Of Big Tobacco Brands, Bans And Profits

Back in July England’s smokers were officially banned from lighting up in pubs, restaurants, offices and any other enclosed public space. The ban almost certainly has had an impact on cigarette consumption as about one in every eight cigarettes was smoked in a pub or restaurant. The ban has eliminated these sales, yet no one from the tobacco industry appears too perturbed.

One might have expected the English ban, which follows a series of similar acts of European legislation, to cut deep into tobacco companies’ profits. But despite the growing restrictions on cigarette consumption, Big Tobacco remains remarkably healthy.

In fact, shares in tobacco companies have surged in recent years, with many stocks doubling in value since 2000. For all the talk of increasing restrictions on smokers, anyone who put money into tobacco five years ago looks like a very prudent investor today. Big brands such as Imperial (which makes almost a third of its global sales in the UK) and British American Tobacco are already up more than 10% for 2007 alone.

How is this possible? It is an industry besieged by legislators, demonized by politicians and facing severe restrictions on its product. Yet it is a very successful industry that looks set for continued growth over the coming decades.

It’s certainly true that the number of smokers in the UK is decreasing. In 1948, the first surveys of smoking found that almost seven out of 10 British men smoked cigarettes. Today that figure has more than halved. While at face value this might appear to represent a real problem for the tobacco companies – how can you lose half your market and still prosper? – there are several answers.

First, the 80:20 rule holds up remarkably well when it comes to market share. It is amazing how often about 80% of profits are generated by 20% of consumers. While the number of smokers has halved, the number of cigarettes smoked has not. A core of smokers still gets through 20 or 30 cigarettes a day, providing the tobacco firms with most of their profits. Handily, they are also the ones least likely to be affected by the ban. The recreational smoker who has a couple of fags with his beer on Friday may give up, but a man who starts his day with a smoke in bed is unlikely to be deterred.

Another key factor is price. British cigarettes are the most expensive in the world thanks to the government’s imposition of an 80% tax on all sales. To absorb any loss in smoking revenue, most cigarette companies are likely to increase their prices by 5%-10% this year. And, in a bizarre twist, the high tax levels will probably help them; a manufacturer may increase its price 10% and a consumer would see the retail price rise by only 2%.

Because purchases are increasingly concentrated on heavily addicted consumers, even major price rises are unlikely to result in any loss of sales. Since Ireland’s public smoking ban took effect in 2004, prices have increased by 15% with little impact on the amount of smoking taking place.

The final explanation for the apparent health of the cigarette industry is its global diversification. While legislation has restricted the European and US markets, there has been a surge in Asia and Africa. In China, average daily cigarette consumption by males jumped from one a day in 1952 to 10 a day 40 years later. That translates into sales of 1.8bn cigarettes a year.

This means a drastic change in the deaths attributed to cigarette smoking. In 2000, the 4m people who died as a result of cigarette smoking were evenly divided between rich and poor countries. By 2030, 70% of the 10m consumers who die from smoking will come from developing countries – a sobering reminder that while the tobacco industry may have a healthy long-term prognosis, its consumers have anything but.

30 SECONDS ON … SMOKING TRENDS

– About 10m adults smoke cigarettes in Britain – 25% of men and 23% of women. Smoking is most prevalent among 20- to 24-year-olds; 34% of men and 30% of women in this age group smoke.

– About 70% of current smokers would like to join the 27% of men and 21% of women who are now ex-smokers.

– More than 80% of smokers start as teenagers. About 450 children start smoking every day in the UK. In England, 16% of 15-year-old boys and 25% of girls of the same age are regular smokers.

– In 2005, 16% of men in higher managerial occupations smoked, compared with 34% in routine occupations.

– The government earned nearly £8bn in revenue from tobacco duty, excluding VAT, in the financial year 2005-06. It spent £23m on education campaigns and £52m on helping smokers kick the habit over the same period.

Source: Ash.org

This thought piece is featured courtesy of Marketing Week, the United Kingdom’s leading marketing publication.

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