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Stock Strategist Industry Reports

Winners and Losers from Tobacco Regulation

New bans and taxes are on their way.

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Federal and national governments in the United States and overseas are clamping down on smoking, both as a public health policy and to raise tax revenues. Bans on smoking in public places, restrictions on tobacco marketing, and rising excise taxes are causing headaches for tobacco manufacturers around the globe. The extent to which restrictions will be implemented is not yet known, and in this report we examine some of the proposals on the table. We conclude that several of these measures may not lead to the material consumption declines that their proponents expect, and that for those manufacturers with the strongest brand equity and the broadest portfolios, increasing regulation could create opportunities to stabilize market share.

Marketing Restrictions Tightening
Tobacco manufacturers are severely restricted in their ability to market products, particularly in developed economies, where advertising in most forms is prohibited, and several countries, including the U.S., have plans to further restrict tobacco marketing. One proposal includes a ban on cigarette displays in stores, a measure already in place in Finland. If implemented, the prohibition of in-store displays would remove one of the last remaining opportunities that manufacturers have of communicating with smokers, but we do not expect it to lead to significant volume declines. In fact, it may lead smokers to smoke their favorite brands more consistently, particularly if in-store pricing displays are also banned. This would, in our view, set current market shares in stone, which would be a positive for U.S.-leader  Altria (MO) and the leaders in overseas markets, particularly  British American Tobacco (BTI) and  Philip Morris International (PM).

Philip Gorham does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.