A Missed Opportunity: How Regulatory Hurdles Are Stifling BAT Kenya’s Growth

A couple of weeks ago I came across a video from MorningBrew about zyn and how it's taking over America. Dan Toomey did an amazing job with this video, it was both informative and entertaining.
Zyn, a Swedish Match brand of nicotine pouches is taking over the world. It's becoming a cultural phenomenon, according to MorningBrew 'zynthusiasts' are growing in number as smokers look for alternatives. Philip Morris International, the parent company of Swedish Match is projecting to sell 560 million cans of Zyn that retail at $4.30/KES 560(comparatively Velo from BAT sells for KES 20), they revised this number from their Feb forecasting of 520 million cans. With 74% of the nicotine pouch market, investors are bullish on PMI; their stock is up 22% YTD.

BAT Kenya has been trying to bring the zyn-goodness to Kenya with no success. Their product Velo, which started off as Lyft in 2019, hasn't received regulatory clearance for commercialization. The team at BAT Kenya saw this trend early on and invested accordingly, purchasing equipment for the production of oral nicotine pouches. This was in an attempt to diversify their business and reduce reliance on cigarettes for revenue. The nicotine pouch is marketed as a safer alternative to smoking and is a great offering for health conscious customers.

Beverly Spencer-Obatoyinbo, former MD of the company had started investing in this product before departing in 2021, she launched Lyft in 2019 which, just like zyn in America, was gaining popularity in the Kenyan market and met both EU and US quality standards. She faced regulatory hurdles, some politicians even suggesting a complete ban on the sale of nicotine pouches. Crispin Achola, the current MD, has reintroduced the product under the brand name Velo, regulatory uncertainty made them opt for importation rather than local production.

In their HY '24 results announcement, BAT Kenya revealed that they accepted an offer to sell the equipment they'd purchased for producing these pouches. According to the company, this was due to the prolonged regulatory uncertainty and in an effort to protect shareholder value. Production of this product had the potential to create immense value for BAT Kenya and the country's economy. How you might ask? For starters, BAT would create jobs for the factory workers in the production facility, families would be supported through these jobs. BAT Kenya would've made Kenya a manufacturing hub for the product and export it to other distributors in the region bring in bucks(foreign exchange) and strengthening the shilling in the process. The new product has the potential to bolster sales and allow BAT Kenya to invest in Kenya while continuing to support the thousands of families of their current employees.

The suspension on the sale of Velo products is costing BAT Kenya, with gross sales down 6% as demand for their legacy products dwindles. Fluctuations in the exchange rate are putting more pressure on the company as debt repayments start to cost more than what was anticipated. They're also in a heavily regulated industry and should be actively channeling some of the profits towards lobbying for deregulation and reduced taxation. HY earnings weren't good and investors are certainly not happy; they were quick to show their disappointment selling off their shares after the HY results were announced.

Conclusion

There's demand for this product in the market, however, the regulatory guidelines are unclear. Jobs that would've supported families and benefited the economy at large have been lost due to lack of clarity. BAT Kenya has been forced to import nicotine pouches rather than produce them locally. Winners in this arrangement are the current stakeholders, but only if the suspension on the sale of Velo is lifted. The loser on the other hand is Kenya; jobs have been lost to foreign producers of the product, foreign exchange revenue from exports has also been lost.

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Video from MorningBrew