EFFECTS OF TOBACCO BILL 2009

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INTRODUCTION

On June 2009 the senate passed unanimously the Tobacco Bill 2009, a legislation that meant that now the tobacco industry will be regulated by the food and drug administration (FDA). According to wall street journal, this new legislation was intended to restrict and regulate the packaging and advertising of the tobacco products. The law was meant to control the tobacco industry by giving the food and drug administration power to make legislations that will regulate the tobacco industry.

GOVERNMENT DECISION

Under this law the FDA will set the standards of the tobacco products and also ban some of the chemicals that are used in making tobacco products. According to New York Times, FDA is expected to open an office that will regulate the tobacco industry. This new office will be maintained with fees from tobacco companies. In this new regulation, FDA will have the power to change the existing products and also ban those products that will affect public health negatively.

The FDA will have authority to impose a ban on any tobacco product advertised within one thousand feets of learning institutions and playgrounds within a period of fifteen months. It also allows a ban of the product if the product advert gives any information that is likely to mislead the smokers for instance a promise that product is safe while in the reality it is not. The law also requires tobacco companies to make new graphic labels that have a warning occupying almost fifty percent of the cigarette packet by 2012. These packages must be approved by the FDA before their use.  In order to minimize the smoking among the youths, a huge penalty will be fined to anyone selling the tobacco products to those less than 18 years. The new legislation is expected to affect all the company in the tobacco industry through reduced sales as result of restricted sales of their products.

The new legislation was praised by many groups that felt that this new legislation will minimize the effects of tobacco related illness that are on increase in the country.  It is believed that about 400, 000 people die in each year as  a result of illness that are related to tobacco smoking such as lung cancer. The groups that advocate for antismoking such as ACSCAN[1] and Altria Group were loudest in praising the senate and congress for that new law. However there was an opposing group to this new legislation that argued that the law is unfair to the tobacco industry. They argued that the new legislation will lead to new bureaucracy in the government and unfair benefits to Philip Morris which is company that have a big share in the sale of cigarettes in the country. The critics also felt that the new law hinders small firms from bringing in new products.

GENERAL BUSINESS REACTION

The tobacco bill 2009 is expected to affect the corporate business in many ways. The advertisement industry was opposing the bill as a result of the consequences they were expecting to face. According to Vranica and Adams (2009), the new bill was expected to reduce the number of advertisements that tobacco companies makes through marketing agencies such as TV, radio, newspapers, magazines and other advertisement channels. The advertisement industry was already going through strict scrutiny from the government which has led to the loss of revenue. The new bill will therefore reduce the profit from the industry as the values of sales continue to decline. For instance, Lorillard Company had planed to use $ 12 million on their magazine advertisements during 2008/2009 financial year. With the new tobacco bill this amount will be diverted to other expenditures thus reducing revenue in the advertisement industry. According to these two scholars, the tobacco companies in US spent about $ 78.4 million to advertise their products in 2008 and the amount was expected to increase as the competition become stiff among the tobacco companies.

Tobacco industry is another industry that is expected to be heavily affected by the new legislation. The new bill establishes an independent centre at FDA that will be responsible for overseeing tobacco sales, product claims, labeling and advertising. In order to establish and sustain this centre, the new bill imposes some fees on all the tobacco companies. (Wechsler, 2009) This fee was expected to begin with $ 85 million in 2009 and increase to $ 712 million each an every year. This fee will be a huge burden to the tobacco companies which will increase their expenses. According to Hoffman (2009), the new bill will start taxing money that tobacco companies pay on advertisement. As per the taxation rule,  all companies are not taxed on the amount spent on advertisement and advertisement fees is taken as an expense that is subtracted from profit before the tax is calculated. This new law will be discriminatory to all the drug manufacturing companies for they will be required to pay tax on their advertisement expenses which other companies from other sectors will not be required to pay. This will be against first amendment[2] and will stop the drug manufacturing companies to claim a deduction in tax for the money spent on advertisement.

According to Briant (2008), the new tobacco bill will put the future of the tobacco industry in jeopardy because all these restrictions in the new bill will stop investors from investing in this industry and those who are in the industry already will not be willing to open new stores. The bill also seeks to ban all types of flavors in the cigarettes apart from menthol which will make them lose their taste and therefore not pleasing to the consumers. This will also likely increase the activities of black market as consumers look for the products that are pleasing to them.

SPECIFIC BUSINESS REACTION

R.J Reynolds Tobacco Company is one of the leading companies in the US tobacco industry. The company has been in the industry for many years and therefore it is fully established in the tobacco market. The passing of the Tobacco Bill 2009 has affected the operations and the earnings of the company in many ways. In September 2009 the company together with other small companies filed a case against FDA claiming that prohibition of the tobacco company to make any statement about their products will be unconstitutional and that the approval of the products by FDA will mean they are safe for consumption. This case was meant to amend the new law but it was not successful.

However the company has come up with new strategies in order to minimize the loss of revenue due to these new restrictions. For the first time the company has started listing the ingredients of their products on the packets which have been kept in secret for long time.  This move will help their customers to be aware of what they are consuming which in away will improve the loyalty of their products’ consumers. The company has also introduced new products which are smokeless in the tobacco market. The latest product in this company is ‘Orbs’ which has cinnamon and mint flavors. This action will help the company to meet their sales targets. The company has also reduced the prices of their products where they have cut the cost of the advertisement due to the new restrictions enabling it to save on the advertising expenses. Low prices have enabled the company to maintain their market share despite the new tobacco legislation.

ANALYSIS

The Tobacco Bill 2009 was meant to minimize the number of illness and deaths resulting from tobacco related ailments. Though the new rule has achieved that goal in the last one year, its impact has also been felt in the business world and more so in the tobacco and advertisement industries. These two sectors have lost much revenue as a result of restricted business environment which have affected their industries. The new law has forced these companies to adjust their way of trading in order for them to survive in the market.  The expected results can now be seen as many tobacco and advertising companies report low profit than previous years. The government should therefore be in a position to balance the two ends (public health and business) in order to cater for the interest of all parties concerned.

CONCLUSION

Government policies will affect the corporate world either negatively or positively. This is evident in the case of Tobacco Bill 2009 which has affected the tobacco industry in many ways. The companies are forced to change their strategies in order to thrive in the market. So it is important for the government and other policy makers to consider the benefits and costs of the rules they make.

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