The tobacco companies argue that plain packaging will commoditize tobacco, meaning that the only way to compete is on price which will lead to price reductions which in turn will then lead to increased demand.
British American Tobacco Australia’s website suggests that plain packaging will lead to cheaper tobacco.
Lower Tobacco Prices
A number of the “unintended consequences” suggested by the tobacco industry center on the assertion that standardized packaging would cause tobacco product prices to drop, especially in the premium segment of the market.
Tobacco companies have, for many years, invested in building premium brands, for which consumers are willing to pay more. The tobacco industry say that, with plain packaging, smokers would no longer be willing to make purchasing decisions based on a brand identity, with premium brands having the greatest to lose.
The tobacco companies claim that, where branding cannot be used, this will lead to increased price competition instead (sometimes referred to as “commoditization”), which will lead to lower-priced tobacco products. Lower-cost tobacco leads to increased demand. The tobacco companies use this argument to suggest that plain packaging will actually increase smoking rates (or reduce the rate of decline).
In its response to the Canadian consultation JTI states:
In a plain packaging environment, it will become ever more difficult to sell products in the premium segments. When all packs look virtually identical and physically feel exactly the same, smokers will be more unwilling to pay a higher price for our premium products. [para 168]
Downtrading
In addition, each of the tobacco companies has said that they believe that there would, in time, be increased “downtrading” (or brand switching), whereby smokers choose to purchase lower priced brands instead of more expensive premium brands as a result of plain packaging. If there is less perceived ‘”status’” to be gained from identifying as a consumer of a high-end brand, which may be the case if tobacco packs were standardized, some say that smokers will switch to cheaper alternatives and price would become the key way to differentiate between products.
This, they claim, would mean that overall, the price of purchased tobacco would be lower and that downtrading stimulates demand.
In its response to the 2012 consultation in the UK, BAT said:
“. . . price competition would inevitably increase, leading to price falls across all segments of the legal market, with the greatest price falls in the premium sector, where branding is a key element of differentiation; lower prices would lead to increased tobacco consumption . . .”
In the tobacco companies’ legal challenge to the UK plain packaging regulations, the companies submitted expert evidence, 1 which they claimed demonstrated that plain packaging would increase smoking rates (or would reduce the existing downward trend of those rates). That expert evidence included lengthy and complex economic analysis. Fundamental to these economic models was the assumption that plain packaging will significantly increase downtrading.
Two issues at the core of the tobacco industry’s legal case that plain packaging is a disproportionate measure are that it will increase illicit trade and increase downtrading. The judge in the UK case rejected these arguments, stating not only had the government proved its case but also that the evidence submitted by the tobacco companies had fundamental methodological flaws. 2
The Counter Arguments
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The evidence is that tobacco companies in Australia have continued to increase the prices of tobacco (above the rate of tax) in all market sectors. 3 In fact, from 2011 to 2013, prices increased more than usual. While tax increased by 2.8%, companies average net price rose 27%. This allowed Australian tobacco companies’ pre-tax profit to rise 30% during the period that plain packaging was introduced. 4
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Downtrading already occurs in many countries, and it is encouraged by the tobacco companies’ existing pricing strategies. Research shows that tobacco companies deliberately accentuate the price gap between premium brands and low-cost brands 5 in order to discourage quit attempts.
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The tobacco companies’ economic models assume that, in future, they will not increase their prices to mitigate the effect that downtrading has on their profits. 6 All the evidence shows that their pricing strategies encourage downtrading, while the overall market price increases to maintain their profit margins.
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Price competition was a topic considered by Sir Cyril Chantler when undertaking his independent review of the public health evidence on standardized packaging of tobacco. The Chantler Review 7 contains a summary of economic analysis on price, which states that:
“the magnitude of effects suggested by opponents of standardised packaging are exaggerated and the likelihood of complete market commoditisation is very low … there is no evidence to date of a commoditisation of the market leading to widespread price reductions in Australia. It is too soon to make definitive conclusions, but the fact that leading brands are increasing prices above tax suggests that predictions of widespread price reductions are exaggerated, at least in the short-run.” [pages 32 and 46]
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The impact of any potential price reduction of tobacco products could be effectively mitigated through increased taxation, as explained in the Chantler Review:
“In the event that standardised packaging eventually results in widespread price reductions, tax could be used to avoid any subsequent consumption effects. The effect of tax changes on price levels, and therefore consumption, depends upon the extent to which manufacturers and retailers pass on tax changes to consumers. The evidence shows that taxes are typically more than passed on in all but the lowest cost brands, both in the UKand in Australia (including evidence since the introduction of plain packaging). The tax system has the flexibility to take into account such factors if a policy to offset any price falls resulting from standardised packaging were required.”
1 BAT submitted a report by Neil Dryden, which was also attached as Appendix 7 of its submission to the UKs 2014 consultation and is available from: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/404457/PDF_15.pdf.
2 See note 32 at paragraph 35 of the judgment.
3
i) M. Scollo , M. Bayly , and M. Wakefield. “Did the Recommended Retail Price of
Tobacco Products Fall in Australia Following the Implementation of Plain Packaging?” Tobacco
Control, 2015; 24:ii90-ii93. Available from:
http://tobaccocontrol.bmj.com/content/24/Suppl_2/ii90.full.
ii) M. Scollo, M. Bayly, and M.Wakefield. “The Advertised Price of Cigarette Packs in Retail
Outlets across Australia before and after the Implementation of Plain packaging: a repeated
measures observational study.” Tobacco Control, 2015; 24:ii82-ii89. Available from:
http://tobaccocontrol.bmj.com/content/24/Suppl_2/ii82.full.
iii) M. Scollo, M. Zacher, K. Coomber K, M. Bayly, and M. Wakefield. “Changes in Use of
Types of Tobacco Products by Pack Sizes and Price Segments, Prices Paid and Consumption
Following the Introduction of Plain Packaging in Australia.” Tobacco Control, 2015;
24:ii66-ii75. Available from: http://tobaccocontrol.bmj.com/content/24/Suppl_2/ii66.full.
iv) Greenland, L. Johnson , and S. Seifi. “Tobacco Manufacturer Brand Strategy Following
Plain Packaging in Australia: Implications for social responsibility and policy.”Social
Responsibility Journal, 2016; 12(2):321-34. Available from:
http://www.emeraldinsight.com/doi/abs/10.1108/SRJ-09-2015-0127
and
http://tobaccocontrol.bmj.com/content/24/Suppl_2/ii90.abstract.
4 N. Chenoweth. “Tobacco Firms Such in $2.2b payday.”The Australian Financial Review, July 2, 2014. Available from: http://www.afr.com/news/policy/foreign-affairs/tobacco-companies-22b-payday-20140701-j05h1.
5 A. B. Gilmore B. Tavakoly, G. Taylor, and H. eed. “Understanding Tobacco Industry Pricing Strategy and Whether It Undermines Tobacco Tax Policy: The Example of the UK Cigarette Market.”Addiction (Abingdon, England). 2013;108(7):1317–1326. doi:10.1111/add.12159.
6 The High Court judge in the UK legal challenge considered this issue. See note 41 above at paragraph 617 of the judgment.
7 Report of the Independent Review undertaken by Sir Cyril Chantler, 2014, available from: http://www.kcl.ac.uk/health/10035-tso-2901853-chantler-review-accessible.pdf.