Glo Hyper Pro product launch

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BAT recently announced the launch of Glo Hyper Pro, the latest heated tobacco device in Japan, Italy and Poland. The latest product features the following improvement:

• new EasyView™ screen, displaying performance settings and information

• new HeatBoost™ technology for even better taste satisfaction

• one charge takes approximately 90 minutes (Glo Hyper X2 takes 210 minutes and Glo Hyper Air takes 120 minutes, while Iqos Iluma takes 135 minutes)

• each session lasts for 4.5 minutes (Glo Hyper X2 lasts for 4 minutes, Ploom X lasts for 5 minutes and Iqos Iluma lasts for 6 minutes)

How do customers in Japan react to Glo Hyper Pro?

Here’s a Youtube video which reviews the product specification and user experience. The comment section includes review by other people. The video and the comments are in Japanese, but you may use the auto translate function of Youtube and your web browser to read the content in English.

While BAT’s latest product is seemingly better than the previous generation, customers in Japan are still not convinced that value proposition of Glo Hyper Pro comes anywhere close to IQOS Iluma due to the following reasons.

• Each session only lasts for 4.5 minutes (unlimited puff), while IQOS Iluma lasts for 6 minutes (14 puffs).

• Glo Hyper Pro can now deliver a “full-body” flavour starting from the first puff, but the flavour would start coming off in the second half of a session. IQOS Iluma can deliver more consistent flavour from the first puff till the last puff.

• Glo Hyper Pro produces even more dirt and residue than the previous generation, and requires cleaning after every 20 sessions (or even more frequently as suggested by some users). In comparison, IQOS Iluma requires no cleaning at all.

• Glo Hyper Pro is not capable of auto-start heating, while IQOS Iluma can do. This feature allows IQOS users to pause in the middle of a session by removing the stick from the device, and resume the session by inserting the stick again.

• The price point (JPY3,980) of the device is comparable to IQOS Iluma (JPY3,980 to JPY9,980 depending on discount) but more expensive than Ploom X (JPY1,980 before discount or JPY980 after discount).

Why does it matter to BAT’s shareholders?

As you may recall from BAT’s 2023 Second Half Pre-Close Conference Call, heated tobacco was the only loss making category among BAT’s NGP portfolio, while vapour and modern oral had become profitable already. Against this backdrop, BAT’s CEO made the following comment:

“For sure, we also want to step up our investments around IPs because this is one area that has been constraining us in the past, and that’s why I was referring to our centres of innovations in places like Shenzhen and the investments that we are making in terms of leveraging internally and external partnerships to reflect into more compelling products that we could launch in the market.”

With the above mentioned, let’s take a step back to revisit a key element that makes tobacco industry so profitable for decades. Cigarette is a highly consolidated category with a simple product that requires rather limited change over time. While heated tobacco requires continuous product innovation, it inevitably comes with significant marketing effort/expenses during each new product launch, let alone hit-or-miss risk. This creates lumpiness in profitability even for PMI which is the dominant leader in the category. This is why some investors have remained skeptical of the unit economics of NGPs despite the growth potential.

Glo Hyper Pro was the 3rd heated tobacco device that BAT launched in the past 1.5 years, after Glo Hyper X2 in July 2022 and Glo Hyper X2 Air in June 2023. Still the latest product was less compelling than IQOS Iluma which was launched in August 2021. As a shareholder of BAT, I can’t stop thinking about the marketing expenses wasted. While some investors may criticise BAT for repeated failure, I am taking a deep breath to ascertain the situation.

First, one has to realise that IQOS Iluma and Glo use very different technology to heat the tobacco stick. Here is an introduction of IQOS Iluma’s heating technology:

The innovative heating technology in these devices is the SMARTCORE INDUCTION SYSTEM^TM that heats the tobacco from within the new TEREA SMARTCORE STICK^TM. These newly designed sticks are to be used only with IQOS ILUMA, which features an auto-start function that detects when the TEREA^TM stick is inserted and automatically turns on the device. These bladeless devices offer a cleaner way to heat tobacco from the core, without burning it, to provide a more consistent experience, no tobacco residue, and no need to clean the device.

And below is how IQOS’s tobacco stick looks, which also highlights how certain product features are made possible. These product features address the pain points of heated tobacco customers, which BAT’s products can’t accomplish. Though it doesn’t look very complicated to manufacture, let’s not forget that this technology is patented, so BAT can’t copy the product design or otherwise risk legal actions from PM. If BAT wants to produce a device that doesn’t require cleaning, provides consistent flavour from first puff till the last puff and is capable of auto-start heating, then it needs to adopt a technology roadmap that is vastly different from IQOS Iluma. It is easier said than done. Let me put it this way - this is easy to go from your bedroom to toilet. You just stand up and walk. However for whatever reason if you are not allowed to stand up and not allowed to walk, then it becomes much more difficult to go from bedroom to toilet.

What’s next?

To conclude, I am not putting too much hope in Glo Hyper Pro. It won’t revive the heated tobacco business of BAT. However, I am not overly pessimistic as there’s one partner BAT may count on. It is to leverage on the technology and manufacturing capability of Smoore International. For those who are not familiar with this name, it is the major supplier (many believe to be the sole supplier) of vaping pod / device to BAT for its iconic Vuse brand. The company is based in Shenzhen and listed in Hong Kong, which BAT is its largest customer.

During its 1H 2023 result announcement, it claimed that “Smoore has successfully developed a portfolio made of a number of new heating technology solutions for its Heat-not-burn Products and expects to be able to provide customers and consumers with competitive differentiated products to meet the diversified needs of different customers.” For details, please refer to the article I wrote on Smoore International 1H 2023 result. Now let’s revisit BAT CEO’s comment during 2023 second half pre-close trading update.

“For sure, we also want to step up our investments around IPs because this is one area that has been constraining us in the past, and that’s why I was referring to our centres of innovations in places like Shenzhen and the investments that we are making in terms of leveraging internally and external partnerships to reflect into more compelling products that we could launch in the market.”

“We will continue to leverage our centres of excellence in Southampton, Trieste and Shenzhen, in order to access wider internal and external strategic partnerships, focused on developing consumer-relevant premium propositions.”

If BAT is to engage in heated tobacco product development through innovation center in Shenzhen and to access “external strategic partnership”, Smoore International is the most credible player in the area. For Smoore International to commercialise its heated tobacco technology, BAT is a key account to target as it is already its largest customer. If BAT can work out something with Smoore International, then it will be a win-win situation, just like how they did with Vuse brand (Smoore International responsible for R&D and manufacturing, while BAT takes care of everything else such as marketing, distribution, legal, FDA approval etc). Smoore’s heating technology is believed to be totally different from IQOS, and you may find from public domain search that Smoore has filed patent to use microwave as the heating technology and it has also filed patent for a heated tobacco device which may use microwave or infrared as the underlying heating technology.

Smoore International will announce FY2023 annual result in Mar 2024, and I look forward to seeing more progress from them on the heated tobacco front. Even if BAT doesn’t work with Smoore International on heated tobacco, I would not be surprised if they manage to find someone else from Shenzhen who is capable of manufacturing a product that is substantially better than its current form.