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November, 2009

Closing the Gaps

British American Tobacco’s French subsidiary has announced that it will sue websites selling contraband versions of its brands. These counterfeit sales weren’t only a hit to BAT’s bottom line, but also deprived the French tax coffers of over €3 bn. Across the Atlantic, Philip Morris USA has worked to ban websites that sell illegally-imported versions of their brands (though legal for sales overseas by PMI), which can be sold at a deep discount to the highly-taxed store-brought cigarettes in the US. These sales do cut into PM USA’s profit margin (which in a volatile market, has remained remarkably calm), but also hurts the US government in the form of lost income.

PM USA has done well over the last few years - legislatively speaking - by working with anti-tobacco activists to push legislation that helps their business model. PM USA is currently supporting the Prevent All Cigarette Trafficking Act of 2009 (the “PACT” Act), which has passed the left-center controlled House of Representatives (not a natural support base for tobacco manufacturers) this past May. PACT is designed to prevent tax-evading sales of cigarettes and smokeless tobacco by remote sellers who operate via the Internet, mail or phone. PM USA’s interest is, of course, less about stopping virtual cigarette sales than it is in stopping cheaper foreign market brands from competing in the US. This legislative push follows on the heels of the PM USA legislative windfall giving the FDA oversight of tobacco products (and marketing) virtually ensuring PM USA’s dominance in the US market for the foreseeable future. This PM USA model is something we will see more of in the future: dominant manufacturers will work with anti-tobacco groups to help craft legislation that on one-hand will limit sales of tobacco, but on the other, secure the position of the market leader.

Expect more pushes by manufacturers to fight illegal versions of their trademarked brands. As taxes and regulations rise on cigarettes, so will the reward for the counterfeiters.

- E. D.

Tobacco International - November, 2009

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