In the past, Europe was a haven for smokers and the tobacco industry experienced steady growth. In a July 2012 report, Moody’s Investors Service predicted sustained robust profits for tobacco companies in Europe, but this summer’s report looks much different. This morning, Moody’s released a new 2013 report stating that growth of the European tobacco industry is now slowing, though it remains stable.
Today’s report stated that the European tobacco industry’s growth status has been downgraded from positive to stable. According to Senior credit officer Paolo Leschiutta from Moody’s corporate finance group, the industry’s profit growth is expected to drop from 7% to between 4.5% and 5.5% in the next year.
The expected drop in profits comes as a result of the economic shift in Europe. “Our revised expectations reflect the likelihood that people will rein in their spending, leading to lower cigarettes sales or a switch to cheaper products,” said Leschiutta. He also noted an increase in tobacco regulations that seems to be taking its toll on the industry.
In the past 12 months, there has been a steady increase in regulatory pressures worldwide. On June 1, a new smoking ban in Russia went into effect, forcing tobacco users to keep their cigarettes away from public places. New laws requiring plain packaging for tobacco have been implemented in Australia and are expected to follow in Ireland. The UK even implemented display bans for all tobacco products. While each of these regulations might not have a monumental impact individually, the combined changes are expected to take a toll on the tobacco industry as a whole.
Moody’s also noted that electronic cigarettes could play a part in the declining growth of tobacco. E-cigs are rapidly becoming a competitive threat against tobacco, with $650 million in annual sales in Europe. According to a 2011 survey from the European Tobacco and Health Conference, 57% of people chose electronic cigarettes over tobacco based on cost factors alone. The American Journal of Preventative Medicine published a 2011 study that showed 30% of e-cig users stopped using tobacco completely within six months of using e-cigarettes.
In order for Moody’s to change their outlook on the tobacco industry to a positive status, they would need to see profit growth of at least six percent. If tobacco profits continue to shrink or major regulations are implemented, Moody’s will change the outlook status to negative.
All eyes are on big tobacco as we approach the second half of 2013. Will Europe’s tobacco companies continue to see a decline in operating profits or will the industry bounce back despite the new regulations? Could the continuing success of electronic cigarettes do permanent fiscal damage to tobacco manufacturers in Europe? What do you expect to see for the European tobacco industry over the next year?