In 2015, over 1.1 billion people smoked tobacco with 5.7 trillion cigarettes being consumed worldwide. The estimated value of the tobacco market is currently £500 billion and the six largest companies have a combined market share of over 80%. That figure would be pushed closer to 85% if we were to see the conclusion of the $47 billion takeover offer for Reynolds American, the second largest tobacco manufacturer in the US. The big six are led by the Chinese state-owned manufacturer, China National Tobacco Corporation, who have a monopoly over the Chinese market and account for over one third of global cigarette production. The four companies with a global reach are: Philip Morris International, British American Tobacco, Japan Tobacco International, and Imperial Brands and the last in the list is Altria Group which is focused in the US after spinning off Philip Morris international in 2008.
The global tobacco industry is a substantial contributor to the economies of many countries and the livelihoods of millions of people across the globe. However, tobacco consumption is the cause of 6 million deaths each year, raises healthcare costs and has an overall negative impact on economic growth, particularly for developing economies. It has therefore become the target of ever increasing regulation. Many developed markets have introduced varying levels of control over the industry or consumers – from outright bans on advertising, the introduction of health warnings and standardised plain packaging, to the prohibition of consumption in public places and private vehicles if a child is present.
In 2005, the World health Organisation’s Framework Convention on Tobacco Control came into force. There are currently 180 UN member states party to the treaty with the objective of protecting present and future generations from the devastating consequences of tobacco consumption. Increasing regulation on the tobacco industry will evidently become a global phenomenon and continue to intensify in the coming decades.
Tax is another area of political threat to tobacco manufacturers. Excised as another measure to combat consumption with the extra revenues used to fund infrastructure projects or fill fiscal deficits, it would seem that tax increases on tobacco are a socio-political win-win. And given tobacco’s addictive nature, thus its demand inelasticity, taxation proves more effective to the latter so is widely used and prone to increase. The indirect consequence of high taxation is an increase in illicit trade activity which has a questionable impact on industry members, after all they are still likely to benefit from the revenue from the cigarettes that are eventually smuggled and the provision of cheap cigarettes to the market only serves to keep waning smokers hooked.
The expected effect of these pressures is that demand would deteriorate, but progress has been slow from a global perspective. Whilst countries that have implemented more stringent laws are now seeing tobacco consumption significantly decline, other nations are seeing an increase as populations continue to grow and disposable incomes increase. Over the last two decades, global smoking rate reductions have been completely offset by consumption growth in China alone. The Eastern Mediterranean Region currently has the highest growth rate and Africa presents itself as a future growth market. However, the group who are most affected by tobacco control policy are youths who become less likely to take up the habit and this important demographic suggests a looming albeit soft landing for the industry.
Tobacco manufacturers are now in a state of transition and investing in alternative ways to provide nicotine to consumers without the threat to one’s health. E-cigs, electronic devices that vaporise nicotine and come with a wide variety of flavours, have become the most recognisable substitute. Medical research in the area is still young but they are considered by many to be non-toxic and it is indeed true that they do not disseminate a number of the hazardous chemicals that traditional cigarettes do. The e-cig industry has boomed over the last decade and is now worth over £6 billion worldwide. Big tobacco companies were slow to enter the market but in a flurry of activity between 2012 and 2014 all five publicly traded companies acquired an e-cig brand. Adoption rates for e-cigs over cigarettes among young adults are now at a ratio of 2:1 in the UK and US. Other innovations in include heated tobacco devices. These gently heat tobacco, instead of burning it, to produce a warm, nicotine-laced aerosol with the intention of attracting smokers who will not go as far as to convert to an e-cig. It is estimated to reduce toxins by 90% when compared to traditional cigarettes.
One factor remains consistent, both alternatives still deliver addictive nicotine and, if considered to sufficiently reduce the health and environmental impacts, could have the potential to expand the consumer base over the long term. The future for the industry is one of investment, Innovation and development, within what could become a regulatory minefield, but, if navigated successfully, these typically high yielding stocks could be an attractive income boosting asset.
British American Tobacco plc
Headquarters London, United Kingdom
Area served Worldwide
Revenue £13.104 billion (2015)
Operating Income £4.557 billion (2015)
Net Income £4.522 billion (2015)
Leading Brands Dunhill, Kent, Lucky Strike, Pall Mall, Rothmans
Leading alternatives Vype (e-cig), Glo (heated tobacco)
Philip Morris International Inc.
Headquarters New York, USA
Area served Worldwide excluding USA
Revenue $73.908 billion (2015) [£50.141 billion]
Operating Income $10.623 billion (2015) [£7.207 billion]
Net Income $7.032 billion (2015) [£4.771 billion]
Leading Brands Marlboro, L&M, Bond Street, Parliament, Philip Morris
Leading alternatives iQOS (heated tobacco), Nicocig (e-cig)
Japan Tobacco Inc.
Headquarters Tokyo, Japan
Area served Worldwide
Revenue ¥2.253 trillion (2015) [£12.679 billion]
Operating Income ¥565.2 billion (2015) [£3.181 billion]
Net Income ¥207.7 billion (2015) [£1.167 billion]
Leading Brands Winston, Mevius, LD, Camel, Sobranie
Leading alternatives E-lites (e-cig), Logic (e-cig), Ploom (heated tobacco)
Imperial Brands plc
Headquarters Bristol, United Kingdom
Area served Worldwide
Revenue £25.289 billion (2015)
Operating Income £1.988 billion (2015)
Net Income £1.723 billion (2015)
Leading Brands Davidoff, Gauloises, L&B, Bastos, P&S
Leading alternatives Ruyan (e-cig), Puritane (e-cig)
Not developing a heated tobacco product
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