The tobacco industry has been facing the brunt of worldwide anti-tobacco campaigns which are prompting governments to impose restrictions on the sale of tobacco products. The industry was hit hard again when ‘The New Tobacco Products Directive' endorsed by the European Parliament in Feb 2014 received a green signal from the Council of European Union (ETF:EU) on March 14, 2014.
The Directive is a revised version of the original Tobacco Products Directive issued in 2001. The revision was made in order to make tobacco products less attractive to young smokers in the region. The new directive imposes stricter rules on the sale of tobacco products in the EU region.
The new rule bans the sale of flavored cigarettes and roll-your-own-tobacco in EU regions. However, member states have the option to exempt products like ‘Other Tobacco Products' like cigars and cigarillos from the ban.
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Moreover, the directive requires the tobacco companies to include both pictorial and text warnings on the cigarette packs to dissuade smokers. The law also requires the warning to cover more than 65% of both the front and back covers. The new rule also bans any misleading labeling containing words like ‘natural' and ‘organic' on the packages.
Member states have also been allowed the authority to ban online sales of tobacco products in their respective regions.
Moreover, the new rule states that e-cigarettes, with nicotine strength of more than 20 milligrams per milliliter, would need authorization as a medicine. Furthermore, curative or preventive qualities of these products need to be proved. E-cigarettes below this level will face the same regulations as conventional tobacco products if their usage as a medicinal product cannot be proved.
The Directive is expected to be enforced in May, 20 days after its publication in the Official Journal of EU. Member states are required to incorporate the new directive into their national laws within two years and apply them from the end of the period.
These rules will pose a problem for the tobacco majors like Philip Morris International Inc. (NYSE: PM), Reynolds American Inc. (NYSE: RAI), British American Tobacco plc. (BAT) and Altria Group Inc. (NYSE: MO). The worldwide anti-smoking campaigns are increasingly forcing these companies to rely on packaging to build brand loyalty and grab consumer attention, especially after the government curbed advertising in magazines, billboards and TV. These efforts may fall apart once the above mentioned stricter regulations come into force.
Philip Morris, which carries a Zacks Rank #4 (Sell), opines that the new rule will disrupt the tobacco market and encourage illicit trade.
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