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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 the 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 than 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 shown 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 the 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 corner shops, thereby trying to get around controls on advertising.
While promoting cigarettes in Europe has been getting more difficult, tobacco companies have been keen to exploit overseas markets 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. Greater 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 throughout the population.
Questions:
- How effective is the EU ban on tobacco advertising likely to be for reducing smoking? What measures could the 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' attitudes 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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Case Study: Smoking may be bad, but tobacco companies' profiles have never looked so good
---------------------------------------------------------------------------------------------------
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 the 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 than 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 shown 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 the 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 corner shops, thereby trying to get around controls on advertising.
While promoting cigarettes in Europe has been getting more difficult, tobacco companies have been keen to exploit overseas markets 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. Greater 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 throughout the population.
Questions:
- How effective is the EU ban on tobacco advertising likely to be for reducing smoking? What measures could the 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' attitudes 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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1. The effectiveness of the EU ban on tobacco advertising in reducing smoking is likely to be modest but significant. Advertising bans can help reduce the visibility and attractiveness of smoking, particularly among young people. However, the ban alone may not be sufficient to cause a substantial reduction in smoking rates. To bring about a significant reduction in smoking, the government could:
- Increase taxes on tobacco products: Higher prices can deter people from starting to smoke and encourage current smokers to quit.
- Implement smoking cessation programs: These can provide support and resources for individuals who are trying to quit smoking.
- Enforce strict packaging regulations: Plain packaging with graphic health warnings can deter potential smokers.
- Encourage public awareness campaigns: These can help educate the public about the harms of smoking.
- Restrict smoking in public places: This can protect non-smokers from secondhand smoke and make smoking less socially acceptable.
2. The booming share price for tobacco companies despite hostile attitudes towards smoking in Europe can be explained by several factors:
- Market expansion: Many tobacco companies have been expanding their markets overseas, particularly in developing countries where tobacco control measures are less stringent.
- Diversification: Some tobacco companies have diversified their product range to include alternative nicotine products, which could be contributing to their share price growth.
- Resilience to economic downturns: The tobacco industry tends to be resilient during economic downturns as nicotine is addictive and people continue to smoke regardless of their economic circumstances.
3. Defending a western tobacco company in its attempts to develop the Chinese market for cigarettes can be challenging due to the ethical implications. However, from a business perspective, it can be defended as follows:
- Market potential: With China being the world's largest market in terms of volume, it presents a significant growth opportunity for western tobacco companies.
- Trade liberalization: As China continues to open up its markets, it creates a level playing field for all companies, including tobacco companies.
- Economic contribution: Western tobacco companies can contribute significantly to China's economy through taxes and job creation.
- Legal compliance: Provided these companies adhere to China's laws and regulations, their operation in the market is legitimate.
Please note that these points are made from a business perspective and do not negate the significant health implications of tobacco use.
From India, Gurugram
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62- Increase taxes on tobacco products: Higher prices can deter people from starting to smoke and encourage current smokers to quit.
- Implement smoking cessation programs: These can provide support and resources for individuals who are trying to quit smoking.
- Enforce strict packaging regulations: Plain packaging with graphic health warnings can deter potential smokers.
- Encourage public awareness campaigns: These can help educate the public about the harms of smoking.
- Restrict smoking in public places: This can protect non-smokers from secondhand smoke and make smoking less socially acceptable.
2. The booming share price for tobacco companies despite hostile attitudes towards smoking in Europe can be explained by several factors:
- Market expansion: Many tobacco companies have been expanding their markets overseas, particularly in developing countries where tobacco control measures are less stringent.
- Diversification: Some tobacco companies have diversified their product range to include alternative nicotine products, which could be contributing to their share price growth.
- Resilience to economic downturns: The tobacco industry tends to be resilient during economic downturns as nicotine is addictive and people continue to smoke regardless of their economic circumstances.
3. Defending a western tobacco company in its attempts to develop the Chinese market for cigarettes can be challenging due to the ethical implications. However, from a business perspective, it can be defended as follows:
- Market potential: With China being the world's largest market in terms of volume, it presents a significant growth opportunity for western tobacco companies.
- Trade liberalization: As China continues to open up its markets, it creates a level playing field for all companies, including tobacco companies.
- Economic contribution: Western tobacco companies can contribute significantly to China's economy through taxes and job creation.
- Legal compliance: Provided these companies adhere to China's laws and regulations, their operation in the market is legitimate.
Please note that these points are made from a business perspective and do not negate the significant health implications of tobacco use.
From India, Gurugram
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