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August 16, 2012

Tobacco Marketing Endgame a Step Closer as Australia Free to Introduce Plain Packs

369103_8507Analyst Insight by Shane MacGuill, Tobacco Analyst at Euromonitor International 

As expected the Australian High Court has upheld legislation for the plain packaging of tobacco products and paved the way for its implementation in December 2012. The legislation removes all branding and logos from tobacco packaging, save for brand name and requires all products to be sold in standardised packaging with extensive, graphic health warnings. It is a development that was fiercely opposed by the four big tobacco companies, particularly by British American Tobacco plc and Imperial Tobacco who are especially exposed to any impairment in the Australian market. However, as a test case for the strength of momentum, if not quite the legal strength, of global moves to introduce plain packaging its significance is likely to extend far beyond Australian shores.

In the immediate term, challenges to the legitimacy of the legislation remain in the form of petitions brought by tobacco-exporting nations, the Dominican Republic, Honduras and Ukraine through the WTO's dispute process, while Philip Morris International is seeking arbitration under the terms of the Australia-Kong Kong Bilateral Investment Treaty. However, both of these exercises are long on procedure and short on clarity and do not impede the introduction of the new packaging rules on schedule in December 2012.

If you can do it, so can we

The process has been closely monitored by a number of other national governments, including New Zealand, Canada, Norway, France and the UK all of whom have been noises off regarding the possibility of introducing plain packaging regimes. Of these, the latter is the next most likely to implement legislation, having just completed a public consultation on the topic. Although the key legal issues at stake in Australia largely diverge from those likely to be in play in the UK, this development has made it more likely that plain packaging will be pushed ahead with in the UK. However, one wonders whether a parlous governing coalition will have the political determination to persist with a measure that will be strongly fought by the industry and retailers alike and is most likely to face opposition from sections of its own membership.

Off with their brands!

With the advent of plain packaging in a major market the tobacco industry is, in a real sense, through the looking glass. It has of course previously faced and to a greater or lesser extent surmounted marketing and advertising restrictions, smoking bans and punitive taxation. However, never before has it been confronted with an inability to brand its products to consumers in that most direct and impactful of locations, on the packet in their hands. Without a true precedent, the impact of more widely adopted standardised packaging is difficult to predict.

Price wars, downtrading and the rise of illicit

In the short term, the impact would be minimal as smokers continue for the most part to reflexively purchase on existing brand loyalty. However, tobacco manufacturers could no longer rely on branding or product development for share retention and will increasingly resort to pricing as the sole means of competitive differentiation at the point of sale. Indeed, BAT is on record as vowing to 'flood' the Australian market with cheaper brand variants in an effort to 'defend' its brands. This will almost certainly result in increased down-trading by consumers as the equity of premium cigarette brands enters that most nebulous of realms, recalled and associative.

This price slashing tactic would also be aimed at limiting the expected exodus of smokers to the illicit trade. It is argued that removing elaborate branding from cigarette packaging amounts to a 'counterfeiter's charter' as criminal organisations will be freed from the necessity to mimic legitimate products and consumers begin to downgrade their perceptions of differences in quality. Conversely, a nostalgia-driven illicit trade in 'branded' tobacco products may well also result.

One certain consequence. And one unintended?

Proponents of tobacco packaging bans are convinced that they will further de-normalise and de-glamorise smoking, particularly in the eyes of the next generation of consumers. The evidential basis for this is ambiguous, to say the least, but it is a defensible intuitive position. However, price wars, downtrading and an increase in illicit trade raise the very real prospect of the maintenance or even a slight increase in smoking prevalence.

Regardless of any unintended impact on volumes, what is clear is that the widespread introduction of plain packaging will dismantle the twin pillars of the tobacco industry's value growth strategy: pricing power and premiumisation, both of which rely on the capacity to communicate innovation and value addition to consumers. This will have a hugely deleterious effect on the major manufacturers's ability to grow profit in key markets and would likely depress the premium segment in 'standardised' countries to unprecedented lows


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