tobacco industry in uk1

Tobacco Industry in

UK Environmental and Industrial Analysis of

Tobacco Industry in UK The given document consists of Environmental and Industrial Analysis of Tobacco Industry in UK which is supported by PESTEL and Porters Five Forces.

2014

Hardik B Bendbar Student ID:21242444

3/23/2014

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Content

TITLE Page No

1 Introduction 3

2 “PESTEL” Analysis

Political Factors 3

High Taxation

Trading Blocks

Economical Factors 4

Rise in GDP

Social Factors 5

Rise in Population

Health Awareness

Technological Factors 5

E-cigarette

Marketing and Advertisement

Environmental Factors 6

Increasing litter due to cigarette butts

Legal Factors 6

Under Age

Smoking in Public Places

3 Key Drivers for Change 7

High Taxation

E-cigarette

4 Porters Five Forces 8

Threat of New Entry

Threat of Substitute

The Bargaining power of Buyer

The Bargaining power of Supplier

Rivalry between Competitors

Industry attractiveness

5 Conclusion 10

6 Appendix 11

7 Bibliography 13

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TOBACCO INDUSTRY IN UK

1) Introduction

Tobacco Industry of UK mainly consists of Cigarette, Hand Rolling Tobacco (HRT),

Cigars, Cigarillos and Pipe Tobacco. There has been a steady fall in the consumption of

tobacco but yet the value sales of Cigarette and tobacco products have increased by 6.4%

and 2.4% respectively in the year 2011 and 2012. The increased in market value is mainly

due to high tax imposed on this products. The tobacco market is mainly dominated by

handful of tobacco companies such as Philip Morris International, British American Tobacco,

Imperial Tobacco and Japan Tobacco International. These companies operate globally and

have combined shares of more than 50% of the global market. (Hucker, 2013, p. 1)

2) “PESTEL” Analysis

Political Factors:

High Taxation

In the recent budget of March 2012, the chancellor has maintained the tax

escalator by raising the cigarettes duty by 2% point above the inflation. Although there

was reduction in ad valorem tax from 24% to 16.5% of the retail price in 2011 but it can

be still considered as insufficient to counter balance the impact of high specific taxation

and high VAT. The main reason to increase tax and VAT was to narrow down the gap

between higher range cigarette and lower range cigarette which in-turn will encourage

smokers to quit smoking instead of choosing lower economical cigarette. This step by

government is mainly taken to control the number of smokers but in process it’s creating

a threat of illicit trade for tobacco industries. (Tobacco in United Kingdom, 2013,, p.8)

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a) Trading Blocks

UK has a trade deficit when it comes to import and export of tobacco products.

In 2012, around £ 817.6 m worth of goods were imported whereas £281.2 m was

exported. Trading with EU enables Tobacco players to shift their manufacturing

outside UK thus creating opportunity to import more with less imposed taxes as there

is less restriction when trading inside the EU. According to the reports, imports of

cigarette in 2012 were 80.8% from EU countries with Poland as primary trade

partner. As the consequences of high taxes, trading block like EU can prove to be

very Opportunistic for tobacco industry as it not only relives them from taxes but

also gives them option to earn higher profits by keeping the base price low.

(Hucker, 2013, pp. 16-18)

Economical Factors:

a) Rise In GDP

The GDP of UK in the year 2009 fell by 3.1% as a result of economic downturn.

However there have been some positive signs for the GDP of UK as it started to bounce

back in 2010 and continued so far. During the economic downturn many people were

unemployed for major part of time which eventually forced them to either quit smoking or

shift to cheaper brands. There was threat of losing tobacco market but as the economy

started to show some improvements with people getting better jobs, which removed

unemployment (thought not completely). This in-turn has provided an opportunity for the

tobacco manufacturers to sell more tobacco products as the people would be earning good

wages with improved life-style.

Even though UK can still be considered as a country undergoing recession

build-up process which creates a threat for tobacco players of losing sales on tobacco

market but at the same time there is considerable rise in HRT (hand rolling tobaccos) which

is considered to be very cheap as compared to cigarettes. Thus economic downturn also

provided an opportunity for rise in HRT. (Hucker, 2013, pp. 4-5)

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Social Factors:

a) Rise in Population

According to National Statistics, UK population grew by 3% between the

years 2008 to 2012. As the tobacco and cigarette market are more consumer based, it is

more likely to benefit the growth of sales for tobacco industries. Increase in population

indicates that there has been increase in number of young people. Cigarette is considered to

be one of way of socialising in UK teenage and youth culture and with nicotine as one of the

content which is very addictive in nature creates an addiction at a very early age which

becomes inevitable for them to give-up at later stages. Thus rise in population is an

opportunity for the tobacco industry as they have the chance to target younger people.

(Hucker, 2013, p. 4)

b) Health Awareness

Due to the efforts of Governments anti-smoking campaign and increasing

awareness of health and fitness among the people, health awareness has created a big

threat for tobacco industry. People are now getting more aware of the harmful effects of the

tobacco and started considering it as an unsocial-able thing. There have been strong steps

taken such as showing health warning like “smoking kill”, showing images of cancerous

mouth and throat with tumour on packets which in-turns leaves bad impact on the smoker.

Although it has been argued that consuming cigarettes daily and watching those warnings

every day leaves less impact as the smokers get used to it.

(Fifty years since smoking and health, 2012, pp. 3-6)

Technological Factors:

a) E-cigarette

E-cigarette was invented as an alternative to traditional cigarette so that people

can quit smoking. Although it looks similar to regular cigarette but it provides an option to

smoker to consume nicotine in harmless way. Generally all regular cigarettes contain

nicotine with harmful chemical substances like carbon dioxide and tar whereas e-cigarette

consist of a battery which helps to convert liquid nicotine into vapours which can be inhaled.

Thus the concept of E-cigarette can be considered as threat for the traditional tobacco

companies as it is distorting their regular cigarette market. (Moss,2014)

b) Marketing and Advertisement

UK government is been very strict when it comes to advertisement of

tobacco products. Supermarkets and retail shop are the leading distribution channel and the

only way of advertising tobacco products. Super markets offer convenience, enabling busy

consumers to buy tobacco along with their groceries. This enables tobacco players to

advertise their product either by emphasizing on products price or brand image. Recently

there was decision made to delay the plain packaging of cigarette which certainly gives

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opportunity for tobacco companies to continue their innovative style of packaging

strategies to support their brands. (Campbell and Wintour, 2013)

Environmental Factors:

a) Increasing litter due to cigarette butts

Consumption of tobacco leads to enormous damage to the environment.

Cigarette use leads to anthropomorphic climate change, caused by human activities as

cigarette smoke contains gases like carbon dioxide and methane. Even the cigarette butts

are huge source of litter on land. As the number of smokers are increasing it is getting more

difficult to control the litter caused by cigarette butts because usually smokers throws butts

on land rather searching for proper waste bin. Thus it creates threat in-terms of

environmental safety. But during this process it creates an opportunity for local citizens

to earn wages which leads to removal of unemployment to some extent. Such opportunity

can serve as extra income for unskilled socio-economic class of UK.

(The tobacco industry's negative impact on environment, 2010, pp. 3-4)

Legal Factors:

a) Under Age

Since 2007 the legal age of smoking in UK has been changed to 18 from 16.

It is estimated that around 207,000 children starts smoking each year in UK. According to

the reports, about two third of the adult smokers started smoking before the age of 18 and

over 80% started before the age 20. The number of underage smokers has been

considerably dropped due to the ongoing government health campaign, high taxation and

stricter law over retail sales for underage smoker. Thus government initiation of anti-smoking

campaign and establishing stricter law for underage smokers has created a threat of

devaluing the smoking habits and it also encourages for illegal proxy purchasing.

(Young people and smoking, 2014, pp. 1-3)

b) Smoking in Public Places

Ban on smoking in public places was introduced in England in July 2007.

This was mainly to protect workers and public from the harmful impact of the second hand

smoking. UK smoking ban covers almost all the indoor workplaces (with some exception). It

is been largely observed and also accepted rapidly in UK. Creating such restriction in

smoking tends to leave smoker to cut down his smoking habit as the smoker is not allowed

to smoke in that particular place. Thus restriction by law and the inconvenience of smoking

caused due to ban creates a threat for tobacco companies of losing their loyal

consumers.

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3) Key Drivers for Change

a) High Taxation:

The UK government is continuously involved in raising taxes on

tobacco products which in-turn can lead to threat of illicit trade and reduction

in smokers.

During this process there can be a silent opportunity for the leading tobacco

players to play around with taxes. As we know that higher taxes on cigarette

results into sharp increase in the price of these products. Tobacco players can

utilize the introduction of higher taxes in order to increase prices for cigarette at

above the rate of taxation increase, which enables them to increase price as well

as profit margin without alienating consumer. Thus consumers would be typically

blaming higher taxes for the increasing cost. This will also enable the tobacco

companies to isolate their profits even when the consumption of cigarette is going

down. (Robinson, 2014)

b) E-Cigarette:

E-cigarette is considered to be a perfect alternative to regular

cigarette as it gives smokers an opportunity to consume nicotine in harmless way. Thus

it can be said that E-cigarette are possibly a threat for traditional cigarette company.

UK government has recently announced that e-cigarette will be licensed and

regulated as medicine from 2016 onwards; it can also be prescribed by GP along with

some other smoking aids in order to assist smokers to quit smoking. It would be a major

concern for UK government and an opportunity for tobacco industry, as the use of e-

cigarette creates an uncertainty of whether it will normalise the habit of smoking or could

encourage youngsters to smoke cigarette.

Moreover leading tobacco players can consider e-cigarette as an area of

opportunity to develop a new market with governments support. It would enable them

to expand its market coverage with an easy access of marketing and advertising and

having less restriction than compared to regular cigarette market.

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4) Porters Five Forces

Threat of Entry (low)

Barriers to entry for any new company in UK tobacco market is very high

as the economies at scales in manufacturing, distribution cost, marketing cost is very

high. It would be very difficult for any new company to raise capital for manufacturing

facilities that can produce tobacco products at national level. Also the cost of

packaging at mass level would be high. Moreover the UK government has very strict

rules and laws for smoking tobacco. Taxation can be considered as a major issue for

any new entry because the UK taxes and VAT on tobacco products are sky high.

Thus it can be said that threat of entry is low as barriers to entry is high. (The effect of increasing tobacco taxation: A cost Benefits and public finance analysis, 2014, pp. 1-8)

Threat of Substitutes (high)

The biggest substitute for tobacco industries is E-cigarette. With

the increasing awareness of harmful effects of smoking and acceptance of healthy

life-style by the UK citizens, E-cigarette is getting more popular as it provides similar

effect without harming the health of consumer. Moreover it is cheaper as compared

to regular cigarette which has to suffer high tax duties by UK government. It is long-

lasting and has an option of re-charging. Thus it is more convenient and also durable.

It is backed-up by government which can be very crucial for traditional tobacco

companies as they lack in support from government.

The Bargaining Power of Buyers (moderate)

Buyer’s power in the tobacco industry depends upon the economy

and the level of their disposable income. If the buyers disposable income declines,

they are more likely to purchase cheaper brands and if incomes increases then they

would more likely to buy expensive brands. As the tobacco products in UK are highly

priced due to taxes it leaves fewer/moderate option for buyers as the price

difference between high range and low range tobaccos is negligible. Due to

consumer health awareness and increasing government regulation it has become

more difficult to sell tobacco.

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The Bargaining Power of Suppliers (moderate)

Tobacco is the major materials used by the industry and UK is entirely

dependent on the imports from overseas growers. Tobacco is considered to be one

of the most cultivated crops in the whole world which is easy to grow and not

perishable. Moreover it can be stored for longer time, thus making it more stable than

other crops. Tobacco farmers then supply tobacco to manufacturing companies. The

main sources of tobacco for UK are Brazil and China. This indicates that the

bargaining power of suppliers is moderate as UK tobacco industries can flip to other

suppliers as there are many countries who are indulge in cultivating tobacco but it is

not necessary that they will offer at the same price as they were offered from Brazil

and China. (Hucker, 2013, p. 30)

Rivalry between Competitors (low)

The Tobacco industry of UK consists of handful of companies which

have over 45% of global market share. There have been constant fall in the

consumption of tobacco due to increasing prices caused by high taxes and health

awareness which forces tobacco companies to concentrate on more global market

rather than concentrating in UK. Moreover some of the companies operate as joint

venture in global market which reduces tension in national market. Thus the rivalry

between competitors can be considered as low as there is no source for them to

advertise or market their products. The only way they can compete is through price

penetration of products.

Thus keeping this five forces in mind it can be said that tobacco industry is less

attractive as it requires high initial cost for set up, it is been strongly opposed by

government through imposing high taxes. Moreover it has high threat of e-cigarette

which is distorting there sales.

However the tobacco industry is not huge with handful of companies only. As

tobacco being an easy source of supply which reduces the bargaining power of

supplier can be good option for any new company to enter in UK tobacco industry.

Moreover the tax being so high can be a positive point for tobacco industry to enrich

its profit making capabilities.

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Conclusion

Based on our research carried out on environmental and industrial analysis of

tobacco industry in UK, we can conclude as follows,

Tobacco industry in UK can be considered as less attractive due to high tax

imposed by government on tobacco products and increasing health

awareness.

High taxes, health awareness and legal restriction have been major source of

decline for the number of smokers in UK.

Illicit trade can be a major threat as a consequence of high taxation.

Trade union like EU can be very beneficial for tobacco industry as it can relive

them from higher taxes.

Delay in plain packaging has given the opportunity for tobacco players to use

innovative ideas of selling their products.

High taxes can be major driver of profits if utilized properly.

Although e-cigarette can be considered as a threat for traditional tobacco

industry but it gives an area of opportunity to develop and increase their

market size.

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Appendix 1

UK Market for Tobacco Industry

Figure shows that market value of Cigarette has been rising every year with a slight

drop in 2009.

Sales of HRT have been growing since 2008 without any drop. It is estimated a

increase of 31.1% overall in 2010 and 2011 as due to number of smoker were

switching from cigarettes to HRT to save money.

Pipe tobacco is been in declination since 2008, mainly because of its old fashioned

nature and being considered to be more risky to he

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Appendix 2

UK Trade Balance of Manufactured Tobacco Products

Figure shows the trade deficit of UK due to its high import of tobacco products such

as HRT and Cigars than it exports.

(Hucker, 2013, pp. 16-18)

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