There’s no smoke without fire

Faced by massive payouts for lawsuits in the US and increasing pressure from anti-smoking lobbies, the tobacco industry is under threat. In addition, moves by EU countries to ban all cigarette-related advertising will potentially stop business

The tobacco industry was left with a bitter taste in its mouth last week after California smoker – and lung cancer victim – Betty Bullock won $28bn (£17.86bn) in damages against US cigarette giant Philip Morris. But the industry has been here many times before and certainly enough times to know that the after-effects of Bullock’s victory will be short-lived, and that it will go on to fight further battles both with claimants and regulators.

Despite the European Union’s imminent introduction of a ban on almost all advertising and marketing of tobacco products, as well as continuing legal battles and regular punitive damages awards in the US – almost always overturned on appeal – “Big Tobacco” is hard at work planning for its future.

It is already plotting how to get around the EU directive, which is expected to come into force on November 15, that requires each EU member state to pass laws restricting the advertising and marketing of tobacco products.

The British Government hopes to get a ban in place by the end of this year, but there are still last-ditch battles to be fought regarding UK legislation. The UK trade body, the Tobacco Manufacturers’ Association, has been lobbying the Government to get so-called “safer cigarettes” (see box) made exempt from the proposed advertising ban (MW last week).

But the industry’s future seems rosy enough, even without such products. Jonathan Fell, tobacco analyst at investment bank Morgan Stanley, says that, while the tobacco market in the West is a mature one, “There is obviously potential growth in developing markets – and I wouldn’t underestimate value growth in Europe, through pricing, restructuring and premium products.”

Black-market imports

The UK, though, is something of a special case. A recent Mintel report suggests that the real threat to the UK tobacco industry comes not from the Government, but from the black market. According to Mintel analyst Simon Howitt, official statistics show cigarette consumption fell by 28 per cent between 1997 and 2001, from 77.4 billion to 55.5 billion sticks (individual cigarettes). He claims that almost all of this fall was because of a switch from duty-paid to non-duty-paid cigarettes. He says that the real fall was very slight, from 84 billion sticks to 81.5 billion.

Howitt adds that in the UK, pressure from black-market cigarettes has forced manufacturers to reposition brands and add cheaper line extensions, to encourage smokers to stick with the duty-paid market. As a result, there has been a shift away from premium brands to lowand ultra-low-priced brands.

Health groups believe the tobacco industry’s main push will be in the Third World, and in particular China. Action for Smoking and Health (ASH) director Clive Bates says that by the year 2025, 10 million people will be dying each year because of smoking – 70 per cent from the Third World. He says: “Some 1 billion people will die prematurely as a result of smoking in the 21st Century. That compares with 100 million during the 20th century.”

In the UK, an estimated 120,000 people die from smoking each year, and the cost of treating smoking related diseases on the National Health Service is £1.5bn. There are also further costs to UK industry from lost productivity and to the State from benefit payments.

Slow-burning reaction

While governments may take steps to curb the recruitment of new smokers, they are unwilling to reduce drastically the number of existing smokers, according to health groups. They claim that governments are compromised by their addiction to tobacco tax revenue. The UK Government earned £9.6bn in revenue from tobacco in 2000 – 78 per cent of the retail price of a packet of cigarettes being tax in one form or another.

Tobacco industry representatives argue that an ad ban is irrelevant anyway. One says: “Most 14-year-olds don’t start smoking because of advertising – they start smoking because they’re told not to and because they think it’s cool.”

Morgan Stanley’s Fell says: “Ad bans in other countries have not led to any decline in consumption. Advertising doesn’t persuade people to smoke: there are lots of reasons why they take it up, such as peer pressure. [Illegal] Drugs aren’t advertised and their consumption is growing.”

Giving up or an early death

Health groups disagree. They believe cigarette marketing is aimed primarily at recruiting new smokers to replace those who are quitting, either through force of will or because they are dead. They point to advertising icons such as Joe Camel, the now banned Camel cigarettes cartoon brand spokesman, and Regal’s Reg and Al campaign as examples of tobacco marketers deliberately and cynically targeting under-age potential smokers.

A spokesman for Imperial Tobacco says: “We don’t believe an ad ban will have any significant impact on consumption. All our advertising is about brand switching. If no advertising is allowed, then brand shares will effectively be frozen. That means the only way of competing will be price – and if prices fall, we could see consumption rise.”

In fact, tobacco companies in the UK have been reducing their above-the-line advertising expenditure over the past few years. In 2001, it was £20.5m (Nielsen Media Research figures), compared with an estimated £65m to £75m in the mid-Nineties.

But critics say any cut in above-the-line spending leads to an increase below the line, in direct marketing and sales promotion. The fact that both of these approaches will be almost completely banned under the proposed UK law means that the industry’s marketers will find other means to get their message across.

And it is certain that even now, while industry lawyers are fighting tooth and nail to delay the passage of the UK ad ban, marketers are scouring the proposed regulations for any loopholes that might be available to them.

A row is already brewing over attempts by the tobacco companies to get “opt-in” direct marketing exempted from the ban, on the grounds that a restriction of their ability to communicate with existing adult smokers, who have requested information, is likely to drive those smokers into the arms of the cigarette smugglers, thus denying the Government their duty.

The tobacco industry’s interests may have been hit by yet another costly damages claim and EU legislation banning the advertising of cigarettes, but the tremors will not last for long as it has the money and some very good lawyers on its side to battle on. Furthermore it is safe in the knowledge that most governments, which claim to want to stamp out smoking, also earn too much tax from the industry to be able to kill it off altogether.

Additional reporting by David Benady

Safer cigarettes

Ask tobacco companies about safer cigarettes and the first thing they will say is: “There is no such thing as a safe cigarette”. This is in itself an astonishing statement, given decades of stonewalling from an industry that has repeatedly claimed that there was no evidence that smoking caused cancer.

But there are such things as “safer” cigarettes. As Chris Proctor, head of science and regulation for British American Tobacco (BAT), says: “You could produce something that would be demonstrably safer, but no one would smoke it. The challenge is to develop a safer cigarette that people would smoke – but to do that, you’d need Government help.”

He claims that in the past, the UK tobacco industry has worked with government to develop safer cigarettes, including nicotine-free cigarettes using so-called “New Smoking Material”, which were launched in the Seventies, and then later on a drive to promote low-tar cigarettes. But the present Government seems unwilling to engage in any such dialogue.

Proctor says there are three possible routes to developing a safer cigarette. Firstly, low-tar and very low-tar cigarettes. Secondly, reducing dangerous chemicals through changes to the way tobacco is prepared or cured, the use of different additives or the introduction of special filters. Thirdly “completely novel ways”, which result in a product that works in different way to that of a traditional cigarette.

But tobacco companies have found that there is little point in producing a cigarette that is theoretically safer if the target market does not like the taste. In 1989, RJ Reynolds (RJR) abandoned its Premier smokeless cigarette, which required consumers to heat a nicotine and flavouring mixture inside a tube, writing off a $1bn (£638.2m) research and development investment in the process because the product tasted like burning rubber (MW March 10, 1989).

Not put off by its earlier failure, RJR launched Eclipse in 1996, a refinement of the Premier system, which heats – but does not burn – tobacco. Test marketing is still progressing.

BAT’s sister company, Brown & Williamson, markets Advance in the US, which uses a filter that reduces toxins and tobacco cured by a special process to reduce carcinogenic compounds.

And Vector, the tobacco group that used to be known as Liggett, produces two “safer” cigarettes – Omni, which uses additives to cut toxins, and Quest, which uses genetically modified (GM) tobacco with reduced nicotine levels. GM is unlikely to be the way forward for Europe, however, given the deep-rooted antipathy to GM products.

So “safer” cigarettes exist, but if they are launched in the EU their manufacturers will face restrictions on marketing the products, because a directive on tobacco product promotion, which specifically forbids “perceived health claims” for brands is due to come into force. Under the directive, even terms such as “light” and “mild” are taboo – so trying to market a less toxic cigarette will be theoretically impossible.

Bizarrely, the latest call for the relaxation of EU laws governing tobacco products comes from Clive Bates of ASH. Speaking last week at the annual conference of the Society for Research into Nicotine and Tobacco in Spain, he called for the legalisation of chewing tobacco, currently only legal in Sweden.

Research in Sweden, Bates says, shows that switching from smoking to chewing tobacco can lead to a significant reduction in the risk factor when it comes to cancer.

The effects of a ban on tobacco advertising

Five years after the election of a Labour Government committed to extinguishing tobacco advertising, The Tobacco Advertising and Promotion Bill should finally receive Royal Assent by this Christmas.

The Bill will ban any form of advertising, including press, posters and the Internet, as well as prohibit the promotion of smoking through free distribution of tobacco products, coupons and mailshots.

Under the forthcoming regulations, tobacco sponsorship of sports will be phased out by July 2003. However, so-called “exceptional global events” – namely Formula One motor racing and World Championship Snooker – will be given an extended deadline of October 2006, provided tobacco sponsorship and the area of visible advertising decreases by at least 20 per cent a year before the cut-off date. Formula One’s governing body, the FIA, says tobacco industry sponsorship probably brings in more than $350m (£223.73m) a year.

Retailers will have to ensure their cigarette display units do not bear prominent ads for tobacco brands under the new legislation. Tobacco vending machines will also be banned from advertising brands. Specialist tobacconists – where more than half of sales are for cigars, snuff, pipe tobacco and accessories – will be allowed to advertise these items in their shops and on shop fronts. Internet sites selling tobacco will be prevented from advertising the product on their home pages, although they will be able to show pictures of products with prices and pack sizes on pages within the website.

“Brand sharing”, where tobacco brand names are used on other products – such as the Marlboro Classic clothes range and Camel boots – will be banned, unless it can be shown that the product was launched before the cigarette brand, and before the legislation was published. This could be complicated in the case of Dunhill, which made lighters and luxury goods before launching tobacco.

The legislation aims to stamp out all forms of tobacco promotion, arguing that if any avenue is left open, the tobacco companies will simply transfer all their marketing resources into that area. On the face of it every eventuality appears to have been covered – for instance, retailers will be forbidden from arranging cigarette packets in a way that promotes a brand name. The example to support this reads : “If there were a brand of cigarettes called ‘Xerxes’ the packets could not be arranged in the shape of the letter “X.”

Marketers are masters of getting round regulations, but they will have their work cut out in scouring this legislation for any dodges.

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