New law in Oz will test Big Tobacco's weird resilience

Australians call them "Winnie Blues." Their favourite cigarettes will lose their familiar blue-and-white packets, however, under Australia's new plain-packaging law, which will take effect Dec. 1. As of that date all cigarettes must be sold in identical packs -- "drab dark brown" is the approved colour -- with the brand name set in standardized type.

The tobacco companies are angry. Plain packs are "plain stupid," declares the website of British American Tobacco (BAT), the second-largest non-state producer.

It ought to be a disaster for big tobacco. Governments started banning cigarette advertising on television in the 1960s and the marketing noose is tightening. Many governments ban ads in print media and oblige manufacturers to emblazon packs with gruesome warnings.

The pack itself survives as a badge of a smoker's taste. Lighter colours hint at relative healthiness. Tall, thin packs seem more feminine.

In the war on tobacco marketing, packaging is "the last major frontier," says David Hammond of the University of Waterloo in Canada. "That's why we're seeing such strong opposition."

Tobacco is a weirdly resilient industry, however. Consumption is shrinking in developed countries, but still rising in poorer ones. As GDP rises, smokers trade up to more expensive brands. The number of cigarettes smoked globally will shrink by nine per cent between 2015 and 2050, predicts Euromonitor International, a research firm, but tobacco firms are adept at wringing fatter profits from stagnant markets.

Addicted customers and high taxes make it relatively easy to raise prices, and a big hike for producers translates into only a small uptick for consumers. Tobacco's stigma keeps potential competitors at bay. BAT aims to raise its earnings per share annually by high single digits and often does better than that, partly by using its spare cash to buy back shares.

Big Tobacco can hardly complain that plain packs will dent demand. It insists that branding is all about market share, not recruiting new smokers. Really? The World Health Organization reckons a blanket advertising and promotion ban would cut puffing by seven per cent.

Kingsley Wheaton, BAT's head of regulation, says the injury lies elsewhere. For one thing, Australia's law amounts to an expropriation of intellectual property, which ought to worry other industries such as food and liquor. Australia's High Court rejected that claim, but the World Trade Organization is considering it.

The second claim is that plain packs will drive smokers into the black market, which would be the fourth-biggest manufacturer if it were a company. This is seen as the main threat to the business. Plain packs will encourage counterfeiters to produce knock-offs of many brands rather than only a few. And that, the cigarette-makers gleefully point out, will cut government revenue.

They are nothing if not ingenious: When regulators banned "light," they struck back with "smooth." Plain packs will not end the duel.

Plain packs may fit with a global back-to-basics mood. Some analysts think they could even help brands in their endless quest for differentiation. Faced with rows of identical boxes, Aussies will ask for their favourites by name. New brands will find it hard to break in. Incumbents may find the new regime rather cosy.

Calgary Stampeders 67%

Toronto Argonauts 33%

Republished from the Winnipeg Free Press print edition November 20, 2012 A11