30/10/2012 11:31 GMT | Updated 30/10/2012 11:31 GMT

Fakes Trade Hitting Tobacco Profits In Austerity-Hit Countries

Cigarettes giant Imperial Tobacco has reduced the value of its Spanish business by £1.2 billion writedown after austerity-hit smokers turn to black market fakes in a bid to reduce the cost of smoking.

The legal tobacco market has shrunk by 10% in Spain over the last year, said Imperial

“Economic conditions remain difficult in Spain; high unemployment and increasing government austerity measures are placing further pressures on consumers and the duty paid tobacco market, with illicit trade a growing problem,” the group continued.

It wasn't all bad news though, as the recession has also delivered a boost for sales of fine cut tobacco, as more smokers choose to roll their own cigarettes.

Imperial Tobacco revealed its pre-tax profits halved in the year to 30 September from £2.2bn to £1bn following an increase in restructuring costs.

Group revenue dipped to £28.6bn from £29bn in 2011 as income in a number of European countries, including Germany and Spain, and the US, fell.

Alison Cooper, chief executive of Imperial Tobacco, said the company’s decision to invest in premium key brands such as Davidoff, Gauloises Blondes, West and JPS was paying off, as the group was able to increase prices for wealthier smokers in Western Europe and the US.

“We're generating high quality growth by investing in total tobacco brands that will deliver long-term sustainable sales. Revenues were strong across the portfolio and I'm particularly pleased with the excellent performances from our key strategic brands Davidoff, Gauloises Blondes, West and JPS, with volumes up 7% and revenues growing 13%,” Cooper added.

Despite the £1.2bn writedown, analysts continue to back Imperial, with Investec's Martin Deboo saying: "We expect this to be a mild embarrassment to Imperial... but in our view this is really a case of the accountants catching up with what the market discounted long ago. Spainish profits were ahead 6% in the full year report, in line with our forecast."