Wednesday, September 11, 2019

Tobacco Companies’ Best Friends

Anti-tobacco activists portray themselves as enemies of “Big Tobacco,” so they naturally characterize the current panic about vaping among American teens as a new campaign by the industry.  This is fundamentally wrong, according to David Sweanor, a veteran anti-smoking advocate and chair of the advisory board for the Center for Health Law, Policy and Ethics at the University of Ottawa.  In the following guest blog, Sweanor suggests that the war against vaping is cigarette manufacturers’ best hope for a lucrative future.

The presence of the tobacco industry plays a huge role in discussions on tobacco harm reduction and disruptive technology, but I have long found that those who think they are that industry’s greatest enemies are often among its biggest enablers. Yet understanding the fundamentals in play should not be so hard.

We can start with what the financial markets appear to think of the state of these companies, which is seen in the 5-year stock price charts at left. In early 2017, the combined value of the FT500 tobacco companies (PMI, BAT/Reynolds, Altria, Japan Tobacco, Imperial and ITC) surpassed US$700 billion. That was a continuation of a longstanding skyward march of these companies as they benefitted from their ‘nicotine maintenance monopoly’ and raised prices in a cartel-like fashion.

Recently the combined value was down to US$372 billion. In looking at their stock charts we can see clearly when disruption started to bite.

This makes sense when we consider that those valuations are the present value of future anticipated earnings. So long as the companies can, as in the US, make cigarettes for 28 cents a pack and sell them, pre-taxes etc., for over $2.00, and keep raising their prices aggressively, and price elasticity is low, it is a licence to print money. Regulatory barriers thwarting competition keep them secure.

But just as OPEC’s cartel invited alternative sources of energy and taxi cartels created an opportunity for Uber, the nicotine market has long been at risk of disruption, of true competition breaking out. The global cigarette market, at well over $US800 billion annually, huge profit margins, high tax burdens putting them at a price disadvantage, and unhappy customers, creates a tempting target. Regulations, public misinformation, actions by self-styled anti-tobacco groups, and technological challenges protect the cartel. But that protection is no longer assured and buying shares in Big Tobacco today starts to look a bit like buying into New York City taxi medallions just as Uber was getting launched.

The idea that cigarette companies welcome this disruption flies in the face of their stock prices. Yet many in the tobacco control field seem convinced that whatever happens with new technology Big Tobacco will win because, well, they have long dominated the market. Leaving aside that the market apparently disagrees, this is worth thinking about. Disruption has hit a great many businesses over a very long time. Would anyone care to list all the market-dominating companies that did well from such disruption? They typically get blown away, and for very good reasons. They are large, bureaucratic and risk-averse, and have much to lose if they make mistakes. They also typically lack the expertise in the emerging technologies and are held back by those in the company who are committed to the status quo. Meanwhile, lots of start-ups can compete for the emerging market with little to lose but huge upside if they are ultimate winners.

Horse breeders did not come to dominate the tractor business, nor horseless carriages. IBM missed out on software, Microsoft on social media, the Yellow Pages on internet search, NYC taxi medallion owners were not the backers of Uber. Then there were makers of rotary dial phones, beat by the likes of Motorola, in turn beaten by the likes of Nokia, which was trounced by BlackBerry, which in turn lost out to Samsung and Apple.  The list of big, established, market-dominating companies ‘doing a Kodak’ is very, very long.

Also, if Big Tobacco really wanted to facilitate a rapid transition to low risk products they would act very differently. They are, after all, in possession of the best market intelligence. They know what happens when vape products compete directly with cigarettes. They know how many smokers would seriously try to switch if adequately informed about relative risks, and they know how things like risk-proportionate regulation and taxation is likely to impact the markets. But they stay pretty quiet.

I think it is helpful to think of Big Tobacco and alternative nicotine the way we would think of the House of Saud and alternatives to fossil fuels. Big Tobacco must prepare as best they can for a market they think is fundamentally changing. They must sound like they are very supportive, for public relation and legal liability reasons. But the slower the transition, the longer they can reap the rewards of their exceedingly lucrative cartel.

Substituting market intelligence for the current ‘if they seem to want to do it, we will oppose it’ thinking, and the application of some strategy could lead to some quite extraordinary breakthroughs.

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