Operating profits in the global tobacco sector will decline this year, but look set to rebound in 2021, ensuring a stable outlook for the industry, according to Moody's.
In a report on the tobacco industry, Moody's said that it expects current market conditions could lead to further investment into alternative products, 'accelerating the industry's transformation'.
In its report, Moody's said that the long-term impact of the coronavirus on tobacco consumption is 'too early to gauge', suggesting that tobacco sales could decline due to reduced demand, or alternatively that consumers could switch to lower priced products.
Elsewhere, tobacco regulations may become 'increasingly restrictive' in a post COVID-19 world, or regulators might delay the development of risk-proportionate regulatory frameworks.
In general, Moody's expects tobacco demand to remain 'fairly stable' over the next two years, albeit impacted by declines in duty-free sales, manufacturing and supply chain disruptions and increased currency volatility.
It said that while cigarette sales volumes are likely to keep falling, price rises will offset the impact of these declines.
Traditional cigarette volumes will decline around 5% to 6% in the US and 2% to 3% in the rest of the world (excluding China) over the next 12 to 18 months, with mid single-digit price increases more than offsetting volume declines.
At the same time, alternative product sales are set to grow, picking up the pace again next year following a slow 2020.
The temporary closure of IQOS stores due to lockdown measures, coupled with tighter regulatory scrutiny of vaping, may impact user acquisition however, according to Moody's, while increased regulation will create a barrier to entry and entrench incumbents' market positions.
As to the business outlook for major manufacturers in the tobacco industry, Moody's said that leverage ratios will 'continue to improve despite high dividend payouts and economic slowdown. Dividends will remain high and absorb most operating cash flow.
'However we expect companies to use free cash flow and available cash balances to repay pending debt maturities.'
© 2020 European Supermarket Magazine – your source for the latest retail news. Article by Stephen Wynne-Jones. Click subscribe to sign up to ESM: The European Supermarket Magazine.