Good news despite the profit increase: analysis of BAT 2012 preliminary results

Pascal Diethelm

OxyRomandie, Switzerland

On 28 February 2013, British American Tobacco (BAT) published their preliminary results for 2012 and issued an accompanying news release in which the chairman of BAT expressed his satisfaction that BAT was able to deliver “strong profit growth in 2012, achieved through good pricing and an outstanding improvement in operating margin”. The press has mostly relayed uncritically BAT’s clamouring of their soaring profits – see for instance here.

One thing BAT did not highlight is the good news, from the tobacco control viewpoint, that this profit increase was exclusively achieved through pricing mechanisms in the context of a declining market across all regions of the world, as shown below:

(Bns = Billion sticks; EEMEA = Eastern European, Mediterranean and African region)

Overall, the number of cigarettes sold by BAT has decreased by 1.56%. Furthermore, although the rate of decrease varies considerably from one region to the other, it is notable that a decrease was observed in all regions of the world. The high decline of smoking in the European regions is not compensated by an increase in other parts of the world.

This is good news and shows a trend that is likely to become more marked in coming years as the full effect of the Framework Convention on Tobacco Control (FCTC) is seen. With a decrease of 1.56%, and expecting even greater decreases in coming years, achieving the WHO Global NCD Action Plan target of 30 x 25 (30% reduction of overall smoking prevalence by 2020) becomes within reach. A reduction of 1.56% for 13 consecutive years would translate into an overall reduction of 18%, assuming a linear correlation between prevalence and number of cigarettes smoked. To achieve the 30×25 target, an overall annual reduction of 2.8% in smoking prevalence is needed.

Of particular note is how BAT’s profit increase is distributed over the regions. At 7.4%, the Western European region contributes very little. By far the greatest contributor is the EEMEA region, which is responsible for 44% of the profit increase. This is also where the price of a pack of cigarettes is lowest, i.e. where the industry has the highest potential for price, and thus profit, increases. This illustrates one interesting aspect of the cigarette business. Relying on addiction which creates a rather inelastic demand for their product, the industry uses tobacco as a means of siphoning money from the pocket of addicted smokers in poorer countries to move it into the pockets of investors in rich countries. And they can increase the flow of money at will simply by enlarging the size of the tube!