentially reduced risk. These categories require different approaches.
If we talk about the specific actions of the authorities around the world in relation to tobacco heating systems, then we can see completely different cases. In the same USA, Great Britain and almost all EU countries, an approach to regulation is used taking into account the risk profile of these products. And tobacco heating systems there are regulated differently than classic cigarettes, including from the point of view of taxation.
If we talk about the countries of our region, then, for example, in Russia, tobacco heating systems are allocated to a separate category, unlike cigarettes, and they are subject to different taxation. Japan also has some regulation for such systems.
As for Kazakhstan, I know that there are also discussions in your country about the taxation of new products. And a bill was recently passed, according to which it is planned to significantly raise the excise tax on this type of product in 2023. In my opinion, this will not allow consumers to switch to new categories of tobacco products with a potentially reduced health risk.
Moreover, now there is a situation where traditional cigarettes receive more preferences from the point of view of state regulation. For example, the warning labels on cigarette packs about the dangers of smoking are much smaller in size than on packs with tobacco heating systems products. I believe that the consumer should be motivated to switch to products with potentially reduced risk. In terms of regulation in Kazakhstan, there are many points in which existing international practice can be used.
Tobacco companies often talk about the lower risk of new products. How is it possible to prove this if new products have existed for no more than ten years, and their long-term impact has not been studied?
– We see that today there is more and more research in this direction. I emphasize that this is not only the research of our company or other tobacco companies. There are the results of research and independent expert institutes, including those commissioned by government agencies. All these studies show that tobacco heating systems contain 90-95% less toxic substances than traditional cigarettes. And we keep researching these products. We expect that over time there will be more data on how new categories of tobacco products potentially pose fewer risks than classic cigarettes.
Tobacco companies in Kazakhstan are among the largest taxpayers, if we do not talk about raw materials companies. Is the same pattern observed in the countries where you are present?
– The taxes paid by tobacco companies are very high in most countries. If we talk specifically about the share of the total tax base, then much depends on the structure of the economy of each country. If we look at the fiscal structure in Kazakhstan, there are countries where our share is even higher, and there are countries where it is much lower. If we draw analogies, Kazakhstan is similar to the Russian market in this regard.
In recent years, many global corporations have been seriously developing their own environmental programs. What actions and campaigns does BAT conduct in this direction?
– We believe that this trend is really important. Regardless of what a company produces, what services it provides, it is important to take care of the environment and cause less harm to our planet. Speaking about our products, cigarettes are a product that poses health risks. And from this point of view, we create conditions for people to reduce these risks by providing them with alternative products. If we talk about our global strategy, then we have clear goals and indicators that we strive for. They stand both before our head of the company and concern absolutely all employees of BAT.
By 2025, we must make all plastic packaging reusable, recyclable or compostable. By 2030, we plan to switch to renewable energy sources. By 2050, we want to become a carbon-neutral company across the entire supply chain of our products. And I also follow this plan as a head of the regional division of the company.
Your sub-region, which includes more than ten countries (including Kazakhstan, Turkey, Russia, Belarus, Kyrgyzstan, Uzbekistan, Tajikistan and Mongolia), is the largest both from a geographical point of view and from the point of view of the consumer market. How difficult is it to work here and how do you assess this market in terms of development prospects?
– These markets are really complex, but at the same time very dynamic. Everything is constantly changing here. On the one hand, consumers of our products from these countries may seem conservative, but they have a clear desire to see and consume innovative products. This desire is for innovation, despite the differences, that is common to all and brings consumers closer together in Kazakhstan, Russia or Turkey.
Speaking of prospects, our main goal is to switch all cigarette smokers to new categories. I have no task to increase the number of consumers of traditional tobacco products. My task is to ensure that they switch to products with potentially reduced risk. Yes, the speed will be different everywhere, but in many ways it will depend on regulation. And in my opinion, the state should welcome and support the transition of consumers to products with potentially lower risk.
What goals and objectives do you set for the Kazakhstan market?
– Our goal here is very simple: we want to invest in the development of new categories. We continue to sell our traditional products, but all the investments that we direct to your market go to the development of new product categories.
Only ten percent of total nicotine users switched to alternative products. It means that this category has a huge potential for growth. And this is where we will invest our money, in our offices and distribution, it is quite possible that in production. But in order for us to invest in this aspect and expand investments, it is important that the government approaches market regulation more carefully.