FDA Oversight May Benefit Major Tobacco Brands

One day after the FDA gained control of tobacco regulation, a new report by Fitch Ratings found FDA regulation will have intermediate and longer-term competitive effects on major players in the tobacco category. Not much is expected to change for the tobacco industry in the short term. However, changes are anticipated down the road, including compliance costs for industry participants, which will disproportionately affect smaller players because of the burden of additional fixed administrative costs.


In fact, larger industry participants with established brands are likely to benefit from potentially greater advertising restrictions.


“Given that today’s tobacco products are grandfathered into the legislation and tobacco products will continue to be sold in retail outlets, we do not expect any significant immediate effects on the sector,” said Christopher Collins, associate director at Fitch Ratings. “However, looking further ahead as more restrictive advertising limits are imposed on all tobacco products, not just cigarettes, the brands with large market share will maintain those shares.”


Longer term, the new legislation could lead to an expedited release of modified or reduced-risk tobacco products being marketed by the tobacco industry. Fitch believes that the reduced-risk products will face a number of hurdles, including current tobacco users continuing to use today’s tobacco products despite the benefits that these modified-risk products offer.


Another expected obstacle is the formal introduction of these new reduced-risk products, which may prove difficult as current advertising and sale restrictions for tobacco products remain in place and may be enhanced by the FDA.


Smoking bans are another complication for these new products, as the three largest cities in the U.S., New York, Chicago and Los Angeles, currently have comprehensive bans in effect that prohibit the use of smoking products. New products also will have to be socially accepted in order for them to reach new customers.


“Nonetheless, creating a regulatory framework particularly for the introduction new products may revitalize the U.S tobacco industry, where the consumption of its primary product, cigarettes, has been declining for over a decade,” said Wesley Moultrie, senior director at Fitch Ratings.


Should modified-risk products achieve acceptance and gain tobacco product market share, sizeable shifts in the tobacco industry are possible. First-movers, including Altria Group, Inc. and Reynolds American Inc., will most likely benefit if these products are successful.


The full report, ‘FDA Regulation Revisited: Anticipated Effects of FDA Oversight of Tobacco,’ is available on the Fitch Ratings Web site, www.fitchratings.com. The Senate voted overwhelmingly yesterday to pass the Family Smoking Prevention and Tobacco Control Act, giving the FDA power to control tobacco regulation. A White House spokesman, Reid H. Cherlin, said on Thursday President Obama, who was a co-sponsor of the bill when he was in the Senate, would sign the legislation when it reached his desk.


Source: Chicago Business Wire




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