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Plain packaging a threat to brands

The tobacco industry is no stranger to draconian measures aimed at reducing smoking.

To date, cigarette makers such as Imperial Tobacco, which makes a quarter of its profits in the UK from brands such as Lambert & Butler, have proved surprisingly resilient in the face of these challenges.

But now, some analysts say government proposals that were issued for consultation last week could do what previous regulations have yet to do – pose serious risks to cigarette companies’ profits.

In a paper on the future of tobacco control, the health department has proposed removing all branding and logos from cigarettes and other tobacco packaging, setting the minimum pack size at 20 to stop young people buying 10s, and banning vending machines.

It also called for cigarettes to be kept under the counter in shops, with tobacco displays outlawed.

Adam Spielman, an analyst at Citigroup, says that among the proposals under consultation, the most serious for industry profits would be a move to ban branding.

“In the medium term, we think plain packaging would go a long way to undermine the power of tobacco brands, and it is the brands that make the industry so profitable,” he says.

“Given the continuous volume declines, the industry is so profitable only because consumers are willing to pay a premium of £1.50 for certain brands."

“We think this measure would cause a rapid worsening of the downtrading trend, which is already bad.”

Indeed, even as the smoking ban caused a drop in cigarette sales volume in the UK, the industry has successfully offset this and raised profits by raising prices.

Erik Bloomquist, the global tobacco analyst at JPMorgan, cautions that talk of plain packaging is still in early consultative stages and that while a display ban is possible, he thinks plain packaging whereby tobacco companies would be obliged sell cigarettes in plain packets, stripped of corporate logos, emblazoned with health warnings is unlikely.

“In our view, the key problem with such an action is that it effectively expropriates valuable assets of companies – their brands,” he says.

“As such, we believe such an action would be opposed not only by tobacco [companies] but by other UK businesses that market branded consumer products.”

However, Mr Bloomquist says that a move to logo and brand-free packaging is potentially serious for Imperial and could accelerate the trend in downtrading.

Imperial, the UK market leader with a 46.1 per cent share, declined to comment.

Source: The Financial Times, 6th June 2008
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