Pestle for UK brewing industry

University Degree Business and Administrative studies

Tobacco industry is a widely castigated industry, which has periodically been subject to royal disapprovals, the whims of fashionable use, medicinal studies, smuggling, trade disputes, and bans. Nevertheless, British cigarette market is known to be the most profitable market in the world. There are two main companies that dominate UK cigarette industry, which control almost 90% of the market. So, the purpose of my essay is to undertake PESTLE analysis and identify the key opportunities and threats that British tobacco industry is facing and also undertake an evaluation of competitive environment using FIVE FORCES model.

POLITICAL - The current and potential influences from political pressures

Government stability - changes in government can lead to changes in taxation and legislation. Elections are a threat on tobacco industry as new legislation or governments may bring in higher taxes and higher prices

International stability - the international economy must be brought into consideration as a threat for tobacco industry sales and markets. The aftermath of 9/11 was an example of an economic downturn that affected the world market. If the world market is in a slump it is not usually the ideal time for a business to look at grand expansion.

Government policy - If taxation went up then it would increase the production costs meaning that their profit would go down

Government campaign against smoking – government appeals that numbers of deaths were linked to the addiction of nicotine and its cancer causing side effects. Sales are declining are threat for tobacco industry. The research shows that only 22% of Britons are smokers - down from 27% at the end of the 1990s - and two-thirds say they would like to give up (ONS).

ECONOMIC - The local, national and world economy impact

Exchange rates – are an opportunity and threat. Tobacco industry is affected by exchange rates when dealing with international trade, if the value of the currency falls in the country of a tobacco supplier this enables retailer to get more for their money or when importing the goods to their country,

Tax rates and excise duty – in the recent years the price of tobacco has risen much faster than the rate of inflation, with VAT, currently at 15%, also payable. Tobacco duty has gone up by 2% ...

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ECONOMIC - The local, national and world economy impact

Exchange rates – are an opportunity and threat. Tobacco industry is affected by exchange rates when dealing with international trade, if the value of the currency falls in the country of a tobacco supplier this enables retailer to get more for their money or when importing the goods to their country,

Tax rates and excise duty – in the recent years the price of tobacco has risen much faster than the rate of inflation, with VAT, currently at 15%, also payable. Tobacco duty has gone up by 2% at 22nd of April 2009 (Guardian,2009). Higher taxes are threat as people are buying less, cutting down smoking if price of cigarettes is high. from 1 of July 2007 VAT on nicotine replacement products was reduced from 17.5% to 5% which is also a threat. (Mintel, 2008)

Interest rates - can be both an opportunity and threat, a rise in interest rates means investment and expansion plans are put off resulting in falling sales for tobacco industry and their suppliers, consumers have less disposable income to spend on luxury products such as tobacco, low interest rates have the opposite effect.

Business cycle - if growth is low or negative consumer incomes tend to fall in periods of negative growth leaving less disposable income, consumer confidence in products can also fall if the economic mood, which is a threat

Disposable income – expansion and economic growth means people have more disposable income and spending more money on cigarettes which in an opportunity if country is heading to recession or is in recession, there is high unemployment and people have less disposable income and spending less money on luxuries, therefore sales are declining and it’s a threat.

Inflation – can be an opportunity and threat for tobacco companies. If there is inflation, that affects the cost of materials and therefore their profit would increase. Deflation has opposite effect.

SOCIOCULTURAL - The ways in which changes in society affect us

Population size/Demographics – are threat for tobacco industry. If the population size decreased then their would be less people to buy cigarettes therefore companies make less profit. According to the research most likely to smoke are people between age 20-34 so if population is ageing sales are declining.

Changes in the social set-up - more people are becoming educated and their awareness about the ill effects of smoking increases. Research show that number of people trying to give up smoking has increased from 20.6% in 2003 to 39.8% in 2007 (Mintel,2008) and sales are declining being a threat for tobacco producers

Levels of education – increasing awareness of the effects of cigarettes to health and fitness is a threat for tobacco producers. The public realised the harmful effects of smoking.

Peoples addiction - this is an opportunity to the company. After nicotine was deemed an addictive drug, cigarettes manufacturers use this addiction as leverage for growing their business.

Female and teenage smokers - while the awareness campaigns have reduced the smoking in males, there has been a trend in the rise of smoking among women and teenagers which is an opportunity for cigarettes manufacturers.

TECHNOLOGICAL - How new and emerging technology affects our business

New technology – is a opportunity for the industry to increase their sales. During the last few years has meant that increasing number of products can now be bought over the Internet and tobacco is no exception to this rule.

Internet – most of tobacco companies are turning to the Internet as a marketing tool, it’s their opportunity to promote their products and increase sales for example both Philip Morris and Imperial Tobacco Ltd. have launched interactive websites designed to build up databases of their customers.

Innovations – are opportunity to increase sales by offering various products, for different tastes i.e. menthol cigarettes.

New discoveries and developments - increased efficiency in production from new technologies has brought down unit costs, giving larger manufacturers opportunity for huge economies of scale

LEGAL - How local, national and world legislation affects us

Licensing – can be an opportunity. A reduction in licensing and permit costs would lower production costs for farmers, this savings are then passed on to the purchaser, price is going down and sales are going up.

Smoking ban – form 1st of July 2007, means people smoking less and sales are declining so it’s a threat for tobacco manufacturers. There has been a mixed response to the ban. Nearly one in ten have given up completely and have not started again. A further 8% did quit, but have resumed their smoking habit. (Mintel,2008)

24hour opening – opportunity to increase sales. In the UK it is compulsory for tobacco firms to have a licence, without the licence firms cannot sell cigarettes. 24h opening means ability to sell cigarettes all day and night

Restriction on age – it’s a threat for tobacco producers as leads sales to decline. The Government raised the legal age for buying cigarettes from 16 to 18 on 1 October 2007. Also retailers have been supported with the No ID, No Sale campaign by the TMA and the Department of Health

Environmental legislation – manufacturers are now obliged by law to observe environmental and packaging waste legislation. Companies failing to comply with these legislations are under threat of loosing their businesses or taking their license away.

ENVIRONMENTAL - The local, national and world environmental

issues

Recycling - members in this industry are becoming more ecologically conscious which is a threat as their expenditure on recycling rises. This takes in the form of packaging developments, tobacco producers’ main purchasing cost are packaging and raw material such as tobacco and energy.

Work disposal - members of tobacco industry need to carefully consider the methods in which they dispose of their waste as there are strict laws, if they do not follow these laws they may find themselves being sanctioned, which not only threats them financially but also tarnishes the reputation of the brand name

Environmental pressure groups – are threat for tobacco industry. Companies like Philip Morris should be aware of power of groups such as Greenpeace and Friends of the Earth. Brand image and customer bases are often irreconcilably tarnished due to the actions of these groups.

Pollution problems - the packaging must be carefully considered to make it as biologically degradable as possible, certain other materials can be very harmful to the natural environment, it’s a threat for tobacco producing companies as their costs may be rising but also an opportunity to promote themselves as environmental friendly company