Philip Morris Could Get Smoked if Aussies Pass Ban on Branded Packaging

With Australia proceeding with its Plain Packaging Bill for tobacco products, Philip Morris International has much to worry about if it becomes a law as this likely hurt its market share in Australia as well as set a dangerous precedent for its other major markets considering similar laws. Philip Morris International is the world’s leading international tobacco company outside of the U.S. and China, and we estimate its market share exceeds 27%. It boasts of eight of the world’s top 15 brands including Marlboro, the number one cigarette brand worldwide.

Marlboro - a cigarette brand of Philip Morris International

Marlboro - a cigarette brand of Philip Morris International

Philip Morris International competes with British American Tobacco, Japan Tobacco and Imperial Tobacco Group plc in its various geographical segments.

In a bid to reduce smoking, Australia is poised to become the first country to mandate tobacco products to be sold in plain packages. The lower house recently passed the Plain Packaging Bill which will soon reach the Senate. It seeks to ban logos and color variations on cigarette packages and mandates a generic logo-free olive green packaging with health warnings on all branded cigarettes from Jan 2012.

The packaging will only carry the brand name and variety of the cigarette printed on the front in a plain white typeface. The reform will give Australia the most restrictive anti-smoking laws.

Threat to Market Share

With this huge setback, the large tobacco players like Philip Morris International and British American Tobacco plan to take legal recourse against the proposed law on grounds of expropriation of tobacco companies trademarks and violation of intellectual property rights.

In a scenario where the plain packaging will weaken its brand identification and may lead to a decline in its market share, it may also increase sales of smuggled products and put downward pressure on the prices of the branded products. Pricing power is a major driver of profits for cigarette manufacturers and its loss would prove quite adverse for the industry already grappling with declining sales volume, especially in the developed markets.

A Dangerous Precedent for Other Markets

The bill if turned into a law would also set a dangerous precedent for other major tobacco markets as governments in countries like New Zealand, the European Union, U.K. and Canada have also been considering similar laws and may follow suit. There is also the risk of plain packaging spreading to emerging markets such as Brazil, Russia and Indonesia.

Declining Tobacco Consumption

The volume of tobacco products sales have already been declining due to growing health consciousness about the extreme health risks of smoking. Governments have also been discouraging tobacco consumption through high excise duties (up to 70% in Europe) and legislative controls like bans on public smoking and strict restrictions on the advertising and marketing of tobacco products and compulsory health warnings.

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