Business review

Corporate governance

Financial statements

Other information

Global market overview

Value of the global tobacco market continues to grow

Global tobacco market Global marketplace

Estimated value of 450 billion Cigarettes account for around 95 per cent of the total market Around 5.5 trillion cigarettes produced each year Overall cigarette volumes (excluding China) declined by around 2 per cent in 2011 but the overall market value continues to grow Up to 12 per cent of global volume is illicit fake, smuggled or local tax-evaded

The global tobacco market is valued at around 450 billion and the industry produces around 5.5 trillion cigarettes a year. While cigarette sales in developed countries continue to decline slightly year on year, overall global market declines are showing signs of moderating. Recent trends indicate that individual smokers will consume fewer cigarettes each and smaller percentages of populations will smoke. However, sustained volume growth is widely predicted in emerging markets, driven by population growth and increasing disposable income. The biggest single tobacco market is China, where the industry is state-owned, with some 350 million smokers who account for more than 40 per cent of the global total consumed.

The four biggest international tobacco companies British American Tobacco, Imperial Tobacco, Japan Tobacco and Philip Morris International account for some 45 per cent of the global market, or around three-quarters of the market outside China. Tobacco companies face an increasingly competitive marketplace but the overall value of the global market continues to grow. This value is expected to exceed 500 billion by 2015, despite tighter regulation, global economic uncertainty and high unemployment levels in developed markets. Consumers worldwide are increasingly looking for and expecting real value, meaning that quality and innovation will both play a growing role in delivering market share.

British American Tobacco cigarette volume by region

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1 Asia-Pacic 27% 2 Americas 20% 3 Western Europe 19% 4 EEMEA 34%

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British American Tobaccos total cigarette volume for 2011 was 705 billion. Our estimated share of the global market was 13 per cent. The breakdown by region was: Asia-Pacific 191 billion; Americas 143 billion; Western Europe 135 billion; and Eastern Europe, Middle East and Africa 236 billion. For more information see our regional review on page 26.

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British American Tobacco Annual Report 2011

Business review

Corporate governance

Financial statements

Other information

Illicit trade

Increasing regulation

Cigarettes are among the most commonly traded products on the black market due to high profit margins, the relative ease of production and movement, along with low detection rates and penalties. It is a widespread problem that is made worse by regulatory policies in some countries. Estimates suggest that up to 660 billion illegal cigarettes are smoked every year. This has a negative impact on consumers, retailers, governments and tobacco companies. For consumers, counterfeit cigarettes mean no quality controls and no health warnings, while smuggled genuine products may carry health warnings that do not meet local government regulations. As illegal cigarette sales are effectively unregulated, criminals also have no qualms with providing anyone with their products, including underage smokers. It is estimated that governments worldwide are losing up to US$40 billion a year in excise and other taxes. Tackling this illegal trade effectively requires cooperation between the industry, regulators and enforcement authorities, backed up by the establishment of appropriate tax policies, strong regulation and effective enforcement.

Much of the tobacco regulation being proposed and introduced around the world is driven by the World Health Organisations Framework Convention on Tobacco Control (FCTC) protocol. However, most of these measures are not based on strong evidence that they are likely to reduce smoking. Indeed, small declines in legitimate companies tobacco volumes in recent years have been largely offset by the increase in illicit trade. Extreme regulation often has unintended consequences. For example, legislation to introduce plain packaging for tobacco products in Australia could damage the livelihoods of small retailers and make criminals lives easier. Counterfeit products could become easier to produce and non-compliant branded illicit products could become more attractive to consumers. Other measures, such as retail display bans and sudden increases in excise rates, can distort competition among tobacco companies and, in some cases, may result in consumers switching to cheaper illicit products. Overall, demand for tobacco products tends to remain fairly stable in the face of price rises. Further marketing restrictions, combined with existing brand loyalty, mean that major changes to the competitive landscape in the tobacco industry are unlikely for some time.

Deloitte report
In 2011, British American Tobacco commissioned a report by Deloitte to examine the intended and unintended impacts of packaging regulation. The report assessed 27 countries covering a period of 14 years and is one of the most comprehensive independent studies on tobacco packaging regulation to date. We commissioned the report in the absence of any comprehensive global studies on the impacts of tobacco packaging and we hope governments will study it and find it a useful contribution to the debate. The report revealed that neither increasing the size of health warnings on packs nor introducing graphic images had directly reduced tobacco consumption. It also recognised that the plainer the pack, the easier it is to counterfeit. You can read the report at www.bat.com/deloitte

Illegal cigarettes whos paying the price?

British American Tobacco produced a short film in 2011 called This is the man and made it available on its corporate website and via YouTube. The film illustrates how the black market in tobacco products is increasingly dominated by organised crime. Law enforcers say some gangs are also behind people trafficking, prostitution, gun and drug crime. They may even have terrorist links. Some regulatory policies could see an increase in illicit trade, so this film asks: Illegal cigarettes whos paying the price?

You can view the film at www.bat.com/theman or at www.youtube.com/WelcomeToBat

British American Tobacco Annual Report 2011

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