British American Tobacco 2010 Annual Report Consumer Goods United Kingdom A N N U A L R E P O R T 2 010 DELIVERING GROW TH THROUGH INNOVATION 20 British American Tobacco Annual Report 2010 Business review British American Tobacco Annual Report 2010 Business review 21 Global market overview Business review The tobacco industry remains relatively resilient to global economic pressures, but recession inevitably impacts consumer confidence and disposable incomes. While this has seen volumes decline, the overall value of the industry continues to grow. The global tobacco market Global marketplace The global tobacco industry produces more than 5,400 billion cigarettes a year. The biggest single market is China, where the industry is state-owned, with some 350 million smokers who account for more than 40 per cent of the global total. Four international tobacco companies – Philip Morris International, British American Tobacco, Japan Tobacco and Imperial Tobacco – account for some 45 per cent of the global market, or around three-quarters of the market outside China. The illicit trade in tobacco products is a serious problem in many countries – meaning that up to 12 per cent of global volume is traded on the black market. Economic outlook The global economic environment remains tough and uncertain. While some emerging economies may grow fast in 2011, recovery in advanced economies is likely to be fragile for some time and high unemployment levels are a concern. Value of the industry All the ‘big four’ tobacco companies face an increasingly competitive marketplace but the overall value of the industry is still growing. There are big opportunities to improve the product and price mix, primarily in developing markets. We believe consumers are increasingly looking for and expecting real value, so quality and innovation both play a key role in delivering market share. Illicit trade in tobacco products Cigarettes are among the most commonly traded products on the black market due to high profit margins, the relative ease of production and movement, and low detection rates and penalties. The principal drivers of illicit trade are economic – cheaper cigarettes for consumers and profits for the smugglers and counterfeiters. Contributory factors include sudden increases in excise, weak border controls and ineffective sanctions. Estimates suggest that up to 660 billion illegal cigarettes are smoked every year. This has a negative impact on consumers, retailers, governments and tobacco companies. For consumers, illegal cigarettes can mean fake products with no quality controls, no health warnings or, where genuine products are smuggled, health warnings that do not meet local government regulations. It is estimated that governments worldwide are losing up to £24 billion a year in excise and other taxes, while the loss to legitimate tobacco companies could be as much as £6 billion a year in revenue. We believe tackling this illegal trade effectively requires cooperation between the industry, regulators and enforcement authorities. We support governments’ establishment of appropriate tax policies, strong regulation and effective enforcement. In 2010, we signed a cooperation agreement with the European Commission and the member states of the European Union to tackle the problem of illicit trade. Industry outlook World consumption Trends indicate that individual smokers will consume fewer cigarettes each and smaller percentages of populations will smoke. However, with the world’s population predicted to increase to seven billion by the end of 2012 and nine billion by the end of 2050, we believe that there will be a very sustainable and important tobacco industry for a long time to come. Increasing regulation Regulation is becoming increasingly stringent, supported by the World Health Organisation’s Framework Convention on Tobacco Control. Appropriate health warnings on packs and other primary packaging have been part of the industry for decades. However, a move towards plain packaging for tobacco products could make criminals’ lives easier. Counterfeit products would become easier to produce and branded illicit products that do not comply with regulations could become more attractive to consumers. Retail display bans could also lead to an increase in illicit trade by driving the sale of the legal product under the counter and could also distort competition among tobacco companies. Excise Many national governments use tobacco taxation as a key instrument to reduce rates of smoking, while also raising significant excise revenue. However, sudden increases in excise rates can destabilise markets and result in consumers switching to cheaper illicit products. Gradual and predictable increases in excise can be more effective for governments, helping to maintain an orderly market that both enables tax revenues to be increased and supports public health policy. Corporate governance The demand for our international brands is growing Our international brand volumes and market shares are increasing in many markets. This trend, supported by consumer-relevant innovation, can increase our sales and profits, even where overall market volumes are declining. Ireland’s illegal cigarette trade It is estimated that one in four cigarettes consumed in Ireland have been smuggled into the country. This illegal trade accounts for around 1.5 billion cigarettes, costing the country €0.5 billion in lost tax revenue. Ireland has the most expensive cigarettes in the EU due to high excise, with prices more than double the EU average. The Minister for Finance decided not to increase excise in 2010, acknowledging that the high prices were giving rise to massive cigarette smuggling. Financial statements Focus on excise 36% In January 2010, illicit cigarettes in Romania reached a peak market share of 36 per cent, over double their 2008 share of 16 per cent. This was largely the result of a sharp rise e rp in excise, which significantly increased nificantly increase eased sed the price of cigarettes. Rather than s. generate the expected revenue, this te expecte ed is s meant that the Romanian Government nian G Go stood to lose €1 billion in un o los ose unpaid taxes s in 2010 if illicit trade remained at the ill llicit same le l. evel. For more information about tobacco taxes, see www.bat.com/tax Other information Consumer focus Understanding smokers’ preferences and buying behaviour is the starting point with innovations. We aim to develop product and packaging developments that will be truly relevant to consumers’ tastes, attitudes, disposable income and purchasing patterns. pp 20-21 British American Tobacco’s outlook section is positioned within the market discussion and the outlook focuses on industry trends such as world consumption, increasing regulation and excise. In response to many of the expected trends, the Company’s will take a responsible approach to focusing on consumer preferences. www.blacksunplc.com © Black Sun Plc 2011 59
