Factors influencing European cigarette markets in the short and mid term Christoph Ihmels,11.10.2006 ERA Packaging Conference
British American Tobacco in Germany Founded in 1926 Sites in Hamburg, Bayreuth + Bremen 1.800 employees #2 in the German market 23.6% market share Total volume (all tobacco products): 31.5 bn sticks 5.1 bn turnover / 2005 4 brands in the German Top10: Gauloises Blondes, Lucky Strike, HB, Pall Mall
Corporate Social Responsibility The social reporting activity at BAT: Since 2001 As the only tobacco company in Germany Instrument for social responsibility Continuos Dialogue with important stakeholders Identification of Intersections Allignment of the business practice to social expectations
The Top4 factors The price of cigarettes Smuggling Smoking Restrictions Advertising Restrictions
The Price of Cigarettes An increase in cigarette prices/ taxes will not have a real effect on the consumption of tobacco products. Because:
The Price of Cigarettes If the price/tax of cigarettes rises then: 1. There are legal alternatives for customers like: a) StiX b) RYO c) Filter-cigarillos A major role is played by the illegal alternatives: 2. smuggling will increase. As a result people will look for cheaper (e.g. illegal) cigarettes. Quitting/reducing smoking will not be their first choice. If the price/tax of cigarettes rises then: b) The governments seek to increase tobacco tax revenue. Instead, if the consumption of cigarettes reduces, the state is confronted with a loss of tax revenue.
Smuggling and its causes Smuggling is caused by large price differences between cigarettes in different countries.
EU-Prices and smuggling to Germany < 1,00 1,00-2,00 2,00-3,00 3,00-4,00 4,00-5,00 5,00-6,00 6,00-7,00 > 7,00
Smuggling Smuggling will result in: Share of non duty-paid cigarettes Less revenue for the governments decreasing volume of the market for duty paid products but not in a corresponding decrease of consumption of tobacco products
Countermeasures Penalties for tobacco smuggling should be revised All tobacco products should prominently display tax stamps showing that applicable taxes have been paid Cigarette Packaging should carry clear labelling that makes it easy to track them from manufacturer to end user market
Smoking Restrictions Smoking bans are not strong factors that can influence tobacco sales, but have a enormous negative impact on the gastronomy. Why?
Smoking Restrictions Smoking bans are found not to be strong predictors of adult smoking prevalence and do not significantly affect cigarette demand If a smoking ban is implemented, then: a) Outdoor smoking (oppoertunities) will increase. b) Consumption will migrate from the gastronomy to private locations.
Smoking restrictions If a smoking ban is implemented, then: it will have a strong impact on the economic sectors associated with the consumption of tobacco products esp. gastronomy. The ban in Scotland and Ireland showed very negative results:
Economic Impact of Smoking Bans Ireland Total smoking ban at workplaces introduced in March 2004 Impact Turnover in Irish pubs down by 20-30% 200 pubs closed Many rural pubs open only in the evening, cutting off a vital social link for many customers living in isolated areas. 7600 jobs lost in hospitality sector in 2004. Scotland (Vintners' Federation of Ireland, March 29, 2005) Total smoking ban introduced in 2006 Impact 6 of 86 Bingo halls have closed 10.8 % decline in drink sales 2.6 decline in food sales
BAT Activities in Germany Support to the gastronomy Nationwide implementation of non-smoking areas, make it a standard in German restaurants Designation-Material to implement voluntary agreement on non-smoking areas
Advertising Restrictions Advertising is not able to convince people to start smoking therefore advertisement restrictions will not prevent people from smoking. Not easy to become a star over night. Why?
Advertising Restrictions Why do advertising restrictions not lead to a decrease of consumption? Advertising is used only for the competition of tobacco companies as each one tries to promote its brands to the public. They do not have the aim of the acquisition of new customers among the public.
Advertising restrictions What are the effects of advertising restrictions? a) Advertising restrictions are destructive for competition and are consolidating the position of the market leader b) Are representing a heavy interference in the business practice of BAT and complicate the communication between the industry and the customer. Tobacco is and remains a legal product consumed by almost 30% of adults BAT stands for appropriate and adequate solutions
BAT Activities in Germany Development & implementation of innovative CHEKX system to enhance the protection of minors on the internet. CHEKX allows only adults to get access to brand websites (e.g. www.lucky-strike.de) of British American Tobacco.
Conclusion Excessive regulatory activities have little effect on demand, as smokers can find cigarettes easily from other sources. The major impact will be found in the different sectors related to the tobacco industry.