Altria 2Q Profit Falls 57% On Charges, Cigarette Volume

NEW YORK -Altria Group Inc.’s (MO) second-quarter earnings fell 57% on a previously disclosed tax-related charge and lower cigarette volume, and the company warned the remainder of the year would remain challenging.
The maker of Marlboro cigarettes and other brands has benefited from increases at its smokeless-tobacco products, such as Copenhagen, along with higher prices and cost cuts, but those factors haven’t been able to outweigh declining demand for its traditional cigarettes. Sellers built up inventory in the first half of the year, and Altria said volumes could be particularly weak in the third quarter as retailers work through their loaded stockrooms. Continued economic pressure, high unemployment and widespread smoking bans may dissuade buyers, too.
Altria, whose products also include Black & Mild cigars and Chateau Ste. Michelle wine, operated in a “highly competitive market” in the latest period, Chief Executive Michael Szymanczyk said on a conference call. Still, Altria said fourth-quarter volumes should be stronger and the company reiterated its full-year forecast of per-share earnings between $1.70 and $1.76.
Shares slid 2.5% to $26.35 in early trading. The company’s stock is up 24% so far this year.
Altria reported a profit of $444 million, or 21 cents a share, down from $1.04 billion, or 50 cents, a year earlier. Excluding items, such as restructuring charges and a charge related to a court decision, earnings rose to 53 cents from 50 cents. Revenue, net of excise tax, fell 7.8% to $4 billion.
Analysts polled by Thomson Reuters had most recently forecast earnings of 53 cents on net revenue of $4.43 billion.
Gross margin fell to 33.3% from 37.8%.
The quarter included a one-time charge of $630 million, or 30 cents a share, related to the tax treatment of some leveraged lease transactions. The charge was recorded after the Internal Revenue Service decided to disallow for the years 1996 through 2003 tax benefits related to lease-in/lease-out and sale-in/sale-out transactions entered into by an Altria subsidiary.
Marlboro cigarette shipment volumes rose 1.1%, thanks to growth in menthol and Special Blend products, while other premium-cigarette volume fell 7.8% and discount cigarettes dropped 16%. Overall cigarette volume fell 0.7%, or about 4.5% excluding the inventory build. The company said it believes total category cigarette volume was down about 3.5%, excluding inventory effects.
Smokeless-product shipment volume fell 2.1%, as Copenhagen’s gains were partially offset by weak Skoal sales and limited Marlboro Snus promotions. Altria had been focusing on building the Copenhagen brand but more recently turned to the struggling Skoal, introducing a series of new products to stem market-share losses.
Still, revenue from cigarettes rose 3.6% excluding excise tax to $3.88 billion, and smokeless-product revenue increased 3.9% to $377 million. Altria announced a spate of price increases recently for both cigarettes and smokeless tobacco, which should help boost those figures going forward.
Chris Growe, an analyst at Stifel Nicolaus, said the company seems to be focusing on profitability over market share by pricing some products above the competition. However, given the major investment Altria has made in its marquis Marlboro brand of late, including new products and promotions, Growe said it would become a concern if that brand begins losing significant share. Marlboro’s market share increased 40 basis points sequentially, to 42.6% of the market, but fell 20 points from the prior-year period.
Net of excise tax, cigar revenue fell 5% to $95 million, while revenue from the wine segment rose 9.8% to $112 million.
Meanwhile, Altria said it bought back 22.8 million shares for about $616 million during the second quarter under its one-year, $1B share repurchase program. The company had said earlier that the one-time tax charge wouldn’t affect stock repurchase plans.
By Melissa Korn
Dow Jones Newswires

Can a Little Lawsuit Shut Down a Big Tobacco Racket?

Coming soon to a courtroom near you: Bambi meets Godzilla. This week, the Competitive Enterprise Institute, a free-market advocacy group in Washington, filed suit in federal court to challenge the constitutionality of the massive and fantastically lucrative 1998 Master Settlement Agreement—otherwise known as the Tobacco Deal. Arrayed against the suit’s five plaintiffs (several small tobacco companies and distributors, plus a discount tobacco store and a smoker) will be Big Tobacco, the state attorneys general, a host of public-health organizations, and probably most of the mainstream media. Other than that, it’s a fair fight.
Asked about the lawsuit’s prospects, Sam Kazman, the institute’s general counsel, says, “It’s a long shot to ever get something declared unconstitutional.” After a beat, he adds: “A meritorious long shot.” After another beat: “I don’t think it’s even right to call it a long shot. I think we’ve got a significant chance of success.”
Sorry, Sam—it’s a long shot. Still, miracles do happen, and this lawsuit deserves a prayer. Not without reason has the Tobacco Deal been called the constitutional crime of the (last) century.
For years, tobacco companies faced and won lawsuits in which smokers claimed damages for ailments caused or aggravated by smoking. In 1994, however, the state of Mississippi filed a different kind of suit, demanding that the companies repay the state for health-program costs allegedly attributable to smoking. Dozens of other states soon filed copycat suits, many of them financed by law firms that acted as subcontractors and stood to earn contingency fees of unprecedented size.
The four tobacco giants that together controlled about 99 percent of the market were smart enough not to bet on prevailing against dozens of state governments. They and nine attorneys general retreated behind closed doors and emerged in 1998 with a 245-page settlement. “The nonparticipating attorneys general,” notes the CEI complaint, “were given seven days to review its terms and decide whether to join it.” Thus hustled, they signed on. The AGs would drop the state lawsuits. In exchange, the companies would pay the states (including four that had already made separate deals) a total of almost $250 billion over 25 years—as in, a quarter of a trillion dollars.
Who would foot this enormous bill? Ordinarily, shareholders. But the majors didn’t like that idea. They preferred to pass the cost to smokers. So they colluded with the AGs to create a national tobacco cartel. The deal guaranteed the majors their overwhelming market share and effectively barred new competitors from all but a tiny sliver of the U.S. tobacco business.
Any company that wanted to sell cigarettes—even a start-up that had never fouled a single pair of lungs, much less committed any tort—would be forced either to join the MSA and pay “damages” for wrongs never committed or to place an even larger amount into “escrow” against wrongs that might be committed someday. Not surprisingly, the majors’ small competitors—about four dozen of them so far—have reluctantly agreed to pay the same new national tax as the majors pay.
And a national tax, not damages, is plainly what these payments are. Under the settlement’s terms, all tobacco companies, large and small, are assessed at nationally standardized rates based on their national (not state) sales. The states give Big Tobacco permanent protection from competition, Big Tobacco showers the states with money, and smokers pay. Not at all coincidentally, billions of dollars also found their way to lawyers who cut themselves in for mind-boggling fees.
What was wrong with this deal? A better question would be, What was not wrong with it? For a start:

  • The states’ claim was bogus to begin with. Economists have found that smoking, if anything, reduces the cost of government programs, because smokers die younger and have fewer years to collect health and pension benefits. Smoking is bad for smokers, but it has done state coffers no harm at all.
  • The transaction was, literally, mercenary. In effect, the attorneys general rented out the states’ sovereign authority to private lawyers who were cut in on the take. Moreover, some of the lucrative subcontracting deals smacked of cronyism, or worse. (Former Texas AG Dan Morales got a four-year prison sentence in a case stemming from his role in the deal.)
  • The deal was Robin Hood in reverse. It provided an immense windfall to the powerful (state governments) and the rich (giant tobacco companies, now favored with a state-enforced cartel), at the expense of the small (would-be competitors to the tobacco giants) and not-rich (smokers).
  • The deal was falsely advertised. Most of the settlement revenues did not go for public-health programs, as promised, but for whatever a state’s politicians chose to spend the money on. Public-health advocates were played for patsies.

Still, the tobacco deal is not the first public policy arrangement to break a promise, or to favor the rich, or to be tainted with cronyism, or to be built on bogus premises. What sets it apart is that it bypasses and neuters the system of checks and balances we call constitutional government.
Congress never approved the deal. Nor did any court order it. The deal was done by private parties acting on their own account. Those who were present in the room benefited spectacularly, at the expense of the smokers and small businesses that were shut out.
To enforce the restrictions on new entrants, however, the deal had to be written into law. So the deal-makers gave every state a choice: It could pass an implementing statute precisely as dictated—”without any modification or addition”—or it would lose all of its billions in settlement money. Faced with those terms, the states did as they were told. Once the cartel was in place, it could be changed only by the unanimous consent of the states. If Iowans, say, hate this deal, they’ll get nowhere by voting out their own AG and legislators. They would also have to vote out the AGs and legislators of the other 49 states. Which, of course, they can’t do.
In short, a cartel of states has colluded with a cartel of tobacco companies to create a public-private supercartel: a market-fixing scheme that is locked in by law, yet is accountable to no particular government authority; that is immensely profitable to the parties at the expense of millions of hapless consumers; and that is enforced with penalties that clobber any would-be defectors. The deal also creates what amounts to a new national taxing authority that arises from state collusion and that bypasses Congress. The companies provided the deep pockets, the states provided the muscle, private law firms provided the legal talent, and public-interest groups provided legitimacy.
The deal got through in the first instance because few but the beneficiaries clearly understood it. It has survived because the states soon became addicted to tobacco money. Congress could shut down the racket, but it won’t, because the states would howl. For objectors, that leaves only the courts—and the Constitution.
With uncanny foresight, as if with the tobacco deal in mind, the Founders stipulated in Article I, Section 10—the compacts clause—that “No state shall, without the consent of Congress … , enter into any agreement or compact with another state.” The clause is intended to prevent states from colluding to supplant or circumvent Congress’s unique national authority. Pursuant to this clause, Congress has been asked to approve all sorts of state compacts over the years.
If the tobacco deal is not an interstate compact designed to circumvent and supplant Congress’s authority, it is hard to imagine what would be. In fact, an earlier version was rejected on Capitol Hill. The Master Settlement Agreement was Plan B, specifically designed to cut Congress out of the picture.
Earlier court challenges have raised the compacts clause and failed; but none, Kazman says, has raised it as frontally as this new one. “The compacts clause claim is the heart of the case,” he says. Even so, the odds are long. “Courts are very reluctant to unravel such a complicated and delicately balanced agreement as the MSA,” says Kenneth Bass, who until June was a lawyer with Kirkland & Ellis, where he represented the Brown & Williamson tobacco company.
Meanwhile, state attorneys general are shopping for new opportunities to supplant Congress. Last year, eight AGs sued five big utilities for—this is not a joke—contributing to global warming. News reports quoted Connecticut Attorney General Richard Blumenthal as saying, “Some may say that the states have no role in this kind of fight or that there’s no chance of success. To them I would say, ‘Think tobacco.’ ”
Watch the new tobacco lawsuit. If it fails, watch your wallet.

Will New Packaging Stop Big Tobacco?

Graphic anti-smoking labels are coming to a tobacco retailer near you. But will it matter to tobacco companies’ profits?
The FDA is requiring that cigarettes sold in the U.S. feature pictorial warning labels on the top 50% of the front and back of the package. Similar warning labels must comprise at least 20% of advertisements. Domestic tobacco players such as Altria, best selling cigarettes brands across the tobacco industry, Lorillard, and Vector Group have until the autumn of 2012 to comply.
The new regulations are being implemented as part of the landmark 2009 Family Smoking Prevention and Tobacco Control Act. The labeling requirements are based on the best practices from other countries. Large labels are more effective than smaller ones, and explicit pictures are more effective than text-only cautions. Already 35 countries require health messages to cover at least 50% of the package. So if you thought abroad-only rival Philip Morris International might be an alternative, well, it’s already been dealing with similar issues.
Several studies show that graphic labels do promote awareness about the dangers of smoking. And research from the International Tobacco Control Policy Control Project shows that “comprehensive warning labels reduce smoking consumption, increase motivation to quit, and increase the likelihood that they will remain abstinent following a quit attempt,” explains the Campaign for Tobacco-Free Kids.
But often awareness does not translate into effectiveness, as anyone who’s tried and failed at dieting and exercising knows. Still, there seem to be indications that the packaging tactics will be at least somewhat effective.
While that provides a headwind to Big Tobacco’s profits, it doesn’t mean these companies can’t still extract more revenue from existing smokers while continuing to closely monitor their costs, as they’ve done for quite a while now. The decline in smoking rates bottomed around 2004 and has remained at about 20% of Americans. This industry still has tremendous pricing power, and market share is very important.
Moreover, because the new labels obscure a significant portion of the packaging, the new guidelines could reinforce the importance of the brands themselves. In other words, the players with strong share are likely to retain their relative positions. And that would be a relative win for Altria, the U.S. market-share leader.
Reynolds, Lorillard, and others are challenging the legality of the labels. Given its stronger position, Altria is probably the best play in this challenging environment, but don’t confuse that with excitement to run out and buy shares at this point.
By Jim Royal

Philip Morris Fights Australian Packaging Rules

Tobacco giant Philip Morris launched legal action on Monday against the Australian government over the country’s plans to strip Cigarette Labelscompany logos from cigarette packages and replace them with grisly images of cancerous mouths, sickly children and bulging, blinded eyes.
The government believes the new rules will make the packages less attractive to smokers and turn Australia into the world’s toughest country on tobacco advertising. Several outraged cigarette makers have threatened lawsuits, arguing the move illegally diminishes the value of their trademarks. Philip Morris is the first of those companies to file a claim for compensation.
“We would anticipate that the compensation would amount to billions,” Philip Morris spokeswoman Anne Edwards told The Associated Press.
The legislation, which will be introduced to Parliament in July, would ban cigarette makers from printing their logos, promotional text or colorful images on cigarette packs. Brand names will instead be printed in a small, uniform font and feature large health warnings and gruesome, full-color images of the consequences of smoking. The law would be phased in over six months, starting in January 2012.
Hong Kong-based Philip Morris Asia Limited, which owns the Australian affiliate Philip Morris Limited, filed a notice of claim on Monday arguing the legislation violates a bilateral investment treaty between Australia and Hong Kong.
The tobacco company says the treaty protects companies’ property, including intellectual property such as trademarks. The plain packaging proposal severely diminishes the value of the company’s trademark, Edwards said.
“Our brands are really one of the absolute key valuable assets that we have as a company — it’s what helps us compete, it’s what enables us to distinguish our products,” Edwards said. “This move … would essentially amount to confiscation of our brand in Australia.”
The government denied the plan breaks any laws and said it would not back down.
“Our government is determined to take every step we can to reduce the harm by tobacco,” Health Minister Nicola Roxon said. “We won’t be deterred by tobacco companies making threats or taking legal action.”
Prime Minister Julia Gillard also brushed off Philip Morris’ threats. “We’re not going to be intimidated by big tobacco’s tactics,” she told Australian Broadcasting Corp.
The legal notice filed Monday opens up a three-month period of negotiation between the two sides. Philip Morris said if a “satisfactory outcome” isn’t achieved by the end of the three months, it will seek arbitration.

Big Tobacco targets city ordinance

WORCESTER — Big Tobacco wants a federal judge to snuff out the citywide ban on all visible tobacco product advertising.
In a filing yesterday, the city agreed not to enforce the advertising section of the ordinance while a civil action filed last week by a tobacco group and several tobacco companies is pending. Enforcement was scheduled to begin Friday.
Both the city and plaintiffs agreed to the stay.
The plaintiffs are R.J. Reynolds Tobacco Co.; Philip Morris USA Inc., Lorillard Tobacco Co. and the National Association of Tobacco Outlets, which is a membership association in Minnesota that promotes and represents the interest of tobacco companies, distributors and retailers.
A portion of the city’s tobacco-control ordinance approved last month bans advertisements of cigarette and tobacco products visible from any city street, park, school or educational institution.
It is that section of the ordinance that is stayed until a hearing can be held in federal court. No date has been scheduled.
The city and plaintiffs agreed enforcement of that section will be postponed until 14 days after the court’s ruling on the plaintiffs’ motion for a preliminary injunction.
The civil action filed last Friday asks a judge to rule that the ordinance is in violation of the Constitution and the plaintiffs’ civil rights. They want a permanent injunction against the advertising enforcement section of the ordinance.
“We believe the ordinance violates our First Amendment rights to responsibly communicate with adult tobacco consumers,” R.J. Reynolds spokesman David P. Howard said yesterday. “It is trying to prohibit communication of a legal product to adults who choose to use tobacco.”
Case law backs the tobacco companies, Mr. Howard said. A U.S. Supreme Court decision involving Lorillard versus former Massachusetts Attorney General Thomas F. Reilly shot down state regulation prohibiting outdoor advertisements of tobacco products within 1,000 feet of a school or playground.
“The Ordinance is far broader than the Massachusetts regulation invalidated by the Supreme Court in Lorillard,” the civil action said. “The Massachusetts regulation was limited to tobacco advertising, visible from outside, located 1,000 feet of a school or playground. In contrast, the Ordinance applies to all tobacco advertising, anywhere in the city, that is visible from a public street, park, or school.”
City Solicitor David M. Moore said the city anticipated legal action after the ordinance was approved.
“What Worcester did is something that no other city has done, and this is pose an advertising restriction,” he said. “You won’t be able to drive anywhere in the city and see a tobacco advertisement. That is what the ordinance does.”
While the tobacco companies argue First Amendment rights, it appears the city is basing its ability to approve such a regulation on the Federal Family Smoking Prevention and Tobacco Control Act of 2009, which is referenced in the ordinance.
The act opened the door to local regulation of tobacco advertising, something before regulated only by the federal government. The tobacco groups argue the federal act does not trump the First Amendment.
City officials working on the ordinance found that almost 24 percent of adults in the city over the age of 18 smoke, and the statewide average is 16 percent.
An estimated 31,265 smokers live in the city. The city noted “the death and devastating effects of tobacco products on the residents of the city” in its decision to put forth the tobacco ordinance.
“The Ordinance is based on the City Council’s judgment that the adult citizens of Worcester cannot be trusted to make decisions regarding their own health and that tobacco advertising may lead adults to make what it believes is the wrong choice about tobacco use,” the civil action said.
By Scott J. Croteau TELEGRAM & GAZETTE

Philip Morris International: Alternative Annual Report

Every year, one of the world’s best-known corporations provides its shareholders a glowing image of a company that is handsomely rewarding its shareholders by expanding into new markets, developing new products, and overcoming market and regulatory challenges.
The truth is that this corporation makes its billions of dollars in profits at the expense of people’s health and their lives. This report reveals the dark truth behind how Philip Morris International earns its profits.
Philip Morris International (PMI) is the world’s largest, deadliest and most profitable publicly traded transnational tobacco corporation. PMI currently operates in 180 countries and holds more than 27 percent of the international tobacco products market (excluding the People’s Republic of China and the United States). In 2010, PMI reported revenues (excluding taxes) of over US $27 billion and an operating income of US $11.2 billion. Another way to look at it: That’s $5,500 in profits for every person who has died so far this year from tobacco-related disease.
PMI reported 11.6 percent growth in profits and an increase of 4.1 percent in its cigarette shipment volume in 2010. This increase in profits and volume contributes to:

  • One tobacco-related death every six seconds worldwide. That’s 5.4 million people every year.
  • Premature deaths. On average, smokers lose 15 years of life and up to half of all smokers will die of tobacco-related causes.
  • Higher healthcare costs and lost productivity. Tobacco causes a $500 billion global economic drain each year — nearly $74 for each person in the world.
  • For every dollar of PMI revenue, health care expenses and productivity loss cost the world economy $7.39.

To achieve these profits, PMI:

  • Spends nearly $5 on its so-called corporate social responsibility initiatives for every tobacco related death — a means of distracting attention from its core business of selling a harmful and deadly product.
  • Implements a range of tactics to undermine the success of public health policies that protect people from the harms of tobacco, including:
  • litigating, particularly by leveraging international trade agreements;
  • targeting women and children with deceptive advertising, promotion and sponsorships;
  • entering into strategic partnerships with governments;
  • establishing front groups; and
  • engaging in so-called corporate social responsibility initiatives.

2010 Alternative Annual Report: Executive Summary
At the annual shareholders’ meeting on May 11, 2011, Philip Morris International’s (PMI) executives and shareholders celebrated another year of growth in spite of the global economic crisis. CEO Louis Camilleri, however, did not mention the true cost of tobacco addiction: 5.4 million preventable deaths globally every year. As of May 11, 2011, close to 2,000,000 people have lost their lives to tobacco this year.
PMI’s 2010 Annual Report highlights its aggressive expansion into markets in Latin America, Eastern Europe, Africa and Asia, but it doesn’t reveal the fact that tobacco’s death toll will rise to eight million women, men and children a year by 2030 — with 80 percent of those deaths occurring in the regions it is destructively targeting. PMI’s Annual Report also paints a picture of itself as a charitable and socially responsible corporation, but the company’s charitable activities are really an attempt at gaining political and public goodwill and defeating efforts to reduce tobacco addiction, especially in the middle- and low-income countries where it is expanding most rapidly.
Every day, PMI undermines and directly interferes with implementation of the world’s first public health and corporate accountability treaty, the World Health Organization’s Framework Convention on Tobacco Control (WHO FCTC). To date, 171 countries and the European Union have ratified the treaty. Because of the tobacco industry’s need to maximize profits in spite of tremendous public health, economic and social costs, the treaty recognizes the fundamental conflict between the tobacco industry’s interests and health policy. In November 2010, the Parties to the WHO FCTC once again upheld this principle when they unanimously passed a resolution supporting Uruguay as it defends itself against PMI’s legal threats and its use of trade agreements to fight tobacco control. It is clear that the global community’s resolve to stand up to Big Tobacco is stronger than ever.
Worldwide support for the health policies endorsed in the treaty is increasing. As a result, tobacco industry opposition to tobacco control policies becomes more aggressive, making this a critical moment in global tobacco control. Tobacco control and corporate accountability advocates must remain vigilant in exposing and challenging the ever-evolving tactics of the tobacco industry.
This Alternative Annual Report is a compilation of stories that illustrate the lengths to which PMI will go to line its coffers, even at the potential cost of one billion lives in this century. It details PMI’s multiple strategies to intimidate countries and circumvent government health policies. Communities organizing to stand up against PMI stretch to every corner of the globe. Their refrain is the same: We need to strengthen the global movement to put people and public health ahead of tobacco industry profits. The time to act is now.

Cigarette makers use FOI laws

Australia – TAXPAYERS are footing the bill for a multi-million-dollar campaign by tobacco companies to extract Health Department information for a looming court challenge to plain packaging on cigarette packets.
The Australian has learnt that Philip Morris and British American Tobacco Australia are using Freedom of Information laws to obtain tens of thousands of documents, while avoiding the more expensive legal discovery process.
It is understood that at least 26 large-scale FOI requests have been lodged by the tobacco companies.
The Department of Health has had to assign nine legally trained staff to work full-time on the tobacco requests, including six new employees.
The bill for one request alone came in at more than $367,000, after being negotiated down from an initial estimate of $1.4 million.
Under FOI legislation, departments charge $15 to $20 an hour for decision-making and consultation. Photocopies cost 10c a page. However, obtaining documents under discovery rules requires lawyers at $300-plus an hour, with copies charged at $2.10 a page.
Obtaining documents through FOI also means they can be used for a variety of purposes, while information obtained through legal discovery can only be used once.
Thousands of pages have been released, but the companies have been denied a key document on the grounds of legal privilege.
The secret advice, prepared by the Attorney-General’s Department in 1995, details the government’s constitutional powers to implement plain cigarette packaging. It also canvasses possible legal hurdles such as international trade rules and intellectual property rights.
The Administrative Appeals Tribunal recently upheld the department’s decision to withhold the document, and BATA has flagged an appeal to the Federal Court.
BATA yesterday began dribbling out documents obtained through FOI, releasing a briefing note from last April from the government’s intellectual property rights administrator, IP Australia.
The briefing says plain packaging could impinge on tobacco industry trademarks. But it says such restrictions could be introduced “if there is a clear public interest to be served”.
“Notably, analysis of the public interest’s need should be based on strong empirical evidence,” the briefing note states.
BATA spokesman Scott McIntyre said the government had failed to prove a public interest case.
“The Health Minister is yet to reveal any real proof that plain packaging will reduce smoking rates and she has continually refused to release any legal advice which actually supports the untested legislation,” he said.
Nicola Roxon, who unveiled the proposed olive-coloured packs earlier this month, said the research showed branding and packaging design could counteract health warnings and increase cigarettes’ appeal to young people.
The Health Minister said the government was prepared for a long legal fight. “This is the beginning of a large and co-ordinated campaign by Big Tobacco,” she said. “We are not going to back away from this fight.”
Slater & Gordon lawyer James Higgins said the information-gathering exercise was ironic, given the tobacco companies destroyed their own internal documents to avoid liability for the effects of their products.
He said the companies would stop at nothing to prevent plain packaging in Australia, fearing an international precedent that would affect global profits.
One tactic included briefing lawyers – even those they would not use – to prevent them being engaged by the government.
“They will use every tactic that is available to them,” he said.
By Ben Packham

Ignore big tobacco’s absurd fight against plain packs

EARLIER this month the Australian government released draft legislation that promises to be a landmark in the global fight against tobacco. If passed, from January 2012 cigarettes and hand-rolling tobacco will have to be sold in plain, unappealing olive-brown packs plastered with large, graphic health warnings. The only thing distinguishing one brand from another will be the name written in a standard font on the top, bottom and front of the pack, below the health warning. This is a world first.
The legislation also proposes that cigarettes themselves should be completely plain. That means no branding, no coloured or flavoured papers, no gold-banded filters and no different gauges like slimline and mini cigarettes.
With this bill, the Australian government is sending out an unambiguous message that cigarettes are exceptionally dangerous. Future generations will grow up never having seen the finely crafted elegance of a cigarette box sitting alongside confectionary and groceries in their local shop.
The health minister Nicola Roxon signalled her intention to introduce the bill a year ago and since then the tobacco industry has repeatedly demonstrated why the government is on exactly the right track. It has poured an estimated $10 million into a proxy campaign against the plan, knowing its own credibility is too low to mount an open one. National media advertising from the hitherto unheard of “Alliance of Australian Retailers” – funded by British American Tobacco, Philip Morris and Imperial Tobacco – featured down-to-earth shopkeepers asserting that plain packs “won’t work, so why do it?” and that there was “no real evidence” to support the policy (a line repeated by the opposition party’s health spokesman Peter Dutton). Many Australians are left wondering, if it won’t work, why is the industry bothering to waste its money campaigning so hard against it?
It is true that no nation has ever introduced plain packs, so arguments for the new policy cannot be drawn from direct evidence. This has become a centrepiece of tobacco industry opposition – a modern example of satirist F. M. Cornford’s 1908 Principle of the Dangerous Precedent: “Every public action which is not customary either is wrong, or if it is right it is a dangerous precedent. It follows that nothing should ever be done for the first time.”
The central impetus for plain packaging has been acres of tobacco industry internal documents and unabashed advertising in industry trade magazines highlighting the importance of the pack as the frontline of tobacco promotion, particularly in an era when tobacco advertising bans are growing exponentially. As a 1999 article in World Tobacco (vol 170, p 16) advised: “if your brand can no longer shout from billboards, let alone from the cinema screen or the pages of a glossy magazine… it can at least court smokers from the retailer’s shelf, or from wherever it is placed by those already wed to it”.
A 1985 industry document similarly explained: “If you smoke, a cigarette pack is one of the few things you use regularly that makes a statement about you. A cigarette pack is the only thing you take out of your pocket 20 times a day and lay out for everyone to see. That’s a lot different than buying your soap powder in generic packaging.” A cover story of the trade magazine Tobacco Journal International spelled it out even more clearly in 2008: “Plain packaging can kill your business.”
Investment advisors Morgan Stanley advised tobacco industry clients in 2007 that “the other two regulatory environment changes [after taxation] that concern the industry… most are homogenous packaging and below-the-counter sales. Both would significantly restrict the industry’s ability to promote their products.”
Internal industry documents show that many smokers cannot identify their own brand without the packaging and experimental evidence has found that when branding is removed from cigarette packs, people perceive them to be less appealing, have more negative expectations of cigarette taste and rate attributes of a typical smoker of the pack less positively.
Within hours of the announcement, British American Tobacco and Imperial Tobacco declared they would challenge the decision in courts and seek billions in compensation on the grounds of “seizure of intellectual property”. The government’s own advice is that the legislation will survive the challenge, a position supported by senior legal commentators. Mark Davison, professor of law at Monash University in Victoria, described the industry’s argument as “so weak, it’s non-existent”. He told The Australian newspaper: “There is no right to use a trademark given by the WTO [World Trade Organization] agreement. There is a right to prevent others using your trademark but that does not translate into a right to use your own trademark.”
With the proliferation of tobacco advertising bans, generations of children are growing into adulthood having never been exposed to tobacco promotions. In Australia, no child under 17 has ever seen direct tobacco advertising, and the number of both young and adult smokers is the lowest on record. In effectively extending the ban on tobacco advertising to packs, the Australian government is simply finishing the job.
Policy domino effects are routine in global tobacco control and this historic decision may bring down the curtain on a century of the tobacco industry presenting its carcinogenic, addictive products in thoroughly market-researched, beguiling packs. When the history of the rise and fall of tobacco-caused disease is written, it will note this momentous initiative.
By Simon Chapman is a professor of public health at the University of Sydney, Australia

Profits Climb at Altria, Philip Morris, Reynolds Even as U.S. Volumes Drop

U.S. tobacco companies’ first quarter earnings are getting a boost from recent price increases but the year’s outlook remains mixed as domestic sales volumes shrink due to state laws banning indoor smoking and the graying of core customers.
On Thursday, Philip Morris International Inc., the world’s largest tobacco company by revenue, posted a 13% profit increase on tax cigaretteshigher prices and gains in Asian markets. Reynolds American Inc.’s per-share earnings excluding one-time items rose 5% on pricing gains and cost cuts. Net at Altria Group Inc. climbed 15%, also aided by pricing.
Late last year, major U.S. cigarette makers raised retail prices by between 5% and 6%, continuing a several years long trend of similar hikes. For instance, Altria’s Philip Morris USA unit instituted an eight cents a pack price hike on brands including Marlboro, Virginia Slims and Merit, while Reynolds American implemented a similar-sized increase for Camel, Pall Mall and American Spirit.
Rival Lorillard Inc. also raised prices on its Newport and other premium brands by six cents a pack effective Nov. 29. Analysts estimated its increase applied to 85% of the company’s unit sales. Greensboro, N.C.-based Lorillard, the third-largest U.S. tobacco seller by revenue behind Altria and Reynolds, is expected to report its quarterly results on Tuesday.
The quarter’s profit gains come despite weaker volumes. Cigarette sales have declined in the U.S. as more states enact laws prohibiting smoking in public places while European customers are cutting back.
Reynolds, the second largest U.S. tobacco company by revenue, reported unit volumes at its large R.J. Reynolds unit declined 5.2% compared to a year ago. Revenue, aided by the price hikes, edged up just 0.3%, to $1.99 billion, in the quarter.
Altria said its cigarette volumes slid 6.4% in the most recent period and its smokeless tobacco, whose sales had been growing in popularity due to indoor smoking bans, fell 1.3% by units.
Michael Szymanczyk, Altria’s chief executive, brushed off the quarter’s larger than usual volume decline and flat year-over-year revenues excluding excise taxes. He told analysts Wednesday that the industry’s ability to successfully pass along price hikes has been sustained over a long period. Mr. Szymanczyk called the Richmond, Va., company’s sales and profits “solid” given the period’s high unemployment, low consumer confidence and strong market competition.
Unlike its domestic counterparts, Philip Morris’s volumes were up, rising 1.6% overall, aided by stronger sales in Korea and the Philippines. Its revenue rose 6% over a year ago, to $16.5 billion.
Even as volume remains strong in some regions, pricing will remain “the key driver” of its profitability gains, Philip Morris executives said in a conference call Thursday.
By Melissa Korn: [email protected]

Plain packaging will hit sales hard, and big tobacco is worried

So, the move to cigarette plain packaging will do nothing to reduce the rate of smoking, but it will be a pain in the proverbial for Plainpackshopkeepers. I’m told this at least once an hour on talk radio, so it must be true.
But things aren’t always what they appear to be. I know this as a reformed tobacco executive. I was employed by Rothmans of Pall Mall from 1994 to 1998 in Queensland, NSW and Victoria in charge of about $250 million in annual supermarket sales.
Working for big tobacco is a double-edged sword. Sure, it’s a legal product, and you could get hit by a bus tomorrow (although I’d take my chances with the bus versus smoking). Over time, I started to feel the imaginary horns attached to my head, especially when asked by my child’s teacher what I did for a living.
But other than that, we ruled the world. In those days, cigarettes made up six of the top 10 supermarket products. Not exactly part of the fresh food mantra, but it wasn’t hard to get an audience with the bigwigs at short notice. The guys flogging baked beans and shoe polish had to stand in line. Our products were money in the bank.
The industry was cashed-up and was not afraid to spend it. The laws were slightly more relaxed, and often tobacco retailers had to do no more than sign a lease. The three tobacco companies would fight tooth and nail to do the shop-fit free, and in some cases pay the rent in exchange for the rights to a window display.
The rule of market share dictated that ”if it can’t be seen, it can’t be sold”. We employed all kinds of surveys measuring our visibility in stores, and lived and died by the results.
For marketing, the brand was everything. People don’t just smoke a brand, they are the brand. What’s inside the cigarette doesn’t really matter, but what the smoker thinks about themselves (true or not) is absolute. If you’re a bus driver, but aspire to being an internationalist with a passport to smoking pleasure, you’ll buy accordingly.
And it’s not just the brand, but the appearance of the pack . . . how it feels, the fonts used: everything was analysed and tested to the extreme.
When NSW tightened the noose on in-store advertising, cigarette package images were replaced with tantalising shots of sunflowers and Uluru. The theory was that people would associate these images with the colour of the brand they smoked. Publicly, the big round of packet health warnings in the ’90s was treated as a speed bump. Like a duck on a lake, beneath the surface things weren’t so calm. One of our bosses referred to the move as an ”absolute disaster” and our focus moved to producing retail stands and lighting that deflected from the top of the packet.
Removing cigarettes from visibility in stores has introduced an impediment to the process, but the allure of the brand still remains – even with an ugly health warning. Olive-green packets will not be cool; there will be no differentiation between one brand and the next. Even the mythology, for those of us who remember the Hoges and Stuart Wagstaff TV ads, will disappear.
The tobacco companies invest a lot in research, particularly in statistics. Every move in price and circumstance is modelled to the N-th degree. As the it-won’t-affect-us-honestly-it-won’t ads increase, you can bet they reflect the anxiety of the industry.
My opinion as a former insider? The proposed plain packaging changes will hit sales hard.
By Craig Seitam