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Plain packaging may butt out ailing tobacco industries

23 August, 2011

The Australian Government has big tobacco companies panicking with the introduction of a tobacco product plain packaging bill to Parliament in July.

In response, tobacco companies are deploying aggressive advertising campaigns and threats of legal action to convince the government – and the public – to reject this bill. The government is adamant, however, that it is protecting lives, while tobacco companies are only interested in protecting profit margins.

There is certainly a lot of profit to protect. British American Tobacco’s Australian and New Zealand operations generated a healthy profit margin of 22% in 2009, while Philip Morris’s Australian profit accounted for a staggering 38% of revenue. In fact, Philip Morris’s profit margin has increased since 2004, despite a decline in smoking rates.

The three major players in Australia’s tobacco industries are all subsidiaries of major global companies and thus have strong reason to fight plain packaging laws in Australia. For example, the successful adoption of these laws in Australia

is likely to prompt similar action in other countries like New Zealand and the United Kingdom, which are considering similar laws. Tobacco companies fear that Australia’s legislation could spark a global domino effect, thus threatening their sales and profits in all markets.

Plain packaging has never been legislated, so its effectiveness in deterring people – particularly young people – from smoking is yet to be proven. However, studies show that plain packaging enhances the effectiveness of health

warnings, reduces misconceptions about the harmfulness of different brands and strengths, and makes cigarettes less appealing. This may not be enough to cause seasoned smokers to quit, but should discourage non-smokers from starting, resulting in the smoking rate declining over time.

Australia’s smoking rate and per capita cigarette consumption have been declining for the past few decades. Increased awareness of the health effects of smoking, higher prices and government anti-smoking regulations have been affecting cigarette sales for many years. The tobacco product manufacturing and wholesaling industries have been declining slowly over the past 10 years, despite higher prices propping up revenue and profits ever so slightly. Any further decrease in the smoking rate caused by plain packaging laws will only hasten these industries’ declines.

A faster fall in cigarette sales will also affect convenience stores, given that about 30% of their revenue comes from cigarette sales, though this proportion declined over the past five years. Higher prices have driven more consumers to

purchase cigarettes at supermarkets and discount outlets. This has led to a decline in add-on milk, snack and newspaper sales for convenience stores, but also reflects a highly competitive retail market and the growing dominance of supermarkets. This is likely to remain the case whether plain packaging laws are passed or not.

Source: IBISWorld

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