Friday, 21 February 2014

Tobacco companies advertise on TV for the first time in decades

This week saw the return of TV advertising by the big tobacco companies after being absent from TV screens for two decades. The big tobacco companies have now entered the e-cigarettes market and are throwing their bank balances behind TV advertising campaigns. E-cigarettes are not covered by current UK legislation against tobacco advertising and fall between the regulatory gaps. As such tobacco companies, such as British American Tobacco, are taking advantage. On Monday evening BAT's e-cigarettes brand Vype was advertised, with the slogan “pure satisfaction”.

A consultation on UK advertising rules for e-cigarettes is expected later this year, and could be as early as next month. The rules for print, TV and online advertising are currently unclear. Traditional cigarette advertising has been banned from UK TV screens since the 1960s while loose tobacco and cigar advertising was banned in 1991.

In the US e-cigarettes have been around for longer and are more widely known to consumers. Demand was strong in 2013 driven by early adopters. We believe high demand growth will be harder to achieve in 2014 as the products are moving into the mainstream. Therefore advertising will be more important to increase consumer awareness. To date 20 million smokers have tried e-cigarettes, however, only 25% of consumers have made repeat purchases and switched from traditional cigarettes to e-cigarettes.  E-cigarettes sales peaked in August last year, we believe because early adopters were not satisfied with first generation products.

In the US e-cigarettes have been advertised on TV for a couple of years. Both the Blu brand and NJOY brand have been advertised during the Super Bowl, one of the most expensive advertising slots on US TV, costing around $133,000 a second. Anecdotal evidence would suggest advertising in the US has been successful as Blu and NJOY enjoyed a combined 70% market share in summer 2013. According to the 2014 American E-Cigarette Etiquette Survey two-thirds of Americans (63%) say they would not be bothered by someone using an e-cigarette in close proximity.

According to the British Medical Journal, UK advertising and promotional spending on related smoking materials, which includes e-cigarettes increased from £1.7m in 2010 to £13.1m in 2012. This increase is likely to continue as the tobacco industry gets more involved. In 2013, British American Tobacco spent £3.6m in just two months to promote Vype.

Four TV adverts have already been banned in the UK by the Advertising Standards Agency (ASA) for not clearly identifying the product, including E-Lites, SKYCIG (owned by Lorillard), V2 and Ten Motives. The E-Lites advert featured a dancing baby and V2 was banned for implying it could be used as a smoking cessation device.

Tobacco companies on both sides of the Atlantic anticipate much tighter advertising regulation, and will adapt or stop adverts as and when required. Until then they will continue to take advantage of the lack of regulation.

At the end of 2013 the e-cigarettes market accounted for 1% of the global cigarette industry, accounting for $3bn of sales compared to the global tobacco industry of $700bn. However expansion could be rapid and one day e-cigarettes could replace cigarettes entirely. No wonder the big tobacco companies are trying to muscle in on the act.

Elaine Coverley, Head of Equity Research

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