- Despite strong regulatory and legal challenges, tobacco brands remain robust
- Applications in China now make up over half of global tobacco product filings
- Middle East and Africa set to be the biggest cigarette smoking markets by 2025
In this week’s World Trademark Review industry report, we shine a light on trends in the tobacco sector, reviewing the performance of the top brands in this field and analysing the broader trademark landscape that they operate in. We also reveal how brands are adapting their filing strategies in the face of regulatory political and societal challenges, such as the rise in vaping and the spread of plain packaging.
Unique challenges for a highly resilient sector
Given the consumer health issues surrounding its products, the $700 billion tobacco industry is mired in controversy and frequently finds itself facing regulatory pressure from governments and other authorities. Against this backdrop, a number of countries have made a concerted push to limit the proliferation of tobacco products, with increased tax rates, tougher regulations and stricter legislation around sales and advertising all contributing to the year-on-year decrease in sales of tobacco in developed countries. The industry is often embroiled in protracted legal battles too, and companies have been hit by several large lawsuits in recent years, including a case in Canada in which the largest damages award in the country’s history was handed out.
Despite this, ‘Big Tobacco’ – which consists of the five major companies – is very much thriving. Population increases, improved sales in emerging markets and a drive to augment profitability through pricing have all helped to offset losses and maintain the economic performance of the leading brands. Additionally, as the market is dominated by a small handful of companies – including Philip Morris International, British America Tobacco, Imperial Brands, Altria and Japan Tobacco – this has made the barrier to entry very high. This dominance protects market share and, in turn, has a direct impact on brand strength.
As a corollary of the success of the industry over the last year, combined with a relatively small universe of companies, nine of the top ten tobacco brands have increased in brand value over the past year:
Top ten tobacco brands by brand value (Brand Finance Tobacco 50 2017):
At $32.5 billion, Marlboro also reached an all-time high for brand value in the tobacco industry, while the huge 33% jump in brand value by Indonesian brand Sampoerna saw it break into Brand Finance’s top 500 list of the world’s most valuable brands.
Clearly, the tobacco industry – at least among its principal players – is proving highly resilient, both generally and from a branding perspective. However, there is little doubt that further challenges lie ahead, especially as the march of plain packaging continues across the globe and sales of cigarettes dwindle. And, with the advent of new, less harmful smoking products in an increasingly health-conscious market, we may very well be seeing the start of a pivotal transformation of the entire industry.
China – the dominant market for tobacco brands
Although tobacco companies have so far managed to navigate the legal and regulatory challenges thrown their way and remained profitable, there’s no denying that ever-decreasing cigarette sales will prove to be a hindrance to their current trajectories in the longer term. In 2016, for the first time in decades, cigarettes as a proportion of global tobacco sales fell below 90%. The Federal Trade Commission of the United States has also shown a prominent downwards trend in sales in the last two decades, with the figure in 2015 being slightly more than half of that in 1995.
China tells a similar story, with tobacco sales dropping last year for the first time in over 20 years. This is especially telling, given that the country had previously gone against worldwide trends, with the amount of tobacco sold increasing, as sales decreased elsewhere across the globe. In fact, it is predicted that China will lead the way in declining consumption in the coming years. Its government has embarked on a drive to reduce smoking through policy measures, increased taxes and legislation banning where products can be advertised.
In spite of this, China is still currently by far the largest cigarette market with over 300 million smokers. Reflecting this, filings in Class 34 (tobacco and smoking products) in China have continued to gain pace, as seen below.
Number of filings in Class 34 in China – 2010-2017 (view full-size here):
In fact, filings in China have shot up so rapidly that they now encompass more than half of the total filings in Class 34 around the world (see graph below). The tobacco sector is unique in that it is one of the few (if not the only) industries that can be tracked from essentially a single trademark class. While it would initially seem that the market is steadily growing in terms of trademark applications, there is actually a noticeable downward trend in overall filings, if you exclude filings in China.
Number of filings globally in Class 34 – 2010-2017 (view full-size here):
It should be noted that Class 34 includes not only cigarettes and traditional combustible products, but also other products that are rising quickly in popularity, such as e-cigarettes and heat-not-burn tobacco products. Hence, the graph above emphasises how important China is as a market for tobacco brands. The reason for the growing number of Class 34 applications there is partially due to the exceedingly large consumer base in China. However, it is also likely influenced by the fact that local e-cigarette manufacturers – which make the majority of the world’s e-cigarettes – are making a move in the lucrative domestic market. Higher taxes and more stringent health and safety requirements abroad, as well as increasing competition from foreign manufacturers, have made competing on a local level more appealing. Additionally, while regulations have tightened on cigarette smoking in China, the rules governing e-cigarettes remain comparatively lax.
Apart from the US and China, other markets worth paying attention to are the UK, Russia, Brazil, Vietnam, India and Indonesia. While India is still a large market, the Global Adult Tobacco Survey shows a steep decline in consumption; attention from rights holders also appears to be waning as filings in Class 34 have decreased in recent years. With four of its top ten brands being tobacco brands, Indonesia remains a considerable market, chiefly because of its noticeable lack of regulation in comparison to other countries in the Asia-Pacific region – but even there demand may be wavering. The UK is noteworthy for having the steepest rise in Class 34 filings for a mature market; the wild success of e-cigarettes has very likely played a major role in this.
It is also interesting to note that the list of countries forecast to have the highest percentage of smokers in 2025, according to a report by the World Health Organization, is dominated by countries from the Middle East and Africa (Nauru and Kiribati are also included in the top ten, but they show a predicted decline in smoking rates compared to 2010). No clear trademark filing trends emerge from these countries, which suggests the Middle East and Africa are not – yet at least – target markets for most rights holders. Instead, greater consumption is likely to be linked to a smaller number of popular brands. Indeed, Big Tobacco evidently sees the potential in these regions, which is why some multinational tobacco companies are vehemently fighting against governments in Africa to prevent smoking-related regulations being put into place.
Percentage of smokers in 2010 and 2025 (view full-size here):
Perhaps the greatest future challenge for tobacco brands is the spread of plain packaging, which prevents tobacco companies from branding their products with distinct marks, images and fonts. Since plain packaging laws first came into force in Australia in 2012, multiple countries have followed suit. Last month, Ireland became the fourth country to bring this into effect, joining Australia, France and the UK. Many others have plans to do so. The key players in the tobacco industry have attempted to put a halt to this, based on the arguments that it violates their IP rights and that it will make it easier to counterfeit tobacco products – although both claims have been contested, and to date, failed to stop the spread of implementation.
It is true that the tobacco sector is heavily affected by illicit trade – it often comes out as the top product category in the trade of fake goods – but that has not prevented it from suffering defeat after defeat in the fight against the adoption of plain packaging rules. Australia’s reported recent victory at the World Trade Organization (WTO) may have been the final nail in the coffin, since the tobacco industry had hoped the five-year dispute about whether plain packaging laws constituted an illegal barrier to trade would turn the tides in their favour; the decision has instead been seen as the go-ahead sign for other countries around the world. Rights holders in this space must therefore prepare branding strategies that can adapt to plain packaging rules. In the meantime, while the spread of plain packaging gathers pace, countries that have yet to adopt it may be valued more by tobacco brands.
In terms of how rights holders have reacted to plain packaging laws, it is worth pointing out that, contrary to what one would expect, Class 34 filings in Australia rose sharply after the new law came into effect:
Number of filings in Class 34 in Australia (split into terms used for ‘traditional’ and ‘electronic’ cigarettes) – 2010-2017 (view full-size here):
What is immediately apparent is the abrupt increase in filings for terms related to e-cigarettes, which have since remained at a relatively consistent level in the following years. Concerning the sharp increase for traditional cigarettes in 2013, David Stewart, principal at Williams + Hughes, notes that “tobacco companies are still permitted to use trademarked names under the legislation, but only if they are registered, so this would have led to a flood of filings”. Agreeing with this, Roger Green, principal at Watermark, adds that the reason could be two-fold: “Traditional cigarette manufacturers may be filing more trademark applications for word marks, rather than relying on their labels, which would no longer be apparent with plain packaging. Smaller companies and manufacturers from Asia countries may also have seen an opportunity to break into the Australian tobacco market, which has been historically dominated by Big Tobacco, after the introduction of plain packaging law.” He goes on to say: “Although Australia has won the dispute at the WTO, I do not expect the number of filings to drop sharply the next year. Those other factors are still in play, and while trademark filings for traditional cigarettes may continue to gradually decline, the filings for electronic cigarettes may conversely increase at a steady rate in the following years.”
The rise of vaping – and brand repositioning
Notwithstanding Big Tobacco’s robust profit margins over the last year from cigarette sales, there has clearly been an unprecedented shift away from traditional tobacco products. Ever-growing pressure from individuals, health groups, international organisations and governments has undoubtedly effected a change in how major tobacco brands want their brands to be perceived. Philip Morris International has made headlines for its stated commitment to build ‘a smoke-free future’. In a similar vein, Imperial Brands changed its name from Imperial Tobacco Group, distancing itself from its main product line, stating that the new name “better reflects the dynamic, brand-focused business” it has become. However, these moves have been met by some with scepticism, who have pointed to the disconnect between the branding message and the continued active promotion of traditional cigarettes.
As discussed above, the e-cigarette market has grown dramatically, in large part due to the fact that e-cigarettes are purported to be 95% less harmful than smoking tobacco. As an industry, it is expected to be worth $50 billion by 2025. In the UK, where uptake of vaping devices has been faster than anywhere else in Europe, a survey has found that more than half of e-cigarette users have quit smoking tobacco, making it a natural market for tobacco brands to target – and the leading companies have done so. It should come as no surprise then that filings with the term ‘vape’ and ‘vaping’ have escalated since 2010:
Number of trademark filings globally with the term ‘vape’ or ‘vaping’ – 2010-2017 (view full-size here):
In addition to vapour products, tobacco companies have made significant inroads with heated tobacco products (devices that heat rather than burn tobacco). Examples of the heat-not-burn devices include Philip Morris International’s IQOS and British American Tobacco’s Glo, both of which have experienced strong demand. The outlook for heated tobacco is certainly promising.
From the diversification of filings by class, it can be seen which companies have led the way in adapting to these new markets. In addition to Class 34 for traditional and electronic cigarettes, Class 9 (computers and scientific devices) would be used for batteries and chargers, while Class 11 (appliances) would be used for vaporisers. The largest tobacco companies appear to have begun filing trademarks in these new classes at roughly the same time (in the 2011-2012 period), but it is evident that British American Tobacco and Philip Morris International have quickly taken the lead in both absolute filing numbers and based on the proportion of filings in these new classes (see graph below). Japan Tobacco has even recently conceded that it has already lost ground to both companies in the next-generation smoking market.
Proportion of filings by class for British American Tobacco – 2011-2017 (view full-size here):
For emerging and established brand owners alike, the market for new tobacco and tobacco-free products is certainly alluring, but it is not without its own set of challenges. Building a strong brand in this area can be tricky, not least because of the high number of businesses and manufacturers already trying to break into the market. Even multinational tobacco conglomerates are having to work from the ground up as they develop new brands, such as with IQOS and Glo, in an attempt to dissociate themselves with the image of traditional tobacco smoking. Moreover, as the market for e-cigarettes and other related products continues to mature, with rising popularity and more research being conducted about their long-term health effects, regulation around their sales, manufacture and advertising will likely be tightened around the world. Just this week, an e-cigarettes inquiry has been launched in the UK, which will examine their impact on health, the suitability of regulation and the financial implications of the e-cigarette market on business and the National Health Service (NHS).
There is also the issue of infringement, as many e-cigarette companies have attempted to build their brand image by using the trademarks of other well-known companies. In particular, the widespread use of flavoured liquids (known as e-liquids) in e-cigarettes has meant well-known trademarks from the food and beverage industry (such as Skittles and Jack Daniel’s) are commonly used by sellers (often without permission). This is something that brand owners outside of the tobacco sector should be keenly aware of, especially for those in the food and drinks industry, as there may be both opportunities and risks.
While traditional cigarettes are far from a dying breed of product, the tobacco industry is now in a period of dramatic change. Strong demand has arisen for new methods of tobacco (or no tobacco at all) consumption, especially in developed nations, while leading brand owners have begun to distance themselves from tobacco smoking. In addition, the introduction of plain packaging in recent years has proved to be a challenge that tobacco companies have failed to overcome. Meanwhile, traditionally dominant smoking markets are seeing their first fall in smoking rates in decades, with countries in the Middle East and Africa set to take their place.
The tobacco industry, then, is one full of opportunities: for major tobacco companies this will come in the form of modernising their historically controversial brand image, while new and smaller rights holders can hope to establish a position in markets that had previously been ruled by Big Tobacco. For their advisors, trademark work creating and protecting both established and new brands will continue for the foreseeable future.
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