SOCIALLY RESPONSIBLE MARKETING SMOKING MAY BE BAD, BUT TOBACCO COMPANIES’ PROFITS HAVE NEVER LOOKED SO GOOD After the arms industry, the tobacco industry must be one of the most politically incorrect business sectors. Yet during the late 1990s tobacco companies in the UK appeared to be very popular with the Stock Market, outperforming the FTSE all-share index by 36% during 1998, and continuing to hold their ground in the falling stock market conditions from 2001. This was despite an EU directive which finally put an end to all tobacco advertising in the UK from March 2003. Tobacco companies now place less emphasis on fighting the health lobby, and no longer pretend that tobacco is anything other than harmful. But fortunately for the tobacco firms, nicotine is an addictive drug. Although cigarette consumption has declined in most developed countries, it is reported that one person in four still smokes. Moreover, among some groups, especially young women, the rate of smoking has shown some increase in recent years. Tobacco companies also benefit from periods of economic recession. While job cuts may be bad news for most consumer goods and services companies, it has historically also been linked to an increase in smoking. The tobacco companies have survived many years of attempts to control tobacco sales throughout Europe, but the EU directive banning all tobacco advertising made it increasingly difficult for tobacco companies to get new brands established. The big three UK companies, BAT, Gallagher and Imperial Tobacco looked at strengthening their brands with joint ventures. BAT linked up with the Ministry of Sound nightclub to push its Lucky Strike brand, while Gallagher tried to promote the Benson and Hedges name through a branded coffee. One industry expert expected to see an army of cigarette girls pushing cigarettes in pubs and corner shops, thereby trying to get round controls on advertising. While promoting cigarettes in Europe has been getting more difficult, tobacco companies have been keen to exploit overseas markets where measures to protect the public are less. In the countries of Eastern Europe, the companies have pushed their products, hoping to capitalize on the hunger for western brands. Gallagher has a plant in Kazakhstan and has heavily promoted its Sovereign brand in the former Soviet Union. The biggest opportunities for western tobacco companies however are in China which is the world's biggest market in terms of volume. The Chinese smoke 1.7 trillion cigarettes a year, making the British market of just 77 billion look quite small. State owned brands such as Pagoda dominate the market with an estimated 98% market share. With import duties of 240%, most foreign cigarettes enter the Chinese market through unauthorized channels, including those smuggled by the Chinese army. Greater trade liberalization will inevitably give freer access to the Chinese market for western tobacco companies. These will undoubtedly pay significant levels of taxes to the authorities, so a financially strained government may be unwilling to reduce tobacco consumption too much, especially when smoking is so pervasive through the population. CASE STUDY REVIEW QUESTIONS How effective is an EU ban on tobacco advertising likely to be for reducing smoking? What measures could governments take to bring about a significant reduction in smoking?What factors could explain a booming share price at the same time as Europeans' attitudes toward smoking are becoming more hostile?How would you defend a western tobacco company in its attempts to develop the Chinese market for cigarettes?

Question

SOCIALLY RESPONSIBLE MARKETING SMOKING MAY BE BAD, BUT TOBACCO COMPANIES’ PROFITS HAVE NEVER LOOKED SO GOOD After the arms industry, the tobacco industry must be one of the most politically incorrect business sectors.  Yet during the late 1990s tobacco companies in the UK appeared to be very popular with the Stock Market, outperforming the FTSE all-share index by 36% during 1998, and continuing to hold their ground in the falling stock market conditions from 2001. This was despite an EU directive which finally put an end to all tobacco advertising in the UK from March 2003. Tobacco companies now place less emphasis on fighting the health lobby, and no longer pretend that tobacco is anything other than harmful.  But fortunately for the tobacco firms, nicotine is an addictive drug.  Although cigarette consumption has declined in most developed countries, it is reported that one person in four still smokes.  Moreover, among some groups, especially young women, the rate of smoking has shown some increase in recent years.  Tobacco companies also benefit from periods of economic recession.  While job cuts may be bad news for most consumer goods and services companies, it has historically also been linked to an increase in smoking. The tobacco companies have survived many years of attempts to control tobacco sales throughout Europe, but the EU directive banning all tobacco advertising made it increasingly difficult for tobacco companies to get new brands established.  The big three UK companies, BAT, Gallagher and Imperial Tobacco looked at strengthening their brands with joint ventures.  BAT linked up with the Ministry of Sound nightclub to push its Lucky Strike brand, while Gallagher tried to promote the Benson and Hedges name through a branded coffee.  One industry expert expected to see an army of cigarette girls pushing cigarettes in pubs and corner shops, thereby trying to get round controls on advertising. While promoting cigarettes in Europe has been getting more difficult, tobacco companies have been keen to exploit overseas markets where measures to protect the public are less.  In the countries of Eastern Europe, the companies have pushed their products, hoping to capitalize on the hunger for western brands.  Gallagher has a plant in Kazakhstan and has heavily promoted its Sovereign brand in the former Soviet Union.  The biggest opportunities for western tobacco companies however are in China which is the world's biggest market in terms of volume.  The Chinese smoke 1.7 trillion cigarettes a year, making the British market of just 77 billion look quite small.  State owned brands such as Pagoda dominate the market with an estimated 98% market share.  With import duties of 240%, most foreign cigarettes enter the Chinese market through unauthorized channels, including those smuggled by the Chinese army.  Greater trade liberalization will inevitably give freer access to the Chinese market for western tobacco companies.  These will undoubtedly pay significant levels of taxes to the authorities, so a financially strained government may be unwilling to reduce tobacco consumption too much, especially when smoking is so pervasive through the population. CASE STUDY REVIEW QUESTIONS How effective is an EU ban on tobacco advertising likely to be for reducing smoking? What measures could governments take to bring about a significant reduction in smoking?What factors could explain a booming share price at the same time as Europeans' attitudes toward smoking are becoming more hostile?How would you defend a western tobacco company in its attempts to develop the Chinese market for cigarettes?

Accepted Answer

Globally, many people smoke tobacco. It is known that, smoking is injurious to health but still many…