10.19 The future of the tobacco industry

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Last updated: May 2018      Suggested citation: Freeman, B., Hagan, K., & Winstanley, M. 10.19 The future of the tobacco industry. In Scollo, MM and Winstanley, MH [editors]. Tobacco in Australia: Facts and issues. Melbourne: Cancer Council Victoria; 2018. Available from

10.19.1 In Australia and other developed country, mature markets

Australia is regarded as a ‘mature’ tobacco market, meaning that consumption is in decline. The best the tobacco companies can hope for is to gain a larger portion of a shrinking market, to sell more of their most profitable brands, and that reductions in the volume of cigarettes smoked and the numbers of people smoking will be gradual. 

Market research company Euromonitor predicts the decline in smoking prevalence in Australia is set to continue. “Significantly, tobacco excise increases have resulted in smoking becoming an expensive habit to maintain, and changes to where smokers can light up have resulted in smoking becoming less socially acceptable. As the impact of tobacco tax hikes is felt more strongly by regular smokers than occasional smokers, the former are choosing to either cut down or kick the habit. The fall in smoking prevalence has also been impacted by Australians opting to pursue healthier lifestyles.”¹

However, the tobacco industry will likely still experience profitability in Australia in the short term, and will continue defending its interests.² Since the introduction of plain packaging combined with a series of large increases in excise/customs duty, price has become a key battleground in Australia. Euromonitor noted that consumers were driven largely by price in 2016, with weak income growth compounding the impact of tobacco excise increases. “This led to economy-priced cigarettes posting an increase in volume share at the expense of both mid-priced and premium brands,” according to Euromonitor’s analysis.¹

In January 2011, Citigroup issued a report that suggested that smoking could virtually disappear in developed countries by the year 2050.³ While acknowledging that in the short term tobacco will continue to be a highly profitable industry, Citigroup reasoned that in the ”very long view, it’s hard to ignore 50 years of data. Smoking rates appear to be falling in a series of straight lines. If this continues, and it has for 50 years, then it means that the percentage declines in volumes will gradually accelerate. This seems to have been what is happening”.³ As a consequence of its findings, Citigroup downgraded its investment rating on tobacco stocks. 

US fund manager Ranger International agreed with this analysis in 2016, arguing that ‘steep’ valuations of tobacco companies are at odds with the ‘basic story of falling demand for tobacco products’. In a note to investors, the fund manager said: ‘We like to call large companies with falling organic growth ‘melting ice cubes’. They may be large and many even dominate their industry, but the business environment has changed such that organic growth continues to slide year after year.’ While the challenges faced by heavily disrupted companies such as Eastman Kodak were well known, tobacco companies had ‘persuaded investors that their inevitable decay can be managed.’ Ranger International said the tobacco industry’s multi-decade growth story had turned to one of decay, and this included emerging markets where growth was no longer strong.⁴

In the US, tobacco profits are up, due to companies raising prices and cost cutting resulting from consolidation within the industry. A Wall Street Journal article says that despite the current boom, an existential threat still hangs over the industry. ‘No-one expects volume declines anywhere to reverse, and price hikes can make up for that for only so long.’ The article points out that while some Middle Eastern and African markets are growing due to rising populations and income, smoking is on the decline in much of the rest of the emerging world where there is less opportunity than in the US to boost prices to make up for a stagnating market⁵ (see Section 10.18 for a detailed overview of tobacco company divestment).

With tighter regulation and higher taxes remaining significant threats in the US and overseas, tobacco companies are investing heavily to develop products they claim are safer, including heat-not-burn products such as Philip Morris’ iQOS. The Wall Street Journal notes that revenue from these “next generation” products remains a tiny slice of overall sales, meaning the tobacco industry must rely on traditional cigarettes for years to come. The article cites British American Tobacco’s head of research and development, David O’Reilly: ‘The focus really is, how do we sustain our revenues from combustible products, which fuel the innovation for next-generation products?’⁵

Citibank has upgraded the investment status of Swedish Match—the smokeless tobacco (snus) company—because of pricing strength and volume growth.⁶ This is consistent with the smokeless tobacco product test marketing that the tobacco industry has undertaken in the US. These products appear to be targeting consumers and smokers in smokefree environments in order to expand the tobacco market and undermine smoking cessation.⁷ Given the current Australian sales ban on smokeless tobacco products, this is very unlikely to have a similar effect in Australia (see InDepth 18A).

All the tobacco companies acknowledge the reality that their markets are likely to become even more tightly controlled. Regulatory development that have been debated include prescriptive controls on emissions and ingredients,⁸ government controlled non-profit tobacco distribution and sale⁹ and even discussion of the ban on the commercial sale of products.¹⁰ But Philip Morris International, for one, is sanguine about the regulatory environment it confronts. Philip Morris International notes that, ‘These matters constitute largely un-chartered territory for regulators’, therefore raising the prospect that the company can influence the process (or, as the company puts 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’).¹¹

Litigation remains a real concern for the tobacco industry, in the US 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.^12-14 Litigation against the tobacco industry is discussed in detail in Chapter 16.

In Australia and other developed countries, smoking will continue to become concentrated among the most disadvantaged sectors of the community and the industry will seek new ways to keep tobacco products as affordable as possible. In the US, the tobacco 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 toward corporate responsibility.¹⁵ In Australia, very low-cost, discount brands have been imported to appeal to this price sensitive market.¹⁶

10.19.2 Low and middle income country markets

The global outlook for the tobacco industry is less pessimistic. According to the World Health Organization:

‘Tobacco use continues to be the leading global cause of preventable death. It kills nearly 6 million people and causes hundreds of billions of dollars of economic damage worldwide each year. Most of these deaths occur in low- and middle-income countries, and this disparity is expected to widen further over the next several decades. If current trends continue, by 2030 tobacco will kill more than 8 million people worldwide each year, with 80% of these premature deaths among people living in low- and middle-income countries.’¹⁷  

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.¹⁸ Investment by the international tobacco companies in foreign markets is typically associated with increased per capita consumption, particularly in low and middle income countries.^19-21 Coupled with this is that in many countries smoking prevalence among teenage girls is catching up with that of boys, use of cigarettes and other tobacco products is widespread among children, and many children are contemplating taking up smoking.²¹ Added to this, in countries where few women smoke, the female market is being aggressively targeted and the prevalence of female smoking is rising.²² The 2017 World Health Organization report on the global tobacco epidemic shows that while progress has been made in advancing global tobacco, a minority of the population is still not protected by key policy reforms. See Figure 10.19.1

Source: WHO 2017¹⁷

10.19.3 Other uses for the tobacco plant

Pilot projects are underway to turn tobacco into biofuel that could be used in aviation, including a collaboration between Boeing and South African Airways called Project Solaris. Researchers are using selective breeding techniques and genetic engineering to create a source of renewable fuel. According to a report in The Guardian, all of the by-products of tobacco, including sugars, oils and proteins, can be used in products ranging from biofuel and animal feed to soil amendments (nutrients added to improve soil).²³

New methods in plant biotechnology may also allow inexpensive mass production of medicines using the tobacco plant. Studies are being conducted using the tobacco plant as a platform to manufacture targeted protein-based therapies to treat Ebola, cancer and HIV/AIDS.²⁴

10.19.4 Shifting product focus

Multinational tobacco companies, particularly Philip Morris, have announced plans to move towards a ‘smokefree’ future by focusing on ‘less harmful’ products such as heat-not-burn and e-cigarettes.²⁵ Some have questioned the ethics and motives of such diversification, with tobacco companies profiting from smokers, new nicotine users, and would-be quitters.²⁶

Tobacco companies are investing heavily in heat-not-burn products which heat tobacco to generate a nicotine-containing vapour. This is in contrast to the combustion of a traditional cigarette, in which tobacco leaves are burned to generate smoke that contains nicotine. According to market research company Euromonitor, tobacco companies believe that heat-not-burn technologies will appeal to smokers looking to switch from combustible tobacco to a “safer” product. This market will likely find heat-not-burn products to be closer to the experience of smoking a combustible cigarette, compared to inhaling nicotine vapour from an electronic cigarette.²⁷

Philip Morris’ heat-not-burn product, iQOS, is currently present nationwide or in key cities in more than 30 markets worldwide, including Japan, Canada, Germany, Italy, and the UK. The company has also filed a Modified Risk Tobacco Product Application (MRTPA) for the product with the US Food and Drug Administration.²⁵ British American Tobacco and Japan Tobacco International have also developed heat-not-burn products.²⁷ In 2017, Euromonitor estimated that heated tobacco would be the fastest-growing tobacco category in the following five years, reaching US$15.4 billion in sales by 2021, up from US$2 billion in 2016²⁸ (see InDepth 18C for a detailed discussion).

Although initially slow to enter the market, the major international tobacco companies have invested heavily in e-cigarettes in recent years.²⁹ For more information see 18B.1 The e-cigarette market. According to Euromonitor, the global market for e-cigarettes was worth US$12 billion in 2016 with use of vapour products to grow but remain niche in the short-term.³⁰

There is also speculation that multinational tobacco companies will move into marijuana. Tobacco industry documents show that since at least the 1970s, tobacco companies have been interested in marijuana as both a potential and rival product.³¹ In 2017, Imperial Brands appointed to its board Simon Langelier, who is also the chairman of a Canadian supplier of cannabis oil extracts, PharmaCielo.³² As governments and public opinion shift towards decriminalising marijuana, some have warned that policymakers should learn from the experience of tobacco “in order to prevent domination of the market by companies seeking to maximize market size and profits”.³¹ 

 

References

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