Is smoking finally on its way to being stubbed out?
The proportion of UK adults who smoke has fallen from 27pc in 1999 to 19pc in 2014
Almost a decade after the UK ban on smoking in public places, the number of people smoking has slumped
By Ben Martin, 06 Jun 2015
When Cecilia Letourneau and Jean-Yves Blais picked a fight with the tobacco industry 17 years ago, they began a legal battle that would make history in Canada.
Letourneau, a smoker who could not quit, brought her class action lawsuit on behalf of 918,000 nicotine addicts in Quebec. A separate suit filed by Blais, who died of lung cancer in 2012, sought damages for 90,000 people with smoking-related diseases.
Last week, after an arduous legal process that saw the two cases merged in 2005, Brian Riordan, a Quebec Superior Court judge, delivered his landmark ruling.
The judge ordered that three Canadian cigarette companies – subsidiaries of FTSE 100 giant British American Tobacco, Japan Tobacco and Philip Morris International – pay out a combined Can$15.6bn (Ł8.2bn), the biggest damages award ever made in Canada.
The decision has made headlines around the world and triggered speculation about what the future holds for Big Tobacco, an industry dogged by legal wranglings and falling smoking rates.
Fears that the ruling would trigger a wave of other fines sent shares tumbling in the large tobacco stocks. BAT fell 2.4pc, while Imperial Tobacco, which is not involved in the lawsuit, slumped 2.9pc. The falls wiped more than Ł2.5bn off the market values of the companies.
The businesses caught up in the legal proceedings are ring-fenced off from their parent companies, meaning the likes of BAT would not be hurt by the Can$10.5bn that its subsidiary has been ordered to pay.
However, if the damages award is not reduced, the ruling is potentially calamitous for the Canadian units involved and, according to analysts at Nomura, would likely bankrupt the subsidiaries.
All three immediately pledged to appeal against the damages ruling, a process that will also add years on to the lawsuits. In the US, where tobacco firms have also been hit by class actions involving eye-watering sums, appeals have generally resulted in the damages being slashed.
Less than a fifth of adults now smoke in the UK
So, while the ruling doesn’t sound the death knell for Big Tobacco, it is a blow as the industry grapples with its biggest crisis in decades, with many of the biggest manufacturers scrambling for growth in an environment in which governments are increasingly hostile to smokers.
On the same day that BAT’s Canadian arm was hit with the Quebec ruling, its London-listed parent company announced it had spent €550m (Ł400m) acquiring TDR, Croatia’s biggest cigarette manufacturer.
The deal, while fairly small, illustrates the steps the world’s biggest cigarette companies are taking to tackle arguably the biggest pressure on the tobacco industry: the dramatic decline of smoking in mature tobacco markets – particularly the world’s more affluent countries – as the habit increasingly falls out of fashion.
In the UK, the proportion of adults who smoke has fallen from 27.4pc in 1999 to 18.8pc last year, according to data from Euromonitor. Over the same period it has slumped from 24.1pc to 17.4pc in the United States.
The TDR purchase boosts BAT’s presence in Croatia, Bosnia and Serbia, potentially lucrative central and eastern European markets where the smoking rate is the highest in the world. The same rationale is driving BAT’s attempts to buy out the 24.7pc of Brazilian cigarette maker Souza Cruz that it does not already own.
“The Croatia deal is at the tail-end of the trend,” says Erik Bloomquist of Berenberg. “The shift toward emerging markets has been going on aggressively certainly since the fall of communism.”
Even so, emerging economies continue to offer plenty of opportunities to tobacco firms.
Fast-growing populations and the emergence of a wealthier middle class with cash to spend mean “the dynamics in emerging markets are more favourable than in mature markets”, adds Bloomquist.
Still, the burgeoning wealth of those markets will eventually prove a double-edged sword.
“We think the reason you have a secular decline in mature markets is because over time, as people get wealthier and education and health consciousness rises, they decide they’re not willing to trade short-term pleasure for long-term risk,” says Bloomquist. “However, we think that will take many years before it’s actually the case in the emerging markets.”
Some potentially lucrative countries, though, will remain frustratingly beyond the grasp of the western tobacco firms for the foreseeable future. China, which has more than 300m smokers, is the most prominent.
“China is estimated to be 40pc of world demand but the multi-nationals have an insignificant share of that market, which is dominated by a series of state-owned companies,” says Panmure Gordon analyst Jonathan Leinster. There is no evidence to suggest that will change any time soon and the market will open up to outsiders.
Furthermore, even attractive markets such as China are starting to evolve. Government intervention – the scourge of the tobacco industry that has done much to dent demand for smoking in the West – is beginning to ramp up in the East.
On Monday, just before the Canadian court ruling, a prohibition on smoking in public places – both indoor and outdoor – came into force in Beijing. The move follows bans of varying severity in countries around the world. In Scotland, a smoke-free law was implemented in 2006 and England followed suit a year later.
Reynolds American, the maker of Camel cigarettes only recently banned smoking in its offices
Governments are taking a wide range of approaches to encourage smokers to kick the habit, including graphic images of cancer on packaging. In April, a ban took effect prohibiting the public display of cigarettes at the point of sale in small British retailers.
Later this year, drivers in England will be prohibited from smoking in cars if there are children in the vehicle.
The most controversial recent step – at least from the perspective of the tobacco companies – came earlier this year, when the British Government became only the second in the world to ban cigarette branding with the passing of the plain packaging law.
In doing so the UK follows Australia, which introduced similar legislation two and a half years ago.
The tobacco firms are up in arms about the new packaging rules and last month BAT, Philip Morris, and Japan Tobacco all launched legal challenges on the grounds the legislation infringed trademark rights.
The industry has argued that the Australian experience suggests that plain packaging his little impact on smoking rates. Panmure analyst Leinster, however, says it is too early for the manufacturers to make that claim.
“The measures were only introduced in December 2012 and were aimed at trying to reduce youth smoking. You’d have to take a 10-year view on whether or not it has worked. It was never intended to drive volumes down on a two-year basis.”
More effective in encouraging smokers to quit is the tax system, according to Martin Deboo, an analyst at Jefferies.
“Behind all the rhetoric of plain packaging and graphic warnings, the most successful way of reducing cigarette consumption is to put prices up,” he says. “So the main tool of regulation is raising duties.”
According to the Tobacco Manufacturers’ Association, tax accounts for almost 90pc of the price of the cheapest cigarettes sold in Britain. The average price of a premium pack of 20 cigarettes has climbed from Ł4.98 a decade ago to Ł9.16.
In the Budget in March, George Osborne, the Chancellor, stuck with a 2pc above-inflation rise in tobacco duties.
However, he appeared to row back on a proposal to implement a levy on tobacco companies’ profits, which would likely force cigarette manufactures to lift prices further. Action on Smoking and Health (Ash) has lobbied hard for the levy and estimates that smoking costs the NHS at least Ł2bn every year.
To tackle the public health argument presented by Ash, the tobacco companies are exploring lower-risk alternatives to traditional cigarettes.
Some in the industry hope that electronic cigarettes are the answer. Big Tobacco is increasingly vying with independent manufacturers of e-cigarettes, which do not use tobacco but instead deliver the nicotine that smokers crave in a vapour.
How times have changed. This advert, featuring Arthur Godfrey, Bing Crosby and Perry Como, was released in 1949
All of the major cigarette makers now have electronic products in the hope that the growing popularity of vaping will offset decline in smoking.
The problem with e-cigarettes, however, is that they are not as effective as conventional cigarettes at delivering nicotine, which dampens their appeal to smokers.
Question marks also hang over the risks associated with the technology. And while some statistics show that they help smokers quit, anti-smoking campaigners are concerned that young people using e-cigarettes will eventually move on to tobacco – a worry that counters the claim that vaping is lower risk.
Deboo is sceptical that the products are the solution to the tobacco industry’s problems.
“The current conventional wisdom is that e-cigarettes have peaked. The recent sales trends in the US and Europe have been flat to declining,” he says.
Meanwhile, the viability of so-called heat-not-burn products – another area of potential growth that is being investigated by some tobacco companies such as Philip Morris and BAT – is also unclear.
Unlike e-cigarettes, these products do use tobacco. However, while conventional cigarettes burn tobacco, the new products merely heat it, which manufacturers hope makes them safer.
Whether such products are truly lower-risk is still to be proven, however, and, because they involve tobacco, analysts have warned they could face the same high tax rates as traditional cigarettes.
It remains to be seen, then, if either of the two potentially less risky smoking products can staunch the decline in traditional cigarettes that poses an even greater threat to the prospects of the tobacco companies than lawsuits such as those in Canada.
Ominously, even the industry’s biggest players appear divided as to whether those alternative products will halt the drop in smoking.
Earlier this year, Imperial Tobacco took the unusual step of publicly declaring it is not “interested” in heat-not-burn technology, ruling itself out of one of the few areas others hoped might lift the haze that shrouds the industry’s future.
http://www.telegraph.co.uk/finance/n...amped-out.html
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Originally Posted by BeerBaron
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