US / EU
According to Moody’s Investors Service, the US and European tobacco industry will see a rise in operating profits in 2016. The rating agency’s outlook on the industry is stable.
“Operating profit is set to grow 4-5% for both the US and European industries during 2016, but cigarette sales volumes are also set to fall by about 4% in the US and Western Europe,” said Nancy Meadows, a Moody’s vice president - senior analyst. “Moreover, the expected fall in sales volume could accelerate in the US if e-cigarette sales see stronger-than-expected growth, whereas in Europe, the pricing environment remains supportive, reflecting stable macroeconomic conditions.”
Within the US industry, profitability is still at the higher end of the consumer products spectrum due to strong pricing flexibility given the low price elasticity of the tobacco category, according to “Tobacco – US and Europe: 2016 Outlook – Stable on Steady Operating Profit Growth.”
On the other hand, margins are also flat to slightly down because of increased investments in marketing, promotion and innovation. At the same time, the impact of investments in new products will be offset by cost cutting and the elimination of excess capacity following the completion of the Reynolds American-Lorillard merger.
Moody’s notes that the US tobacco industry’s exposure to litigation risk will continue to moderate as the number of class-action cases keeps falling. Meanwhile, regulatory pressures have eased, though a degree of uncertainty remains.
For the European industry, strong pricing in Western Europe will continue in 2016, although sales volumes will stay under pressure due to price increases. Cash flow will remain strong, and negative foreign-exchange impacts on earnings, after peaking at around 15% in 2015, will ease in 2016, reflecting a moderation in the pace of the appreciation of the US dollar and the British pound.
Moody’s further notes that the European tobacco industry will face an increase in regulatory pressures with the implementation of the EU Tobacco Products Directive, which includes a rise in pictorial health warnings and a ban on sales of 10-packs to deter young consumers from buying smaller, more affordable packs.