Growth In Tobacco Shipments To Australia Reflects Minimal Impact Of The Plain Packaging Law

The implementation of plain packaging requirements by the Australian government in 2012 was seen as a big set back for the tobacco industry. This was not because of its potential impact on cigarette consumption in Australia, since it is a relatively small market, but because of concerns that the plain packaging law in Australia could potentially drive other governments around to world to implement similar laws.

However, recent data reveals that tobacco shipments to Australian retailers actually grew marginally last year, reversing a declining trend seen over the previous four years. While it does not necessarily imply that the actual consumption of tobacco products grew last year, it does reflect that the plain packaging law had a minimal negative impact on total tobacco consumption in Australia in the first year of its implementation. This could potentially weigh in favor of Philip Morris International (NYSE:PM) and other tobacco companies as other governments review the impact of standardized packaging requirements on tobacco consumption trends in Australia, before implementing similar regulations in their own country. ^[1]

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What Is Plain Packaging?

The plain packaging law implemented in Australia is designed to ban cigarette manufacturers from glamorizing their brands through attractive packaging. Despite strong opposition from the tobacco industry based on the claims of intellectual property rights and concerns that the implementation of this law could act as a fuel for illegal trading of cigarettes in the country, the Australian government went ahead with its implementation in December 2012. As a result, Australia became the first country in the world where all cigarette packs are the same color, with pictures depicting the dangers of smoking above the brand name written in plain text. ^[2]

The Idea Behind Plain Packaging

The idea behind plain packaging is simple – to make cigarette packs ugly in order to turn off youngsters from smoking. The removal of attractive packaging is primarily aimed at preventing young people, especially children, from picking up the habit of smoking. It is not so much intended for old smokers, who are already addicted to it. Proponents of the idea suggest that if they can prevent youngsters from smoking, they can potentially reduce the number of casualties arising from the dangerous habit in the long run. The Australian government estimates that around 15,000 people die every year in the country from tobacco-related illnesses. ^[3]

The fact sheet available on the Australian government’s website claims that 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 appealing to young people. ^[4]

The Tobacco Industry’s Perspective

The tobacco industry has openly criticized the plain packaging law citing lack of substantial evidence supporting claims made by the Australian government. The tobacco companies do not agree that plain packaging would be effective in discouraging young people from smoking or encouraging existing smokers to quit. They have also argued that because generic packaging makes all cigarette packs look alike, it becomes harder to prevent smuggled and counterfeit products entering the market, which could indirectly fuel growth in the black market for cigarettes. Furthermore, the tobacco companies also claim that the law denies them to use their intellectual property, which they have created and invested in over long periods of time.

Adoption By Other Countries

Since the very beginning, a prime concern for the stakeholders of tobacco companies has been the implementation of standardized packaging requirements in other countries. Australia represents only a small share of the global tobacco market. In 2013, the country made up less than 2% of the total number of cigarettes sold in Asia, excluding China, by our estimates. ^[1] However, if other governments start adopting similar measures, it could potentially have a big impact on the tobacco industry. Currently, the government of U.K. is actively considering the plain packaging law, after it had put the bill aside in July last year, citing the need for further evidence. In November last year, the country’s public health minister, Jane Ellison, said that the plain packaging law would be brought in after the ongoing review of its impact on tobacco consumption in Australia to provide sufficient evidence to support it. ^[5]

The New Zealand government also introduced plain packaging requirements for cigarettes and other tobacco products in February last year. However, the associate health minister, Tariana Turia, said that the legislation will not be brought into effect until Australia, the first country to take this step, tackles pending legal challenges against it from tobacco companies. ^[6]

On the day that the Australian government passed the plain packaging law in November 2011, Philip Morris International launched legal action against it based on the Bilateral Investment Treaty (BIT) between Hong Kong and Australia. One of the main arguments of the company is that the law is designed in a manner that expropriates its intellectual property. ^[7] Apart from this, there is another case pending before the World Trade Organization (WTO) against the Australian government that has been filed by five countries including Ukraine, Honduras, Dominican Republic, Cuba and Indonesia, on the grounds that the subject law is contrary to the country’s obligations as a WTO member. ^[8]

How Does It Impact Tobacco Companies?

We believe that the plain packaging requirements hold significant potential to dent the financial performance of tobacco companies if they were to be implemented by other governments as well. This is because generic labels lead to commoditization of the product, which could reduce the price-taking ability of tobacco companies. Additionally, it could also shrink the size of addressable market for these companies by fueling growth in illegal trading of cigarettes and the rise of counterfeit brands.

• Downward Pressure On Pricing: What essentially happens when all the brand-specific graphics are stripped out from cigarette packs is that they become more commoditized. In the current scenario, where most forms of media advertisements are already out of bound for tobacco companies in most countries, the plain packaging requirements also take away the only marketing tool they have left. This situation is expected to put downward pressure on the price-taking ability of the tobacco companies, which is the key growth driver for them. The recent industry data from Australia shows that while total tobacco sales volume to the country grew marginally last year, it was actually because of higher loose tobacco sales, while the number of branded manufactured cigarettes sold went down slightly. So, the threats of down trading by consumers are not unwarranted. ^[1]

• Shrinking Addressable Market: The tobacco companies are already struggling with declining tobacco consumption in most parts of the world due to increasing excise taxes. The standardized packaging requirements are expected to further aggravate this problem, as it could fuel growth in the market for counterfeit products. We believe that this could potentially further shrink the size of addressable market for Philip Morris International and other tobacco companies. A recent KPMG report showed that the prevalence of illegal trade of cigarettes in Australia grew from 11.8% in July 2012 to 13.3% in June 2013. ^[1]

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1. Australia Tobacco Sales Edge Up Despite Plain Packaging, reuters.com [↩] [↩] [↩] [↩]
2. Cigarette Plain Packaging Laws Come Into Force In Australia, theguardian.com [↩]
3. Tobacco Giants Fail To Stop Australia Plain-Pack Law, wsj.com [↩]
4. Tobacco Plain Packaging Fact Sheet, yourhealth.gov.au [↩]
5. Cigarette Packaging: Ministers Launch Fresh Review, bbc.com [↩]
6. New Zealand To Propose Plain Cigarette Packs, wsj.com [↩]
7. Bilateral Investment Treaty (BIT) Arbitration, pmi.com [↩]
8. Indonesia Becomes Fifth To File WTO Case Against Australia Tobacco Plain Packaging, ip-watch.org [↩]