EU's highest court upholds restrictive new law on cigarettes
LUXEMBOURG/LONDON: The European Union's highest court on Wednesday upheld a tough EU law that will standardise cigarette packs, ban menthol flavouring and restrict e-cigarette advertising, paving the way for its adoption this month and dealing a blow to Big Tobacco.
The European Court of Justice's rejection of a legal challenge brought by Philip Morris International and British American Tobacco (BAT) could weigh on profits for the industry and sets a precedent for other governments to crack down on a habit that causes nearly six million deaths a year worldwide.
"The court finds that, in providing that each unit packet and the outside packaging must carry health warnings ... the EU legislature did not go beyond the limits of what is appropriate and necessary," the court said in its decision, which reflected the opinion a court adviser had published in December.
The legal challenge, which was also supported by Japan Tobacco International and Imperial Brands, can now be taken no further and the Tobacco Products Directive (TPD) will take effect on 20 May, though wholesalers and retailers will be given a year's grace to sell stocks manufactured before that date.
The TPD will ban menthol cigarettes by 2020, standardise packs and impose rules on e-cigarettes, such as limits on nicotine strength, tank size and advertising.
The European Court of Justice also said that member states may introduce further packaging requirements, such as the "plain packaging" measures proposed in Britain, France and Ireland.
These regulations, aimed at reducing the lure of smoking by forcing tobacco to be sold in uniformly drab packs with no branding, are due to come into force in the UK on 20 May, though the English High Court is expected to rule on another legal challenge brought by the tobacco companies in the coming weeks.
Action on Smoking and Health, an advocacy group, said the decision was "welcome if not surprising".
Japan Tobacco International, a leading player in the UK with brands such as Benson & Hedges and Camel, said the ruling "endorses the proliferation of different regulations for the same product" and "brings additional confusion".
Shares of BAT and Imperial, the two big tobacco firms that trade in London, were each down by about 1 percent. Imperial also reported weaker than expected sales volume on Wednesday.
Imperial Chief Executive Alison Cooper told reporters that the new rules would affect different European markets to varying degrees and could lead to an increase in illicit trade.
"Our view on this is that clearly consumers will be making some different choices given some of the changes in the market," Cooper said, adding that Imperial had budgeted tens of millions of pounds for implementation.
The impact of TPD remains unclear because of limited precedent. When it comes to plain packaging, only Australia serves as an example.
In the year after implementation in Australia in December 2012 sales of mainstream and premium brands fell, but value brands rose, suggesting that smokers traded down to cheaper alternatives. Yet there was a significant increase in tobacco tax at the same time, so it's hard to isolate the impact of the switch to plain packaging.
Morningstar analyst Philip Gorham said that margins will be at risk in the UK, with potentially lower sales growth if pricing power is undermined.
Wells Fargo analyst Bonnie Herzog said the development was disappointing for the industry but called it a manageable risk. She recommends owning shares of Philip Morris.
On plain packaging, Herzog said that the failure of the Australian law to bring any dramatic reduction in smoking suggests that the move in Britain "will result in more 'headline' than actual risk".