Plain packs seen as a risk to cigarette profits

Cigarette makers face a new and serious risk to their profits if the government rules that cigarettes should only be sold in plain packaging, undermining the power of brands, analysts said on Monday.

Cigarette companies can often offset lower sales by raising prices as happened when England introduced smoking bans in pubs and bars last year, but a move to plain packaging would see smokers switch to cheaper brands and hit profits, they said.

The government launched a three-month public consultation on Saturday involving a number of measures to cut the number of smokers. The most serious for industry profits is the move to ban branding and company colours from packages.

If this measure is implemented, then all UK cigarette packs will be white and brand names printed in plain black type. The only colour on the packs will be graphic health warnings.

"We believe the proposal would be extremely serious for the tobacco industry if implemented," said industry analyst Adam Spielman at investment bank Citi, who believes there is a 50 percent chance the proposal will be enforced by 2010.

Plain packaging would require new legislation, so if the measure is to become law the industry is likely to hear plans in the latter part of 2008 for a law to be passed in 2009 and implemented in 2010, analysts say.

They also say the political mood may be against the tobacco industry as the parliament voted by a large majority for last year's ban on smoking in English pubs, and at the time this seemed quite controversial but now seems quite popular.

The country's biggest cigarette company is Imperial Tobacco with a 46.1 percent share followed by Benson & Hedges and Silk Cut group Gallaher, taken over by Japan Tobacco last year, with a share of just under 40 percent. British American Tobacco has a 6 percent stake.

Imperial shares were off 2.6 percent at 19.73 pounds and Rothmans and Lucky Strike maker BAT down 0.2 percent at 18.85 pounds by 2:20 p.m. in a stock market down 0.8 percent.

The industry's profitability is based around its leading brands and it would be harmful to manufacturers if smokers traded down to cheaper cigarettes, as analysts say different brands may taste different but the difference in quality is barely perceptible.

Citi's Spielman says for Imperial Tobacco its net sales from its premium-priced brand such as Embassy is 96 pence a pack while it only gets 70p from mid-priced Lambert and Butler and much less for discounted brands.

Dresdner Kleinwort analyst Charles Manso de Zuniga said: "In extremis, a UK tobacco market of plain boxes is likely to become very price-driven, maybe even wiping out the premium sector."

Any legal challenge from the industry would test the right of a government to try to improve public health against the right of companies to use their trademark brands.

"We would oppose these moves, we have the right to differentiate our products from our competitors," said an Imperial Tobacco spokesman.

BAT said: "We believe that plain packs would undermine a consumer's ability to clearly choose one brand over a competitor's and will make it even harder to spot fakes, playing into the hands of black market criminals."

The consultation paper proposed by the Department of Health is also suggesting banning displays in shops and vending machines and also abolishing packs of 10 to make the minimum cigarette pack size 20.

Smoking-related diseases kill 87,000 people a year in England, and despite a drop in the number of smokers by 1.9 million in the past decade, smoking remains the nation's biggest killer.

Smoke-related illness costs the National Health Service between 1.4 billion pounds and 1.7 billion pounds a year, while the cigarette companies pay over 10 billion pounds in tax to the government.