Will New Packaging Stop Big Tobacco?

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Graphic anti-smoking labels are coming to a tobacco retailer near you. But will it matter to tobacco companies' profits?

The FDA is requiring that cigarettes sold in the U.S. feature pictorial warning labels on the top 50% of the front and back of the package. Similar warning labels must comprise at least 20% of advertisements. Domestic tobacco players such as Altria (NYSE: MO  ) , Reynolds American (NYSE: RAI  ) , Lorillard (NYSE: LO  ) , and Vector Group (NYSE: VGR  ) have until the autumn of 2012 to comply.

The new regulations are being implemented as part of the landmark 2009 Family Smoking Prevention and Tobacco Control Act. The labeling requirements are based on the best practices from other countries. Large labels are more effective than smaller ones, and explicit pictures are more effective than text-only cautions. Already 35 countries require health messages to cover at least 50% of the package. So if you thought abroad-only rival Philip Morris International (NYSE: PM  ) might be an alternative, well, it's already been dealing with similar issues.

Several studies show that graphic labels do promote awareness about the dangers of smoking. And research from the International Tobacco Control Policy Control Project shows that "comprehensive warning labels reduce smoking consumption, increase motivation to quit, and increase the likelihood that they will remain abstinent following a quit attempt," explains the Campaign for Tobacco-Free Kids.

But often awareness does not translate into effectiveness, as anyone who's tried and failed at dieting and exercising knows. Still, there seem to be indications that the packaging tactics will be at least somewhat effective.

While that provides a headwind to Big Tobacco's profits, it doesn't mean these companies can't still extract more revenue from existing smokers while continuing to closely monitor their costs, as they've done for quite a while now. The decline in smoking rates bottomed around 2004 and has remained at about 20% of Americans. This industry still has tremendous pricing power, and market share is very important.

Moreover, because the new labels obscure a significant portion of the packaging, the new guidelines could reinforce the importance of the brands themselves. In other words, the players with strong share are likely to retain their relative positions. And that would be a relative win for Altria, the U.S. market-share leader.

Reynolds, Lorillard, and others are challenging the legality of the labels. Given its stronger position, Altria is probably the best play in this challenging environment, but don't confuse that with excitement to run out and buy shares at this point.

Jim Royal, Ph.D., owns shares of Philip Morris. The Motley Fool owns shares of Altria Group and Philip Morris International. Motley Fool newsletter services have recommended buying shares of Philip Morris International abd writing puts in Lorillard. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (9) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 29, 2011, at 5:17 PM, whyaduck1128 wrote:

    I'm so tired of nanny-stating that I'm inclined to start my own mutual fund, the Politically Incorrect Socially Reprehensible Fund. In it would be stocks involving gambling, tobacco, defense, oil, logging, Big Pharma, alcohol, historically major polluters, pornography, and, to show that we'll stoop to any low level, the WWE.

    I'm long on MO and not selling.

  • Report this Comment On June 29, 2011, at 8:01 PM, longertime01 wrote:

    The whole thing about tobacco weakness is full of &8%$. It's hot air. When the earning season comes, it will tell the truth.'

    I'm long on MO and am buying.

  • Report this Comment On June 29, 2011, at 8:03 PM, longertime01 wrote:

    I'm expecting the dividend will also be raised next quarter!

  • Report this Comment On June 29, 2011, at 8:16 PM, longertime01 wrote:

    For the people who listen to Jim Cramer, here is the message for you.

    cramer is an idiot, and that's why he is not rich, ha ha.

  • Report this Comment On June 30, 2011, at 7:36 AM, 2112Brian wrote:

    What is next! Are we going to be forced to look at fat people before we order a burger and fries from McDonalds? The fact is we already have to do that. It does not seem to stop anyone from eating more or less.

    Long on MO/PM.

  • Report this Comment On June 30, 2011, at 11:01 AM, Stocklovr wrote:

    It's interesting and I'm not advocating this but ... the govt. could very easily ban all cigarettes - but they would NEVER do that! Look at all the tax revenue that comes from this product.

    So... they are two faced (surprise, surprise). They want to whine about smoking and do somthing as stupid as putting these pictures on the packaging but they would never want everyone to quit... the tax loss would be huge. They just want you to think they are looking our for all of us... yeah, right.

    To me, there's not a lot of difference between this and banning toys in Happy Meals ... the government aristocracy wants to completely run your life. Better get all the goodies out of cereal boxes and Cracker Jacks while they are at it.

  • Report this Comment On June 30, 2011, at 11:39 AM, ByrneShill wrote:

    " Are we going to be forced to look at fat people before we order a burger and fries from McDonalds?"

    I would say that if you'Re standing in line at McDo, you're probably looking at fat peoples.

  • Report this Comment On July 01, 2011, at 11:39 AM, pepijndk wrote:

    I am not concerned about tobacco's profits. But i am concerned about the total lack this is showing to smokers decency.

    Of all people who smoke regularly, 50% will eventually die as a result of their habit. Of all people who eat red meat regularly, 30% will eventually die as a result. There we are, both cigs as well as red meat are known killers. Yet, for some arbitrary reason cigs are under attack, red meat isn't. That's all fine, though irrational. But it's no longer fine if smokers are demonized and treated without a basic level of respect.

    The problem is further compounded by the fact smoking is known to be highly addictive. Hence, smokers don't have the free choice to quit because the gvmt insults them or raises taxes on them yet again. They don't have that free choice because they're addicted. Only those with the necessary stamina and discipline will manage. All the rest - law abiding citizens - are forced to live with this abuse. That is what is concerning. Not tobacco's profits.

  • Report this Comment On July 04, 2011, at 12:27 PM, skypilot2005 wrote:

    + Rec

    I can't think of anything to add... Which may be a first for me.

    Sky Pilot

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