European Tobacco Companies Prosper Despite More Smoking Bans

By Thomas Mulier

Smoking bans are meant to be good for public health. In Europe, they haven’t been too bad for tobacco companies, either.

Shares of British American Tobacco and Imperial Tobacco Group, both based in London, have more than doubled since smoking bans were first put in place in 2004, as producers adjusted by raising prices.

Prohibitions on public smoking, along with advertising bans and tax increases, have narrowed their market to the most addicted smokers, who are willing to pay whatever price to get their nicotine fix.

Anyone who has considered shorting tobacco shares before England carries out new restrictions on July 1 should think again. Cigarette prices there, already the highest in the world, may rise 5 percent in the coming year, according to the median estimate of three analysts surveyed by Bloomberg News.

“You’re getting closer and closer to the hard core of smokers in Europe,” said David Liston, an analyst in London at Barclays Private Clients, whose clients own BAT and Imperial Tobacco shares. “These are people who will smoke no matter what the circumstances are.”

Cigarette makers are now reaping benefits from a captive audience. The product lends itself to price increases because nicotine is as addictive as heroin and cocaine, according to the Royal College of Physicians in Britain.

Shares of BAT fell 7 pence to close at l16.30, or $32.38 Friday in London. Imperial dropped 22 pence to close at l22.08. Imperial shares have gained about 10 percent this year, while BAT shares are 15 percent higher.

Smoking bans have not had a significant long-term impact on smoking rates in countries such as Ireland, where 25 percent of the population pays 15 percent more to smoke than they did when a ban took effect in 2004. Spanish cigarette prices rose 7 percent in 2006 after new restrictions. In contrast, French cigarette prices did not change from 2004 to 2006, before smoking bans this year.

Tobacco is “an addictive, branded product and it’s capable of sustaining price increases,” said Thomas Russo at Gardner Russo & Gardner in Lancaster, Pennsylvania.

Typically consumption may drop 8 percent in the first weeks after a ban. After that, smoking consumption patterns revert to the long- term trend, which in Europe is an annual drop of about 2 percent, he said.

Twelve percent of cigarettes smoked in Britain are consumed in bars or restaurants, said Vincent Allilaire, a Standard & Poor’s analyst who follows British tobacco makers.

That means the resulting decline should be less than that after England bans smoking in bars and restaurants. He said the ban would not affect credit ratings of Imperial Tobacco, based in Bristol, England, or Gallaher Group, which is now owned by Japan Tobacco.

The drop in consumption can be recouped in 12 to 18 months through price increases, said Allilaire, who is based in London.

“It’s much easier to raise cigarette prices than for other products,” he said.

Because about 80 percent of the price of British cigarettes is tax, a manufacturer may increase its price 10 percent and a consumer would only see retail prices going up 2 percent, Allilaire said.

Successfully dealing with the English restrictions is critical for Imperial, which gets more than a third of its profit from Britain and is the biggest producer in the country. Imperial net profit is forecast to rise 6.2 percent this year, according to estimates compiled by Bloomberg.

The prices have not deterred people much so far. Imperial’s profitability has almost doubled since 2003, the last full year before smoking bans started. British American’s profitability more than tripled in that time.

(c) 2007 International Herald Tribune. Provided by ProQuest Information and Learning. All rights Reserved.