Like all cigarette makers, British American Tobacco (NYSE: BTI) has one really big problem: Its core product is cigarettes. It is working to reduce its reliance on this declining product category, but there's no easy fix. Here's what the company has done so far, and why it still has miles to go before cigarettes aren't the most important product it sells.

Just how bad is British American Tobacco's cigarette problem?

When British American Tobacco reported first-half 2024 earnings, CEO Tadeu Marroco led off with this comment: "We are building a smokeless world. We added 1.4 million consumers (to 26.4 million) of our smokeless brands, now accounting for 17.9% of Group revenue, an increase of 1.4 ppts vs FY23."

However, if roughly 18% of revenue comes from smokeless products, then the remaining 82% comes from traditional tobacco. In that category, cigarettes are the driving force. So, when it comes to the top and bottom lines, cigarettes are clearly still calling the shots.

With that in mind, cigarette volumes fell 6.8% year over year in the first half of 2024. Other combustible products did worse with volumes down 12.6%. Luckily, other combustibles -- such as cigars -- only make up 2% of volume. Still, these trends are concerning, and the company recognized the challenge in a big way last year with a major accounting change.

In 2023, British American Tobacco took a massive impairment charge, writing down the value of its U.S. operations. Management also announced its decision to amortize the value of its U.S. cigarette brands over a period of no more than 30 years, a tacit acknowledgment that the long-term viability of this business is unknown.

New categories are where the future is for British American Tobacco

Management clearly isn't sticking its head in the sand with about 18% of revenue coming from smokeless products, but even here, the news isn't all good.

For example, the company's growth engine on the non-cigarette side falls into a division called New Categories. That group accounts for 13.3% of revenue. This is where British American Tobacco is putting the bulk of its effort, or so you would expect. Revenue in the New Categories group fell 0.4% year over year during the first half of 2024. However, revenue was up 7.4% on an "adjusted organic" basis, which excludes:

[T]he performance of businesses sold (including the Group's Russian and Belarusian businesses) or acquired, or that have an enduring structural change impacting performance that may significantly affect the users' understanding of the Group's performance in the current and comparator periods to ensure like-for-like assessment across all periods.