adminLONDON. — From today all cigarettes manufactured in the UK must be boxed in plain packaging, adorned with large, graphic photos highlighting the dangers of smoking. The new rules — upheld by the High Court yesterday — provide another hurdle for the tobacco industry to clear, as it battles high taxes, declining smoking rates, and new EU legislation banning packs of 10 cigarettes and flavoured products such as menthol.
Retailers in the UK will face a hit of at least £90 million to profits over 10 years as a result of consumers ditching premium brands, according to the National Federation of Retail Newsagents.
The cost will put more pressure on the big tobacco groups — British American Tobacco, Philip Morris International and Imperial Tobacco — which are already investing heavily in ecigarettes and other “reduced-risk” products as they seek to maintain profit growth.
Despite the obstacles, annual profits at BAT and Imperial have risen handsomely in recent years, with pre-tax profits reaching £5,6 billion and £2,6 billion respectively in 2015. Net annual profit growth at BAT has averaged 17 percent since 2003, yet ecigarettes account for less than 1 percent of total revenues.
Since the turn of the century, the proportion of UK smokers has fallen from 16 percent to 11 percent, and although Big Tobacco has compensated for the drop in volumes by bumping up prices, many realise this is not sustainable in the long term.
The shift to new revenue streams for tobacco groups is illustrated by the change that has taken place at BAT’s premises in Southampton, which at its peak produced 35 billion cigarettes a year.
That factory — BAT’s last in the UK — closed in 2007. On the same site today, men in white coats are using test-tubes hooked up to computers to analyse the output from the company’s ecigarettes and develop “next-generation products”.
BAT has invested £500 million in the past five years developing ecigarettes and other reduced-risk products, pinning its hopes on this providing a strong source of revenue in the future.
“I’m not sure this business will pay my pension, but if you’re a management trainee joining today, it may pay yours,” says Kingsley Wheaton, head of next generation products at BAT.
In addition to its research output, BAT’s Southampton laboratory is responsible for ensuring the company’s latest ecigarettes are compliant with strict EU legislations due to come into force this month.
One machine mimics a human mouth and takes a three-second drag on one of its ecigarettes. The resulting vapour is captured in a small, purple vial, which a scientist places into a box the size of a microwave. The vapour is analysed and a computer breaks down its chemical composition.
“Each spike on the graph represents one chemical, and its height reflects its frequency in the puff,” says one BAT scientist.
“From this ecigarette, we’ve detected around 90 chemicals. In a traditional cigarette, there are over one thousand.”
A report from the Royal College of Physicians last month said ecigarettes were 95 percent safer than traditional tobacco products — a conclusion that Public Health England also reached.
But take up among consumers remains slow. James Bushnell, analyst at Exane BNP Paribas, says: “Ecigarettes could be the next big thing, but currently, the products are not good enough, and that’s why they haven’t taken any significant share from traditional tobacco sales.” — Online.
The nicotine delivery is not potent enough. They may find a way to improve that, but until they do, the ecigarette is to be proven.”
Tobacco companies are battling larger independent ecigarette makers, such as Multivape and Gamucci, to formulate a product that can dominate a heavily fragmented market.
BAT has recently launched its own high-tech ecigarette in the UK, the Vape Ebox. Philip Morris International is due to release a new device in the UK next year, while Imperial Tobacco has launched its blu PLUS+, a model it says has “the look and feel” of a real cigarette.
Analysts say that selling ecigarettes is very different to traditional tobacco — more reminiscent of the razor-and-blades type model, in which the initial product is sold at a low margin, and the top-up equipment, in this case liquids, is sold at a higher one.
Mr Wheaton insists BAT can generate as much money from an ecigarette user as from a traditional smoker. But only a fraction of non-smokers are taking up vaping — prompting fears the big groups could simply be shifting a shrinking consumer group on to a different product.
He counters that, saying the total number of nicotine users is increasing for the first time in decades. “For the first time in a long time, I think BAT sits in a growing industry,” he says.
But analysts stress there is a long way to go, even if the right product is found. Natasha Kendall, tobacco analyst at Nielsen, says: “[Ecigarettes are] probably the future, but at the moment they represent less than 1 per cent of the tobacco market.” – Online
Charles Duri
Online Reporter