British American Tobacco (NYSE:BTI) is shedding 2,300 jobs, or around 4% of its global workforce, as it plans to consolidate its business and put more energy and money into cigarette alternatives, such as heated tobacco devices, electronic cigarettes, and nicotine pouches.

New CEO Jack Bowles said in a statement, "My goal is to oversee a step change in New Category growth and significantly simplify our current ways of working and business processes, while delivering long-term sustainable returns for our shareholders."

The timing really couldn't be worse. 

Man breaking cigarette in half

Image source: Getty Images.

An e-cig crackdown

Although cigarettes are in decline, the announcement comes just as the e-cig market in the U.S. is under a renewed, sustained, and coordinated attack on the purported health risks associated with the devices. Hundreds of cases of illness and even death are supposedly linked to e-cigs, though the Food and Drug Administration has cautioned there is no proof yet they are the culprit. President Trump also just announced all flavored e-cigs would be yanked from the market.

U.S. regulators have never been very enamored of e-cigs. Even when other countries tout the relative safety of the devices over traditional cigarettes, U.S. agencies see them more as the lesser of two evils and have erected a costly labyrinth manufacturers need to go through to simply get their products on the market, let alone designed as reduced risk.

While there was a temporary thaw in the relationship between the FDA and the industry, it was short-lived as the regulatory rallying cry became one of highlighting a teen "epidemic" of e-cig usage and cracking down hard on leader Juul Labs. Ignoring that many teens were also switching from harmful cigarettes to e-cigs, the agency instead focuses on the millions of teens who use the devices.

And now there's been a spike in alleged illnesses cause by e-cigs, which follows directly from the FDA publicly calling for any health-related symptoms experienced after using e-cigs to be reported. It's not surprising that the reports suddenly skyrocketed from just a handful to hundreds.

Cigarette alternatives are on fire

The U.S. is British American Tobacco's largest market, representing 41% of its total 12.1 billion pound in 2019 first-half revenue (about $15 billion at current exchange rates), and over half its operating profits, or 2.2 billion pounds out of the nearly 4.4 billion pound total.

The U.S. has also been its biggest growth market, with sales rising 10% over last year while profits soared 20%. Concentrating the savings from the job cuts into the innovative part of its portfolio, while focusing the rest of the company's attention on that segment, could be ill-timed if the weight of the U.S.'s regulatory system falls hard on e-cigs, as it seems it will.

British American Tobacco is seeing tremendous growth in this innovative portion of its portfolio. While its traditional cigarette brands such as Kent, Lucky Strike, Newport, and Camel saw revenue go up 7% in the first half, that's the result of pricing actions the tobacco giant took; cigarette volumes were actually down almost 4% in the first half. Conversely, the new innovative product segment saw double-digit volume increases.

Heated tobacco volumes rose 17% in the first six months of 2019, vapor products were up 32%, and nicotine pouches soared 179%. Overall revenue for the segment jumped 16%, but pouch revenue nearly quadrupled. It's starting from a smaller base, but it indicates the growing popularity of the segment, and both Swedish Match and Altria are also making significant investments in this niche.

A wrench in the system

British American job cuts could hamper its ability to grow, though. Some 20% of those getting fired will be senior managers, arguably those who know the industry best. While the cuts could eliminate redundancy, the business could also suffer as well. 

British American Tobacco bought Reynolds American about three years ago in a $50 billion deal that sought to target the U.S. market and the fast-growing e-cig industry. Both of those goals are now threatened, and the job cuts could make the task even more difficult.