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Taat Lifestyle & Wellness [CSE:TAAT / FRA: 2TP2] is a very interesting proposition – an alternative cigarette maker that is setting out to give smokers a better experience than smoking a tobacco-based cigarette. It wants to provide smokers with a way 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, 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 is setting out to deliver 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 Lifestyle & Wellness 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.

We like the fact that Taat is building a formidable management team with the addition of Setti Coscarella from Philip Morris. Coscarella knows his tobacco industry, and has worked on some of the more innovative products within it. More importantly, he knows where and how these products sell. He also understands smokers and their pain points, the sort of cues they look for when making decisions about alternatives.

Coscarella is a recognised tobacco strategist with a background that includes investment banking, not a start-up leader feeling their way as they go. The company has the benefit of mature and experienced leadership with a solid industry track record.

Coscarella was part of the Philip Morris Iqos heated tobacco product development team and understands some of the pitfalls involved in a launch like this.

Distribution strategy is key

Taat Lifestyle & Wellness is attacking a very different supply chain in its first market, which it has identified as the US, although UK investors should expect to see it coming to our market soon.

Taat has already contracted with a manufacturing partner that has the capacity to produce over 2000 cigarettes a minute and will help it to facilitate a launch in Q4. Marketing regulations on tobacco are onerous, but a hemp-based cigarette does not need to worry as much about tobacco or nicotine restrictions.

Coscarella is cautious about his distribution strategy: he has seen how Juul ran afoul of regulators with their marketing. He has a good feel for how distribution and marketing can be managed on a more ethical basis, selling to people who already smoke and want to give up, not potential new users. Taat does not need to sell to people who don’t smoke, there are enough smokers out there already. This should place Taat in a good position – helping to solve tobacco addiction.

Taat has also importantly filed for patent for its process. The company possesses some unique IP, including its flavours. It is not easy to engineer a hemp cigarette to taste like tobacco. This is creating an important moat for Taat which will make it harder to compete against. The molecule it is using at the core of the Taat cigarette is able to help deal with the withdrawal symptoms that most smokers are feeling almost all the time.

“I don’t see any reason why smokers won’t give this an honest try. When they try it, I think this product will speak for itself,” says Coscarella.

Feedback from test consumers has been very positive so far.

Full product launch anticipated before year end

Initial testing has been carried out in Nevada and California, with limited distribution to around 60 stores. Taat believes it is important to fine tune the product ahead of a full launch later this year. Future key markets have not been specified yet but investors can expect to see major distribution channels being opened up in the US this winter. Taat has now signed two national distribution deals. These will be important for its early stage success.

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 will be to undercut existing cigarette prices. For vape users, it offers a more satisfying alternative without the nicotine.

Taat is currently working on the build out of its marketing strategy and tactics designed to get the product off the shelf. Coscarella says he will be working to build out his key management team and that there will be a second private placement in the pipeline in the near future.

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.

What we think about Taat Lifestyle & Wellness

We are big fans of the Beyond Tobacco vision. We think it provides smokers addicted to tobacco with a healthier alternative. In Cosacarella’s words, “there isn’t a smoker that would not look at this product seriously.”

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. In Coscarella’s view, he has a superior product on his hands to Juul’s. We think he’s right and Taat Beyond Tobacco has some very exciting growth prospects.

Investors seem to be in agreement. At time of writing, Taat was trading in Frankfurt at EUR 1.15, up from about EUR 0.56 a month ago. We will be watching this one closely.

Stuart Fieldhouse

Stuart Fieldhouse has spent 25 years in journalism and marketing, including as a wealth management editor for the Financial Times group, covering capital markets and international private banking, and as an investment banking correspondent for Euromoney in Hong Kong. He was the founder editor of The Hedge Fund Journal.

Stuart has worked at CMC Markets, supporting the re-launch of its global financial spread betting and CFD trading platforms. He is also the author of two books on trading, published by Financial Times Pearson. Based in The Armchair Trader’s London office, Stuart continues to advise fund managers, private banks, family offices and other financial institutions.

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