British American Tobacco p.l.c. (BTI): 5 FORCES Analysis [Nov-2025 Updated]

As a seasoned financial analyst who spent a decade leading teams at a firm like BlackRock, I can tell you that British American Tobacco p.l.c. (BTI) is not just managing decline; they are aggressively funding a pivot right now. The late 2025 picture is one of tightrope walking: the core combustible business is still inelastic enough to support their 1.5-2.5% adjusted profit from operations growth target, even as global cigarette volumes drop by about 2%. The real action is in the New Categories, which now account for 18.2% of Group revenue, with Modern Oral products like Velo skyrocketing over 40% in growth. But this transition is messy-intense rivalry and illicit Vapour trade are putting pressure on Vuse, which still holds a 40% value share in tracked markets. You need to see how these five forces are shaping their next move below.

British American Tobacco p.l.c. (BTI) - Porter's Five Forces: Bargaining power of suppliers

The bargaining power of suppliers for British American Tobacco p.l.c. is a mixed equation, heavily influenced by the dual nature of its sourcing needs: traditional tobacco leaf versus components for New Categories.

Large-scale global operations mitigate power for commodity leaf suppliers. British American Tobacco p.l.c. directly contracts with approximately 91,000 farmers for most of its tobacco leaf. An estimated additional 157,000 farmers are contracted through third-party suppliers. This direct and extensive relationship structure helps British American Tobacco p.l.c. manage the supply base for its core commodity input.

Increased leaf prices in 2024 due to adverse weather show some cost pressure. For the year ended December 31, 2024, inflation on the cost base was 6.5%, amounting to approximately £387 million, which was mainly attributed to higher leaf prices and manufacturing costs. British American Tobacco p.l.c. delivered savings of £402 million in 2024, which largely offset this specific inflation impact. The company has committed to delivering cost savings of over £1.2 billion in the three years to 2025.

British American Tobacco p.l.c.'s focus on ethical sourcing and audits increases compliance costs for suppliers. By the end of 2024, 91% of in-scope suppliers (product material and higher-risk indirect suppliers) had undergone at least one independent labour audit, against an aim for all to be audited within a three-year cycle by the end of 2025. In 2024 alone, 321 independent labour audits were conducted, comprising 156 first-time audits and 165 re-audits. Since 2022, a total of 540 in-scope suppliers across 59 countries have received at least one labour audit.

Shifting to New Categories diversifies the supply chain away from tobacco leaf to electronics and batteries. This diversification lessens reliance on the traditional agricultural supply chain. New Category revenue reached £3,432 million in 2024. For the first half of 2025, New Categories revenue was reported at £1,651 million, representing an increase of 2.4% at constant foreign exchange rates. The smokeless portfolio's share of Group revenue grew from 17.5% in FY24 to 18.2% in H1 2025.

Here's a quick look at the scale and compliance metrics related to the supplier base:

The New Category segment, particularly Modern Oral, shows significant growth, with Modern Oral revenue growth reaching 223% in the US region in FY24. The New Categories contribution margin increased by 2.8 ppts to 10.6% at constant FX in H1 2025.

The power of suppliers for non-leaf components, such as electronics and batteries for New Category devices, is managed through a risk-based approach to social due diligence, with an aim for all in-scope suppliers to have undergone an audit within a three-year cycle by the end of 2025.

British American Tobacco p.l.c. (BTI) - Porter's Five Forces: Bargaining power of customers

The bargaining power of customers for British American Tobacco p.l.c. (BTI) is a complex dynamic, balancing the inelasticity of demand for its core combustible products against increasing price sensitivity in the New Categories driven by illicit competition.

High excise taxes make final product price inelastic, allowing British American Tobacco p.l.c. (BTI) to maintain pricing power on combustibles. This is evident in the 2024 performance, where the Group achieved a 5.3% organic price/mix increase, which helped stabilize revenue despite a 9.0% drop in combustibles volume that year. This ability to pass on costs, even tax-driven ones, suggests customers accept price hikes on traditional products, though this is being tested in specific markets.

Global tobacco industry volume is expected to be down c. 2% in FY 2025, increasing customer-driven volume pressure. This overall market contraction means that volume erosion is a persistent factor that customers leverage, even if they cannot dictate unit pricing on established brands. For context on the volume pressures:

Customers have low switching costs between major New Category brands like Vuse, iQOS (PMI), and Juul. This competitive landscape in reduced-risk products means consumers can easily shift loyalty based on product experience, flavor availability, or price point, directly challenging British American Tobacco p.l.c. (BTI)'s Vuse brand. For instance, in 2024, Vuse saw its US closed-system e-cigarette share drop 2.0 percentage points to 50.2%. The competitive intensity is high, with the top 10 e-cigarette brands capturing 85.6% of dollar sales in the US between March 23, 2025, and May 18, 2025.

Illicit product markets in Vapour (e.g., US, Canada) increase price sensitivity for legal British American Tobacco p.l.c. (BTI) products. This grey market directly undercuts the value proposition of legal, regulated products, forcing a price-conscious response from consumers who might otherwise pay a premium for compliance and quality. The impact is significant:

• Vapour revenue declined 13.0% in H1 2025 due to illicit products in the U.S. and Canada.
• Illicit disposable vape sales in untracked US channels are estimated as high as $6 billion in annual turnover.
• In the U.S., legal industry volume was down by a mid-teens percentage year-to-date (H1 2025).

British American Tobacco p.l.c. (BTI) is countering this by deploying innovations like Vuse Ultra, a premium non-disposable device, expecting consumers to shift to these options now that disposable bans are in place in some regions.

British American Tobacco p.l.c. (BTI) - Porter's Five Forces: Competitive rivalry

The competitive rivalry within the global tobacco sector remains exceptionally high, characteristic of a consolidated oligopoly. British American Tobacco p.l.c. competes directly with established giants, making market share defense and growth a constant, intense battle. This rivalry is evident in the structural market positions of the key players.

In the broader global tobacco market, excluding China and the United States, Philip Morris International holds approximately 28.7% market share. British American Tobacco p.l.c.'s closest competitor share is cited around 21%, while Japan Tobacco Inc. controls about 13-14% of that international segment.

Competition is aggressive, particularly within the high-growth New Categories, where market share shifts rapidly based on innovation deployment. British American Tobacco p.l.c.'s Vuse vapour product holds a significant position, with the company citing approximately 40% market share in top Vapour markets. However, more granular data from May 2025 shows Vuse's value share in tracked US retail at 34.9%.

The heated tobacco segment presents a clear competitive challenge. British American Tobacco p.l.c.'s glo product faces the dominant platform of Philip Morris International's iQOS, which captured 76% of the global heat-not-burn market share as of Q2 2025. In late 2024/early 2025 context, glo held a volume share of 16.80% in top heated tobacco markets.

The intensity of this rivalry is reflected in British American Tobacco p.l.c.'s financial guidance, which suggests tight market conditions. The company targets adjusted profit from operations growth of 1.5-2.5% at constant rates for the full year 2025. This target is weighted to the second half, contingent on the deployment of New Category innovations in key markets from the middle of the year.

Here is a snapshot of the competitive landscape metrics:

The competitive pressure is also seen in the New Categories segment performance for the first half of 2025:

• New Categories revenue: £1,651 million
• New Categories revenue growth (constant FX): 2.4%
• New Categories contribution margin: 10.6% at constant FX
• Smokeless products share of Group revenue: 18.2%

British American Tobacco p.l.c. (BTI) - Porter's Five Forces: Threat of substitutes

When you look at British American Tobacco p.l.c. (BTI), the most immediate and potent substitute threat isn't coming from a competitor's new product; it's coming from the company's own strategic pivot. You see, the primary substitute for their traditional cigarette business is British American Tobacco p.l.c. (BTI)'s own New Category portfolio, which includes Vuse, glo, and Velo. This internal cannibalization is the clearest sign of the market shift you need to watch.

The numbers from the first half of 2025 confirm this transition is real and accelerating. Smokeless products reached 18.2% of Group revenue in H1 2025, which is an increase of 70 bps (basis points) compared to the full year 2024 figure. This means the revenue base for these alternatives is growing, even if the overall mix still heavily favors combustibles. Management is definitely banking on this segment, guiding for New Category revenue to grow at a mid-single-digit rate for the full fiscal year 2025.

To give you a clearer picture of what's driving that New Category performance in H1 2025, here is how the key segments stacked up:

The contrast in profitability here is stark, and it's why the transition is so critical for long-term value. For instance, the contribution margin for New Categories in H1 2025 was 10.6% at constant FX, a solid increase of 2.8 ppts. Still, compare that to the established combustibles business, which reported a contribution margin of 57.4% in H1 2025. That margin gap definitely shows you the financial challenge of substituting high-margin legacy revenue with lower-margin, albeit growing, alternatives.

The consumer shift isn't just about product preference; it's being forced by external pressures. Health-conscious trends and social stigma are the macro drivers pushing consumers toward non-nicotine and cessation products, which British American Tobacco p.l.c. (BTI) must address with its portfolio. You can see the consumer adoption in the numbers:

• Added 1.4 million smokeless consumers in H1 2025.
• Total smokeless consumers reached 30.5 million as of June 30, 2025.
• Modern Oral revenue growth was driven by Velo Plus, which saw over 380% growth in Modern Oral revenue in the U.S..
• Vapour revenue declined by 13.0%, largely due to illicit products in the U.S. and Canada.
• The company expects New Category revenue growth to accelerate in the second half of 2025 driven by innovation roll-outs.

So, while the threat of substitutes is high because British American Tobacco p.l.c. (BTI) is actively creating them to preempt external disruption, the pace of substitution is uneven across their own product lines. The Modern Oral segment is clearly leading the charge, but the Vapour segment is struggling against illegal competition, which is a risk you need to factor into your near-term model.

British American Tobacco p.l.c. (BTI) - Porter's Five Forces: Threat of new entrants

For the traditional combustibles segment, the barrier to entry remains exceptionally high, primarily due to the sheer scale of investment required just to operate. Consider the capital outlay: British American Tobacco has guided for a gross capital expenditure in 2025 of approximately £650 million. This level of spending is necessary to maintain and upgrade state-of-the-art manufacturing facilities globally and support the massive logistical requirements of the business.

The distribution infrastructure itself acts as a formidable moat. British American Tobacco leverages well-developed distribution channels globally, which are critical enablers for rolling out innovations. A significant portion of their sales relies on this established network. Here's a quick look at the scale involved in their operational footprint:

Moving beyond capital, the regulatory environment for new traditional tobacco entrants is effectively a lock-out mechanism, particularly in the United States. The Premarket Tobacco Product Application (PMTA) and Substantial Equivalence (SE) pathways are the only authorized channels to bring new tobacco products to market legally in the U.S. The U.S. Food and Drug Administration (FDA) recently updated required submission forms, making compliance with these new standards mandatory starting July 6, 2025; submissions using outdated forms after this date will be rejected. This opaque and expensive process has historically squeezed out independent companies that could not afford the multi-million dollar cost of preparation.

The threat profile shifts considerably when looking at the New Categories, specifically Vapour. While the combustibles barrier is high, the Vapour market is more susceptible to smaller, agile entrants, including those operating illicitly. The global vape market is valued at $33.1 billion USD in 2025, representing a large, attractive, but fragmented space. This fragmentation is exacerbated by regulatory patchwork, such as state-level policies in the U.S. The impact of this is visible in British American Tobacco's own performance:

• Vapour revenue declined by 13.0% in the first half of 2025.
• This decline was attributed to the continued impact of illicit products in the U.S. and Canada.
• Rising compliance costs could spur mergers among manufacturers, favoring players with scale.

Still, for the core combustible business, established brand loyalty provides a significant defense against new competition. British American Tobacco's Global Drive Brands-which include Dunhill, Kent, Lucky Strike, Pall Mall, and Rothmans-account for over 40% of the cigarettes they sell globally. This strong brand presence ensures high consumer loyalty, making it very difficult for a new player to gain meaningful initial market share against these entrenched names.