EU tobacco pricing still in firing line

Executives at Altria, Imperial Tobacco, and British American Tobacco must be taking long drags thinking over this conundrum.

During the summer, mandarins in Brussels indicated that Ireland, Austria and Italy must amend domestic legislation that establishes a minimum selling price for cigarettes. It said that the price imposition may infringe EU law.

On the face of it, the European Commission move seems positive for cigarette manufacturers' stocks, if not for general health. Or so you might think.

The Commission gave the three countries until mid-September to eliminate mandatory minimum cigarette prices, or face its wrath – albeit very long, drawn out wrath. In Ireland, the minimum selling price per pack of 20 is €1.30, but retail prices are around €7.30 after taxes and excise duty.

The Comission has threatened to harry the three respective governments through the European Court of Justice if they fail to dispose of the miniumum price regulation.

And there’s a precedent.

Back in 2000, the Commission found that the Greek government was in breach of EU rules by also determining the minimum price of a packet of cigarettes. In its ruling, the Commission said that manufacturers, their representatives or authorised agents of cigarettes and importers from non-member countries “shall be free to determine the maximum selling price for each of their products for each Member State for which the products in question are to be released for consumption”.

Legal wrangling in the case began in 1994, when the Commission fired off a missive to the Greek government, alleging it was in breach of the law by interfering with cigarette pricing. The Greek government, unsurprisingly, took a different view.

It argued that by maintaining a minimum selling price that it was protecting public health. The EU acknowledged that, but said that objective could be “adequately attained by increased taxation [of tobacco products] which would safeguard the principle of free formation of prices”.

The upshot was that the Greek argument was shot down.

Last March, the EC initiated a similar case against France.

For the big tobacco firms this is good news, right?

Wrong. It’s instilling fear.

They know that if the Commission is successful in forcing the Irish, Austrian and Italian governments to abandon minimum pricing policies, then the result could be a surge in taxes levied on their products. And that’s bad for business, if not for people’s health.

Yesterday in Ireland, the anti-tobacco lobby ASH called on finance minister Brian Cowen to introduce a whopping €2 per pack rise on cigarettes in his budget next month, which would bring the average price close to €10 (US$14.55) per pack of 20 (packs of 10 were outlawed earlier this year to deter young people in particular from smoking).

While the government is feeling a marginal fiscal tightening and additional sources of tax revenue would be welcome to help balance the books, slapping such a price rise on cigarettes is highly unlikely as it would fuel inflation, which has been just about kept under control. As an ‘old reliable’, it’s more than possible that some tax hike on tobacco will be implemented, but no where near as much as €2 per pack.

Altria, which owns Philip Morris and produces brands such as Marlboro, Chesterfield and L&M, has said that if the European Commission is successful in its pursuit of Ireland, France, Austria and Italy, that its actions “could adversely impact excise tax levels and/or price gaps in those markets”. In other words, Altria’s sales growth within the EU could be in danger of being stubbed out.

It’s not alone in fearing the worst. Gallaher, acquired earlier this year by Japanese Tobacco in a $15bn deal, said that the imposition of a minimum selling price in Austria last year, at €3.25 per pack, had actually helped its more expensive Memphis brand to stabilise its sales. However, at an interim results presentation in September last year, chief executive Nigel Northridge said that the activity, including lowering the price of its cheaper brands, “had led to a reduction in the Austrian profit pool”.

A smoking ban in Scotland hasn’t helped either, with Gallaher’s sales there down by single digit figures, although revenue in Ireland, where a ban has been in place in pubs and workplaces since 2004, has grown. Gallaher, whose brands include Benson & Hedges and Silk Cut, increased its Irish market share by 0.2% in 2006. It controls about 50% of the cigarette market in the country.

An EU ruling scrapping minimum selling prices could make things an awful lot tougher for the big tobacco firms, forcing them to continue looking further afield to regions such as Africa and Asia for further growth.

The European Commission could be killing them with kindness.

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