Cigarette health warnings: size matters
Just as investors in cigarette stocks were relieved that the increase in excise duties was manageable, a new problem has landed at their doorstep
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Cigarette firms are stopping production, apparently in protest against the government’s decision not to withdraw new graphic health warnings. This development could worry investors as lost output may lead to lost sales. Since the deadline was known, firms are likely to have stocked up in advance to ensure retail sales are not affected. The bigger worry for investors should be if these warnings are implemented and they lead to a further drop in cigarette consumption.
The new norms, in effect from 1 April, require cigarette firms to display a graphic warning that covers 85% of the cigarette pack on both sides from the current 40%. A parliamentary committee had recently submitted recommendations for a lower area of 50% to be covered, according to news reports. Since the government has not said anything yet, the new guidelines have taken effect. ITC Ltd says it is unprepared for the change and is stopping production.
If this is a pressure tactic, the companies may keep output shut for long. If not, then companies will change their packaging and resume production. After all, this change has been in the works for long.
Investors will be puzzled if this becomes a long-drawn affair. After all, analysts have said that most cigarettes in India are sold loose; so packets and their warnings are not that big a problem. In fact, a ban on loose cigarettes is what had them worried, and there is no sign of that happening. Therefore, the impact should be minimal.
But it may not be that simple. Even if loose sale is not banned, the packs themselves are visible on shelves even now, making a bigger warning more visible. The portion of smokers who do buy packs may be influenced by bigger warnings.
That brings us to the last question. Do bigger warnings really matter to smokers? They can already read them on the packs now. Global studies conclude that graphic warnings do play a role in reducing cigarette consumption. The Global Adult Tobacco Survey, prepared by the World Health Organization (WHO), states that the number of people thinking of quitting smoking due to health warnings has increased from 46.3% in 2008 to 53% in 2012. In India, in 2010, 28.6% were considering quitting smoking due to these warnings. If a pictorial warning more than doubles in size, this percentage may increase.
Of course, thinking of quitting and actually quitting are two different things. However, concerted efforts to reduce smoking may work. The WHO’s 2015 global report on trends in the prevalence of tobacco smoking says that India’s smoking population was 13% in 2010 and if tobacco control efforts continue at the same intensity then WHO projects that this will come down to 8% in 2025.
That should be a worry for the industry.
The immediate impact may be negligible as companies may already have inventory to sell. Eventually, if the government remains firm, companies will have to sell cigarettes with the new packs. After some years, the impact of the size and type of warnings can be assessed. Just as investors in cigarette stocks were relieved that the increase in excise duties was manageable, a new problem has landed at their doorstep.