Tobacco profits burn bright despite bans

By Will Smale
Business reporter, BBC News

From 1 July all the UK will be smoke free within enclosed public spaces

With England's smoking ban starting on Sunday, you might think that the bosses of the UK's tobacco firms will need to go outside for a cigarette to get over their annoyance.

Smoking in enclosed public spaces will now be stubbed out across the entire length and breadth of the UK, as England follows in the footsteps of Scotland, Northern Ireland and Wales on 1 July.

British smokers will no longer able to light up inside their favourite pub or bar, so you might expect that cigarette sales are set to fall significantly beyond the usual 2% to 3% drop each year.

However, the UK's main tobacco firms claim that all previous smoking bans have only caused a temporary additional fall in sales, and they expect this to be repeated in England.

Return to normal

Tobacco industry analyst Andrew Darke of Evolution Securities points to the Republic of Ireland, which in March 2004 became the world's first country to ban smoking in all enclosed public places.

The cigarette firms are absolutely not worried by the English ban Adam Speilman of Citigroup

"The experience in places like Ireland is that immediately after the ban you see a 5 to 6% dip in sales, but then this soon wears off, and sales return to the normal 2 to 3% annual fall," says Mr Darke.

Official figures from the Republic of Ireland's Office of Tobacco Control seem to bare this out.

Its statistics show that the proportion of people in Ireland who smoked before the Irish ban started in March 2004 was about 26.5%, falling to just above 24% a year later, but then rising again to 25.5% in December 2005.

The Irish experience suggests English smokers will just go outside

The figures for the Republic of Ireland suggest that while many smokers initially quit, or at least cut down, to avoid having to go outside for a cigarette, some soon learn to put up with this inconvenience.

Here the tobacco companies lend a tremendous helping hand that should not be forgotten - cigarettes are addictive.

After all, there are few things other than fags that make people choose to cower under an umbrella in the pouring rain.

Alternatively, many smokers will instead decide to spend more of their cigarette-filled leisure time at home.

Weather impact

The timing of England's smoking ban - in the middle of summer - should not be overlooked, observes tobacco sector analyst David Ireland of ABN Amro.

While Scotland, both parts of Ireland, and Wales all brought in their bans at the end of winter or the start of spring, England's choice of 1 July means that more smoking pub-goers will already be sitting outside in beer gardens.

At least if the recent torrential rain goes away.

"Smokers will continue to choose to smoke," says Simon Evans, spokesman for Imperial Tobacco, the best-selling tobacco company within in the UK.

"The impact in the Republic of Ireland has also been born out in Scotland [which introduced its ban in Mach of last year]."

Perhaps unsurprisingly, anti-smoking group Ash - or Action on Smoking and Health - disagrees.

While it acknowledges that the Republic of Ireland has been a partial rebound in smoking numbers, it says that a ban combined with health campaigns and other measures can lead to a real and lasting decline in cigarette consumption.

Ash spokesman Martin Dockrell says he expects forthcoming official Scottish data to reflect this.

Increased prices

It is also important to point out that the cigarette firms have already increased the prices of their packs to offset any additional decline in sales as a result of the English ban, observes Adam Speilman of Citigroup.

UK'S BEST SELLING CIGARETTES 1. Lambert & Butler (Imperial) 2. Benson & Hedges (Gallaher) 3. Marlboro Gold (Philip Morris) 4. Mayfair (Gallaher) 5. Richmond (Imperial) 6. JPS (Imperial) 7. Silk Cut (Gallaher) 8. Richmond (Imperial) 9. Regal (Imperial) 10. Royals (BAT) Figures for 2003. Source: Ash

"The companies have obviously seen the ban coming," he says.

"So while the government increases the price of duty on cigarettes every year, the companies also add a bit extra to the price.

"This year, they have just added a bit more than usual, say about 10p on average."

And while the government's approximate £4.10 duty per 20 cigarettes at £5.50 might not initially appear to leave much room for a cigarette firm to make a profit, it only costs them 15p to manufacturer the pack.

Which gives plenty of scope for stellar profits.

So much so that Imperial has one of the highest operating margins of any UK company - more than 60%.

To put this into context, a typical spirits company enjoys a margin of 30%, while confectionary giant Cadbury's current margin is just 10%.

Such strong profits makes tobacco firms very resilient to any sales dips, temporary or lasting.

Global scope

Another factor that needs to be taken into account, is that the UK's two main tobacco firms - Imperial and British American Tobacco (BAT) - are global operations.

BIGGEST GLOBAL FIRMS 1. Philip Morris (US) 2. BAT (UK) 3. Japan Tobacco 4. Imperial (UK)

So a UK-wide ban on smoking in public places only affects a part of their business.

This is especially true for BAT, for whom the UK is only a tiny part of its business, while Imperial still sees overseas sales account for 60% of its operations.

And as sales in the UK and other Western nations continue to decline by a few percentage points each year - regardless of any bans - BAT freely admits that it targets higher sales in the developing world to offset falls in the West.

"The cigarette firms are absolutely not worried by the [English] ban," says Mr Speilman.

"These things are very profitable."