Ireland's smoking ban adds to the gloom at Gallaher

Shares in Gallaher slumped 2 per cent yesterday after the tobacco group warned of difficult trading in Europe, as tax rises and increased border trade took their toll, along with Ireland's ban on workplace smoking.

Shares in Gallaher slumped 2 per cent yesterday after the tobacco group warned of difficult trading in Europe, as tax rises and increased border trade took their toll, along with Ireland's ban on workplace smoking.

The company, whose brands include Benson & Hedges, Silk Cut and Mayfair, said its core UK market had been helped by a fall in cross-Channel trade, but other markets in the European Union had seen "significant declines" in duty-paid volumes.

In a trading update ahead of its interim results to the end of June, Gallaher said cigarette volumes had risen 6 per cent in the first five months of the year. However, it noted that the growth rate was helped by a weak first-quarter a year ago and the acquisition of KT Merkury, a Polish cigarette maker, in the second half of 2003.

Market volumes dropped 9.3 per cent over the period in Ireland, which imposed a ban on smoking in the workplace at the end of March. Gallaher attributed most of the fall to Ireland's above-inflation increases in duty, which it warned were likely to prompt an increase in non-duty paid, cross-border trade.

There were signs of an initial impact on sales volumes from the Irish smoking ban, Gallaher said, though it cautioned that it was too early to determine whether this was down to short-term buying patterns or because of longer-term changes in consumption.

In continental Europe, market volumes dropped by more than 13 per cent in Germany and 26 per cent in France during the five months. Germany, which accounts for up to 10 per cent of Gallaher's tobacco earnings, announced a hike in tax on cigarettes in March, adding €0.012 to the duty on each cigarette.

Volumes fell by 20 per cent in Germany in May alone, and Gallaher forecast further declines in the German market and downtrading from premium to lower priced brands.

The company said that higher prices this year would partly offset lower volumes in continental Europe, and forecast growth of 4 to 6 per cent over 2004 in its tobacco operations, in local currency terms.

"The trading statement has a cautious tone about it," Andrew Darke, at Williams de Broe, told Bloomberg. "As expected, the German tax increases have had a noticeable effect."

Shares in Gallaher fell 15.5p to close at 686p.