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Case Study: Smoking may be bad, but tobacco companies’ profiles have never looked so good

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Next to the arms industry, the tobacco industry must be one of the most politically incorrect business sectors. Yet during the late 1990s tobacco companies in the UK appeared to be very popular with stock Market, outperforming the FTSE all-share index by 36% during 1998, and continuing to hold their ground in the falling stock market conditions from 2001. This was despite an EU directive which finally put an end to all tobacco advertising in the UK from March 2003.

Tobacco companies now place less emphasis on fighting the health lobby, and no longer pretend that tobacco is anything other harmful. But, fortunately for the tobacco firms, nicotine is an addictive drug. Although cigarette consumption has declined in most developed countries, one person in four still smokes. Moreover, among some groups, especially young women, the rate of smoking has show down some increase in recent years. Tobacco companies also benefit from periods of economic recession. While job cuts may be bad news for most consumer goods and services companies, it has historically also been linked to an increase in smoking.

The tobacco companies have survived many years of attempts to control tobacco sales throughout Europe, but the EU directive banning all tobacco advertising made it increasingly difficult for tobacco companies to get new brands established. The big three UK companies - BAT, Gallagher and imperial tobacco – considered strengthening their brands with joint ventures. BAT linked up with ministry of sound nightclub to push its luck strike brand, while Gallagher tried to promote the Benson and Hedges name through a branded coffee. One industry expert expected to see an army of cigarette girls pushing cigarettes in pubs and corners shops, there by trying to get round controls on advertising.

While promoting cigarette in Europe has been getting more difficult, tobacco companies have been keen to exploit overseas market where measures to protect the public are less stringent. The companies have pushed their products in the countries of Eastern Europe, hoping to capitalize on the hunger for western brands. Gallagher has a plant in Kazakhstan and has heavily promoted its sovereign brand in the former Soviet Union. The biggest opportunities for western tobacco companies, however, are in china, which is the world’s biggest market in terms of volume. The Chinese smoke 1.7 trillion cigarettes a year, making the British market in terms of just 77 billion look quite small. State- owned brands such as pagoda dominate the market with an estimated 98% market share. With import duties of 240%, most foreign cigarettes enter the Chinese market through unauthorized channels, including those smuggled by the Chinese army. Grater trade liberalization will inevitably give freer access to the Chinese market for western tobacco companies. These undoubtedly pay significant levels of taxes to the authorities, so a financially strained government may be unwilling to reduce tobacco consumption too much, especially when smoking is so pervasive through the population.

Questions:

- How effective is the EU ban on tobacco advertising likely to be for reducing smoking? What measures could government take to bring about a significant reduction in smoking?

- What factors could explain a booming share price for tobacco companies at the same time as Europeans’ attitude towards smoking are becoming more hostile?

- How would you defend a western tobacco company in its attempts to develop the Chinese market for cigarettes?

From Sri Lanka, Kurunegala
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