Bat Kenya is selling the machines installed at its Nairobi nicotine pouch factory, which has been idle for about five years as the government has refused to grant a marketing license for the new product.
The cigarette maker announced the decision on Thursday in a commentary accompanying its financial results for the six months to June 2024, in which net profit fell 24.3 percent to Sh2.14 billion due to lower sales and higher financing costs.
British American Tobacco said it had accepted an offer to sell the machines, marking the end of its licensing efforts that began in 2019.
The company marketed the pouches as a safer alternative to a tobacco product that has been linked to an increased risk of diseases such as cancer.
“As a result of the prolonged regulatory uncertainty, the commercialization of our oral nicotine pouch plant has been disrupted. To protect shareholders’ rights, the company has accepted offers to sell the oral nicotine pouch plant machinery,” British American Tobacco said in a statement.
Abandoning the bag business means that British American Tobacco (BAT) will continue to rely on the cigarette business amidst declining numbers of contract tobacco farmers, rising taxes and a growing illicit market for the product.
Trading results released on Thursday showed the 24.3 percent drop in net profit in the first half of the year came on the back of a 10.7 percent drop in net revenue to Sh11.72 billion.
The company said it also incurred significant foreign exchange losses on its exports after the shilling appreciated by 22% against the dollar during the review period. The exchange rate movement also added Sh700 million to the cost of repaying loans.
“Total revenue declined by six per cent to Sh19.6 billion, mainly due to lower export sales volumes, a decline in consumers in the domestic market, and the suspension of sales of modern oral nicotine pouches,” the company said.
The Nairobi Securities Exchange-listed company introduced the bags in 2019, then branded them as Lyft, but stopped marketing the product in 2020 after the government said it should be regulated as a tobacco product.
The company relaunched the product — renamed Velo — in 2022 as a trial. The company has been working to convince the government to recognize the science behind its new oral nicotine pouches, which it refers to as “scientifically based, low-risk alternatives” to traditional cigarettes.
However, regulatory uncertainty has led to a suspension of sales of oral nicotine pouches in the domestic market even as British American Tobacco continues to press for government licensing.
British American Tobacco had planned to commercialize its nicotine pouch factory in Nairobi’s industrial zone, opening up manufacturing for both domestic and export markets. Years of uncertainty have robbed it of the opportunity to grow and diversify its revenues, and the capital locked up in the idled factory is also a lost investment.
The cigarette maker is hoping to avoid a back-to-back decline in full-year profits, as it reported a 19.2 percent drop in net profit to Sh5.57 billion in the year to December 2023 as sales fell and consumption of illicit cigarettes rose. The drop in full-year profits was the first since 2019 when profits fell 4.9 percent to Sh3.89 billion.
The illicit cigarette market remains a concern for British American Tobacco, which, based on third-party research, estimates the market share of illicit business in the country at around 27 per cent.