The world's top tobacco groups fear if new rules on plain packaging take hold in Australia and Britain they may spread to higher-growth and potentially more lucrative emerging markets and put a curb on their future profits growth.
Health campaigners are pushing for tobacco companies to package their cigarettes in plain packs displaying the product name in a standard typeface and with graphic health warnings as a way of discouraging youngsters from taking up smoking.
Australia aims to become the first nation in the world to force tobacco groups to sell cigarettes in these plain, brand-free packets by December this year, while Britain this week launched a three-month consultation over the issue.
"It seems inevitable that should Australia succeed in easily implementing plain packs, that other regulators will explore the potential to do likewise," said analyst Chris Wickham at brokers Oriel Securities.
Britain the next battle ground
Analysts say that if Australia adopts these plans then the next battlegrounds are likely to be Britain, Canada and New Zealand, and will cause concern to tobacco companies, which have seen their shares perform strongly so far in 2012.
"With tobacco stocks back on high relative valuations and fears of a plain packaging contagion spreading from Australia, we see a risk that the sentimental climate on tobacco once again becomes more questioning and skeptical," said analyst Martin Deboo at brokers Investec Securities.
Analysts say the real risk from plain packaging to industry profits would be if it spreads to emerging markets such as Brazil, Russia and Indonesia and so slow the process of smokers moving to pricier and profitable cigarette brands.
Emerging market smokers aspire to western brands such as Marlboro, Lucky Strike and Camel, which confer status on the individual, and these mean bigger margins to the cigarette makers than the local brands that smokers are abandoning.
Smokers reluctant to change brands
Smokers in mature markets like Western Europe and North America are more fixed in their habits and reluctant to change brands and so changes to packaging are likely to have a relatively low impact on smokers' choices, analysts added.
With falling smoking levels in these mature markets the world's big-four tobacco groups Philip Morris, British American Tobacco, Japan Tobacco and Imperial Tobacco have offset this by looking to fast-growing emerging markets to drive overall growth.
This growth has been helped by tobacco groups introducing innovative packaging to attract consumers, and if this avenue is closed by plain packaging rules, the cigarette companies will find it harder to push smokers towards more expensive products.
The industry is fighting against the proposed plain packaging legislation in Australia, taking its battle to the high court, and has been giving evidence over the last three days as analysts say tobacco groups are fearful that many other governments are looking to Australia as a test case.
Australia has toughest anti-smoking laws
Australia has some of the toughest anti-smoking rules in the world banning tobacco advertising, smoking in public places and the public display of cigarettes in shops, while in some states it is illegal to smoke in a car with children present.
Under these tough Australian rules only around 15% of adults smoke compared with 23% a decade ago, while in Britain the current figure is around 22%, analysts said.
The British market is in slow decline like many other mature ones but Britons still smoke around 56 billion cigarettes a year, which the government says is responsible for over 100,000 deaths a year and puts pressure on the public health system.
This is why Health Secretary Andrew Lansley announced his consultation process to run for 12 weeks up to July 10, and Lansley has insisted that he is keeping an open mind.
(David Jones, Reuters Health, April 2012)