Feb 20 - Plain cigarette packaging of the type proposed this week by New Zealand could be
particularly damaging to manufacturers' pricing power if replicated in other countries, Fitch
Ratings says. While plain packaging legislation is the biggest regulatory risk facing the
tobacco industry, it is still unclear how many other countries may follow suit.
We believe the biggest impact if bigger tobacco markets were to successfully
introduce similar rules would be on manufacturers that sell premium and
above-premium cigarette brands. As all tobacco packages would look the same,
their added appeal would fade, potentially reducing the price difference between
brands. Loss of pricing power would be particularly concerning for tobacco
companies as it is the ability to increase prices that has allowed them to
maintain growth despite falling volumes. Another effect that is difficult to
predict is the risk of a widespread pickup in illicit trade, as packages become
more vulnerable to being forged.
Any similar rules in major European markets would be likely to have the biggest
impact on Philip Morris International, because its portfolio is skewed towards
premium brands, and Imperial Tobacco, which has lower-priced brands but relies
on Europe for a bigger overall proportion of sales.
We believe politicians in many European countries could be in favour of
introducing plain packaging. But any attempt to do this would be met with
multiple legal challenges similar to those being brought against Australia - the
first country to implement rules of this type, in December 2012. The extent and
speed with which other countries might follow is therefore unclear and would
depend on the extent to which the courts or arbitration panels could see plain
packaging as an infringement of companies' intellectual property or a breach of
Plain packaging rules are unlikely in the US in the short to medium term, after
the success tobacco companies had in fighting a less severe challenge to
intellectual property such as graphic warning labels.
Any change is likely to be very slow and our ratings therefore only factor in
expectations of falling pricing power for the relatively small Australian
market. However, they do factor in other regulatory pressures that are more
certain. These include the gradual extension of smoking and advertising
restrictions and higher excise regimes in the developing markets of eastern
Europe, Asia and Latin America. These pressures in emerging markets will be more
than offset in the short term by the trend for consumers in these countries to
move on to more expensive products and brands.