TAAT Global Alternatives (CSE:TAAT / OTCQX:TOBAF / FRA:2TP) is a very interesting proposition – an alternative cigarette maker that gives smokers a better experience than smoking a tobacco-based cigarette. It wants to provide existing smokers with a means to get away from the addictive qualities of nicotine.
TAAT is looking to compete against the other solutions smokers have used to help them give up, often not successfully, be it nicotine patches or vaping or heated tobacco products. None of these have been as effective as hoped, and in the case of vaping products, continue to run into regulatory and health obstacles.
TAAT manufactures what it calls Beyond Tobacco, namely a hemp-based cigarette that uses a different molecule from tobacco and can be used as an alternative by smokers. The product tastes and smells like tobacco however. Ultimately, it has the potential to assist smokers with giving up nicotine.
A huge potential global market
The market for TAAT Global Alternative is enormous, with an estimated 1.3 bn people currently addicted to nicotine worldwide. TAAT is setting out to provide a product that tastes as good as, or even better than, a tobacco-based cigarette. Part of its potential appeal comes from the fact that it replicates the ritual of smoking.
The underlying chemical is CBD and can replicate some of the uplifting mood properties that nicotine provides. It can therefore work to dissipate the addictive properties of nicotine.
TAAT appointed Michael Saxon as its new CEO in June 2022. Saxon has sat on the TAAT advisory board since 2020 and has over 25 years of experience within the consumer products business, growing footprints for products in both the US and overseas.
Saxon has successfully influenced government policy and led business units with full P&L responsibility from USD $100 million to USD $3 billion while operating in different regulatory systems. His career reflects a demonstrated history of setting record income and market share results in a wide range of market conditions and succeeding in various go-to-market models, including wholesale, distributor, and DSD.
He has plenty of experience of creating new products and brands and has been the catalyst for successful large-scale transformation initiatives to drive organic growth and executing M&A transactions to enter new markets. In particular, he has served in senior roles within major tobacco firms like Philip Morris and Altria.
Distribution strategy is key
TAAT Global Alternatives is attacking a very different supply chain in its first market, which it has identified as the US, but has also expanded into other markets including the UK, Ireland, Middle East and Australia.
Within the US it has been busily signing up distributor relationships, starting in Ohio, but proceeding to other strategically important states like Virginia and Pennsylvania. It has signed deals with the likes of the Par Mar stores network and has also reported significant repeat orders from stockists, evidence of the demand from the end consumer. At the start of 2022 it reported that re-orders comprised 48% of its sales volume.
It also acquired HLND Holdings, which is the parent of a convenience and tobacco wholesaler in Ohio. HLND owns a network of more than 5000 convenience stores through direct and indirect relationships. This includes a network of regional sub-distributors. TAAT has already said that the deal reduces its price to sales ratio down from 60x to 1.5-2.0x. HLND can also be used to road test new TAAT products ahead of wider distribution.
Cheaper than normal tobacco
It should also be noted that hemp cigarettes of this nature are also able to sell at a much lower price point than conventional tobacco. Governments continue to add duty to tobacco making cigarettes extremely expensive (e.g. in the UK it is currently 16.5% plus £4.47 on a pack of 20, while smoking tobacco is £3.13 for a 25g packet).
In any market in which TAAT launches its product, the aim is to undercut existing cigarette prices. For vape users, it offers a more satisfying alternative without the nicotine.
Product innovation continues at TAAT: the company announced in May 2022 that it was entering the heat-not-burn (HNB) market, with its own device already developed. This is designed to use heatable TAAT sticks. The company is confident that this will further expand its market share.
TAAT Global Alternatives as an investment
TAAT also represents something that looks and feels like a junior tobacco company that is accessible via public markets. It has the advantage of not being a tobacco stock, so will satisfy many fund managers’ ethical screens. We like the fact that this is a company that is setting out to help smokers to give up smoking and improve their health over the long term.
We are big fans of the Beyond Tobacco vision. We think it provides smokers addicted to tobacco with a healthier alternative. We are not alone in this – Horizons Ventures, the Hong Kong-based venture firm led by Debbie Chang, and which also makes investments on behalf of Li Ka-shing, the Hong Kong tycoon, has already backed TAAT to the tune of more than CAD 16m in two private placements. Horizon Ventures likes to back innovative, disruptive technologies, and has supported companies like Facebook, Spotify and Zoom in the past.
Let’s have a think here about the size and the potential profits that exist in this market, if your product is innovative. Using a historical example, Juul launched its alternative product in 2015, added some flavours and within two years captured 75% of the e-cigarette market, and by 2018 was taking a chunk out of the combustible cigarette market. Altria bought 35% of Juul three years after Juul launched, at a valuation of $40bn.
Altria also recently acquired Poda Holdings for USD 100m, which readers of The Armchair Trader will be familiar with. Poda was acquired because of its proprietary HNB capsule technology. Big Tobacco obviously values innovation. With the US FDA now also planning a possible ban on menthol tobacco cigarettes, which would leave TAAT as the only provider of menthol cigarette products on the market, the opportunity set for this company is obvious.