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New York Hides its Cigarettes

Zacks Equity Research

The shops in New York will no longer be allowed to display cigarettes on the shelves of their stores, per a plan by the mayor of the city. The plan also compels shops which derive less than 50% of their revenue from selling cigarettes to keep tobacco products away from public view in cabinets, drawers, under the counter, behind a curtain or in other concealed spots.

New York City, which has the reputation of levying the highest cigarette taxes in the country, is also going to be the first city in the U.S. where public display of cigarettes will be banned. Such a ban, however, already exists in Iceland, Canada, England and Ireland.

Anti smoking advocates like The American Cancer Society, Cancer Action Network, the American Lung Association, other anti-smoking groups and several City Council members hailed the proposal, as the measure will dramatically reduce the growth rate of the city’s smoking population.

Anti smoking protagonists are of the opinion that seeing the tobacco products shelved in the shops every time they visit would only increase the desire to try the product.

However, this will pose a problem for shops and tobacco companies like Altria Group Inc. (MO), as keeping tobacco products under cover will inevitably reduce the sale of cigarettes to a considerable extent. Adding to the woes of the tobacco distributors, the price per pack of cigarette is already the highest in the city. Altria raised its voice against the decision of the mayor, saying that the law was overreaching.

The tobacco industry is having a tough time as governments all around the world are imposing restrictions on tobacco consumption. While the Food and Drug Administration (:FDA) has passed a rule compelling tobacco companies to print thought-provoking images on cigarette packs inducing smokers to refrain from smoking, governments of Britain, Australia and New Zealand have made plain packaging mandatory for cigarette packs.

Moreover, weighted average state cigarette excise tax increased at a compounded annual rate of about 10% between 2004 and 2010. The scenario has improved slightly due to mass protests against proposals imposing tax burdens on smokers. The compound tax growth rate has slowed down a little in the past two years, following the protests. However, the cigarette industry continues to carry a heavy tax burden. The industry has been seeing a decline in shipment volume for the past several years due to unfavorable excise taxes and growing awareness worldwide.

Tobacco companies are resorting to cigarette alternatives, trying to reduce the harmful effects of tobacco. In May 2011, Philip Morris International (PM) bought the patent and global rights to an aerosol nicotine-delivery system for the delivery of nicotine to lungs without cigarette smoking.

British American Tobacco plc. (BTI) also created a subsidiary called Nicoventures focused on nicotine alternatives. In 2009, Reynolds American Inc. (RAI) purchased Swedish company Niconovum, whose nicotine gum, pouches and spray help people give up smoking.

While Altria currently carries a Zacks Rank #2 (Buy), Philip Morris and Reynolds American carry a Zacks Rank #3 (Hold). However, British American Tobacco holds a Zacks Rank #4 (Sell).

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