Analyst Insight by Shane MacGuill, Analyst – Tobacco, Euromonitor International
When it comes to the legislative agenda facing the global tobacco industry, debate and activity understandably currently revolves around the potential spread of plain packaging in Western markets, the imposition of sweeping tobacco control measures in major developing markets such as Russia and Indonesia and the EU’s ongoing revision of the Tobacco Products Directive (replete with the distinctly sub-Watergate sideshow of burgled offices and alleged official cover-ups). However, in January 2013 the Chilean Senate quietly passed tobacco control measures which, while ostensibly lacking the scope and intrigue of these other regulatory conundrums, say just as much about the challenges confronting the industry. The new laws on public smoking, additives and tobacco marketing are emblematic of a diminished outlook for the industry, and indeed even herald the end of Latin America as a reliable growth region for tobacco players.
Remarkable measures in a middling market
With the greatest of respect but also with the greatest of veracity, in relative terms Chile is an unremarkable tobacco market with a retail size firmly in the lower half of global totals, on a par with the unremarkable European markets of Belgium and Netherlands and the backmarking, illicit bedevilled Malaysian industry in Asia. However, it has a strong smoking culture, with prevalence showing signs of plateauing at 35%, one of the highest rates in the Latin American region. According to the WHO’s Tobacco Atlas rates of female and youth smoking (particularly female youth smoking) are increasing dramatically. Unremarkable also then that it would seek to introduce long delayed bans on smoking in public places and marketing restrictions? To a point. What is truly remarkable is not that legislators have acted but that they have done so with such gusto and reach in the face of public and industry pressure.
The January measures, which came into force on the 1st March 2013, bar, without exemption or alteration, smoking in all enclosed public places, including not only bars and restaurants but also stadiums and casinos, venues which may have hoped to escape such an injunction. They also regulate the direct and indirect marketing and visibility of tobacco products, turning Chile into a virtual promotional blackhole. Tough, but so far so well-trodden. However, finally and crucially, the legislation prohibits the inclusion of additives in tobacco products, meaning in effect that Chile becomes only the second country in the world after Brazil to ban menthol cigarettes (in both standard and capsule form) and the first to implement a ban, as Brazil’s measure is staggered. The legislation abolishes at a stroke a rapidly burgeoning segment which proponents would argue has done so much to boost female and youth smoking rates.
Designed to impede premiumisation
The prohibition on menthol is a blow to the tobacco industry in real terms, as menthol has grown from under 2% of the market in 2008 to reach 13% in 2012, the equivalent of some one billion sticks. By August of 2013 this demand would need to be met by products of another type, the development of which is likely to be an innovation too far for the industry, or (most probably) will be lost to the industry entirely. The driver of growth in Chile, has been capsule technology, enjoying triple digit growth here as it is globally. It is emerging as the key tool in premiumisation for the industry worldwide and this is precisely why Chile’s ban is also a major blow in symbolic terms – it represents an increasing willingness on the part of legislators to strike at the heart of the industry’s ability to generate value.
Chile’s is an expanding economy and a premiumising tobacco market – the premium segment has grown from 23% in 2008 to 27% in 2012. However, marketing restrictions and menthol bans threaten this increasing value and in this, Chile is totemic of the wider region. The industry has struggled for many years in Latin America, confronted by economic unrest and the pervasiveness of illicit trade (BAT’s share of profit has dropped from 33% in 2008 for Latin America and America-Pacific to 25% in 2012 for the reporting unit known as the Americas).
The received wisdom had been that economic dynamism and improved anti-illicit enforcement would eventually make Latin America a stable seam of revenue in the manner of other declining but affluent developed markets. The dawning truth must now be that Latin American governments are determined not to replicate this grandiose decline of plenty and that with measures attacking companies’ ability to communicate with their consumers and to premiumise their products the future for the industry in the region is one of unstable and ever diminishing returns.
As goes Chile … so goes the world?
And what of the rest of the world? The industry is confronted with the possibility of menthol bans in far more significant markets than Chile. It is a sword of Damocles which has been hanging over the industry in the US (an 80 billion stick menthol market) since the FDA’s 2009 flavouring ban and an outright ban is included in the proposed EU Tobacco Products Directive. Indeed, one EU country, otherwise tobacco-friendly Germany de facto banned capsule cigarettes late in 2012 by refusing to issue licences for their distribution. Chile had also been thought a market not entirely inimical to the tobacco industry. While it is still likely that the US will not impose a menthol ban in the foreseeable future, that the TPD may be watered down through horsetrading and that Chile’s menthol ban may turn out to be an outlier of local significance which is not followed by other governments, one is forgiven for reflecting – if this is how your friends treat you, of what might your enemies be capable?