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Moody’s: E-Cigarettes Hitting European Tobacco Industry Growth


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?
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Suspicions Rise After Tobacco Giant Wines and Dines French Officials


At first glance, it seemed like an innocent dinner among friends or colleagues. The group gathered at the Chez Francoise restaurant in Paris last Wednesday, where they sipped top-notch Bourgougne wine and dined on frog legs and veal. The group ended their meal with Cuban cigars according to French weekly Le Journal de Dimanche.

While it might have seemed like a nice celebratory luncheon, many are concerned about the timing of the meal considering the guests that attended. Just one week after Health Minister Marisol Touraine announced a new bill to ban the use of e-cigarettes in public, Soraya Zoueihid, French President of British American Tobacco hosted the €10,000 meal. Curiously, his guests were some important political figures.

Luncheon guests included several deputies and a senator: Andre Santini, Patrick Balkany, Francois Sauvadet, Jean-Claude Lenoir, Odile Saugues, and Dominique Bussereau. Gladeric Sabatier was also in attendance and he works within the finance ministry, acting as third in command over the customs administration that determines tobacco prices throughout the country.

With a major tobacco company hosting such an elaborate lunch for French politicians and lawmakers, many are left to wonder about the state’s relationship with big tobacco. After all, France has seen a lot of policy changes in the past few years, including major tax hikes on tobacco products and new requirements for plain packaging in some regions.

According to Le Journal de Minache, Zoueihid did mix in some business affairs during the lunch. He reportedly discussed tobacco regulations including the upcoming bill to ban e-cigarettes. He called for balance in making future decisions related to tobacco products. Interestingly, British American Tobacco also has a stake in the new bill banning e-cigs as it currently sells e-cigs and is even planning to launch a new line of e-cigarettes in the coming months.

The luncheon clearly contradicted France’s previous stance against tobacco lobbyists. In fact, France signed an initiative from the World Health Organization that addresses these kinds of meetings. This initiative says, “The state must guard against politicians being influenced by the interests of the tobacco industry.” However, this extravagant luncheon seemed to be an opportunity for British American Tobacco to influence politicians towards their objectives.

Luncheon attendee Odile Saugues defended the gathering, claiming that it was nothing more than an opportunity to dialogue about issues surrounding the tobacco industry. He told local reporters that “BAT maintains its relationships in order to weigh up and share ideas, but that doesn’t change anything. I vote in favor of all price increases (on tobacco products).”

The timing of the expensive lunch still leaves many people skeptical. While tobacco prices are continually increasing each year for the French public, an estimated 500,000 residents are using e-cigarettes as a more cost effective solution. Many chose e-cigarettes for use in public places where tobacco was not allowed. However, the upcoming e-cig ban would eliminate that possibility and potentially cause a substantial drop in sales for e-cig companies.

Is it possible that the €10,000 luncheon was just another example of tobacco lobbyists trying to get what they want from politicians? British American Tobacco certainly stands at risk for falling sales if the new bill banning e-cigarettes is passed. Do you think this luncheon was out of line?
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CDC Reports Decline in Number of U.S. Smokers


A new report by the Center for Disease Control and Prevention reveals that many U.S. adults are giving up cigarettes. Despite the number of U.S. smokers staying mostly the same for the past decade, a new survey showed that the smoking rate is now down to an all-time low of 18%.

The CDC reports that smoking rates hovered around 20% for seven years before dipping to 19% in 2010. This rate held steady until 2012, when a new survey revealed that only 18% of American adults are still lighting up. This has brought up a lot of speculation over what is causing people to finally give up the cigarette habit.

The preliminary report was released on Tuesday, with the CDC showing results from a recent survey among American adults. The survey did not include adolescents so it does not give us any definitive answer on whether smoking rates have declined among teens as well. Among the 35,000 people who participated in the survey, the major of smokers were male and the lowest rates of tobacco use were among adults over age 65.

Joshua Yang works as a tobacco control researcher for the University of California in San Francisco. He weighed in on the new report, offering his thoughts on why smoking rates are falling. According to Yang, the three biggest factors are the increase in tobacco tax, stricter smoking restrictions, and an emphasis on tobacco education.

Richard Grucza, associate professor of psychiatry at Washington University, agreed with Yang. Grucza credited new smoking bans and restrictions on the decrease in smokers. Many people have chosen to give up cigarettes rather than deal with the inconvenience of new restrictions.

The CDC’s recent ad campaign could also be a possible cause for the decline. Last year, the CDC released new graphic ads featuring disturbing videos, photos, and stories of former smokers. According to the CDC, they received calls from 200,000 smokers looking for help to give up tobacco after viewing the new ads.

One of the most obvious causes for declining tobacco use could be the constant increase in the price of cigarettes. Higher tobacco taxes have made smoking unaffordable for many Americans, particularly young smokers that have a tight budget. The CDC stated that by increasing the price of cigarettes by only 10% creates a 4% reduction in cigarette use among American’s young people.

Washington University released a June 13 study in the American Journal of Public Health that linked stricter age limits with decreased tobacco use. The report showed that states that have the highest age limits for tobacco use have the lowest incidence of smoking in the country. It’s possible that as some states increase the legal age to purchase tobacco, rates decline, as teens can no longer buy cigarettes at their local stores.

According to Darmouth Medical School’s cancer control program, the lower incidence of smoking could be traced back to changes in Hollywood. Smoking has become less popular on the Hollywood scene. In the past, cigarettes were used in many movies and television shows, but that is no longer the case. In 1998, the Master Settlement Agreement made it illegal for tobacco companies to advertise on television. Interestingly, smoking rates have declined among Americans just as they have declined in appearance in movies and television.

Beyond the higher tobacco costs costs, graphic anti-smoking advertising, and reduction of cigarettes in Hollywood appearances, there is another factor that is certainly worth consideration. As tobacco use is going down, the number of people using electronic cigarettes is on the rise. More and more Americans have stopped using cigarettes, turning to e-cigarettes as a tobacco-free alternative. Not only are e-cigarettes tobacco-free, but they are also more cost effective in the long run. Each time a smoker chooses electronic cigarettes, there is one less sale for the tobacco industry.

Even with the less Americans using tobacco, cigarettes still pose a major threat to public health. Experts say that one in five U.S. deaths can be linked to tobacco. Smoking results in $50 billion to $73 billion in medical expenses every year.

San Diego State University’s professor of global health spoke out this week about the declining smoking rates. Thomas Novotny issued a word of caution to people who believe the battle against tobacco is nearly over. “We are a long way from the end game on tobacco use,” he said. “It is too early to declare victory. It is encouraging to see that the prevalence rate has finally edged downwards for adults after lingering above 20% for so long. Nevertheless, we still have 45 million or so smokers in the U.S. and so we still have an enormous challenge to try to reduce this number further.”

While Americans rightly celebrate this week’s CDC report and the decline in tobacco use, the future remains uncertain. Will smoking rates continue to decline in the coming years? Why do you think fewer American adults are lighting up these days?
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Monday’s Minnesota Tobacco Tax Increase Leaves Smokers Feeling Burned


July 1 delivered more than a new month to residents of Minnesota. Monday was the first day of the state’s new tobacco tax increase, raising the tax an additional $1.60 per pack of cigarettes to a total of $2.83. Minnesota health activists are heralding the new increase as a major victory, but the tax hike leaves many smokers feeling burned.

The new tax increase rockets Minnesota to the sixth-highest cigarette tax in the country. New York is currently at the top of the charts at $4.35. Minnesota smokers are feeling frustrated at the climbing cigarette prices.

Dustin Luedtke, 43, told reporters on Monday, “I think it’s a little ridiculous.” As a smoker for 15 years, he expects the tax increase to hit smokers hard and cause many to reconsider their habit, including himself. “It’s going to force a lot of people to quit. I’m going to end up quitting.”

Many smokers stocked up on cigarettes this past weekend, in anticipation of the higher prices. Shayna Moore from Freedom Station reported that the store was low on several brands by Monday morning. “We’re out of a lot of cigarettes… we went through a lot of cartons (Sunday).” Moore said that many customers told her they would fight rising costs by switching over to less expensive brands.

Retailers in bordering states hope the tax increase causes more customers to cross state lines to buy cigarettes. Bernice Burroughs of Centerville, Wisconsin said her store in Toad’s Cove had already stocked up on extra inventory. Like other Wisconsin stores, they hope that smokers who cross the bridge for work will stop by and purchase cigarettes before crossing back into Minnesota.

Smokers will definitely notice the price increase if they continue buying cigarettes in Minnesota. On Monday, the cheapest pack of Pall Malls cost $6.50 at Brady’s Service Center off Interstate 94. However, if smokers traveled just a few miles to Fargo’s Gateway Service Center in North Dakota, that same pack was only $3.79. Brady’s price for a pack of Marlboros was a hefty $8.30, while it cost only $5.15 across the state line at Fargo’s.

Brady Olson, owner of Brady’s Service Center vented his frustration, saying that the tax increase gives Minnesota stores a major disadvantage. With the rising taxes, there is just no way to compete with prices on the other side of the state line. “It puts a very unfair advantage for North Dakota because we’re also at a disadvantage on the gas tax, sales tax, and whatever other taxes. It’s just getting worse and worse.”

Olson disagrees with public health officials that claim that the new tax hikes will prevent kids from picking up cigarettes and cause current smokers to kick the habit. “It’s $15 in Las Vegas and $10 in New York, and they’re still smoking. If you want something, you’re going to do it whether you like to pay for it or not.”

Apparently, some Minnesota smokers have been crossing state lines to buy cigarettes for years. Smoker Jeremy Myers of Moorhead was surprised to hear of the new tax hike. He has been buying his cigarettes in North Dakota for years because “They’re just cheaper.” Before the latest tax increase, cigarettes were still around $1 cheaper in North Dakota, according to Myers.

The Cenex station in Fargo, North Dakota confirmed Myers’ claims. Manager Shari Bettenhausen told reporters that Minnesota residents had been stopping in her store for a long time. She noted “A few more cartons are going out the door today,” although the increased sales were not really significant yet.

At this point, it’s too early to know whether the increased taxes will have a major impact on the number of Minnesota smokers. According to Minnesota’s Quit Plan, around 16 percent of Minnesota residents are smokers. The new tax is expected to push 36,000 smokers over the edge and cause them to quit.

Of course, it’s also possible that these smokers will just seek out an alternative to their former cigarette habit. Mark Roussin, co-owner of Vapor Vibes welcomed the tax hike, believing it would bring more business to his e-cigarette shop.

Roussin and his friend Dave Delsing opened their e-cigarette store just one month ago. According to Delsing, e-cigarettes cost only one-third of the price of tobacco cigarettes. He said his store had already noticed a change just in the first day of the new tax. “We’ve seen it already today,” he said, noting an increase in business on Monday.

Other e-cig retailers noted a similar increase in business over the past few weeks. In the Twin Cities, there has been a notable surge in demand for electronic cigarettes. Sina Wars of Uptown Vapor Shoppe in South Minneapolis has even expanded her business, opening a second location in Maplewood in June.

At this point, electronic cigarettes are not taxed under the same laws as analog cigarettes. Minnesota does require tobacco taxation on electronic cigarettes, but it is broken down differently than the tax on regular cigarettes.

The law was changed on August 1, 2010 to include e-cigarettes in taxable tobacco products, despite the fact that e-cigs are tobacco-free. Today, e-cigarettes are taxed based only on the price of the nicotine cartridges. So if someone purchases an e-cig starter kit in Minnesota, they only pay the tobacco tax on the value of the nicotine cartridges that are included, rather than on the electronic cigarette kit as a whole.

For Minnesota smokers, the tax hike is definitely a game changer. Whether they pay higher prices for their current cigarettes, give up smoking for good, or switch to electronic cigarettes for their nicotine cravings, there is certain to be a shift among the state’s smokers.

How do you expect Minnesota smokers to react to the new tax? Do you expect many smokers to quit or will there be continued surge in the sale of e-cigarettes?
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