TOBACCO INDUSTRY IN Uk1

Tobacco Industry in
UK
Environmental and Industrial Analysis of
Tobacco Industry in UK
The given document consists of Environmental and Industrial Analysis of
Tobacco Industry in UK which is supported by PESTEL and Porters Five Forces.
2014
Hardik B Bendbar
Student ID:21242444
3/23/2014

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Content
TITLE Page No
1 Introduction 3
2 “PESTEL” Analysis
 Political Factors 3
 High Taxation
 Trading Blocks
 Economical Factors 4
 Rise in GDP
 Social Factors 5
 Rise in Population
 Health Awareness
 Technological Factors 5
 E-cigarette
 Marketing and Advertisement
 Environmental Factors 6
 Increasing litter due to cigarette butts
 Legal Factors 6
 Under Age
 Smoking in Public Places
3 Key Drivers for Change 7
 High Taxation
 E-cigarette
4 Porters Five Forces 8
 Threat of New Entry
 Threat of Substitute
 The Bargaining power of Buyer
 The Bargaining power of Supplier
 Rivalry between Competitors
 Industry attractiveness
5 Conclusion 10
6 Appendix 11
7 Bibliography 13

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TOBACCO INDUSTRY IN UK
1) Introduction
Tobacco Industry of UK mainly consists of Cigarette, Hand Rolling Tobacco (HRT),
Cigars, Cigarillos and Pipe Tobacco. There has been a steady fall in the consumption of
tobacco but yet the value sales of Cigarette and tobacco products have increased by 6.4%
and 2.4% respectively in the year 2011 and 2012. The increased in market value is mainly
due to high tax imposed on this products. The tobacco market is mainly dominated by
handful of tobacco companies such as Philip Morris International, British American Tobacco,
Imperial Tobacco and Japan Tobacco International. These companies operate globally and
have combined shares of more than 50% of the global market. (Hucker, 2013, p. 1)
2) “PESTEL” Analysis
Political Factors:
High Taxation
In the recent budget of March 2012, the chancellor has maintained the tax
escalator by raising the cigarettes duty by 2% point above the inflation. Although there
was reduction in ad valorem tax from 24% to 16.5% of the retail price in 2011 but it can
be still considered as insufficient to counter balance the impact of high specific taxation
and high VAT. The main reason to increase tax and VAT was to narrow down the gap
between higher range cigarette and lower range cigarette which in-turn will encourage
smokers to quit smoking instead of choosing lower economical cigarette. This step by
government is mainly taken to control the number of smokers but in process it’s creating
a threat of illicit trade for tobacco industries. (Tobacco in United Kingdom, 2013,, p.8)

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a) Trading Blocks
UK has a trade deficit when it comes to import and export of tobacco products.
In 2012, around £ 817.6 m worth of goods were imported whereas £281.2 m was
exported. Trading with EU enables Tobacco players to shift their manufacturing
outside UK thus creating opportunity to import more with less imposed taxes as there
is less restriction when trading inside the EU. According to the reports, imports of
cigarette in 2012 were 80.8% from EU countries with Poland as primary trade
partner. As the consequences of high taxes, trading block like EU can prove to be
very Opportunistic for tobacco industry as it not only relives them from taxes but
also gives them option to earn higher profits by keeping the base price low.
(Hucker, 2013, pp. 16-18)
Economical Factors:
a) Rise In GDP
The GDP of UK in the year 2009 fell by 3.1% as a result of economic downturn.
However there have been some positive signs for the GDP of UK as it started to bounce
back in 2010 and continued so far. During the economic downturn many people were
unemployed for major part of time which eventually forced them to either quit smoking or
shift to cheaper brands. There was threat of losing tobacco market but as the economy
started to show some improvements with people getting better jobs, which removed
unemployment (thought not completely). This in-turn has provided an opportunity for the
tobacco manufacturers to sell more tobacco products as the people would be earning good
wages with improved life-style.
Even though UK can still be considered as a country undergoing recession
build-up process which creates a threat for tobacco players of losing sales on tobacco
market but at the same time there is considerable rise in HRT (hand rolling tobaccos) which
is considered to be very cheap as compared to cigarettes. Thus economic downturn also
provided an opportunity for rise in HRT. (Hucker, 2013, pp. 4-5)

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Social Factors:
a) Rise in Population
According to National Statistics, UK population grew by 3% between the
years 2008 to 2012. As the tobacco and cigarette market are more consumer based, it is
more likely to benefit the growth of sales for tobacco industries. Increase in population
indicates that there has been increase in number of young people. Cigarette is considered to
be one of way of socialising in UK teenage and youth culture and with nicotine as one of the
content which is very addictive in nature creates an addiction at a very early age which
becomes inevitable for them to give-up at later stages. Thus rise in population is an
opportunity for the tobacco industry as they have the chance to target younger people.
(Hucker, 2013, p. 4)
b) Health Awareness
Due to the efforts of Governments anti-smoking campaign and increasing
awareness of health and fitness among the people, health awareness has created a big
threat for tobacco industry. People are now getting more aware of the harmful effects of the
tobacco and started considering it as an unsocial-able thing. There have been strong steps
taken such as showing health warning like “smoking kill”, showing images of cancerous
mouth and throat with tumour on packets which in-turns leaves bad impact on the smoker.
Although it has been argued that consuming cigarettes daily and watching those warnings
every day leaves less impact as the smokers get used to it.
(Fifty years since smoking and health, 2012, pp. 3-6)
Technological Factors:
a) E-cigarette
E-cigarette was invented as an alternative to traditional cigarette so that people
can quit smoking. Although it looks similar to regular cigarette but it provides an option to
smoker to consume nicotine in harmless way. Generally all regular cigarettes contain
nicotine with harmful chemical substances like carbon dioxide and tar whereas e-cigarette
consist of a battery which helps to convert liquid nicotine into vapours which can be inhaled.
Thus the concept of E-cigarette can be considered as threat for the traditional tobacco
companies as it is distorting their regular cigarette market. (Moss,2014)
b) Marketing and Advertisement
UK government is been very strict when it comes to advertisement of
tobacco products. Supermarkets and retail shop are the leading distribution channel and the
only way of advertising tobacco products. Super markets offer convenience, enabling busy
consumers to buy tobacco along with their groceries. This enables tobacco players to
advertise their product either by emphasizing on products price or brand image. Recently
there was decision made to delay the plain packaging of cigarette which certainly gives

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opportunity for tobacco companies to continue their innovative style of packaging
strategies to support their brands. (Campbell and Wintour, 2013)
Environmental Factors:
a) Increasing litter due to cigarette butts
Consumption of tobacco leads to enormous damage to the environment.
Cigarette use leads to anthropomorphic climate change, caused by human activities as
cigarette smoke contains gases like carbon dioxide and methane. Even the cigarette butts
are huge source of litter on land. As the number of smokers are increasing it is getting more
difficult to control the litter caused by cigarette butts because usually smokers throws butts
on land rather searching for proper waste bin. Thus it creates threat in-terms of
environmental safety. But during this process it creates an opportunity for local citizens
to earn wages which leads to removal of unemployment to some extent. Such opportunity
can serve as extra income for unskilled socio-economic class of UK.
(The tobacco industry's negative impact on environment, 2010, pp. 3-4)
Legal Factors:
a) Under Age
Since 2007 the legal age of smoking in UK has been changed to 18 from 16.
It is estimated that around 207,000 children starts smoking each year in UK. According to
the reports, about two third of the adult smokers started smoking before the age of 18 and
over 80% started before the age 20. The number of underage smokers has been
considerably dropped due to the ongoing government health campaign, high taxation and
stricter law over retail sales for underage smoker. Thus government initiation of anti-smoking
campaign and establishing stricter law for underage smokers has created a threat of
devaluing the smoking habits and it also encourages for illegal proxy purchasing.
(Young people and smoking, 2014, pp. 1-3)
b) Smoking in Public Places
Ban on smoking in public places was introduced in England in July 2007.
This was mainly to protect workers and public from the harmful impact of the second hand
smoking. UK smoking ban covers almost all the indoor workplaces (with some exception). It
is been largely observed and also accepted rapidly in UK. Creating such restriction in
smoking tends to leave smoker to cut down his smoking habit as the smoker is not allowed
to smoke in that particular place. Thus restriction by law and the inconvenience of smoking
caused due to ban creates a threat for tobacco companies of losing their loyal
consumers.

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3) Key Drivers for Change
a) High Taxation:
The UK government is continuously involved in raising taxes on
tobacco products which in-turn can lead to threat of illicit trade and reduction
in smokers.
During this process there can be a silent opportunity for the leading tobacco
players to play around with taxes. As we know that higher taxes on cigarette
results into sharp increase in the price of these products. Tobacco players can
utilize the introduction of higher taxes in order to increase prices for cigarette at
above the rate of taxation increase, which enables them to increase price as well
as profit margin without alienating consumer. Thus consumers would be typically
blaming higher taxes for the increasing cost. This will also enable the tobacco
companies to isolate their profits even when the consumption of cigarette is going
down. (Robinson, 2014)
b) E-Cigarette:
E-cigarette is considered to be a perfect alternative to regular
cigarette as it gives smokers an opportunity to consume nicotine in harmless way. Thus
it can be said that E-cigarette are possibly a threat for traditional cigarette company.
UK government has recently announced that e-cigarette will be licensed and
regulated as medicine from 2016 onwards; it can also be prescribed by GP along with
some other smoking aids in order to assist smokers to quit smoking. It would be a major
concern for UK government and an opportunity for tobacco industry, as the use of e-
cigarette creates an uncertainty of whether it will normalise the habit of smoking or could
encourage youngsters to smoke cigarette.
Moreover leading tobacco players can consider e-cigarette as an area of
opportunity to develop a new market with governments support. It would enable them
to expand its market coverage with an easy access of marketing and advertising and
having less restriction than compared to regular cigarette market.

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4) Porters Five Forces
 Threat of Entry (low)
Barriers to entry for any new company in UK tobacco market is very high
as the economies at scales in manufacturing, distribution cost, marketing cost is very
high. It would be very difficult for any new company to raise capital for manufacturing
facilities that can produce tobacco products at national level. Also the cost of
packaging at mass level would be high. Moreover the UK government has very strict
rules and laws for smoking tobacco. Taxation can be considered as a major issue for
any new entry because the UK taxes and VAT on tobacco products are sky high.
Thus it can be said that threat of entry is low as barriers to entry is high.
(The effect of increasing tobacco taxation: A cost Benefits and public finance analysis, 2014, pp. 1-8)
 Threat of Substitutes (high)
The biggest substitute for tobacco industries is E-cigarette. With
the increasing awareness of harmful effects of smoking and acceptance of healthy
life-style by the UK citizens, E-cigarette is getting more popular as it provides similar
effect without harming the health of consumer. Moreover it is cheaper as compared
to regular cigarette which has to suffer high tax duties by UK government. It is long-
lasting and has an option of re-charging. Thus it is more convenient and also durable.
It is backed-up by government which can be very crucial for traditional tobacco
companies as they lack in support from government.
 The Bargaining Power of Buyers (moderate)
Buyer’s power in the tobacco industry depends upon the economy
and the level of their disposable income. If the buyers disposable income declines,
they are more likely to purchase cheaper brands and if incomes increases then they
would more likely to buy expensive brands. As the tobacco products in UK are highly
priced due to taxes it leaves fewer/moderate option for buyers as the price
difference between high range and low range tobaccos is negligible. Due to
consumer health awareness and increasing government regulation it has become
more difficult to sell tobacco.

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 The Bargaining Power of Suppliers (moderate)
Tobacco is the major materials used by the industry and UK is entirely
dependent on the imports from overseas growers. Tobacco is considered to be one
of the most cultivated crops in the whole world which is easy to grow and not
perishable. Moreover it can be stored for longer time, thus making it more stable than
other crops. Tobacco farmers then supply tobacco to manufacturing companies. The
main sources of tobacco for UK are Brazil and China. This indicates that the
bargaining power of suppliers is moderate as UK tobacco industries can flip to other
suppliers as there are many countries who are indulge in cultivating tobacco but it is
not necessary that they will offer at the same price as they were offered from Brazil
and China. (Hucker, 2013, p. 30)
 Rivalry between Competitors (low)
The Tobacco industry of UK consists of handful of companies which
have over 45% of global market share. There have been constant fall in the
consumption of tobacco due to increasing prices caused by high taxes and health
awareness which forces tobacco companies to concentrate on more global market
rather than concentrating in UK. Moreover some of the companies operate as joint
venture in global market which reduces tension in national market. Thus the rivalry
between competitors can be considered as low as there is no source for them to
advertise or market their products. The only way they can compete is through price
penetration of products.
 Thus keeping this five forces in mind it can be said that tobacco industry is less
attractive as it requires high initial cost for set up, it is been strongly opposed by
government through imposing high taxes. Moreover it has high threat of e-cigarette
which is distorting there sales.
However the tobacco industry is not huge with handful of companies only. As
tobacco being an easy source of supply which reduces the bargaining power of
supplier can be good option for any new company to enter in UK tobacco industry.
Moreover the tax being so high can be a positive point for tobacco industry to enrich
its profit making capabilities.

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 Conclusion
Based on our research carried out on environmental and industrial analysis of
tobacco industry in UK, we can conclude as follows,
 Tobacco industry in UK can be considered as less attractive due to high tax
imposed by government on tobacco products and increasing health
awareness.
 High taxes, health awareness and legal restriction have been major source of
decline for the number of smokers in UK.
 Illicit trade can be a major threat as a consequence of high taxation.
 Trade union like EU can be very beneficial for tobacco industry as it can relive
them from higher taxes.
 Delay in plain packaging has given the opportunity for tobacco players to use
innovative ideas of selling their products.
 High taxes can be major driver of profits if utilized properly.
 Although e-cigarette can be considered as a threat for traditional tobacco
industry but it gives an area of opportunity to develop and increase their
market size.

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Appendix 1
UK Market for Tobacco Industry
 Figure shows that market value of Cigarette has been rising every year with a slight
drop in 2009.
 Sales of HRT have been growing since 2008 without any drop. It is estimated a
increase of 31.1% overall in 2010 and 2011 as due to number of smoker were
switching from cigarettes to HRT to save money.
 Pipe tobacco is been in declination since 2008, mainly because of its old fashioned
nature and being considered to be more risky to he

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Appendix 2
UK Trade Balance of Manufactured Tobacco Products
 Figure shows the trade deficit of UK due to its high import of tobacco products such
as HRT and Cigars than it exports.
(Hucker, 2013, pp. 16-18)

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