Senate Approves FDA Tobacco Bill

The bill mandates stronger health warnings on cigarette packets and prevents the use of language such as "mild" and "low tar" that may imply that certain brands are less damaging to health than others. It also allows states to impose their own restrictions on the sale of cigarettes at convenience stores. Although the FDA will have control over the content of cigarettes, the bill prevents the organization from implementing an outright ban on nicotine, the addictive component of cigarettes. A panel will be established to investigate whether menthol cigarettes are more harmful than nonmenthol brands, but we expect menthol to be exempt from the broader ban on flavors in tobacco products.

We do not anticipate this legislation to alter the competitive dynamics of the tobacco industry in the short term. We think it could take the FDA several years to begin to write regulations, because setting up and staffing its tobacco unit will take time. In the long term, however, we expect the U.S. industry to evolve in a manner akin to other developed markets that have already implemented similar marketing restrictions. Evidence from Western Europe, for example, suggests that tighter marketing controls reduce the competitiveness among firms in the industry, leading to more stable market shares. With its dominant 51% share of the U.S. market, Altria's leadership position could become unassailable, while competitors with weaker brands will find it almost impossible to catch up. However, weaker competition on price should help to improve margins slightly throughout the industry.