The decades-long decline the cigarette industry will only accelerate if the group of eight Democratic senators pushing the Food and Drug Administration to ban menthol cigarettes is successful. While cigarette volumes have been falling every year, the decline in menthol cigarette volumes has been less and at times has even shown growth.
Congressional efforts to kill off a profit center for the tobacco industry is simply another way of trying to hurt the companies without having the courage to vote on an outright ban. And a regulatory end run will allow the politicians to achieve their goals and further insulate themselves from any fallout.
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Hurting less bad
But not all tobacco companies will be equally affected. Imperial Brands (NASDAQOTH: IMBBY), for example, the third largest U.S. tobacco company, owns two popular menthol cigarette brands, Kool and Salem, that it acquired from the merger of Reynolds American and Lorillard. Yet despite their presence in its portfolio, analysts at specialty banking firm Investec estimate that menthol cigarettes account for only around 5% of its total revenue.
Still, a ban won't be helpful for it. Imperial is struggling to gain market share against its rivals, and eliminating brands that are less resistant to smoker attrition won't help.
Conversely, Altria (NYSE: MO) has a menthol version of its Marlboro brand of cigarettes that at the time of the Reynolds-Lorillard merger was estimated to have an 18% share of the menthol market.
Marlboro, of course, is the single largest-selling brand of cigarette in the country, with a 44% share, accounting for 85% of Altria's cigarette shipment volumes. But if we use some available statistics, we can see just how much a menthol ban would hurt Altria.
According to the Centers for Disease Control, there are approximately 36.5 million smokers in the U.S., 30% of whom smoke menthol cigarettes, according to the Federal Trade Commission. That gives us about 11 million people smoking menthols, and considering Altria's 18% share of the market, it means it risks losing almost 2 million smokers to a ban. Some might turn to other types of cigarettes, and others still would find a way to get them on the black market, but at least one study found that as many as 40% of menthol cigarette smokers would simply quit.
A big bet gone bad?
As problematic as that would be for Altria, a ban wont be nearly as bad for it as it will be for British American Tobacco (NYSE: BTI), which, after acquiring Reynolds American in a $47 billion merger earlier this year, owns the most popular menthol cigarette on the market, Newport, which alone accounted for 44% of Reynolds' total domestic cigarette shipment volume.
BAT also has the third most popular menthol cigarette on the market, Camel, which has an estimated 12% share, meaning together with Newport's one-third menthol, it has a nearly 50% share of the menthol market. Therefore, it stands to lose as many as 5 million smokers from a ban, but in Reynolds' last annual report before being bought by BAT, it estimated that half of its $12.5 billion in revenues came from menthol cigarettes. That's obviously a substantial loss of revenue for BAT.
The group of senators pushing the ban argue in a letter to the agency that "it is time for the FDA to act on the substantial scientific data and use the authority provided by the Tobacco Control Act to remove menthol cigarettes from the marketplace."
The request comes some six years after an FDA scientific review found that "menthol cigarettes pose a public health risk above that seen with non-menthol cigarettes." But it stopped short of recommending an outright ban at the time. Now it's considering implementing one again, and if it did, British American Tobacco would pay dearly for having bought Reynolds American after it bet big on menthol.
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