More Trouble For Phillip Morris As New Zealand Introduces Plain Packaging Legislation

Plain packaging is the most discussed topic in the world of tobacco of late. It refers to the legislation designed to bar cigarette manufacturers from glamorizing their brands through attractive packaging. Australia, the first country to implement this piece of law in December 2012, is now a place where all cigarette packs sold are painted in same color with pictures depicting the dangers of smoking above some plain text that has the brand name.

Amid strong opposition from tobacco companies based on claims of intellectual property rights and concerns over growth of black market cigarette products, the Australian government went ahead with the move aimed at cutting the vital cord of communication between tobacco companies and consumers.

Philip Morris International (NYSE:PM) launched three avenues of litigation against the Australian government in relation to the plain packaging law: one at the domestic level, which was decided in favor of the Australian government, and two at the international level that remain unresolved. Meanwhile, following a probabilistic approach, we have considered its impact on our price estimate for Philip Morris.

See our full analysis for Phillip Morris

Although Australia has a low smoking rate (around 15%), concern that other countries may decide to implement similar laws is troubling the tobacco industry. Since the implementation of this historic piece of legislation, the Australian tobacco market has become the focal point of discussion around the world, with experts from several countries debating its impact on tobacco consumption in the country.

Argument and Counter Argument

According to the fact sheet available on the Australian government’s website, there is ample research to prove that industry branding and packaging design of tobacco products can potentially mislead consumers about the harmful effects of smoking or reduce the effectiveness of health warnings on tobacco products, and even make smoking more appealing particularly among young people. ^[1]

On the other hand, tobacco companies have openly criticized the plain packaging law based on the lack of evidence that it will be effective in discouraging young people to smoke or encouraging existing smokers to quit. Another argument offered by tobacco companies is that generic packaging makes all cigarette packs look alike, which makes it harder to prevent smuggled and counterfeit products entering the market and indirectly fuel growth of black market tobacco products. Furthermore, the cigarette companies also claim that the law denies them to use their intellectual property that they have created and invested in over long periods of time.

In our opinion, while the plain packaging law may reduce the rate at which adults and adolescents take up smoking, its impact on existing smokers will be fairly limited. Nevertheless, the law has the potential to reduce smoking prevalence among children as cigarettes in plain packs would be less appealing.

New Zealand Follows Australia’s Lead

Following Australia’s lead, New Zealand’s government has given a principal nod to logo-free cigarettes. However, recognizing significant international trade issues with standardized packaging, the government has decided not to implement it until the pending international legal challenges to Australia’s version of the law are resolved. ^[2]

There have also been initial discussions on this law in the UK, France and India but no official stance has been taken by any of these governments yet. If more countries implement similar laws, it could potentially result in a decline in adult smoking rates which would impact tobacco companies significantly.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Tobacco Plain Packaging Fact Sheet, yourhealth.gov.au [↩]
2. Government moves forward with plain packaging of tobacco products, February 19 2013, beehive.govt.nz [↩]