Changing the tobacco industry's profit story offers a much-needed focus for future tobacco control policy

Addressing industry profits as part of tobacco control

9 February 2021
Rob Branston.png

Dr Rob Branston

Associate Professor in Business Economics, University of Bath

Given the harm caused by tobacco products, most countries apply excise taxes in order to increase their retail price and hence encourage existing users to quit and discourage others from starting. The World Health Organization (WHO) suggests such taxes should be at least 75% of the retail price of tobacco, so you would be forgiven for thinking that left very little room for tobacco companies to earn that much profit. In actual fact, manufacturing tobacco products is inordinately profitable despite high taxes. Such high profits are addictive, much like the cigarettes that generate them, so it isn’t surprising that tobacco companies want to maintain business as usual in their tobacco markets so that they can continue selling their cigarettes and generating these profits. Targeting the profitability of the tobacco industry should therefore be one of the tobacco control measures that countries consider as they look to avoid the millions of global deaths caused by smoking each year.

Profits like no other

Manufacturing and selling tobacco products, such as factory-made cigarettes, is almost a licence to print money. In 2015, the most recent year for which figures are available, the world’s six largest cigarette manufacturers made a profit of more than USD 62 billion. That is more than the combined profits of Coca Cola, Walt Disney, FedEx, Google, Starbucks and McDonalds combined, which collectively made profits of USD 55 billion in the same year. Such high total profits for tobacco companies are possible because they are able to earn very high profit margins on their tobacco sales despite the imposition of tobacco duty. For instance, in 2018 Philip Morris International reported global profit margins of 39%, and 43.1% in the EU, which means that for every USD 100 that the company generated of revenue after paying excise taxes, USD 39 were profit. In the same year Imperial Brands had a global margin on operating profits of 46%, including a margin of 63% in the UK. Such margins are simply phenomenal when compared to those earned by firms in other comparable industries, which would typically include Swiss based Nestle, for example, a global food and drinks firm with many well-known international brands/products, that in 2018 earned an operating profit margin of 15.1%.

Tobacco companies can make such extreme profits because they sell very addictive products and don’t face the same competitive pressures that firms in other markets regularly face. Such powerful positions allow them to offset falling sales volumes with higher prices, thereby maintaining or even expanding their overall profits. The companies are also very adept at dealing with the taxes they face and adopt a range of tactics to undermine the intended impact of increases in tobacco duty, including offering a range of products at different price points and changing retail prices slowly to make sure they avoid a sudden hike that would induce people to quit. Tobacco companies also seem quite proficient at lowering the tax bills on their large profits. For instance, British American Tobacco seems to have paid virtually no corporation tax in the UK since 2009 despite reporting billions of pounds in profits, generating significant profits from the UK market, and the group being based there.

The problem with such large profits is that not only do they give companies the means to fight new tobacco control measures, but they also provide them with a strong incentive to work to maintain the status quo so that they can keep making these profits by continuing to sell the cigarettes that currently dominate their business. These are very addictive and harmful products, that cost little to make, require very little on-going R&D expenditures, but can be sold at relatively high prices. Changing this profit story therefore presents a potential fruitful area for future tobacco control policy if we are to end the deadly tobacco epidemic that costs millions of lives each year.  

What should be considered?

The fact that the companies are able to earn such large profits suggests that in most countries there is significant scope for larger increases in tobacco taxation. Since such taxes are widely regarded as one of the most effective tobacco control measures, they are a good place to start. The Industry often argues against higher taxes by suggesting the resulting higher prices will inevitably lead to higher rates of illicit tobacco, but it can’t really believe this as the industry often raises its prices even when taxes are not increased. Higher prices are to be welcomed, as they encourage existing smokers to quit and prevent others from starting – but higher prices should be due to taxation, so the resulting revenues go to governance finance ministries, rather than from the industry looking to generate higher profit margins.    

Furthermore, since the industry can push the burden of excise duty to smokers in the former of higher prices, there is a need to consider other more imaginative policies that directly address profitability. Introducing the direct regulation of wholesale tobacco prices, which would not only reduce industry profitability but also give greater scope for tobacco taxes. Other attractive possibilities include higher taxes on the profits made from tobacco products, as this would not only ensure tobacco companies paid more towards the harms they create, but would also give them an incentive to move into other, less harmful industries, which would not be taxed at such high levels.

Unless such measures are implemented, tobacco companies will keep profiting from the harm and misery their cigarettes create, and efforts to reduce the tobacco epidemic will be fought at every turn.
 

Dr Rob Branston is Associate Professor in Business Economics in the School of Management and part of the Tobacco Control Research Group, at the University of Bath in the UK. His primary research interests surround the governance and regulation of organisations, with a particular focus on the regulation and taxation of the global tobacco industry. Disclaimer: Dr Branston is supported by Bloomberg Philanthropies Stopping Tobacco Organizations and Products (www.bloomberg.org). The funder had no role in the preparation of or decision to publish this editorial.
 

Last update: 
Wednesday 10 February 2021
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