Lockdowns and social distancing threaten Big Tobacco's supply

Big Tobacco is struggling in markets wracked with uncertainty during the pandemic.

By Vinjeru Mkandawire of The Daily Telegraph

Big Tobacco has long looked to overseas markets for a friendly welcome amid declining cigarette sales and lobbying by anti-smoking activists at home. But now, nationwide lockdowns and social distancing measures on auction floors around the world have thrown their sales and international supply chains into uncertainty.

At every major turning point in regulation in Europe and the US, tobacco companies have been able to count on bumper sales and fast growth in low and middle income countries. When the Eighties brought a crackdown on tobacco advertising and sports censorship across the western hemisphere, big brands sought refuge abroad. After 46 US states sued the industry, eventually agreeing to a $366 billion settlement in the late Nineties, the biggest tobacco groups set their sights on markets such as Malaysia, the Philippines and Colombia. Investments would later follow in countries such as Turkey, Vietnam and South Korea.

As smoking bans accelerated from 2007, Marlboro-maker Altria moved to split Philip Morris, severing its fast-growing international unit from its sluggish US sales. Strong gains in markets such as Argentina, Indonesia and Egypt were laid out in stark contrast to falling cigarette consumption at home. Even when the big brands faced criticism in 2008 for targeting young people in African countries with branded concerts, competitions and a string of other marketing campaigns, industry bosses continued to enjoy a sales boom on the continent.

Today, the majority of the world's 1.1 billion smokers (roughly 80 per cent) live in low and middle-income nations, according to Action on Smoking and Health (ASH). Most tobacco farming has also shifted from high-income countries in Europe and North America to markets in Africa, Asia and South America. However, cigarette factories and sales around the world have come under pressure from government-mandated shutdowns due to the global coronavirus outbreak. Big brands have also been hit by reduced duty-free sales as empty airports take their toll.

Philip Morris International (PMI) chief executive André Calantzopoulos was among the first industry figures to fire a warning shot over this year's outlook, while Altria scrapped its full year earnings guidance.

British American Tobacco said factories in a small number of markets had been forced to shut down for limited periods. "With social isolation measures placing day-to-day life on hold for much of the world's population, this temporarily impacts our operating environment," Calantzopoulos said in a recent earnings call. He added that further uncertainty over the scale of the economic disruption – along with the speed and shape of the recovery efforts required – had already impacted consumption levels in some countries.

Developing countries are particularly at risk. PMI bosses warned that the high rate of minimum wage earners, coupled with lower resources for social support in countries such as Indonesia and the Philippines, would add to the insecurity. Meanwhile, tobacco auction floors have enforced strict social distancing measures in countries such as Malawi and Zimbabwe, where the start of the selling season had been delayed due to the Covid-19 outbreak.

"There will be some disruption in places where tobacco is sold. However, a growing number of tobacco auction floors are adapting to the new reality," says Erik Bloomquist, an independent consultant and former industry analyst. "After the initial disruption of the virus and governments trying to get their heads around it, you're now seeing that key suppliers have been able to put in place protocols to adapt, allowing them to gradually resume sales."

In other countries, the pandemic has ushered in a more hostile regulatory environment for tobacco groups. South Africa, which has enforced one of the strictest lockdowns worldwide, last week reversed a decision to ease a ban on cigarette sales. But some have warned this could push people towards the illicit trade, where cigarettes are sold far below the required tax levels.

"I was surprised that South Africa had decided to continue with its ban on cigarette sales," says Bloomquist, who adds that this would do little to stop people from smoking or buying cigarettes, particularly in the poorer townships.

"It won't change behaviour," he says. "And the effect of the ban on tax revenues – in a country that had already been struggling in this regard – could be disastrous. The country will ultimately miss out on much-needed taxes."

India, which recently extended its lockdown by a further two weeks, has also banned the sale of cigarettes. Restrictions on tobacco products in the two countries follow warnings from the World Health Organisation that smokers could be more vulnerable to the virus. Doubts are growing over this approach.

"The lockdown is not a good time to begin a ban on smoking and the move will have a lot of unintended consequences," says Bloomquist. "It simply entrenches and facilitates a shift to illicit products."

While sales at the big tobacco brands have remained resilient so far, bosses admit that future earnings will be harder to predict.