After decades of litigation and regulatory challenges in the U.S., investors initially believed Philip Morris International would offer freedom from the challenges facing U.S. tobacco companies. Yet along the way, shareholders of the global tobacco giant discovered that they faced their own unique challenges, including the effect of a strengthening dollar against foreign revenue.
Now the company faces a new problem that shows the rest of the world has followed in the footsteps of the U.S. — and in some cases, gone even further — by imposing regulatory restrictions on tobacco.
Problems across the pond
Earlier this month, lawmakers in the U.K. voted to ban branding on cigarette packs. Manufacturers will have to use standard fonts for product names, and graphics and other promotional marketing is now prohibited. The changes will take effect in May 2016. Although it will only apply to England, the rest of the U.K. is expected to consider similar moves. The House of Commons passed the law by a 367 to 113 margin, reflecting broad support for the measure.
Predictably, the tobacco industry in the U.K. is up in arms, with many companies looking at ways to challenge the legislation in court. One Philip Morris rival said it expects to go to court within 30 days of the measure becoming law in order to protect its property rights, and Philip Morris itself said it would “seek fair compensation” for any measure that restricts its ability to market its product.
No cigarette company is happy about replacing packaging developed by marketing experts with plain labels coated with health warnings. Yet the news could be worse for Philip Morris, which only has about a 7% share of the U.K. tobacco market. One could even argue the measure might give Philip Morris an edge over its rivals, leveling the playing field in the region.
A spreading phenomenon
The real problem, though, is that Philip Morris cannot assume restrictions on tobacco will remain confined to any one jurisdiction. The U.K. measure closely mimics plain-packaging legislation passed in Australia in December 2011. Philip Morris presented similar constitutional challenges to the measure that many expect to see in the U.K., but the Australian High Court ruled in favor of the laws, saying that they did not represent a taking of property that required fair compensation from the government. Still, Philip Morris is also fighting the measure through arbitration under international treaties — that dispute has already run for years and will likely take years more to resolve.
Moreover, the U.K. measure follows similar action in Ireland, where standardized cigarette boxes should appear within the next two years. Warnings will grow to almost two-thirds of the packaging surface area, with the goal of preventing children from picking up the habit. Philip Morris has already moved to challenge tobacco-sales rules the European Union imposed last year, which covered not only labeling but aspects of sales, including product ingredients and flavoring, shipment tracking and tracing, and the rapidly growing e-cigarette arena.
What is unclear is whether Philip Morris can count on the legal success its U.S. tobacco peers have enjoyed domestically. A 2012 court decision overturned FDA requirements that tobacco companies display graphic warning labels on their cigarette packaging, upholding their rights to advertise their products in their own manner. Yet free speech played a role in that decision, and it is not yet known whether foreign governments will find the same arguments equally compelling.
Philip Morris has faced regulatory pressure before, but the pace of new action is accelerating. As this is coming on the heels of currency-related financial difficulties, the company will have its hands full for the foreseeable future.
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Dan Caplinger has no position in any stocks mentioned.