It is true that the tobacco industry has been the target of a concerted crusade against smoking for decades. It is also true however that it has demonstrated a remarkable resilience and this proven by the fact that it still produces and sells around six trillion cigarettes each year.
Now the industry comes under new pressure as two prominent figures, namely Microsoft founder Bill Gates and ex-New York Mayor Michael Bloomberg have decided to back a scheme aiming to help governments of poorer nations defend anti-tobacco laws from legal challenges.
This is important because most tobacco giants derive most of their revenues from exactly such nations, the emerging markets and they are banking on the population growth in such areas in order to increase the volume of their sales. Despite the numerous challenges there is a widespread belief that revenue growth for tobacco giants still has some way to go. This is based on the proven durability and effectiveness of the business model currently employed by tobacco manufacturers, whose basic characteristic is reliance on pricing rather than volume. The model works well because it ensures that the companies have ample leeway to raise prices even when general consumption starts to fall.
In emerging markets, or markets where smokers are getting increasingly wealthier , such as for example Russia, where cigarettes are also still relatively low priced, tobacco makers can take advantage of every tax hike on tobacco products in order to hide incremental price increases on the base product itself. Obviously, this cannot happen in the more mature markets, such as the UK or Australia, because there taxes are already so high that they are hurting the companies’ profits.
Notwithstanding, the determining factor which will affect whether tobacco companies will have a sustainable future, is the success or failure of new technologies, such as e-cigarettes and “heat not burn” devices, both of which are believed to reduce the harmful risks associated with traditional smoking and which have started to be pursued actively by traditional tobacco companies.
Although for example in the UK currently the market for e-cigarettes is estimated to be worth around £340m this year, which is a very low figure when compared with the traditional tobacco market, the huge prospects of this market are reflected in the fact that grew by a massive 340 per cent in 2013, alarming health activists who are asking that e-cigarettes should be classed as a medicine and be subjected to greater regulation.
Wishing to promptly jump on what appears to be the bandwagon for the future all the traditional players of the tobacco industry sought a piece of the act, resulting in the notable acquisitions of e-cigarette start-ups, such as the purchase of Blue Ecigs by US firm Lorillard. Moreover, Philip Morris International has already recently launched a range of heat not burn products called Marlboro HeatSticks in Japan and Italy, planning to circulate them on a global scale before the end of the year.
The jury is still out whether tobacco companies will succeed and keep their strong position using e-cigarettes and other e-devices as their vehicle, but what is certain is that as governments and public opinion seek greater regulation, the firms will remain committed in seeking viable alternative products to traditional cigarettes.