After a decade of the smoking ban, the tobacco industry's real fight begins now

10 July 2017
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Big tobacco is hoping its smoking alternatives can help the industry breathe easy.
Bradley Gerrard
2 JULY, 2017
Telegraph

Few products could support a highly profitable industry if their use was banned indoors in public.
Yet 10 years on from the smoking ban, the tobacco industry continues to generate cash almost unabated, surviving wave after wave of public legislation, from plain packaging to increased taxation.
The industry spluttered in 2007 when the ban came into force but dusted itself off by slashing costs. It was helped by the deftness of parts of the hospitality industry which adapted to keep smokers feeling welcome with designated outdoor areas.
The battle over public smoking appears lost. Support for the smoking ban has risen since it was introduced, according to surveys by the charity Ash.
The industry is increasingly resigned to dwindling cigarette sales volumes as a result. Philip Morris International (PMI) held an event last week entitled Can Britain Go Smoke Free in the Next 10 Years, an acknowledgement that alternatives to smoking are required. New technologies are also a major factor in BAT splashing out $49bn for Camel maker Reynolds American, which has valuable patents in “heat not burn” smoking.
According to the Tobacco Manufacturers’ Association, the number of cigarettes consumed in the UK, excluding those illicitly traded, has fallen from 99bn in 1990 to 34bn in 2014.
Investors remain enthusiastic about tobacco companies, however. Regardless of the pressures the industry has faced in the past decade, tobacco stocks listed in London, British American Tobacco and Imperial Brands, have been particular stockmarket darlings, thanks to their generous cash returns for shareholders.
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A 2015 study co-authored by Robert Branston, senior lecturer in business economics at the University of Bath, suggested UK profits by the tobacco industry had risen from £1.03bn in 2009 to at least £1.1bn in 2013. This was in spite of cigarette volumes falling from 47.72bn sticks in 2009 to 38.39bn sticks in 2013.
This has meant tobacco giants have become key constituents of most UK equity income funds available to retail investors.
Liontrust UK income fund is one of few to have abandoned tobacco stocks. It sold out of the sector at the beginning of 2013.
Jamie Clark, a fund manager on the team, acknowledged that the decision had been “wrong” from a performance point of view but believed the call would be proven right in the long term.
He said regulation was “one-way traffic” and that western economies in particular had been “particularly zealous” in imposing it on the tobacco industry.
He pointed to data from the Office for National Statistics which shows roughly 16pc of the UK population smoked in 2016, down from in excess of 20pc in 2007 and roughly half in the early 1970s.
“You can see it is a clear trend towards consumer cessation and it will continue unabated in developed markets,” Mr Clark said.
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E-cigarettes | Helpful or harmful?

Nearly 80,000 people a year die of a smoking related illness and smoking costs the NHS £2 billion a year. 2.6 million people use e-cigarettes in the UK and they are now the most popular quitting aid.

  • Public health officials are at odds with scientists over whether or not e-cigarettes are safe
  • In August, Public Health England issued a report concluding that e-cigarettes were 95 per cent less harmful than conventional tobacco and urged Britain’s eight million smokers to start vaping.
  • But health experts from the London School of Hygiene and Tropical Medicine and the University of Liverpool claim evidence used in the report was flawed, based on inconclusive evidence which was tainted by vested interests.
  • Writing in the BMJ, Professor Martin McKee and Professor Simon Capewell said there was no reliable evidence to show that e-cigarettes were safe or that they did not provide a ‘gateway’ to smoking for youngsters.
  • Although the PHE report was welcomed by bodies like Action on Smoking and Health (ASH) and the Royal College of Physicians of London, other leading health bodies – including the British Medical Association, the UK Faculty of Public Health, the European Commission and the World Health Organization, have expressed caution.

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The University of Bath’s Dr Branston agreed the success of new smoking products would be a major deciding factor for the future profitability of the tobacco industry and pointed to its billions of pounds in investment as evidence of their bet on future trends.
But he raised the prospect of the potential for more onerous legislation to come the tobacco industry’s way, such as the revival of a proposed levy which was previously mulled by Government and the potential for a price cap, which he thought could more easily be instigated after Brexit.
Dr Branston said the smoking charity ASH had funded a preliminary investigation into whether a price cap would be compatible with EU law but found it would be problematic under the Tobacco Tax Directive and other European legislation.
But Dr Branston, who has worked with ASH on research documents, said they planned to “push the idea again” once Brexit is nearer to reality and the Government might be seeking positive Brexit stories.
He argued if the Conservative party had been willing to propose price caps on gas and electricity companies, in spite of there being healthy levels of competition in those markets, then a price cap would certainly be arguable in the tobacco industry where there is less competition.
For all the potential forthcoming challenges the industry faces though, it still has its cheerleaders, including one of the UK’s most prominent fund managers Neil Woodford. His firm said the three best contributors to the manager’s equity income fund’s three-year performance came from the tobacco sector.
While Mr Woodford has recently reduced his exposure to BAT a spokesman said this had been on valuation grounds as the shares look “as fully valued as they have ever done in modern market history” rather than a change in view about the potential for the sector as an investment.
How many smokers – and perhaps non-smokers – the industry can recruit to its new products will be crucial to the industry’s prospects. Other factors count too. Might the industry’s tax bill fall if HMRC and other treasuries go easy on the new generation of tobacco-based smoking products given the current view they are less harmful?
Will these more advanced products be more difficult to counterfeit – something which could be useful given an estimated 16pc of cigarettes smoked in the UK are illicit? And would ethical investors who have divested from the sector, including Aviva and Axa, consider returning to by tobacco if it genuinely abandons conventional cigarettes?
It is all possible. The recent history of the tobacco industry shows it is more difficult to stub out than you might think.
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