10.24 The future of the tobacco industry
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10.24.1 In Australia and other mature markets
Australia is regarded in tobacco industry parlance as a 'mature' market, meaning that consumption is in decline, and that the best the tobacco companies can hope for is to gain a larger slice of a shrinking market, and for reductions in volume of cigarettes smoked and the numbers of people smoking them to be gradual. Euromonitor, an international organisation which compiles business intelligence and industry data,341 anticipates that the total value of tobacco retail sales in Australia will be in decline by the end of the decade. Nonetheless this does not mean that the industry, perhaps in a more consolidated form, will not continue to be profitable in Australia, and the industry can be expected to continue defending its interests with the usual vigour.
In the substantially mature markets of Western Europe, an analysis from 2005 examining prospects for investment in tobacco in the region enthused that 'almost everything about this industry is the opposite to what you might expect,' and that 'underlying economics are unique and attractive.' It helps, of course, that tobacco is addictive. The report points out that where countries tax tobacco on an ad valorem basis[68], tax increases deliver higher profits to the companies as well and price rises have, historically, more than offset declines in sales volume and lower profitability due to smokers choosing cheaper brands. According to this analysis, these factors make the tobacco sector in Western Europe extremely resilient.342
In Australia and other developed countries, smoking will continue to become concentrated among the most disadvantaged sectors of the community and the industry will doubtless seek new ways to keep tobacco products as affordable as possible. In the USA, the industry has reached its more 'downscale' customers by making donations to key groups supporting the homeless and the mentally ill, thereby giving them access to an important market, while permitting the industry a nod in the direction of corporate responsibility.343
All the companies acknowledge the reality that their markets are likely to become yet more tightly controlled. Regulatory constraints which have been debated in the tobacco control arena include prescriptive controls on emissions and ingredients,344 deletion of brand names and imagery and the introduction of generic packaging,345 and, most extreme, government controlled non-profit tobacco distribution and sale.346 But Philip Morris Inc, for one, is sanguine about the regulatory environment it confronts. PMI notes that 'These matters constitute largely unchartered territory for regulators,' therefore raising the prospect that the company can influence the process (or, as they put it, offering 'a good opportunity for PMI to provide expertise and comprehensive solutions as a result of our transparent and supportive approach to reasonable regulation.')92 In the USA, Philip Morris has stated that it supports legislation which would grant the Food and Drug Administration (FDA) regulatory authority over tobacco products.347 Presumably Philip Morris feels well positioned to compete in the potentially reduced exposure products (PREP) market (see Section 10.7.5), but more importantly, it has been observed that submitting to FDA authority is likely to be a shrewdly calculated manoeuvre to ensure long term viability and protection for the company.348
Litigation remains a real concern for the tobacco industry, in the USA and elsewhere. While acknowledging that the litigation environment may be unpredictable, the companies state on their respective websites that they will vigorously contest any cases brought against them and that they have every confidence that they will prevail.3, 5, 8 Litigation against the tobacco industry is discussed in detail in Chapter 16.
10.24.2 .... and elsewhere
The global outlook for the tobacco industry is far from pessimistic. As noted, the developing world is home to 80% of the world's smokers349 and still offering major prospects for growth.2 The websites of the major tobacco companies are universally bullish about their prospects. Each catalogues its expansion into new markets through takeovers or partnerships (the most effective way of increasing market share, particularly if sales of the more profitable 'international' brands increase4) and points to the high return offered to shareholders.
The comparative lack of tobacco regulation in many countries and government willingness to embrace tobacco growing and manufacturing in return for substantial financial inducements makes these markets ripe for industry exploitation and there is every sign that this is occurring.10 Investment by the international tobacco companies in foreign markets is typically associated with increased per capita consumption, particularly in low and middle income countries.350-352 Coupled with this is the doubtless heartening news for the industry that in many countries smoking prevalence among young teenage girls is catching up with that of boys, that use of cigarettes and other tobacco products is widespread among children, and that many children are contemplating taking up smoking.353 In countries where few women smoke, the female market is being aggressively targeted and the prevalence of female smoking is rising.354 And as BATA itself points out, even if 'smaller percentages of populations will smoke ... the number of adults in the world over the age of 20 is forecast to grow by 11% by 2015.'19
It is likely that the industry already has strategies in place to protect their interests in developing markets, having learned from experience in mature markets. According to an RJR executive, 'we feel very strongly that there are opportunities around the world for the industry to head off issues that were not handled in the US as effectively as they might have been.'355
10.24.3 Alternative uses for tobacco crops?
The question of whether tobacco has potential commercial uses beyond addicting and satisfying the addiction of tobacco users remains open.
Over the years there has been speculation that nicotine may have some pharmaceutical benefits. For example a small number of disease processes are known to be slowed down or averted in smokers, possibly due to the protective effects of nicotine (see Chapter 3, Section 3.28). In the USA a pharmaceutical company called Targacept, formerly a subsidiary of the tobacco company RJ Reynolds, is continuing research into a class of drugs described as neuronal nicotinic receptor therapeutics.356 Other researchers are investigating the potential for tobacco to be used as a host plant for genetic and other biomedical purposes, including the production of vaccines and other chemicals to treat and prevent disease.357-360
Even if tobacco plants are found to be a suitable source for production of biomedical products, the amount of land needed for tobacco production for these purposes would be very small compared to that required to supply the traditional tobacco market.361
[68]Or have an ad valorem component to the tax regime. Australia no longer taxes in this way but many countries do. See Chapter 13 for discussion.
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