British American Tobacco (BAT) is cutting nearly a fifth of its global workforce, or about 9,000 jobs, as part of a major cost-cutting drive, according to BBC and additional sources. The tobacco giant. Which makes brands like Lucky Strike and Dunhill, is shedding 5,500 roles and outsourcing 3,500 more, but BAT did not specify the locations of the job cuts but noted the U.S. is not affected.

Cost-Cutting and AI Focus

BAT had previously announced plans to become “more digital and AI-focused” as part of its strategy for the year; the company is shifting its focus from traditional cigarettes to smoking alternatives such as its Vuse vapes and Velo nicotine pouches. However, sales and profit margins have been sluggish in recent years.

Traditional cigarette sales are shrinking as consumers increasingly switch to vapes and nicotine pouches — the company currently employs about 47,000 people globally, as it said the cost cuts are expected to save about £600 million annually by 2028.

Market Challenges

Sales in the U.S.—BAT’s biggest market,have been affected by the cost of living, as smokers switch to cheaper brands; the company also faces rising duties and stricter regulations in some markets. American regulators have taken a firm stance on approving licenses for new products, including vapes, which has delayed product launches.

BAT said this regulatory environment has fueled an influx of illegal Chinese products, which has impacted its sales and market share; Dan Coatsworth, head of markets at AJ Bell, noted the slow transition from traditional cigarettes to next-generation products. He said vaping is now common. But manufacturers are facing challenges due to a proliferation of illegal products.

Transformation and Outsourcing

The job cuts, which have already begun, are set to be completed by the end of 2024. Chief executive Tadeu Marroco said the changes would make the company “more agile, cost disciplined and technology enabled.” Marroco added that the company is focused on supporting affected employees through the transition with care and respect.

In an effort to become more technology enabled, BAT partnered with the technology consultancy Accenture to outsource some of its work. Since the deal, some jobs in the UK, Poland, Romania, Costa Rica, Mexico, Singapore, and Malaysia have been absorbed by Accenture. In February, the BAT interim finance chief, Javed Iqbal, told the Financial Times that the company’s simplification plans would make it “more digital and AI-focused.”

BAT has also been closing some of its traditional cigarette manufacturing facilities. In January, the company announced the closure of its eighth largest factory in South Africa due to competition from illicit trade. The group predicts that global cigarette industry volumes will fall by about 2.5% this year.

Meanwhile, BAT has been investing heavily in smoke-free products such as Vuse vapes and Velo nicotine pouches. It told investors this month that revenue growth in this “new categories” part of the business was accelerating, with mid-teen percentage growth expected this year. Shares in BAT fell by about 1.4% in early trading on Monday, although they were still up by about 11.8% in the year to date. Shares in its rival Imperial Brands also fell by 1% in early trading on Monday.