Why I'm Not Concerned About The Beverly Hills City Council Banning Tobacco Sales

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Includes: BTI, IMBBY, MO
by: Daniel Thurecht
Summary

The assault against tobacco usage recently took another turn with the Beverly Hills City Council banning sales in their jurisdiction from 2021.

This is the first of it's kind in the United States and could mark the beginning of new type of anti-tobacco regulation.

Regardless of whether this ban spreads to other city councils, I believe the impact for the industry is negligible.

Despite this, it provides investors a mini wake up call regarding the possible future risks from increased government regulations.

Introduction

It appears as though the assault against tobacco usage has filtered down from Federal and State levels to the City Council level, with the Beverly Hills City Council approving a ban on the sale of most tobacco products. After moving past the initial fear surrounding the word “ban”, I believe this move will again prove to be a toothless tiger and thus have virtually zero impact on Altria (MO), British American Tobacco (BTI) and Imperial Brands (OTCQX:IMBBY). Naturally this development isn’t of any particular interest for Philip Morris (PM) since their sales are completely located outside of the United States.

Current Situation

It’s believed this move is a first and once it becomes effective in 2021 the sale of tobacco products and e-cigarettes will be banned unless sold at high-end cigar lounges and hotels. Currently it’s unknown whether this ban will continue as a standalone event, however, I believe it’s quite likely other city councils will be following suit soon enough. Regardless, as I subsequently explain I don’t believe this latest development is anything to fear, nor does it materially alter the investment thesis for the tobacco companies.

Why I’m Not Worried

I’ll begin by addressing the simplest and most obvious observation, Beverly Hills doesn’t even have 40,000 residents. This makes their consumer market insignificant and thus even if all of their sales were completely removed it wouldn’t be noticeable at a national level. Although here sits the crux of my argument, it’s virtually guaranteed that the residents of Beverly Hills frequently travel outside of their small city and thus can still easily purchase their desired tobacco product elsewhere. This renders the effectiveness of the ban as essentially alike to green washing or dare I say, virtue signalling.

Proponents of the ban would likely point to the notion that other surrounding city councils will probably follow suit with their own bans and thus mitigate this easy method of circumvention. Even if this scenario eventuates I highly doubt it will have any material impact on the total volumes or earnings of the tobacco companies and if anything it will prove to be boom for the grey and black markets. Providing there are sub-markets that still freely allow adults to purchase tobacco products and there is still demand arising from other banned markets, there will be an economic incentive for people to purchase in the former to sell in the latter. Granted the extra marginal black market cost and general undesirable situation could lower demand, it’s important to remember this would only occur in an extreme scenario.

Although it’s partly outside the scope of this article, I could see these types of bans actually increasing underage smoking rates as the less scrupulous people reselling tobacco products are more likely to be less concerned if their customer is 16 or 21 years old.

A final aspect to consider is how many city councils could possibly follow their lead and implement their own bans on tobacco sales. I suspect the answer largely depends on the local smoking rates, the general political persuasion and socioeconomic status. It’s no surprise this ban has occurred in a fairly politically left-leaning area that has some of the lowest smoking rates in the United States. Whilst I could certainly see this type of ban expanding through other areas with similar demographics, I highly doubt it will sweep across the entire United States. It’s important for investors to remember that there are a very significant number of politically right-leaning areas that have higher smoking rates. I’ve included three key graphs for any readers, likely outside of the United States, to illustrate this dynamic. It quite apparent that areas with higher tobacco use are often more politically right-leaning and or are more rural.

Map of current cigarette use USA

Image Source: Centres for Disease Control and Prevention.

USA 2016 Presidential Election Results

Image Source: Politico 2016 Presidential Election Results.

Tobacco Usage By Area

Image Source: Centres for Disease Control and Prevention.

Conclusion

Since it appears as though the anti-tobacco movement is alive and well, it’s important that investors continue monitoring events and are aware of the risks posed from possible future government regulations. Whilst this latest development is unlikely to impact the future of the industry in any material manner, further regulatory moves may prove more potent. If anyone is interested in my views on the FDA’s much more notable proposed menthol ban, please see this previous published article.

Disclosure: I am/we are long Mo, BTI, PM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.