Many tobacco investors have thought that the U.S. would always have the most onerous restrictions on cigarettes and other tobacco products. Yet instead of continuing to allow a freer environment for tobacco companies, several countries around the world have imposed more stringent limitations on sales. In May, New Zealand became a new battleground for Philip Morris International (NYSE:PM), British American Tobacco (NYSE:BTI), and other tobacco companies doing business there. Let's take a closer look at what Philip Morris and its peers face and why investors should keep a close eye on the Kiwis.
A taxing proposition
In New Zealand's annual budget, a new plan introduced taxes that will eventually be among the highest in the world. As part of a longer-term plan to eliminate smoking entirely from the country, New Zealand will raise its tobacco taxes by nearly half in the coming four years, with increases phasing in through four consecutive 10% increases. Even now, the price of a pack of cigarettes in New Zealand is relatively high, at 20 New Zealand dollars, or about $13 in U.S. dollars.
After the increase fully takes effect in 2020, cigarettes will cost about 30 New Zealand dollars per pack. That works out to about $20 in U.S. currency at current exchange rates.
Officials at the New Zealand Ministry of Health argue that raising the excise tax will promote quitting and produce decreases in smoking-related illnesses. As one ministry official said, "Raising the price of tobacco is the single most powerful tool to reduce smoking." Pointing to the success of past increases in cigarette excise taxes, the ministry believes that the move will save lives.
Meanwhile, tobacco companies are more skeptical about the move. Already, Philip Morris and other producers have seen black-market activity in other areas that have relatively high excise taxes. Many argue that higher taxes simply push smokers into illicit activity that's bad for customers, the government, and tobacco producers.
The other half of New Zealand's one-two punch came later in the month. New draft regulations came out that will require the packaging in which cigarettes are sold to have large graphic images covering the majority of the space on the pack, along with the health warnings that are now almost ubiquitous in most jurisdictions around the world. Tobacco companies would no longer be able to display logos under the new regulations, with only neutral colors allowed in any open space remaining on the package.
New Zealand had considered such moves in the past, but at the time, other countries had run into legal disputes. Most notably, neighboring Australia was one of the pioneers of the plain-packaging movement, and Philip Morris and other companies argued that the laws that permitted plain-packaging regulations violated their rights. In Australia, courts upheld the plain-packaging laws, and that has prompted New Zealand to move forward with its own version of the law.
Proponents of the regulations argue that taking away major marketing components of tobacco ad campaigns will help in reducing smoking. Again, though, Philip Morris, British American, and others believe that the measures aren't proven and that legal challenges connected to international trade law still need to be resolved.
A changing world
New Zealand likely won't be the last country to look to impose tighter regulations on cigarette and tobacco use. In the end, Philip Morris will have to find ways to fight back against restrictions, and moves like its efforts to promote reduced-risk products like the iQOS heat-not-burn tobacco system have the potential to be an answer to tougher laws. If it can succeed, then Philip Morris could turn regulations to its advantage by being first to promote compliant alternatives.