Rock solid

| June 1, 2017

Despite mounting anti-tobacco pressures, the top cigarette brands are more valuable than ever.

By George Gay

At the International Food & Drink Event (held March 19–22 at the Excel center in London), Japan Tobacco International (JTI) hosted a stand dedicated to the future of brands, which was designed as a “wake-up call to global food and drinks companies that their brands are under increasing attack of excessive regulation.”

“JTI has been on the front line fighting bad regulation for several years, and as regulators look to hit food and drinks companies with the same punitive taxes, pictorial health warnings and even ‘plain’ packaging—a measure which bans any form of branding on packs—we have experience and expertise that we would like to share,” Jonathan Duce, head of external communications at JTI’s global headquarters in Geneva, was quoted as saying on JTI’s website.

The note went on to say that whether it was a bottle of wine, a chocolate bar or a fizzy drink, excessive regulation not only impacted large product manufacturers but also threatened small businesses, including design and packaging suppliers. Small shops—often central to communities—could be hit hard by ill-thought-through regulation such as plain packaging through struggles with implementation costs and logistical constraints, confused customers who couldn’t find their products, slower transaction times, product inventory issues, and impacted margins. The creative industry was indirectly under attack too, as branding bans would affect their other fast-moving consumer goods clients, while smaller boutique/craft businesses that were becoming increasingly popular would suffer disproportionately from the attack on their brands.

“Regulators are ‘copy and pasting’ tobacco-style regulations into other sectors without any thought as to whether they worked elsewhere,” said Duce. “Australia failed to speed up the already existing decline in smoking rates after banning branding on tobacco packs more than four years ago. In fact, the measure backfired and distorted the whole competitive landscape. It didn’t change whether people smoke—it changed what they smoke. Between two products, smokers now choose the cheapest. This includes illegal tobacco, which has increased by over 20 percent since the introduction of the policy.”

On JTI’s website, there is much information about some of the ways in which regulations that have been used against tobacco products are being applied to other types of products. Indeed, the website quotes Olivier De Schutter, former UN special rapporteur on the right to food, as saying, “Unhealthy diets are now a greater threat to global health than tobacco. Just as the world came together to regulate the risks of tobacco, a bold framework convention on adequate diets must now be agreed.”

The website lists a number of regulations already imposed or being brought in on nontobacco products, of which the following are some. Thailand has imposed pictorial health warnings on alcohol products, Indonesia is considering alcohol plain packaging, France and South Africa have placed restrictions on alcohol advertising and promotion respectively, and Australia has imposed a 70 percent tax on alcopops. A number of countries, including France, Belgium and the U.K., have adopted or proposed special taxes on soft drinks containing sugar, and Hungary has implemented a law imposing such taxes on foods such as prepackaged sweetened products with high sugar content and foods with high fat and salt content. Mexico has introduced advertising restrictions on sugary soft drinks, and Ireland has introduced advertising restrictions on fast food and foods with high sugar content. The Canadian province of Ontario has proposed pictorial health warnings on chips, pizzas, grape juice and chocolate milk, and Chile has imposed 20 percent health warnings on sugary drinks.

Prompting change?

This all sounds very worrying up to a point, but, given that some people champion these sorts of restrictions, it is as well to ask whether they are a good thing or a bad thing, and whether they are universally good or bad. And I guess these questions have to be asked from the point of view not only of the brand owners, their suppliers and retailers but also from that of consumers and society in general.

It could be argued that the pressure put on the tobacco industry over the years helped to prompt the invention of electronic vapor products, and most reasonable people would consider this to be no bad thing I think. So if pressure is brought to bear on these other industries and their products, could it be the case that the businesses that make up these other industries might start casting about for solutions to the health problems that their products help to create?

One thing seems certain: They won’t do so of their own volition. Otherwise they would have done so by now. This is not to say that they are unethical, though some might be; it is merely a question of competitiveness. It would be competitive suicide for one company to change the formula of its products to make them less risky if, in doing so, they were made less appealing to the consumer. Other companies would merely take advantage, and relying on consumer loyalty would be naive. Clearly it is the case that, like the tobacco industry, these other industries need to be the subject of regulation; the question concerns only what sorts of regulation.

But perhaps one of the most interesting questions concerns why JTI is taking the trouble to alert other industries to the dangers posed by excessive regulation. As far as I know, solidarity across industries has not been a feature of tobacco’s experience in the past, and, if a survey carried out earlier this year by the World Intellectual Property Review is anything to go by, things aren’t set to get better. The publication asked its readership whether the intellectual property (IP) sector was fighting a losing battle against standardized packaging. Ninety-three percent of replies answered yes, but the point was made by one reader that it was the tobacco sector rather than the IP sector that was losing. One reader was reported to have said that public health concerns did and should outweigh IP rights, while another apparently said that IP rights did not have greater force than legislation designed to protect public health.

All things considered, it seems to me that there is a certain logic in putting pressure on industries, businesses and their risky products, but I cannot say I’m in favor of the sorts of policies used against the tobacco industry. Increasing taxation, especially in the case of sugary drinks and fast food, would certainly be regressive—as it is in the case of tobacco—because these are the sorts of products mainly consumed by the financially worse-off within most societies. I have never been a fan of bans on advertising and promotion because I do not see these as having a great impact on volume sales, though they can cause existing consumers of a particular product to try a different brand.

As to graphic health warnings and standardized packaging, I have to ask whether the world needs further uglification. Imagine a world where graphic health warnings were applied to tobacco products; alcoholic drinksp; fatty, salty and sweet foods; and sugary drinks. A visit to the supermarket would be a nightmare. Or rather, it wouldn’t, would it? Because we would all gradually block out these images. But then again, what would a trip to the supermarket be like if all of these risky products were the subject of display bans? It would be a logistical impossibility. We would all have to shop online, which would at least have the advantage of disallowing people from squeezing the avocados and then putting them back. I take it that it is not possible to squeeze such items in a virtual way and cause actual bruising.

The way to handle these risky products, including tobacco, is for governments to provide the public with accurate information about their possible deleterious effects and to let people make their own choices. After all, as somebody pointed out long ago: There are no bad foods, just bad diets. In some countries, where illiteracy is widespread, some of that information might have to be delivered via illustrations, but, even so, it should not descend into propaganda.

As valuable as ever

On the other hand, another way to deal with the brand issue is to let governments regulate as they think fit because it won’t make any difference. In March, Brand Finance issued a press note titled “Tobacco Brand Values Hit New Highs in Spite of Regulation.” According to the note, more than 80 percent of tobacco brands are growing in value.

Brand Finance said that each year it values the brands of thousands of the world’s biggest companies. “Brands are first evaluated to determine their power/strength (based on factors such as marketing investment, familiarity, loyalty, staff satisfaction and corporate reputation) and given a corresponding letter grade up to AAA+,” it said. “Brand strength is used to determine what proportion of a business’s revenue is contributed by the brand, which is projected into perpetuity to determine the brand’s value.”

The company made the point that during the past 15 years, an accelerating tide of regulation had swept over the tobacco industry. There are now significant restrictions on when and where consumers can buy and use cigarettes in most markets of the Organisation for Economic Co-operation and Development and many in other markets too. “The advent of plain packaging is an even more fundamental threat, putting the very existence of tobacco firms’ brands at risk,” it said. “In its strictest form, it will prevent companies from differentiating themselves and from communicating quality and unique features to consumers. This could ultimately commodify the product, leading to a race to the bottom in terms of price and quality.”

But so far so good, I guess. Brand Finance went on to say that despite the apparently existential threat of this regulation, the world’s top tobacco firms were managing to increase the value of their brands. “Marlboro, the world’s most valuable tobacco brand, has achieved an all-time record brand value of $32.4 billion,” it said. “A decline in Western markets is being offset by growth in other parts of the world such as China, Indonesia and Africa where regulation remains weaker. Marlboro is also successfully extending its brand into new products. Many of the major tobacco brands were slow off the mark to embrace e-cigarettes; however, Marlboro’s iQOS system and HeatSticks are now proving hugely popular, demonstrating the brand’s power.”

Brand Finance’s CEO David Haigh said Marlboro’s success was by no means an isolated case, with the brand values of major names such as Pall Mall, L&M, Newport and Winston all growing this year and the likes of Parliament, Sampoerna and Chesterfield enjoying double-digit growth. “Despite the well-founded health concerns and mounting regulation, the value of these brands for their owners and investors remains robust,” he said. “The day when the value of tobacco brands goes up in smoke is a long way off.”

I don’t think that this is at all surprising, partly because of the brand mergers that have been introduced. But in any case, when tobacco advertising restrictions and bans first came in, the theory was that the well-known and respected brands that were on a market before it went dark would continue to dominate that market after advertising was banned. A lot of people said that this dominance would last for 10 years, but I think that was an underestimate. And I think the same will apply in the case of standardized packaging. It is often said that standardized packaging is unbranded, but this is clearly not the case. The branding is limited, but, importantly, the brand name is still there. The consumer who turns up at her local tobacco retailer and cannot see the brand names of cigarettes because they are so small or because displays have been banned can, unless she has a lot of time on her hands, rely only on her memory, and her memory will be loaded with the biggest brand names. Where branding is severely limited, the products that are likely to suffer are the least-known brands. And new-brand launches become extremely difficult.

And I don’t get the argument that smokers will opt for the cheapest brands simply because of standardized packaging, unless the “quality” of the top brands hangs only on their packaging. Smokers and the consumers of other under-threat products might go for the cheapest brands, but this they will do rather as a result of having to survive in a broken economic system where shortsighted companies use redundancies as a profit tool or offer only insecure jobs that pay starvation wages. One of the biggest dangers to brand values has to come from the actions of companies in general and even from some of the owners of those brands, not from regulation.

Category: Also in TR, Editorial Archives

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