Global Tobacco: Will Legislation Kill the Industry?

1. Global Tobacco: Will Legislation Kill the Industry? July 2009

2. Introduction Legislation: What Restrictions Are There? Litigation: What Have Been the Impacts? Regional Legislation: Analysis by Region Manufacturer Strategies Legislation Outlook: Where Next?

3. Introduction Probably the Worst Operating Environment in the World • A survey of the world's major tobacco markets shows an increasingly restricted smoking environment. • A phrase used by the French Ministry of Health whose stated aim is to "de-normalise the consumption of tobacco" epitomises the objectives of the legislative measures to which the industry is subject. • The de-normalisation is effected through public smoking bans, particularly bans on smoking in social environments. The aim is to prevent non- smokers being subjected to 'second-hand' smoke. • However, legislation also targets the way in which the product is marketed – by cutting off advertising in all media, such that it becomes difficult to find any positive attribute, image, media, location or sponsorship which is not proscribed or limited in some way. • Legislation also targets the product by using compulsory health warningsto separate tobacco products from other consumer goods and makes it more difficult for cigarette packs to be fashion items. The warnings are increasingly designed not merely to appraise the smoker of the health effects but to frighten him or her into giving up. The next stage in warnings is to use graphics to shock the smoker and these are already present in a number of countries. • There is also legislation concerning the minimum tar yield of cigarettes in many countries, though this is viewed as a Trojan Horse by some since creating a minimum may be taken to imply that a lower level of tar is safer than a higher level of tar, which is the concept behind billions of dollars worth of anti-tobacco litigation. • However, the key point regarding tobacco control legislation, particularly in developing countries is the extent to which it is observed by the population, which depends on the smoking culture and how far the government is prepared to go to enforce the legislation. This report analyses the impact of tobacco control legislation on the industry: public smoking bans, advertising restrictions, health warnings, minimum age requirements and tar limits. The future legislative environment as tobacco control tightens its grip, the impact on the market and what the industry can do to mitigate the damage are also considered. Note: All tables and regional analysis based on the 80 largest tobacco markets analysed by Euromonitor International.

4. Introduction Tobacco Industry Restrictions

5. Introduction The Framework Convention for Tobacco Control

6. Introduction FCTC – Stated Aims • The WHO's Framework Convention on Tobacco Control (FCTC) requires its signatories to adopt a number of measures to reduce tobacco consumption and growing in each country and its stated aims include measures such as: increasing tobacco taxes, adopting graphic health warnings, imposing bans on advertising and smoking in public as well as encouraging alternative crops to tobacco and combating illicit trade in tobacco.

7. Introduction FCTC: Who's In and Who's Out? • To date, some 168 nations have signed and ratified the FCTC. Notably, the US has signed the FCTC but not ratified it though President Obama has already shown himself to be more supportive of tobacco control measures than his predecessor. Indonesia has not signed whilst Switzerland and the Czech Republic are the only European countries not to have ratified the FCTC, despite both having signed it. • Case study: Indonesia • Indonesia is the only country besides North Korea in East Asia to not sign the FCTC. The Indonesian government's stance is predicated on the premise that the country's tobacco industry is of greater benefit to the economy than tobacco control measures. Tobacco taxes in Indonesia are the lowest in Southeast Asia with few limits on the sale, consumption or advertising of tobacco products. Indonesia's estimated US$8 billion tobacco industrysupports about close to seven million people and accounts for about 10% of the country's tax revenue. • Indonesia's anti-smoking groups have been vocal in their criticism, indluding Yayasan Lembaga Menanggulangi Masalah Rokok (YLMMM), Yayasan Jantung Indonesia (YJI) and Yayasan Kanker Indonesia (YKI). In 2008, MajelisUlama Indonesia (MUI) or the Board of Moslem Leaders in Indonesia, planned to declare smoking as haram, or strictly prohibited, for Moslem children and pregnant women as well as MUI members, in January 2009. • Municipals around major cities have taken different approaches to tackling tobacco consumption. Jakarta issued an act in 2005 to ban smoking in public places which is being enforced loosely. The sale of cigarettes to minors under 18-years is also common by street vendors who sell their wares freely without identity checks.

8. Introduction National Anti-smoking Lobbies • The strength of anti-smoking groups is a key factor in legislation. Strong, well-organised groups orchestrating high-profile campaigns can create an atmosphere of acceptance for anti-smoking legislation. The mobilisation of public anti-tobacco sentiment can be a strong influence on Governments, especially in democracies. • There are hundreds of anti-smoking organisations in the world. Many are charities with links to Cancer and other health charities. Action for Smoking and Health ASH in the UK receives funding from the British Heart Foundation and Cancer research UK. • There are a number of anti-smoking organisations in the US which have a strong voice in the media on smoking and health matters such as National Center for Tobacco Free Kids, Foundation for a Smokefree America and the American Cancer Society. Some organisations major on offering help to smokers wishing to stop, e.g. Stumppi in Finland and Stivoro in the Netherlands. • The most significant organisation is the World Health Organisation, partly through its instrument FCTC which countries and powerful regional organisations such as the EU can use as a platform and launch pad for national and regional legislation. Anti-smoking organisations are stronger in developed than developing countries. The development of Government-sanctioned anti-smoking campaigns in China is of particular importance to the future of global cigarette volumes. In April 2007, the biggest scale anti-tobacco project 'Stepping into No-Smoking China' was launched jointly by the China Disease Control Centre and China Medical and Health Ministry across 20 provinces, in an attempt to reduce smoking in public places in both urban and rural China. The projects have a concrete aim of reducing the population of second-hand smokers from 53% to 30%, according to the ministry. The question is whether the Governments in countries like China have the will to make such campaigns effective within a resolute smoking culture and in view of the importance of the tobacco industry to government revenues and employment?

9. Introduction Legislation: What Restrictions Are There? Litigation: What Have Been the Impacts? Regional Legislation: Analysis by Region Manufacturer Strategies Legislation Outlook: Where Next?

10. Legislation: What Restrictions Are There? Minimum Smoking Age • Smoking by children and young people and the marketing of tobacco products to this demographic is a central issue in tobacco control. Out of the 80 countries analysed, four have no age limit, three have an age limit of over 18, nine have an age limit of 16 and 64 have an age limit of 18. • As with all legislation, the key point is always whether the laws are observed by the smoking population and whether they are enforced at national and local level. Necessary for enforcement of age limits are controls on the retailing of tobacco products. • In a number of countries, even when supermarkets, tobacconists and c-stores attempt to limit sales to those above the minimum age, there exist street vendors who ignore the law. • Unpoliced vending machines are another means by which under-age persons acquire cigarettes. With some exceptions, enforcement of age limits is low in Asia, Middle East & Africa, Latin America and Eastern Europe. In Indonesia, research shows that one in 10 starts smoking below the age of 10; in Algeria a quarter of under 10s have smoked. In the United Arab Emirates the limit is 20 but this does not deter teenagers. • In Western Europe, rules tend to be better enforced, though under-age smokers still buy cigarettes from kiosks in Greece and from shops and vending machines in many other countries where ID is not demanded. Some countries such as Italy and Japan have introduced controls on vending machines.

11. Legislation: What Restrictions Are There? Minimum Smoking Age: Case Studies The legal smoking age in Mexico is 18 years. Currently, no plans to raise this level exist. Retail outlets across the country must display a notice prohibiting the sale of tobacco products to under-age persons, and all cigarette packages have to contain the warning "VENTA PROHIBIDA A MENORES" ("Sale to minors is prohibited"). When in doubt, sales staff are asked to demand a photo ID. It is also prohibited to hire minors to sell tobacco products. These are the laws but local reports suggest that they are not being implemented. Around 70% of teens are estimated to smoke and freely buy cigarettes at most convenience stores or from street vendors selling cigarettes by the stick at Mx$2 or Mx$3 per unit despite single stick sales being against the law. Attitudes to teenage smoking are permissive : research shows that some 12% of teens smoke openly at home and 30% on the street. Source: NHS UK In 2003, the Child Protection Act was introduced to ban smoking by persons under the age of 18 years. However, a study on 'Cigarette sales to women and children in urban Thailand by a researcher from Central Queensland University of Australia, published in 2003, revealed that approximately one third of the urban population did not even know the minimum legal age and approximately 50% of retailers sold cigarettes to persons younger than 18 years. Of the countries with a smoking age limit of 18 (within the 80 major countries) Euromonitor International estimates that, in at least 25, it is easy for under -18s to buy cigarettes and little or no effort is made to stop them. In Vietnam the minimum smoking age is 18, but by tradition and due to lack of Government enforcement many smokers start the habit at the age of 13-14 or younger because no fines or other legal sanctions of any kind are applied, with buyers or sellers ignoring the law.

12. Legislation: What Restrictions Are There? Tar Cap Legislation • 33 countries out of the 80 analysed by Euromonitor International have no tar limits despite the fact that it is generally accepted that the proportion of carcinogens in a cigarette is based on the tar yield. • Tar caps vary significantly. Generally, the stricter the tobacco control regime the lower the minimum tar level. Euromonitor International divides tar levels as follows: high tar cigarettes = tar content of greater than 10mg; mid tar = 6-10mg; low tar = 4-6mg; ultra low tar = cigarettes with a tar content of less than 4mg. In most markets the long-term trend has been for the proportion of high tar cigarettes to fall. • Some view the imposition of a legal tar limit as being a tacit acceptance that one cigarette is safer than another, hence the banning of terms such as "light", "mild" and "low" in many markets. • However, smokers seem generally to accept the idea of low tar equating to lower risk and this is a trend which is forecast to continue. • In Western Europe most countries are subject to the EU product directive and observe the 10mg tar maximum (apart from Turkey where the maximum is 12mg). In Canada and the US there are no tar restrictions. In the case of Canada this is because to state a maximum is regarded as giving tacit approval of cigarettes with lower tar content and this is regarded as the wrong message.

13. Legislation: What Restrictions Are There? Tar Caps: Case Studies Although the EU has legislated a maximum limit which is significantly lower, the Australian government has not found it necessary to legislate lower levels. Descriptions such as "light" and "mild" on packs of cigarettes with lower tar levels have been phased out since 2005, when the Australian Competition and Consumer Commission ruled against the companies using these descriptors because they create the impression that the cigarettes are less harmful. However, descriptions like "smooth" and "fine" are still accepted and the colour coding of packaging differentiates brand variants according to tar level. This is an example of companies 'getting around' a restriction by creating a complicity with the consumer. In Malaysia all cigarette packs are required to include information on tar and nicotine level, manufacturer's name and manufacturing date. In New Zealand, where there is no maximum level, there is a view that imposing a cap would increase smoking volumes as smokers accustomed to high tar increase the number of units consumed in order to compensate. The failure, due to litigation fear, to be able to tie lower tar to a safer smoke is a key issue. The intensity of a smoke is also relevant to the tar debate covering issues such as number of puffs and treatment of the filter tip by the smoker. In Thailandresearch shows that smokers are unaware of the health risks associated with tar and are more concerned about the negative (addictive) effect of nicotine. Public Health Ministry data revealed that many lower-income smokers are poorly educated or even illiterate, and this would limit the effectiveness of a move towards limiting tar yields.

14. Legislation: What Restrictions Are There? Health Warning Legislation • Health warnings are present on tobacco products in all 80 countries analysed, in the vast majority of cases due to legislation. The main variation is in size of warnings in terms of percentage coverage and whether the warnings are on both sides of the pack. In the EU in all countries (plus official candidate countries Croatia and Macedonia) the warning must occupy at least 30% of the area on the pack front and 40% of the area on the rear. • The EU is also considering the idea of enlarging pack warnings and ordering mandatory pictorial warnings on both sides of packs. It is also considering replacing maximum tar, nicotine and carbon monoxide (TNCO) yield data with information on other substances in tobacco products or help lines. • It has been suggested that smokers quickly become accustomed to health warnings, and either ignore them or cover them up. However, some research indicates that pack health warnings may be more effective for juveniles, especially if backed by other measures such as high-profile anti-smoking campaigns. Where cigarettes are sold in single sticks consumers do not see the pack warning. Similarly, in rural areas of developing countries where illiteracy is high, only graphic warnings are likely to have the desired deterrent effect.

15. Legislation: What Restrictions Are There? Health Warnings – Effective? Case Studies Smokers pay little attention to health warnings on cigarettes packs in Vietnam. According to a survey conducted by the National Institute of Tuberculosis and Lung, more than half of the respondents were not aware of, or did not see, health warnings on cigarettes packs. A survey conducted by the Ministry of Trade showed that only 1% of consumers were able to read the health warning messages because the print was too small. According to surveys conducted by the Ministry of Health in Italy, 'Il fumo uccide' (Smoking kills) is the health warning that makes the biggest impression on smokers. That said, health warnings in general are still not very effective in getting smokers to quit. Data from the ISS (Superior Institute of Health) and Lega Italiana Lotta ai Tumori (Italian Association against Cancer) suggested that just 10% of smokers had reduced their daily consumption of cigarettes as a result of pack health warnings. Moreover, only 8% of smokers aged 20 years old or younger altered their smoking habits (by cutting down or quitting completely) as a result of pack health warnings. According to a recent Health Canadapoll, 57% of smokers are unmoved by graphic warnings, up five percentage points over the last five years thus demonstrating effectiveness lowering with familiarity. Among smokers seriously thinking of stopping, the proportion who said the campaign was ineffective rose from 40% to 43%.

16. Legislation: What Restrictions Are There? Graphic Health Warning Legislation • There is a saying a picture is worth a thousand words and this is particularly the case where a proportion of the population is illiterate. • Canada was the first country to use images in 2001. Research a year later found 31% of ex-smokers said the images had motivated them to quit, while 27% said they had helped them to remain non-smokers. Surveys one year later showed that a third of smokers had been motivated to quit by the images. • However, other research, on behalf of Health Canada, showed that graphic health warnings need to cover almost the entire surface of the cigarette pack if they are to be really effective, and the general view is that any deterrent image needs to be regularly changed so that its impact is not dulled by familiarity. • Although, at the time of writing, there were only 12 countries with graphic health warnings on cigarette packs, in a further 11 countries including Spain, Denmark and the United Arab Emirates they are likely to be introduced in the near future. Brazil Proposed UK plain packaging Source: packagingnews.co.uk

17. Legislation: What Restrictions Are There? Graphic Health Warnings: Do They Work? The EC has set up a central EU library of colour photographs and other illustrations for member states to chose from when health warnings on tobacco products become obligatory. In Mexico, according to a research panel, clear graphic images of the health consequences of smoking influenced the decision to quit smoking in those consumers who were already trying to quit the habit or reduce consumption. Those images having the biggest impact were a close up of a lung cancer and a man with a noticeable larynx cancer. Source: European Commission A year after the introduction of graphic health warnings, smoking prevalence in New Zealandfell from 25% to 20%. Although the warnings are not regarded as the only factor they are regarded as significant and evidence that smokers are asking for packs with less disturbing warning pictures on them (as in Thailand) is taken as supporting this. The images are to be replaced by different ones to prevent people from becoming desensitised and the warnings losing their impact. Thailand was the fourth country in the world to adopt graphic warning pictures on cigarette packs, in 2005. According to surveys conducted by local news agencies, Thai smokers ask for the pack with the least scary picture. The data also showed that, in the first period of introducing this measure, volume sales declined though the impact was less amongst regular smokers, who quickly became accustomed to the pictures. According to a study by the Central Agency for Public Mobilization and Statistics in Egypt, which was reported in October 2008, graphic health warnings were not affecting cigarette sales or prevalence.

18. Legislation: What Restrictions Are There? Graphic Warning Alternatives In Australia, the release of 'wallet packs' from BATA's Dunhill brand was viewed as a way of getting around the legislation demanding graphic warnings. These packs of 20 could be split into two packs - of 13 and seven, with the resulting smaller packs featuring the warning label only on one side of the pack. BATA was consequently promptly taken to court by the ACCC, and the cigarette packs were soon removed. It is likely, however, that these packs were introduced not so much to avoid the graphic health warnings, but to take advantage of the trend towards smaller packs, given that the lower limit for pack size in Australia is 20 cigarettes. Sleeves to cover health warnings sold in Australia Source: nzma.org Since the implementation of graphic labels in Singapore, sales of metallic cigarette cases have been brisk, especially amongst the young adult smoking population. Smokers in Singapore have the habit of leaving their cigarettes on tables as they light up in social settings, and by using such cigarette cases, the 'offensive' graphic warnings are kept out of sight.

19. Legislation: What Restrictions Are There? Advertising Bans and Restrictions Advertising bans are rarely total: as the table shows there are many exceptions with POS (Point of Sale) advertising the most common. The FCTC encourages the banning of all tobacco product advertising but specific national legislation is required. The table above categorises tobacco product advertising restrictions with the rating in the right hand column based on the proportion of countries surveyed by Euromonitor International in which these aspects of advertising and promotion are restricted.

20. Legislation: What Restrictions Are There? Advertising Bans: Case Studies When point-of-sale advertising is banned in Ireland, cigarette sales will be entirely dependent on maintaining existing brand loyalty rather than fostering interest among new smokers. This will have considerable impact on new product launches, potential brand share and overall cigarette volume sales over the forecast period. Following this ban in July 2009, the only avenue for tobacco companies' advertising expenditures will be in retail trade magazines – which are a form of B2B advertising directed at store owners. In a survey administered by the OTC in early 2008, 92% of shops visited had some form of tobacco advertisement on display. With such a high percentage of retail outlets advertising tobacco products, this new legislative change in July 2009 will drastically affect the industry. Since the TV and print advertisement ban in Argentina in 2003, tobacco manufacturers have changed their strategies from main media advertising to direct marketing activity: promotions, contests and prize draws have become key marketing tools. Printed advertisements are only allowed in those magazines with at least 75% readership in the adult segment, in order to meet the regulation of the international agreement signed by tobacco manufacturers. Distribution of tobacco-branded gifts is currently unregulated in Argentina. Source: blog.kievukraine In Kazakhstan a number of companies sought to circumvent restrictions by using outdoor advertisements for their brands, which did not mention that these brands were tobacco products. As a result, the law was amended to restrict the advertising of entire brand families and not just individual tobacco products. For example, companies will no longer be permitted to place billboard advertisements for tobacco products near schools, universities or other places frequented by under-age consumers.

21. Legislation: What Restrictions Are There? Advertising Ban Strategies In India the clampdown on tobacco advertising during the review period prompted some companies to develop more creative marketing strategies. GTC Industries, for example, launched Chancellor XP in 2005, a cigarette brand positioned as the choice of India's IT (Information technology) workers. While the 'XP' in the brand's name ostensibly refers to its 'extra premium' status, it is also intended as a subtle reference to the well-known Microsoft operating system Windows XP. To reinforce the association with India's IT professionals, the company added the tagline 'Luxury blend - for the finest minds in India'. Advertising via vending in Japan In Japanvending machines can be used for display advertising. Japan Tobacco also has a campaign, which uses humour, advertising smoking manners on TV and in a street campaign. Source: quitguide.com Source: quitguide.com In Thailand, many tobacco manufacturers try to get round the advertising ban by promoting their products via advertisements in foreign magazines which are widely available in Thailand, or by sponsoring foreign sports events which are broadcast on satellite channels in the country. There is, however, a censorship board that strictly enforces the ban on tobacco advertising in all media channels. Tobacco logos and brand names are censored on television programmes, including international sporting events. Even films which feature scenes where logos or brands are displayed or mentioned are censored.

22. Legislation: What Restrictions Are There? Point of Sale Legislation: Key Issues One face per pack display In 1991 the Singapore government pioneered global product display restrictions by limiting retailers to display only one pack face per brand per variant. Since 1993 retailers have been prohibited from selling tobacco products to teenagers aged under 18, and have to prominently display age restriction signs at points of sale. Price and bulk purchase discounts for tobacco products are also prohibited. UK point-of sale display ID checks In Australia, it is illegal for a retail outlet to sell cigarettes to any person under the age of 18 or to an adult on a minor's behalf. Retailers are also asked to do ID checks. Signs are also required to be displayed saying "We Don't Sell Tobacco To Under 18s", "No Proof Of Age, No Cigarettes" and "Selling Tobacco Products To Under 18s Can Incur a A$5,000 Penalty." Fines for selling to minors start at A$220 for an 'on-the-spot fine', and if prosecuted can go as high as A$5,400. Despite such disincentives, it is estimated that around half the tobacco retailers in Australia still sell cigarettes to minors.

23. Legislation: What Restrictions Are There? Point of Sale (POS) Legislation: Display Ban the Next Big Step • As advertising bans have multiplied and become more wide ranging and severe, the emphasis for cigarette companies and legislators has shifted to point of sale (POS). • Just over half the countries analysed have no POS advertising restrictions and in most of the remaining countries there is still scope for tobacco product marketing, e.g. by poster (as in France) or special display cabinet. • Vending is a key issue because, in many countries, there is no restriction on access. In 2008, in order to prevent vending machine purchases by minors in Japan, only holders of taspo IC cards, issued free by the Tobacco Institute of Japan are to be able to buy cigarettes from automated vending devices. Japan and Germany have the largest per capita proportion of vending machines among the major countries and their availability to under-age smokers is a major issue. • Restrictions at POS may be mild, e.g. concerning the permitted distance of the outlet from a school, or banning single stick sales, as in Kenya. • The key future issue in POS is the complete display ban (i.e. putting cigarette packs under the counter) favoured by the WHO and by the EU. • There are, as yet, few display bans but the issue is increasingly important. A law proposed by Finland's ministry of social affairs and health, which is expected to be passed in 2010, would ban retail display of cigarette packs to discourage under-age smoking. The Northern Ireland Assembly has approved a ban on the display of tobacco products, which is planned to be implemented late in 2010, although some (DUP) politicians have recommended a delay until 2013. A similar ban is to be introduced in the Irish Republic in July 2009. • The UK Public Health Minister has proposed that cigarettes should be removed from display and hidden under shop counters with cigarette vending machines banned from hotels, bars and restaurants to further limit children's access to tobacco products.

24. Legislation: What Restrictions Are There? Retail Display Ban: Case Study – Ireland The regulations which are about to be implemented in Ireland, a country at the forefront of tobacco control since its total public smoking ban in 2005, are detailed (right) as these could be a blueprint for regulations in other countries. These regulations strike at the last bastion of tobacco marketing – the point-of-sale environment. • In Ireland on 1 July 2009, the commencement of further provisions of the Public Health (Tobacco) Acts 2002 and 2004 will occur. These provisions include: • A ban on all in-store/point-of-sale advertising of tobacco products (this includes signs, change mats, mouse pads, till covers, decals, etc). • A ban on the display of tobacco products in retail premises (a menu board with one image of each tobacco product sold can be provided to a customer, but not put on display). • The introduction of a closed container/dispenser provision (all tobacco products must be out of view and stored within a closed container/dispenser which is only available by the retailer). • Tighter controls on location and operation of vending machines (these machines must be token activated, located within the view of a member of staff and are not permitted to show any tobacco advertising – rather a black and white only ticket will inform the customer of the tobacco products available). • The introduction of a retail register (anyone who wishes to sell tobacco products must register with the Office of Tobacco Control, paying a fee of €50. • In consequence, retailers will have to transform their point-of-sale units. Furthermore, it can be suggested that cigarette sales will be entirely dependent on maintaining existing brand loyalty rather than fostering interest among new smokers. This will have considerable impact on new product launches, potential brand share and overall cigarette volume sales. Source: Cancer Society of New Zealand

25. Legislation: What Restrictions Are There? Media Advertising Restriction Strategies Advertising restrictions cause sales to fall and the trend in recent years has been for manufacturers to try to compensate with point-of-sale and/or 'below-the-line' strategies, making use of the cash no longer needed for media advertising of tobacco products, Some examples are summarised below: • In the EU, JT's Gallaher in the UK has invested in point-of-sale facilities which display brands by price platform to help prevent consumers down-trading from premium to budget brand alternatives. • In the US, Philip Morris is well-known for its 'Retail Leaders' programme, in which retailers agree to devote a certain percentage of shelf space (usually around 50%, and always the most desirable 'eye-level' section) and signage to Philip Morris brands in exchange for increased promotional allowances. • In South Africa, BAT uses a two-tier approach – customers are engaged at point of sale by innovative displays but, in addition, the company uses one-on-one marketing to give out samples and explain the merits of new products such as snus in order to create customer advocates, i.e. 'brand champions' willing to carry the message to peers. • In Taiwan, cigarettes cannot be given as a prize or gift, and price discounting is not allowed for cigarettes. When giving-way branded gifts such as lighter when purchasing a cigarette product, the gift value must not exceed 25% of the retail cigarette price.

26. Legislation: What Restrictions Are There? Public Smoking Bans • Public smoking bans are a central element of the FCTC and integral to the WHO's intention to 'de-normalise' the practice of smoking. Thus there is a public smoking ban of sorts in most countries. • The key drivers of public smoking bans are separating children from smokers and preventing workers from inhaling second hand smoke, i.e. preventing passive smoking. Thus bans are most common around schools and hospitals. Enclosed places where bans are rare are the home and the car, i.e. where health meets individual freedom. Smoking bans 'in the open air' are also rare. • However, the acid test of any ban is whether it is enforced and whether it is observed, which has to do with the political will of the Government and the smoking culture of the country concerned. • A general public smoking ban is due to be implemented in Greece in July 2009 but, in a country where anti-smoking groups are marginal and where the smoking culture is strong, it is thought that cultural factors could well undermine the ban. The success of the 2009 public smoking ban in Turkey, which is seeking EU membership, will also be an important indicator. • Political will is a key element: President Vasquez of Uruguay imposed the first public smoking ban in Latin America by presidential decree, and the increase in excise tax in Venezuela from 50% to 70% was via a decree from President Chavez.

27. Legislation: What Restrictions Are There? Public Smoking Bans in Western Europe: Case Studies The smoking ban in Italy had an immediate impact on retail volume sales of tobacco products in 2005. According to statistics published in the British Medical Journal (BMJ 331, 2005, 1159), there was a strong decrease in tobacco consumption in the first year following the ban, which, according to the 'Newsletter Tobacco Observatory' published by REF (Research for Economics and Finance), was equal to a drop of 3.5 million kg in cigarette volume sales, depriving the treasury of around €400 million. According to the tobacco vendors' trade association, Assotabaccai, the Italian government lost €94.3 million in excise duties in the year following the ban. Reports suggest that the public smoking ban has proved fairly popular, partly due to the climate. In Ireland the immediate impact of the public smoking ban was a fall in consumption followed by a partial recovery as consumers became more used to the non-smoking environment. According to recent surveys administered by the OTC, 95% of all smokers who visited a pub within the previous fortnight either smoked outside or did not smoke at all, while more than one in five smokers chose not to smoke at all when out socialising. In metropolitan areas, investment in the provision of outdoor smoking areas and the development of continental-style street culture has been significant and a whole industry developed around providing comfortable outdoor accommodation for smokers. The use of gas burners for outdoor heating became a feature of many pubs attempting to cater to smokers during the winter though there have been calls for a ban in their use due to their contribution to global warming. The locations in which Irish consumers smoke have also changed, with many now smoking more in the home, as well as in their cars. Retailers, foodservice outlets and bars have sought to capture some lost sales from these consumers by offering new takeaway or off-licence services.

28. Legislation: What Restrictions Are There? Public Smoking Bans in Asia Pacific: Case Studies In 2008, the enforcement of the Public Smoking Ban 45/2005/ND-CP in Vietnam was only rated 4/10 by a WHO expert, with the only visible smoke-free environment being the indoor office. Almost all indoor offices in the cities prohibit smoking, and have separate smoking places. Although there are some smoke-free restaurants in Ho Chi Minh city and Ha Noi, these are unusual and the level of acceptance of such restrictions by the smoking population is low. Source: WHO report on the Global Tobacco Epidemic, Vietnam, 2008 In China, while the Chinese government has banned smoking in various public locations and on public transport, people have continued to smoke in many public places, including restaurants. Smoking remains rampant and unchecked in many public places such as restaurants, cinemas, offices and railway stations despite the widespread presence of "No Smoking" signs. In restaurants, for example, people continue to smoke owing to the belief that consumption of wine and cigarettes go hand in hand. Only airline companies have fully implemented a ban on smoking on all domestic and international flights.

29. Legislation: What Restrictions Are There? Smoking Bans in Restaurants and Bars • The key battleground for public smoking bans is social environments – bars, clubs and restaurants – and the number of countries whose public smoking bans extend to these locations is significant, as is the proportion of countries where bar/restaurant smoking bans include provision of designated areas for smokers. • More than half the 80 countries analysed have extended their public smoking bans into bars and restaurants, though, in only about a third of these, is there a total smoking ban. • The other two thirds offer bar and restaurant owners the option to create a designated smoking area. This is often dependent on the size of the outlet concerned. In some countries small bars/restaurants are exempt from the ban although frequently they are not allowed to serve food within an area where smoking is permitted. • Rules regarding designated smoking areas within non-smoking establishments also vary. These must frequently have separate air conditioning and be sealed off from the smoking area by means of a self-closing door. • These smoking bans have caused growth in patios and terraces, often heated and covered, where smokers may sit and smoke legally. There are examples of tobacco companies helping in the establishment of such outside areas.

30. Legislation: What Restrictions Are There? The Impact of Restaurant/Bar Smoking Bans on Sales • Of all the tobacco control measures employed by governments, the measure that has the most immediate impact on sales, apart from price, is a public smoking ban, though the degree of impact varies based on factors such as coverage, enforcement, weather, drinking culture etc. For example, the year of Italy's ban saw an exceptionally warm summer and so people continued to smoke whilst socialising outdoors, whilst England's wet weather had the reverse effect. Nevertheless, every country witnesses an immediate impact on volume as the opportunity to smoke is reduced, though the industry argues that the effect is temporary. • The impact is felt not only by cigarettes – in the UK, for example, cigar sales slumped by over 11% in the year of the smoking ban. Cigar sales are particularly vulnerable to smoking bans due to the social nature of cigar smoking, and, in the case of larger cigars, the time it takes to finish one. • The effect of bans can be mitigated. Tobacco manufacturers have innovated to accommodate smokers in smoking ban countries, producing shorter cigarettes with higher nicotine levels, as well as investing in cigarette alternatives such as smokeless tobacco. Ireland, for example, swung back to growth on the back of a large migrant population from Eastern Europe that was young and more likely to smoke. Italy's decline was not as high as it could have been, owing to a particularly hot summer in the year of the ban. • The table illustrates the immediate impact of smoking bans in selected European countries. The key element of workplace bans is whether these apply to bars and restaurants and whether, if the ban does apply to these establishments, there are exceptions – such as those based on area. Note: The above 'impact' column refers to volume sales in the year immediately following the ban

31. Legislation: What Restrictions Are There? Restaurant/Bar Smoking Ban Impact: Ireland/UK Case Studies C B A A Cigarette volumes fell in Ireland following the public smoking ban in 2004 but then recovered as smokers became accustomed to having to smoke outside and making use of external smoking facilities. B and C. In the UK , public smoking bans in Scotland and Wales were followed by a ban in England in July 2007 and then by a ban in Northern Ireland. The view is that the bans accelerated the existing falling trend in cigarette volumes due to high prices and high levels of illicit trade. The general view is that public smoking bans, when these include restaurants and bars, create lifestyle changes which reduce the incidence of smoking severely until adjustments are made but then some of the losses in volumes are recovered whereas changes due to price are more permanent.

32. Legislation: What Restrictions Are There? Restaurant and Bars Smoking Ban Alternatives • Disputed effect of public smoking bans • In Mexico the non-smoking directive established a 70% area for non-smokers, a 30% open space area (or at most 20 sq m) properly separated for smokers and a ventilation and air conditioning system in the largest section. In the open space for smokers the serving of any kind of beverage or food is not allowed. • By the end of 2008, the Chamber of Restaurant and Bar Owners (CANIRAC – Camara Nacional de la Industria Restaurantera y Alimentos Condimentados) announced that the drop in sales for the year 2008 was 17% with a 15% fall in industry employment. • This was disputed by the anti-tobacco lobby on the grounds that: • consumer foodservice had been impacted by economic crisis. • the anti-smoking law at bars and restaurants had not been rigorously enforced, • with very few prosecuted despite widespread contravention. • Smoking bans in Western Australia, Queensland New South Wales and South Australia, Victoria and the Northern Territory have led to an increase in the popularity of 'beer gardens'. In fact there are many cases where the construction of 'beer gardens' and 'balconies' has been subsidised by tobacco companies in return for exclusive sales rights. Melbourne in particular has witnessed the sudden and phenomenal growth of 'rooftop' bars. • Beer gardens have been targeted by government campaigns to reduce litter caused by smoking (particularly cigarette butts), with slogans such as "Don't be a tosser" used in a campaign in Victoria (see right). Source: Victorian Litter Action Alliance

33. Legislation: What Restrictions Are There? Public Smoking Bans Update 2009 • The table, which is not an exhaustive list, demonstrates the accelerating pace of smoking ban legislation. • Not only are bans proliferating, they are becoming more precise and targeted. • Where public smoking bans have been introduced which cover restaurants and bars, e.g. in Ireland, fears were expressed that this would increase smoking in the home and the car thus making children more vulnerable to second hand smoke. • Thus the trend towards car smoking bans and also to bans in dwelling and public parks in the US, particularly California.

34. Legislation: What Restrictions Are There? Tax, Cigarette Prices and the Consumer • The legislation which has the most immediate and lasting effect on tobacco product consumption is tax increases which cause prices to rise. The EU's minimum tax requirements have caused profound changes in a number of European markets and particularly new member countries such as Poland currently being called upon to implement minimum rates of duty and levels of price to agreed time scales. • Taxes on tobacco products are broadly of three types: ad valorem, where tax is a proportion of price; sales taxes such as VAT; and specific taxes unique to tobacco products. Governments not only increase revenues by raising tax rates and imposing new taxes, they may also insist on manufacturers raising prices which means more revenue to the Treasury, provided that the taxes are ad valorem. Governments may also stipulate the extent to which a decision to increase prices will impact margins. • The chart opposite (bottom right) illustrates the trend towards rising cigarette taxes (see also slide 35) and also the occasional need of governments, as in the case of Turkey (and once in Canada), to reduce taxation in order to avoid market distortion and consequent loss of net revenues. Tobacco taxes are a political issue for governments, but, for tobacco companies, their importance is the impact on price and the effect on markets. Price rather than volume thus became the primary driver of the global tobacco market. • The next slide demonstrates how different tax regimes have widened regional average price differences.

35. Legislation: What Restrictions Are There? Average Cigarette Prices by Region 2008 (US$ Per 20 Pack) Western Europe North America Eastern Europe 4.5 1.0 4.3 1.0 Different regional pricing environments are partly due to differing tax regimes Asia Pacific 1.3 Latin America Australasia 5.6 2.2 Middle East and Africa Note: Prices are average paid by smokers based on dividing market value (US$ current prices) by number of packs sold. Red signifies cigarette volumes falling, blue signifies volumes rising.

36. Legislation: What Restrictions Are There? The Tax Environment: Recent Changes The table demonstrates the trend towards tax-driven price rises in keeping with FCTC exhortations and revenue needs. Also noticeable (not included in the chart) have been a number of countries either deciding not to raise taxes or, as in the case of Poland and Hungary, opposing the EU Directive to raise prices on the grounds of damaging the market and encouraging illicit trade.

37. Legislation: What Restrictions Are There? European Union Taxation Latest • The Economic Affairs Committee in the European Parliament recently (March 2009) backed a gradual increase in the minimum tax rates on cigarettes – up to at least €1.50 per pack throughout the EU by 2014. The legislation aims to foster tax convergence and avoid market distortions caused by variations between countries. • The committee has proposed that the minimum tax on cigarettes should be set at €64 per 1,000 cigarettes from January 2012 onwards, rising to €75 (€1.50 per pack of 20) on January 2014. • The final decision on the proposed minimum tax will be taken by the Council of Ministers and will require a unanimous vote. Taxation as a Proportion of Total Pack Price (Mid-price) 90% 79% 77% 74% 78% Note: The proportion of the pack price accounted for by taxation does not equate to price level when comparing countries UK Germany France Spain Czech Rep

38. Legislation: What Restrictions Are There? Illicit Trade and Legislation • Tax legislation can increase cross-border discrepancies thus attracting illicit trade and also make consumers more inclined to buy non-duty paid (NDP) products. About 7% of the global market or some 400 billion cigarettes is classified as illicit trade. This may be contraband, entering the country illegally in container ships or in the back of bootleggers' vans, or it may be counterfeit, illegally manufactured imitations. • Cross-border illicit trade thrives when there are price differences between countries. Countries where prices are high, or have risen quickly, tend to have high proportions of NDP. The trend towards higher prices as a result of tobacco control measures tends to increase illicit trade. • Illicit concerns • InVietnam the rise of special consumption tax in 2008 caused cigarette prices to rise by 10-12% in 2008 causing an increase in illicit trade. The volume of illicit trade increased from 12,600 million sticks in 2007 to 14,000 million sticks in 2008, a rise of 35%. • According to media reports, the Irish government recently decided against a tax rise, which would have increased the cost of cigarettes by €2 a pack, to avoid the risk of a major increase in illicit trade. • In the Philippines, according to the National Tobacco Administration (NTA), proposals to increase cigarette excise taxes could result in an actual loss to the Philippine government of some Ps60 billion in revenues. The NTA warns that a second cigarette tax increase in the year (excise tax on alcohol and cigarettes were increased on 1 January 2009) could displace two million people in the tobacco industry and encourage smuggling and counterfeit cigarettes.

39. Legislation: What Restrictions Are There? Other Legislation: Fire-safe Cigarettes • 'Low or reduced ignition propensity' cigarettes, also known as 'fire-safe' cigarettes, are a major trend in the US and there are plans for their introduction in the EU. These cigarettes use bands of less porous paper at regular intervals that provides 'speed bumps'. If left unattended, the cigarette will burn until the speed bump and extinguish itself. While this will not completely eliminate cigarette-induced fires, data from the state of New York (which in 2004 became the first US state to exclusively sell fire-safe cigarettes) shows dramatic decreases in the number of fires attributable to cigarettes. • At the start of 2008, nine US states had a fire-safe mandate (1 January 2008, the states of Illinois, Maine and Massachusetts became fully compliant). By 2010, it is expected that a total of 35 states will have fully implemented legislation requiring that all cigarettes sold within state lines be fire-safe. There have been calls for fire-safe cigarettes in Australia following the recent bush fires, some of which were attributed to cigarettes. The European Commission is likely to ban traditional (non fire-safe) cigarettes, possibly by 2010. According to evidence submitted by 17 of the 27 EU member states, some 2,000 people across Europe die every year in house fires caused by cigarettes and a further 7,500 are injured, while, in the US, 700-900 people die each year due to cigarette-ignited fires. Source: The Coalition for Fire-Safe Cigarettes In 2009 South KoreaGyeonggi Province announced plans to sue KT&G for losses from fires started by cigarettes. The amount to be demanded is KRW 79 billion (€43.7 million) based on the company's market share. According to the province, the company has been exporting fire-safe cigarettes to the US since 2005. In 2009 a new state law was passed in Minnesotarequiring all cigarettes sold in the state to be self-extinguishing if left unattended. Minnesota joins New York, Vermont, California, Illinois, New Hampshire, Massachusetts, Indiana and Michigan in passing 'fire-safe' laws.

40. Legislation: What Restrictions Are There? LIP Regulation: US Case Study

41. Legislation: What Restrictions Are There? LIP Service: US Reaction

42. Introduction Legislation: What Restrictions Are There? Litigation: What Have Been the Impacts? Regional Legislation: Analysis by Region Manufacturer Strategies Legislation Outlook: Where Next?

43. Litigation: What Have Been the Impacts? Tobacco Litigation Today The main impact to the global market of litigation remains the MSA in the US … Russia USA Litigation regarding "light" descriptions in Russia US tobacco industry remains the key legal battle ground with product liability cases mainly based around claims concerning the "light" descriptions of cigarettes. Germany Court bans 'organic' description South Korea Saudi Arabia Litigation regarding fire damage Nigeria Compensation for medical expenses in Saudi Arabia Govt suing multinationals for targeting of juvenile smokers in Nigeria. …but major lawsuits are moving outside the US.

44. Litigation: What Have Been the Impacts? Litigation: Signposts to the Future

45. Litigation: What Have Been the Impacts? Case Study: How the MSA Impacted the US Market • Subsequent to the MSA, the US market fell by 3-4% per annum but, because average prices paid for cigarettes rose, the value of the US cigarettes market was able to increase. • Due to the rise in cigarette prices between 2000 and 2007, cigarette sales declined 18%, from 21.1 billion packs to 17.4 billion packs. However, over the same period, sales of other tobacco products increased by the equivalent of 1.1 billion packs of cigarettes, comprised of 714 million (cigarette pack equivalents) moist snuff, 256 million RYO tobacco and 130 million small cigars. • Cost is a key factor in the upsurge in the use of non-cigarette tobacco products. The weekly cost for a typical user of a premium moist snuff brand is 55% less than for a typical cigarette smoker. • The growth potential of the smokeless category is clear by the explosion of interest from major companies. • Could this be a blueprint for the future of the global tobacco products market? The major companies are certainly covering the possibility, with Reynolds and PM USA acquiring the major smokeless companies Conwood and UST, respectively. The MSA (Master Settlement Agreement) was signed in 1998 by the four major tobacco companies and subsequently by a further 40 US tobacco companies. The agreement was also signed by every US state. Under the agreement the companies agreed to pay some US$365 billion to meet projected health costs. The companies' need to pay for the MSA changed the US price environment and accelerated the downward trend in cigarette volumes

46. Introduction Legislation: What Restrictions Are There? Litigation: What Have Been the Impacts? Regional Legislation: Analysis by Region Manufacturer Strategies Legislation Outlook: Where Next?

47. Regional Legislation: Analysis by Region Overview of Legislation: Major Markets • A survey of the world's major tobacco markets shows an increasingly restricted smoking environment. • Legislation targets the way in which the product is marketed – by cutting off advertising in all media, such that it becomes difficult to find any positive attribute, image, media, location or sponsorship which is not proscribed or limited in some way. Even more significantly, legislation is reducing the number of places where tobacco products can be smoked. • Legislation also targets the product by using compulsory health warnings to separate tobacco products from other consumer goods and makes it more difficult for cigarette packs to be fashion items. The warnings are increasingly designed not merely to appraise the smoker of the health effects but to terrify him or her into giving up.

48. Regional Legislation: Analysis by Region Asia Pacific: Legislative Overview • In the less developed regions, which dominate global cigarette volumes, the two most populous countries are signatories to the FCTC and operate restrictions on advertising and partial public smoking bans, though these are less well observed than in most European countries and North America. • Smoking bans, particularly in developed countries, have benefited from a level of public acceptance and approval. Where this is not forthcoming, however, Governments proceed more carefully. • The Hong Kong government will recommend in a report to legislators whether or not to allow smoking rooms to be created in some bars. A total public smoking ban came into force in January 2007 but a two-and-a-half year period of grace was granted to some bars and nightclubs. The Delhi High Court has just reversed a ban on smoking scenes in films and newspapers displaying cigarettes and other tobacco products as being beyond the competency of the powers conferred by the Anti-Smoking Act.

49. Regional Legislation: Analysis by Region Asia Pacific Legislation: Summary Table

50. Regional Legislation: Analysis by Region Asia Pacific Legislation: Analysis by Country (Part 1) • In Azerbaijan production and sale of cigarettes must be licensed but underage sales from street vendors, often of single sticks continues. Similarly, there is an advertising ban but polythene bags with tobacco company logos are sold. • In China there are clearly efforts being made to impose and implement tobacco control legislation in accordance with the FCTC but there remains a gap between intention and achievement. Starting in April 2007, the biggest scale anti-tobacco project 'Stepping into No-Smoking China' was launched jointly by the China Disease Control Centre and China Medical and Health Ministry across 20 provinces, in an attempt to reduce smoking in public places in both urban and rural China. The projects have a concrete aim of reducing the population of second-hand smokers from 53% to 30%, according to the ministry. • In Hong Kong, however, bans are being extended into previously exempt areas such as bars and restaurants and graphic warnings are compulsory. Graphic warnings are expected to be introduced in India along with other new guidelines to enforce previously ignored public smoking bans. • Indonesia is the only country besides North Korea not to sign the World Health Organisation's Framework Convention on Tobacco Control (FCTC) in 2003. The Indonesian government's non-interventionism is because policy thinking is inclining to the view that the tobacco industry is of greater benefit to the economy than tobacco control measures. • In Malaysia manufacturers are required to print all six of a set of warning graphics including pictures of neck, mouth and lung cancers as well as gangrene and miscarriages. By 1 June 2009, all cigarette packs must include the health warnings. • Culture and infrastructure are key elements of tobacco control. In Pakistan, although there is no tar limit most people smoke mid-tar but generally restrictions are not enforced. On the other hand, Singapore is one of the strongest tobacco control regimes because rules are enforced; in January 2008, four retailers had their tobacco retail licences suspended for six months after the employees were found to have repeatedly sold tobacco products to under-age customers.