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It seems that the leaders of New York City have been striving hard to make the city smoke-free. In fact, the Mayor Bill de Blasio of New York has reportedly issued a series of laws in April to reduce the number of smokers in the city over the next three years.

Per the Aug 28 bill, the minimum price for a pack of cigarettes will now be $13 in New York. Notably, a packet of cigarettes currently costs $10.50. The latest price hike has made New York the most expensive city in the U.S. for cigarettes, as declared by some officials in the Health Department stated in sources. In the past too, the mayor has resorted to price hike as a tool to restrict smokers. Smoking rate in the city has declined from 21.5% in 2002 to about 14.3% in 2015. The rate is expected to decline to 12% by 2020 due to this price hike, as anticipated by some city health officials.

The law was introduced in anticipation of making almost 900,000 smokers quit smoking as well as to reduce the number of retailers licensed to sell tobacco products in the city. Currently, about 8,300 retailers have a license to sell cigarettes.

The mayor is also seeking to ban the sale of all tobacco products in pharmacies, as a result of which pharmacy chains like Walgreens Boots Alliance Inc.’s (WBA - Free Report) Duane Reade and CVS Health Corporation (CVS - Free Report) will have to take cigarettes off their shelves. The new legislation also requires licensing of e-cigarette retailers and will force all residential buildings to have smoking policies, including banning cigarettes in common areas like hallways.

We note that these measures will severely dent businesses of tobacco majors including Philip Morris International Inc. (PM - Free Report) , Altria Group Inc. (MO - Free Report) , British American Tobacco p.l.c. (BTI - Free Report) and Vector Group Ltd. (VGR - Free Report) , which are already plagued by ongoing government restrictions related to selling and packaging.

If we look into the share price performance of these tobacco stocks in comparison with the industry, we note that except Philip Morris, all the other stocks have underperformed the industry that declined 5.6% in the past six months. While Philip Morris gained 5.5% and British American declined 4.3%, Vector Group and Altria declined 7.8% and 15.4%, respectively, in the same time frame.

Recently, the state government in India's capital directed Philip Morris and other tobacco companies to remove all advertisements in the city, warning them of legal action if they do not comply. Last month, the U.S. Food and Drug Administration (FDA) proposed to lower nicotine levels in cigarettes, as it is responsible for a number of health issues.

Governments around the world are imposing restrictions on tobacco companies which, in turn, are lowering cigarette consumption. The FDA has made it mandatory for tobacco companies to use precautionary labels on cigarette packets to dissuade customers from smoking. The European Union and the FDA have proposed a ban on menthol in accordance with the Tobacco Control Act. Per the act, menthol has an adverse effect on health and thus should not be used in any product.

Amid increasing government restrictions and declining smoking rates, the tobacco giants have introduced e-cigarettes and Reduced Risk Products to mitigate losses. Altria is expanding presence in the e-cigarette market steadily with its MarkTen and Green Smoke brands.

On the other hand, Philip Morris has been gaining from its iQOS smokeless cigarettes since its launch in November 2014. The marketing and technology sharing agreement between Philip Morris and its peer Altria Group is also boosting the business of both the companies amid declining tobacco volumes.

However, the FDA also imposed several restrictions on e-cigarettes. The FDA made it mandatory for all tobacco makers to seek marketing authorization for any tobacco product introduced after Feb 15, 2007. The law was extended to include e-cigarettes, pipe tobacco, cigars and hookah. The FDA has currently deferred its reviews for products like cigars and hookah tobacco until 2021 and e-cigarettes until 2022.

Bottom Line

While price hike and lower availability of cigarettes do help smokers to quit smoking, as seen in the past, the ban also creates a serious black market for these products, which can be detrimental to all tobacco companies.

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