New Data From Australia Shows Big Tobacco Is Set to Benefit From Plain Packaging Laws

After the first year of enforced plain-packing laws, sales of tobacco in Australia have gone up, great news for Philip Morris, British American Tobacco, and Imperial Tobacco.

Apr 14, 2014 at 4:30PM

One of the most recent threats to big tobacco's global dominance has been the threat by multiple governments around the world to enforce the introduction of plain packaging for cigarettes in an attempt to reduce cigarette sales. Industry leaders Philip Morris International (NYSE:PM), British American Tobacco (NYSEMKT:BTI), and Imperial Tobacco (NASDAQOTH:ITYBY) have all been lobbying hard to try and stop lawmakers from taking the plunge -- without success.

Australia was the first country to introduce the law back in 2012, and many other countries have been watching the nation's progress before they introduce their own laws. Australia's law requires standardized packaging on all tobacco products, forcing companies to replace their logos and branding with graphic images of smoking-related diseases on a drab background. However, initial results have not come out quite as expected.

The results are in
For the first full-year of plain-packaging regulation, tobacco companies sold approximately 21.074 billion cigarettes in Australia, a 0.3% increase on the number of cigarettes sold during 2012. Surprisingly, this was the first time in four years that the number of cigarettes sold within Australia has actually increased. Before plain packaging regulations were brought in, the volume of cigarettes sold within Australia declined year after year.

British American Tobacco Australia put out a media release only about a week ago detailing the results of the plain-packing experiment. According to British American Tobacco Australia's spokesman Scott McIntyre::

"Over the five years in the lead-up to the introduction of plain packaging, total tobacco industry volumes were declining at an average rate of -4.1 per cent... Subsequently, since plain packs were introduced on 1 December 2012, industry volumes have actually grown for the first time in a long time to +0.3 per cent."

"Further, the number of cigarettes smoked on a daily basis declined at a rate of -1.9 per cent in the five years leading up to plain packaging, while it slowed to -1.4 per cent after green packs hit shelves."

"At the same time the illegal tobacco black market has risen from 11.8 per cent to 13.3 per cent of total tobacco consumption following the introduction of this failing policy."

"With growth in industry volumes, fewer people quitting and a jump in the amount of cheap illegal cigarettes on the streets, you could draw the conclusion that people are actually smoking more now than before plain packaging came into effect."

A mystery
There is no clear explanation why the volume of cigarettes sold within Australia increased after the introduction of plain packaging, although Eoin Dardis, director of corporate affairs for Philip Morris in Britain, has one theory.

Mr. Dardis believes that, when you commoditize a product -- i.e. making a process, good, or service easy to obtain by making it uniform -- people go after the price. So if people are buying cheaper cigarettes, they could be smoking more. Mr. Dardis does stress that this is just a theory.

However, this theory makes sense, as industry figures showed that for the whole year, Australian sales of factory-made cigarettes declined just 0.1 percent, to 18.75 billion cigarettes. Meanwhile, loose tobacco volume rose 3.4 percent to the equivalent of 2.32 billion cigarettes.

These figures are actually quite important, and help investment decisions. For example, Imperial Tobacco is one of the largest suppliers of loose tobacco for the Australian market. Australia is considered one of Imperial's "key returns markets," and the company has a market share of more than 15%. What's more, two of Imperial's key brands are Golden Virginia and Drum loose tobacco. The company also manufactures and sells Rizla rolling papers, the number one rolling-paper brand in the world. As a result, Imperial is extremely well positioned to benefit from rising sales of loose tobacco and plain packaging introduction.

So, it would appear that for British American Tobacco and Imperial Tobacco, the introduction of plain packaging is great news. Unfortunately, Philip Morris does not seem to be so sure.

Leaving Australia
Due to strict Australian tobacco laws, Philip Morris has recently announced that it will be closing its only Australian manufacturing facility, with the loss of 180 jobs.

This closure is mainly due to strict Australian regulations, which forced the plant to manufacture cigarettes that did not match consumer preferences elsewhere. Due to these regulations, the factory has been operating at less than half of its currently installed capacity for some time now, and has been marked for closure as part of Philip Morris' global cost-cutting program.

The company will now make cigarettes destined for Australia in South Korea. Australia is notorious for its high cost of labor and mazes of red tape that prevent companies from doing business the way they would like to, so it's possible that this closing by Philip Morris could have significant cost-saving benefits for the company .

All in all
Overall, it would appear that the tobacco industry is set to benefit from the introduction of plain packing -- good news for Imperial Tobacco and British American. Meanwhile, Philip Morris looks set to benefit from lower costs as it leaves Australia, favoring cheaper manufacturing facilities elsewhere.

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Rupert Hargreaves owns shares in Imperial Tobacco. The Motley Fool owns shares of Philip Morris International. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.

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