Impact Of Strong Regulations On Philip Morris In Australia

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Two regulatory hurdles have affected global tobacco major Philip Morris (NYSE: PM) adversely in Australia in recent years. The first of these came in the form of plain packaging restrictions that mandated graphical health warnings on cigarette packs and uniformity in the font, color and size of brand names across companies. The second of these was a series of annual excise tax hikes of 12.5%  to be effected every year for four years. [1] In this article we review the situation in Australia for tobacco companies and see how Philip Morris has been impacted.

See Our Full Analysis For Philip Morris

What Are Plain Packaging Laws

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. [2]

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. [2]

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. [2] However, if other governments start adopting similar measures, it could potentially have a big impact on the tobacco industry. We have written earlier about Philip Morris’ lawsuit with the Uruguayan Government on this account (See Uruguayan Lawsuit For Philip Morris). Ireland is considering implementing such laws, which experts say can have a domino effect on the rest of the European Union. [3] Australia’s success in this regard is said to have inspired France’s own version of plain packaging law. [4]

Impact Of Plain Packaging Laws

Australia’s cigarette plain packaging law, which came into effect in December 2013, is supposed to be the most restrictive in the world. However, the government and the industry sing different tunes when it comes to analyzing the results of this law. Data from Australia’s Bureau of Statistics suggest that household consumption of tobacco fell 4.9 percent in financial year 2013-14. Economists at the Commonwealth Bank of Australia say consumption of cigarettes and tobacco dropped 7.6% in the first quarter of this calendar year.

On the other hand tobacco manufacturer, British American Tobacco Australia says that industry volumes have actually grown. British American Tobacco (LON: BATS) has a big presence in Australia with a 45% market share among the 3.5 million smokers of the continent. It claims that the decline in the number of people smoking has slowed, a trend seen for the first time in ten years. [5] Whether the contradictions among these reports are due to apples-to-oranges comparisons, sampling errors or the biases of the researchers is uncertain.

Impact Of Higher Excise Taxes

The annual 12.5% hike in excise for the year 2014 was implemented on September 1. With an additional tax proposed this year, the effective rise in tax rate on cigarettes increased by 13.7%. This has raised the price of a single cigarette stick to about 1 Australian Dollar (AUD). Someone who smokes a pack of cigarettes a day in Australia will now have to spend ~7000 AUD per year. [1] The Government has highlighted the fact that this increase in tax is expected to raise $5.3 billion over four years, thereby helping to balance the national budget. [6]

The rise in prices due to increased excise taxes has led consumers to shift their demand towards the more affordable categories. In response to this trend, market leader British American Tobacco reduced prices of its super-low price category cigarettes to $13 per pack. This affected the market share of Philip Morris in the first quarter, as it fell to 32.9% from its previous two year average of 37.7%. In the second quarter, it has resorted to price reductions, helping improve market share in the low-price segments. Its profitability has suffered due to this price based competition. There is likely to be little respite for Philip Morris on this front as British American Tobacco has affirmed its commitment to meet consumer expectation with respect to prices in the low-price category. [7]

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Notes:
  1. A Dollar To Light Up [] []
  2. Minimal Impact Of Plain Packaging Laws [] [] []
  3. Irish Law Can Create Domino Effect []
  4. France Mulls Plain Packs []
  5. Australia’s Cigarette Pack Warnings Appear to Work []
  6. Tobacco Excise Increases By 12.5% []
  7. Tobacco Giant Defends Ultra Cheap Cigarette Brand []
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