It’s amazing how big an effect one remark can have on society. Last week, after a senior FDA representative commented about potential restrictions on menthol in cigarettes, the market saw a mass sell-off of big tobacco stocks. While the action taken is based merely on speculation, that speculation is based in fact. The FDA has long since been emphasizing the risk posed by menthol based cigarettes, especially towards children who are more likely to choose that type of cigarette.
A whole month’s worth of profit went down the tubes in just two days for Altria Group (NYSE: NYSE:MO). Tuesday, in the early hours of the trading day, we saw shares break under the weight of a bullish support line that has been going since May of 2018.
It was even worse for British American Tobacco (LON:BATS) (NYSE:BTI), the makers of the popular menthol cigarette Newport. By the closing bell on Monday their valuation had decreased by a staggering $11 Billion.
Their larger fall can be attributed to their larger interest in the menthol market. Menthol only makes up 20% of Marlboro’s profit, while British American Tobacco’s is greater still.
“BAT is the most exposed name to the potential risk,” wrote Richard Taylor, an analyst with Morgan Stanley (NYSE:MS). He estimates that menthol products account for over 25% of BAT earnings.
Western Civilization Is Moving On From Cigarettes
The numbers are clear and they don’t lie. Fewer and fewer new smokers are emerging, with an increasing number of existing smokers quitting. This is a trend that spans all age groups but the constant campaigning regarding the dangers of smoking have been especially effective with the young.
With public opinion shifting from an inclusive to exclusive when it comes to smoking, both European and American governments are flexing their muscles. Rather than just taxing the products, they are going so far as to consider banning them altogether.
In a press release that occurred May of this year, the European Commission unveiled several new initiatives like the Tobacco Advertising Directive, and Tobacco Products Directive. These initiatives place greater restrictions on the sale of tobacco as well as the advertising of it. The EU has also initiated a ‘track and trace’ system which protects against illegal tobacco trade.
These restrictions are strict, but they have nothing on the hammer about to drop in 2020: an outright ban of all menthol cigarettes in the EU.
Policy shifts like the ones coming from Europ have Big Tobacco companies worried over the future of the U.S. market and how it will be effected. With the EU setting a precedent and public opinion swayed in a less smoking friendly direction, it’s easy to see the winds might shift the EU’s way in America as well. Even if we don’t make as drastic a policy change, the FDA’s new restrictions on menthol will still have a major impact on sales.
All this is just based on rumors created by a FDA official’s side comment, but with those rumors substantiated by current market trends, they are rumors we cannot ignore.
Tobacco moves East and South: Using New Markets to stay Relevant
It’s hardly a surprise for big tobacco companies that western countries are reducing their use of tobacco products. The writing has been on the wall for years. Because of that, they are moving their efforts East, to less developed countries with fewer restrictions and less education on the dangers of smoking.
Tobaccofreekids.org compiled a recent report that observes a radical shift in the average market when it comes to tobacco users. Now, nearly 80% of smokers are low to middle income households in both Europe and America:
Sales are shifting from developed markets, like those in Western Europe, where smoking prevalence is declining and where tobacco company operations are more restricted by government policies, to emerging markets, like those in Asia and Africa, where tobacco companies take full advantage of lax regulatory environments, growing populations and increasing incomes.
So long as big tobacco companies are able to offset their losses with profits in less educated parts of the world, their share prices will stabilize.
Someday soon the day may come when even the less educated nations become aware of the dangers of smoking, and the burdens it places on their healthcare system and force the product out of their lives. The most important market to watch for, though, is the Chinese one. As of right now, China is the largest buyer of tobacco products worldwide, so their stance will have great effect on the market in the years to come.
Should the Chinese begin to shy away from smoking, the whole market could go up in smoke.