The volume of tobacco sales for tobacco companies is decreasing, especially in Western countries and mostly in Europe. The associated fall in sales and revenues has meant that certain companies are forced to shut down certain production units and lay off staff, as was the case in the recent decision by the British Company Imperial Tobacco, which announced its plans to close its last cigarette producing factory in England, located in Nottingham, with an ensuing loss of 540 jobs.
Smuggling and illicit trade of cigarettes and tobacco products pose a serious threat to the industry as well, but the major challenge that the tobacco companies are called to face are government decisions which greatly increase the regulation in the industry. The changes to packaging, advertising bans etc. mean increased costs to companies and seriously affect their revenues and profit making ability.
In 2012 Australia became the first country to force tobacco companies to change their packets and replace them by plain olive green packaging with images depicting the damaging effects of smoking. Now it seems that Britain is ready to follow suit and become the second country in the world to impose such demands on tobacco companies and the first country in Europe to enforce the decision about selling cigarettes in plain packets. Indeed, within the government effort to improve the health of the citizens and limit the number of children smokers, the UK authorities have announced that within a year the relevant law will be passed forcing companies to sell their cigarettes in packets without branding but only space for graphic health warnings. For these warnings to be accommodated on the packets, the actual size of the cigarette packets will have to be increased. To be able to do this, tobacco producing companies will have to make huge expenses to buy new packaging machines and also incur additional costs for the designing of the new packets.
Up until today the additional cost required to implement these new packaging requirements had not been estimated, however with the new rules appearing as a certainty, senior executives of Europe’s largest cigarette maker, British American Tobacco have done their maths in order to be able to put a price tag on the costs that these new legislation will entail and have announced that these costs could exceed £200m also mentioning that they could even spiral to to just under £1billion.
No matter what the actual additional cost will be in the end, it is certain that companies will want to fund this through their profits, meaning that once the legislation is passed smokers can certainly expect to be called to pay more for each packet of cigarettes. Therefore, consumers should be prepared for yet another price hike will tobacco companies that increases in price will most probably mean a further reduction in sales volumes in the developed world.