A recently completed study by research firm IBISWorld has concluded that the new graphic labels, which were just released by the FDA and include images of rotting teeth and corpses, will result in a decline of less than one percent in overall U.S. tobacco revenues in 2013, the date when the new labels must be used.Revenue for the tobacco industry for 2013 is estimated at $43.8 billion.  According to the study, “Gradually, the warnings could impact the smoking population….but in the near term, it won’t have much of an impact.”  Some analysts believe that the new large warnings will result in consumers being less able to differentiate between cigarette packs, and consumers may begin to care less about what they are smoking and more about how much the cigarettes cost.  Thus, some believe that industry leading brands, such as Marlboro, may become just another brand of tobacco.  Consumers may also negate the impact of the new warning labels by using cigarette cases or sleeves to cover the warnings, as has occurred in other countries where graphic warning labels have been introduced.

The analysis, however, does not take into account several factors.  Most importantly, the analysis fails to include compliance with the new warning labels, which includes the cost of redesigning and printing new cigarette packages.  The compliance cost will be particularly burdensome on small manufacturers that produce fewer cigarettes, and thus, the per unit cost of the required package redesigns will be greater for such companies.  Further, to the extent that the cost of compliance overburdens certain small manufacturers, this segment of the industry may begin to shrink and larger companies, such as Philip Morris, may be in a position to gain market share that has been lost to the smaller companies that produce value-brand products.

For questions and/or comments, please contact Bryan Haynes, at 804.697.1420 or by email.