The tobacco industry is undergoing some dramatic changes. As shareholders reduce stakes in the controversial sector following increasing regulatory backlash, the challenge grows for the leading operators to produce a model that can incorporate innovative new approaches.
For Oliver Tant, the CFO of Imperial Brands (previously Imperial Tobacco), stepping out of the comfort zone of being a leading partner at accountancy giant KPMG was a bold step. He says if anyone had suggested years ago that he’s be in the role he started in 2013, he says: “I’d have been surprised I was out of professional services, and surprised I’d made the decision to go into tobacco, which is a fascinating space.”
The decision to make the switch was motivated, he admits, by a failure to win his bid to become the firm’s senior partner and then after he’d decided to move into industry, his appointment as CFO of insurance giant Legal & General was blocked by the industry’s regulator- down to concerns about his experience in the space.
But despite the knockback, Tant says he was committed to becoming a major group CFO as he relished the “intellectual and practical challenge”. He says: “I’d not had to stand up in front of shareholders, I’d not had to go and negotiate with banks. I’d never appeared on stage, I’d always been a director behind the scenes.” Tant says he joined from a bastion of the establishment to an organisation “that operates in an area where the public has a perception of aspects of behaviour.”
The tobacco is a hugely controversial sector that may think should not be allowed to exist, and one that many large investors have shunned in recent years, being blacklisted by ethical funds about concerns over the harmful effects of smoking cigarettes.
The top five US tobacco companies paid a combined $246 billion to settle with 46 states, five US territories and the District of Columbia in 1998. The states had successfully argued that tobacco companies should cover the exorbitant cost of treatment for health issues related to smoking.
Tant, who limits his puffing to an occasional cigar, says Imperial Brands is in the business of converting smokers to what are considered less harmful products such as e-cigarettes, through its vaping product blu. This may not wash with many who view the entire tobacco industry- and the way it seemingly avoided responsibility for the effects of its products- in vitriolic terms.
The jury may be out on the safety of e-cigarettes- although Public Health England says they are 95% safer than cigarettes, because there are concerns- especially in the US- that they are attracting take-up amongst schoolchildren.
But Tant says the marketing of innovative products such as e-cigarettes, which are classified as the group’s New Generation Products arm are currently worth revenues of £200m to the group. That’s currently worth just 2.6% of total global sales of £7.8bn for Imperial Brands, but he says this is modelled to reach £1.5bn by 2020. “By that point it would be getting on for 20% of our business,” he reveals.
Redefining the model
These innovative changes are part of a wider overhaul of the group being driven by chief executive Alison Cooper, who has been in the top role since 2010. “Alison had clearly started a strategy that was to focus much more strongly on the consumer, after the business had been put together over a period through acquisition. If one’s entirely blunt about it, a level of integration and remoulding of that process had been relatively primitive,” he says.
“Alison had clearly concluded that the next iteration of Imperial needed to be on driving that collection of acquisitions into a more effective global business, and that was about focusing the brand portfolio. It was about ensuring we optimised our investment in the market to deliver the best overall revenue, and profit accretion opportunity for the business, that we managed our costs effectively and then we drove a much more effective use of our capital, and that has been the journey we’ve been on,” says Tant.
He says that although Cooper had won hearts and minds for her plan, the execution was at relatively early stages outside of the core brands of the business. He says the transformational skills experience he could offer were key to the process that involved turning a federation of businesses with 250 brands into a simpler global structure focused on developed markets such as US, UK, Germany, France, Spain and Australia.
“If you cut out brands you cut out SKUs [stock-keeping units], you can improve the simplicity of your manufacturing process, and you don’t have to change automated equipment, so regularly to deal with different formats of product. If you change the packaging of something, that may affect the balance of machinery when you’re producing anything up to 20,000 packs a minute,” reveals Tant.
Although he says broadly speaking the number of cigarettes consumed globally is declining 3-4% a year, the group has shunned emerging markets in favour of “developing new technologies that provided something significantly better for our consumer base”. “If its’s going to take you 20-30 years to get to emerging markets and your volumes are declining 4% a year in both markets, it’s a high-risk strategy to imagine you’re better off targeting those markets,” says Tant.
The changing business model is reaping rewards, says Tant. He points to the fact that in the last annual results, revenues grew by 2%, and underlying operating profit in the group’s core tobacco business was 6%. “By comparison with any other consumer goods category that’s pretty effective growth. We continue to generate £900m of surplus cash flow, we’ve paid down a further chunk of our debt, and we’ve announced £2bn of asset disposal opportunities,” he adds.
Role of finance
Imperial Brands’ finance team is playing a key role in driving the group’s performance, says Tant. “We have the insight around our performance to ensure that we optimise our capital allocation, to drive the best long-term performance. It is a critical part of what we’re transforming the finance function into, because it’s not just a question of counting the score anymore. As we’re actively developing on a journey, we need to become the group’s satnav,” he says.
Business partnering is seen as a critical means of ensuring finance can help drive the innovative aspects of the business. “That dynamic investment is not done in isolation, it’s done with the business. We’re not pretending we have some specialist skill, we’re obtaining knowledge, as the skills required to make the right decisions are done with commercial resources,” he adds.
Tant is also a keen advocate of ensuring finance people in the group are able to use tools effectively to drive innovation. “A lot of the opportunity to enhance insights is often not about the tool itself- it’s often the easiest thing to focus on because it doesn’t involve self-examination and performance improvement. It’s actually about the skills and behaviours of the individuals you’ve got within the function,” he says. “An awful lot of what we’re looking at is how we empower people to ensure they’re focused on the capabilities that matter, that really drive insight in the key areas that will drive long term performance,” he adds
An example of that innovative approach was the investment last year by Imperial Brands’ venturing arm into biotech firm Oxford Cannabinoid Technologies, which funds projects at Oxford University to invest in seeking pain and pain management remedies using cannabinoid substances. “As an organisation that’s capable of handling these sensitive substances, we’re increasingly under pressure to participate in various jurisdictions around the world, because they trust our skills to ensure they are appropriately delivered in markets,” says Tant.
“I have been on a journey with the whole cannabis space. When I went to the West coast of the US four years ago, I was getting asked when am I going to get involved in it. Clearly a much more sophisticated dialogue needs to happen before an organisation like ours were to embrace the substance more widely. Right now, we’re having very loose conversations. We’re not lobbying, we’re not trying to get engaged. We’re just trying to understand where we are,” he insists.