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Big Tobacco prepares for packaging switch – FT.com

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February 14, 2012 6:06 pm

Big Tobacco prepares for packaging switch

By Christopher Thompson in London and Neil Hume in Sydney

Australia has one of the lowest smoking rates in the world, at less than one in five people, but it will still be the key battleground for the tobacco industry in 2012.

From the start of December, under the world’s toughest antismoking laws, tobacco companies will have to sell their products in identical drab packaging, without logos but featuring graphic images of smoking-related diseases. Brand names can still appear but in a standard font on the front of every packet.

Big Tobacco has launched an aggressive fight back against the plain packaging law. The curbs on Australia’s $9.5bn-a-year smoking market do not pose much of a threat to profits. But the bigger worry is that, just as the ban on smoking in public places spread from California across the world, Australia’s move could spread to the $161bn cigarette market in the European Union and beyond.

Some analysts even raise the possibility that emerging markets could implement similar laws, giving Big Tobacco even more of a problem.

“Obviously there’s a possibility other countries will follow,” said Michael Prideaux, director of corporate affairs at British American Tobacco (BAT), who described the move to plain packaging as part of “the de-normalisation of tobacco”.

A person familiar with internal discussions at Philip Morris International (PMI), the world’s second biggest publicly listed cigarette company by sales, said: “This is the alpha and the omega as far as tobacco companies are concerned.”

The European Union is considering introducing plain packaging as part of proposed revisions to tobacco regulation expected later this year. In the UK, the Department of Health is due to publish the results of its consultation on plain packaging in the spring.

Battle lines are already being drawn. In the UK Imperial Tobacco, BAT and Japan Tobacco (JTI) have helped form a libertarian-style campaign group called “Hands Off Our Packs”. It urges supporters to say no to “more Nanny State diktats”.

“Our fundamental argument is that people are informed and should be allowed to make an adult choice,” said Paul Williams, head of corporate affairs at JTI. “The ban could make its way to alcohol and obesity.”

JTI, PMI and the Australian arms of BAT and Imperial all launched legal challenges within days of the Australian law being passed last November by the federal parliament in Canberra.

They argue the plain packaging law breaches the Australian constitution, will cost taxpayers billions in lost excise duty, and will be a boon for cigarette smugglers. They say there is no evidence it will lower smoking rates. Australia’s high court is expected to hear the cases in April.

But privately all the tobacco companies are preparing for life after plain packaging. In particular, they are considering how to market different cigarette brands which look alike.

“Word-of-mouth will become more important,” said Mr Prideaux. “We will have to differentiate on products differently [than in the past] … probably more on taste, to give consumers something they want to talk about.”

There is growing concern among Big Tobacco that price wars could follow.

“Without brands how do you charge a premium?” said Peter Nixon, vice-president of communications at PMI. “We assume brand choice going forwards will be about price … we will see prices going down so we are likely to see revenues going down.”

Last year, PMI published an internal study, seen by the FT, in which it projected the average price of cigarettes falling by up to 19 per cent if plain packaging was implemented as companies compete on price.

The cost would be heaviest in emerging markets, where companies are trying to persuade new middle class consumers to trade-up to premium brands.

Jonathan Fell, an analyst at Deutsche Bank, said that while he was not worried about a reduction in short-term smoking rates, the ability of tobacco companies to achieve premium prices would be questioned.

“It’s clearly something investors will be concerned with if it’s implemented,” he said. “I don’t think there’s massive amount of difference in developed and developing economies in terms of regulation. As countries like Brazil and South Africa have done in the past, they would normally be pretty quick to catch on and implement what others have done.”

Publicly, the companies are confident of winning their court cases in Australia. If the courts force the government to back down, they hope it would set an example to other governments considering plain packaging laws.

Alex Parsons, director of corporate communications at Imperial, said he does not believe there will be an immediate “domino effect”.

“I think others will wait and see how it plays out in Australia,” he said.

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