Will Packaging Rules in India & EU Hurt Tobacco Volumes?

The fate of tobacco biggies in India is in question in the wake of the latest plain packaging rule enforced by the government. As per the regulations imposed by the Supreme court in India, tobacco makers will have to exhibit graphic health warnings on cigarette packets.

A two judge bench ordered that the plain packaging rules should not be violated and the Karnataka High court was asked to listen to all the pleas challenging the directive.

The Indian government, supported by health proponents across the nation, had proposed that health warnings should cover 85% of cigarette packets against the current 20%, which was effective from Apr 1, 2016. Notably, the rule was proposed in 2014 by the Health Ministry.

The tussle between tobacco makers and the government of India heightened when tobacco makers reportedly decided to halt production as a protest against the graphic warning rule. Tobacco makers like ITC Ltd., VST Industries Ltd. and Godfrey Phillips India Ltd. (in which Philip Morris International Inc. PM owns almost 25%) paused manufacturing on Apr 1, due to confusion over the new requirement.

The majors said that the production halt will not cause any shortage in the market as they have products in stock. They will cease production until some certainty is reached on the implementation of the graphical warnings.

In India, the ills of tobacco consumption have taken an ugly shape, costing nearly a million lives every year. Per the World Health Organisation tobacco related diseases cost nearly $16 billion in India. IN order to address the situation, the government first implemented pictorial warnings in 2009 that had to cover 40% of the front portion of a cigarette pack. Youth health advocates have long been urging Indian policymakers to set a date for the implementation of the pictorial health warnings on 85% of both sides of all tobacco packets.

A parliamentary committee was reported to support the tobacco industry as it was of the opinion that the proposal to cover 85% of tobacco packets with health warnings is too harsh and should be reduced to 50%. The parliamentary committees are of the opinion that such a measure will hurt tobacco farmers and encourage illicit trade in the country. The government however stuck to its decision.

Meanwhile the European Union (EU) Court of Justice also ordered against tobacco companies and banned the use of flavored cigarettes like mint and menthol. The court ruled that the use of flavor makes cigarettes more attractive. It also stated that reducing the attractiveness of those products may contribute to reducing the prevalence of tobacco use and dependence among new and continuing users.

The EU court of Justice further stated that member states may maintain and even introduce further standardizations regarding plain packaging of cigarettes in their respective countries. The EU court ruled that 65% of front and back sides of a cigarette packet need to be covered with health warnings.

Tobacco companies have been penalized for taking recourse to any kind of advertising or packaging that flouts the laws, to boost sales. The global tobacco industry has been facing severe advertising and packaging restrictions on their products for some time.

Meanwhile, governments around the world are imposing restrictions on tobacco makers which, in turn, are lowering cigarette consumption and affecting margins. The plain packaging concept was pioneered by Australia in 2011 (read: Australia Harsher on Smoking ). Ireland was the first European country to enact plain packaging. It passed the legislation on Mar 10, 2015, and is expected to come into effect in May 2016.

Anti-tobacco activists commend U.K.'s decision to introduce plain packaging as they believe many countries will follow suit.

The Food and Drug Administration has made it mandatory for tobacco companies to use precautionary labels on cigarette packets to dissuade smokers. The labels have been designed in accordance with the Family Smoking Prevention and Tobacco Control Act and depict disturbing images that highlight the health hazards of smoking.

These rules are posing significant problems for tobacco majors like Philip Morris., Reynolds American Inc. RAI and Altria Group Inc. MO that are already bearing the brunt of anti-smoking campaigns worldwide.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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