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November 17th, 2012:

Look what they’ve done to my brands

Cigarette-makers will weather the spread of plain-packaging laws

Nov 17th 2012 | from the print edition

Choose your poison


AUSTRALIANS call them Winnie Blues. But their favourite cigarettes will lose their familiar blue and white livery under Australia’s new plain-packaging law, which takes effect on December 1st. From then all cigarettes must be sold in identical packs (“drab dark brown” is the approved colour) with the brand name set in standardised type. The tobacco companies are angry. Plain packs are “plain stupid”, declares the website of British American Tobacco (BAT), the second-largest non-state producer. New Zealand, Britain and the European Union are contemplating plain-pack laws of their own. Everyone is watching the Australian experiment.

It ought to be a disaster for big tobacco. Governments started banning cigarette advertising on television in the 1960s, and though the marketing noose is still loose in much of the world it is tightening. Many governments ban ads in print media and at the till and oblige manufacturers to emblazon packs with gruesome warnings. The pack itself survives as a badge of a smoker’s taste and means, displayed and pocketed 20 or 30 times a day. Lighter colours hint at relative healthiness. Tall thin packs seem more feminine. In the war on tobacco marketing, packaging is “the last major frontier”, says David Hammond of the University of Waterloo in Canada. “That’s why we’re seeing such strong opposition.”

But tobacco is a weirdly resilient industry. Consumption is shrinking in developed countries but still rising in poorer ones, thanks partly to their growing populations. As GDP rises, smokers trade up to more expensive brands. The number of cigarettes smoked globally will shrink by 9% between 2015 and 2050, predicts Euromonitor International, a market-research firm. But tobacco firms are adept at wringing fatter profits from stagnant markets.

Addicted customers and high taxes make it relatively easy to raise prices (a big rise for producers translates into a small uptick for consumers). Tobacco’s stigma keeps potential competitors at bay. BAT aims to raise its earnings per share annually by high single digits and often does better than that, partly by using its spare cash to buy back shares, points out Rae Maile of J.P. Morgan Cazenove. Philip Morris International, BAT’s bigger rival, has retired a quarter of its shares since 2008.

Big Tobacco can hardly complain that plain packs will dent demand. It insists that branding is all about market share, not recruiting new smokers. Really? The World Health Organisation reckons that a blanket advertising and promotion ban would cut puffing by 7%.

Kingsley Wheaton, BAT’s head of regulation, says the injury lies elsewhere. For one thing, Australia’s law amounts to an expropriation of intellectual property, which ought to worry other industries such as food and liquor. Australia’s High Court rejected that claim, but the World Trade Organisation is considering it.

The second claim is that plain packs will drive smokers into the black market, which would be the fourth-biggest manufacturer if it were a company. Mr Maile sees this as the main threat to the business. Plain packs will encourage counterfeiters to produce knock-offs of many brands rather than just a few, he thinks. And that, the cigarette-makers gleefully point out, will cut government revenue.

They are nothing if not ingenious; when regulators banned “light” they struck back with “smooth”. Plain packs will not end the duel. BAT will go back to the “core of our product” by upgrading flavour and other inherent qualities rather than investing in promotional pizzazz, says Mr Wheaton. After all, fine wines do not sport flashy labels.

Plain packs may chime with a global back-to-basics mood. Some analysts think they could even help brands in their endless quest for differentiation. Faced with rows of identical boxes Aussies will ask for their favourites by name. New brands will find it hard to break in. Incumbents may find the new regime rather cosy.