Going 'Super Value' in New Zealand: cigarette pricing strategies during a period of sustained annual excise tax increases

BACKGROUND

Between 2010 and 2020, the New Zealand (NZ) Government increased tobacco excise tax by inflation plus 10% each year. We reviewed market structure changes and examined whether NZ tobacco companies shifted excise tax increases to maintain the affordability of lower priced cigarette brands.

METHODS

We cluster-analysed market data that tobacco companies supply to the NZ Ministry of Health, created four price partitions and examined the size and share of these over time. For each partition, we analysed cigarette brand numbers and market share, calculated the volume-weighted real stick price for each year and compared this price across different price partitions. We calculated the net real retail price (price before tax) for each price partition and compared these prices before and after plain packaging took effect.

RESULTS

The number and market share of Super Value and Budget brands increased, while those of Everyday and Premium brands decreased. Differences between the price of Premium and Super Value brands increased, as did the net retail price difference for these partitions. Following plain packaging's implementation, Super Value brand numbers more than doubled; contrary to industry predictions, the price difference between these and higher priced brands did not narrow.

CONCLUSIONS

Between 2010 and 2020, NZ tobacco companies introduced more Super Value cigarette brands and shifted excise tax increases to reduce the impact these had on low-priced brands. Setting a minimum retail price for cigarettes could curtail tobacco companies' ability to undermine tobacco taxation policies designed to reduce smoking.

Improving estimates of the illicit cigarette trade through collaboration: lessons from two studies of Malaysia

This paper critically analyses contrasting estimates of Malaysia's illicit cigarette trade in 2011, 2015 and 2019 by Bui et al and Koya et al who previously produced independent estimates at about the same time using tax gap analysis. Collaboration between the two authors' teams emerged due to the discrepancies in their results, generating this paper to explore the methodological issues identified and hence produce revised estimates of the rate of illicit. Key issues identified were: Bui et al's assessment of legally imported cigarettes impacting all years; their exclusion of ad valorem duty affecting the 2011 and 2015 estimates; Koya et al overlooked the value of cigarettes for export market in their ad valorem calculation and used the sales value of imported tobacco/tobacco products, not just cigarettes, both of which impact estimates for 2011 and 2015. Recalculations using Koya et al's consumption data reveal that in 2019, illicit cigarettes accounted for about 70% of the market, which is higher than Bui et al's estimate (38%) but slightly lower than Koya et al's (72%). For 2011 and 2015 where ad valorem applied, the corrected estimates show a share of the illicit cigarette market of approximately 41.1% and 52.7%, respectively, differing from Bui et al's 0% in 2011 and 29.6% in 2015, and Koya et al's 51% in 2011 and 55% in 2015. This paper provides essential lessons for addressing methodological issues between authors' teams and updated estimates of Malaysia's illicit cigarette trade, verifying that Malaysia faces a substantial illicit cigarette trade problem.

Tobacco industry pricing strategies for single cigarettes and multistick packs after excise tax increases in Colombia

INTRODUCTION

Taxes on tobacco products are an efficient way of reducing consumption. However, they are only effective if passed on to consumers with higher prices. This study aims to examine tobacco industry (TI) pricing strategies in response to tax increases, and whether they differ by price segments or presentation (packs or individual sticks) in Colombia. This is the first such academic study in Latin America and the first anywhere to include the market for single sticks.

METHODS

Using data on cigarette pricing/taxation from a survey of smokers (2016-2017) and official government data on pricing (2007-2019), the TI's pricing strategies were examined, split by brand, price segments, different sized packs and single cigarettes.

RESULTS

The TI employed targeted pricing strategies in Colombia: differentially shifting taxes; and launching new brands/brand variants. The industry overshifted taxes when increases were smaller and predictable, but used undershifting more when there was a larger increase in 2017, after which it mostly overshifted on budget and premium (but undershifted mid-priced) brands. The prices for single sticks increased more than the tax increase in 2017 when their consumption also increased.

CONCLUSION

The pricing strategies identified suggest excise taxes can be increased further, particularly the specific component, to reduce the price gap between brand segments. Brands should be restricted to a single variant along with prohibitions on launching new brands/brand variants. Lastly, since the pricing of single sticks does not match the pattern of packs, more monitoring of their sales and distribution is required, especially since they promote consumption and hinder effective implementation of tobacco tax policies.

Promoting convergence and closing gaps using affordability-based minimum taxes: an illustration using the European Union Tobacco Tax Directive

BACKGROUND

The rules governing tobacco taxation in the European Union (EU) are currently under revision. Earlier research has proposed reforms aimed at stimulating price convergence across countries by linking national minimum taxes to a measure of average prices across the EU. This paper proposes that revised tax rules include an affordability criterion whereby minimum taxes are required to be no less than a common prespecified fraction of domestic average disposable income.

METHODS

Longitudinal data on prices and taxes on factory-made cigarettes and roll-your-own tobacco in 24 EU member states and the UK between 2011 and 2019 are used to estimate econometric models for their weighted average prices as a function of taxes. Two scenarios are simulated with the models' estimates: a baseline scenario for the actual tax stance pertaining to 2020 and a reform scenario implementing an additional affordability criterion.

RESULTS

The affordability criterion would significantly increase the price of both tobacco products, particularly in richer countries with relatively low tobacco prices that are often not affected by the increases in nominal minima mandated by the EU rules. There would also be some price convergence between the two tobacco products, both on average and in the majority of countries.

CONCLUSIONS

Such results show an affordability criterion could be a potentially fruitful complement to the tax reforms proposed in earlier research.

How has the tobacco industry passed tax changes through to consumers in 12 sub-Saharan African countries?

INTRODUCTION

Tobacco taxation is only effective in reducing consumption when it is translated into higher prices. This study aims to investigate to what extent the tobacco industry (TI) passes tax increases over to consumers by increasing the retail price of cigarettes in 12 sub-Saharan African (SSA) countries.

METHODS

African Cigarette Prices Project and WHO's Global Tobacco Epidemic Reports data were used to calculate the rate of tax pass-through by decomposing the retail price of cigarettes into tax and net prices between 2016 and 2020. Percentage change in net price was used to identify industry pricing behaviour, in both packs and single-stick sales. TI pricing strategies were examined by country, producer type, producers, and cigarette price segment.

RESULTS

There were mixed TI strategies, with taxes primarily overshifted (Botswana, Madagascar, Tanzania, Zimbabwe), undershifted (Ethiopia, Lesotho, Mozambique, Namibia, South Africa, Zambia) or a mix of both (Malawi, Nigeria). The detail varied between countries, over time, and between the different brands/segments offered. Patterns for single-stick sales were broadly similar to that of packs but with some differences observed in particular countries/years. Pricing strategies for the various transnational tobacco companies and domestic producers were similar but the changes in net price for the latter were larger. The country tax level/type and the size of tax change did not seem to be an obvious influence.

CONCLUSION

This paper provides an overview of TI pricing strategies in response to tax increases in SSA. Governments must monitor how the TI responds to tax changes to ensure that tax increases are effective in impacting price.

Corporate communication of the relative health risks of IQOS through a webchat service

BACKGROUND

Communication of the relative health risks of IQOS can attract potential consumers, aiding its commercial success. However, health-related claims need to be used cautiously to avoid inaccuracies and attracting non-smokers. We used the live webchat service on the IQOS website to identify information and claims on the relative risks of IQOS made directly to potential consumers in different countries.

METHODS

The study was promoted through authors' networks and conducted between 1 August and 30 November 2020. Participants collected webchat conversation responses to three queries regarding the safety of IQOS relative to cigarettes and e-cigarettes using step-by-step guidance and a predesigned form. Responses were analysed to identify health-related claims and information provided.

RESULTS

70 webchat attempts were recorded across 27 countries, 54 of which (in 22 countries) were successful webchat conversations. In 48 of these, one or more claims were used to indicate IQOS is safer than cigarettes, such as IQOS is smoke free, emits less harmful substances or reduces harm. Four conversations contained statements indicating IQOS is safer than e-cigarettes. Some statements provided were contradictory. Participant age was consistently requested on accessing the website, but tobacco/nicotine use was not. Other information provided included referral to the 2020 US Food and Drug Administration Modified Risk Tobacco Product decision, IQOS or Philip Morris International web pages and claims that IQOS is not risk free nor a cessation device.

CONCLUSIONS

A variety of claims and information on the relative safety of IQOS were used in webchat communications. Response variation highlights that clearer regulation is needed to appropriately control corporate communications via live webchat services.

Tobacco industry pricing strategies in response to excise tax policies: a systematic review

OBJECTIVE

To explore what is known about the tobacco industry's (TI) price-based responses to tobacco excise tax policies and whether these vary by country income group using a systematic review.

DATA SOURCES

Studies assessing TI pricing tactics were identified via searches of five online databases using a combination of search keywords.

STUDY SELECTION

Inclusion criteria were applied by two reviewers independently who screened all search results (titles and abstracts) for possible inclusion. They identified 37 publications that reported TI pricing tactics.

DATA EXTRACTION

Study details were tabulated, and information was extracted on the country income group, population characteristics, excise tax structure, and pricing strategies.

DATA SYNTHESIS

Of the 37 publications identified, 22 were conducted in high-income countries, while 15 covered low-income and middle-income countries (LMICs). Major pricing strategies employed were: differentially shifting taxes between products (35 studies); launching new brands/products as pathways for downtrading (six studies), product promotions and different prices for the same products for different customers (six studies); price smoothing (two studies); and changing product attributes such as length/size of cigarettes or production processes (three studies).

CONCLUSIONS

While there is limited evidence to fully ascertain industry responses to tax increases, this review suggests that the TI widely uses a multitude of sophisticated pricing strategies across different settings around the world with the intention of undermining tax policies, thereby increasing tobacco consumption and maximising their profits. There is a need for further research in this area especially in LMICs so that effective policy responses can be developed.

Promoting convergence and closing gaps: a blueprint for the revision of the European Union Tobacco Tax Directive

BACKGROUND AND AIMS

Despite the European Union (EU) Tobacco Tax Directive (TTD), a lack of convergence in EU tobacco prices promotes high levels of cross-border shopping and down-trading from factory-made (FM) to roll-your-own tobacco (RYO) cigarettes. This study presents a blueprint for reform, whereby minimum taxes are related to the overall price level in the EU and where taxation of RYO is related to that of FM.

METHODS

Longitudinal data on prices and taxes on FM and RYO in 25 member states over 2011-2019 are used to estimate econometric models for their weighted average prices as a function of taxes. Two scenarios are simulated with the models' estimates: a baseline scenario for the actual tax stance pertaining to 2020 and a reform scenario implementing the blueprint.

RESULTS

The baseline results show that, while the prices of both products have experienced a slight increase since 2016 in real terms, the dispersion in the prices of FM across countries has increased and the difference in the prices of RYO within countries has widened. The results for the reform scenario show dispersion would diminish both EU-wide and in hotspots for cross-border sales of FM. The reform would also lead to a substantial reduction in the price gap between FM and RYO.

CONCLUSION

To promote price convergence and close the price gap between FM and RYO, the revised TTD should ensure minimum FM taxes track a measure of their average EU price, and RYO taxes are related to FM taxes.

Perceived regulatory compliance in micro-firms: The case of English accommodation providers

Business regulation is only successful when firms comply. Compliance is determined by several factors, including knowledge-of/attitude-towards regulation, which we suggest consists of both burden and value. Existing literature generally ignores regulatory value and focuses on larger firms in “high-risk” industries. We explore Perceived Own-Firm and Perceived Competitor Compliance in English accommodation micro-firms. Perceived Own-Firm Compliance exceeds Perceived-Knowledge of regulation, and has the strongest (positive) association with Perceived-Value. Perceived Competitor Compliance is thought to be very low and is (negatively) associated with Perceived-Value and Perceived-Burden. Furthermore, the factors associated with greater Perceived Own-Firm Compliance are associated with lower Perceived Competitor Compliance.

The Lebanese Regie state-owned tobacco monopoly: lessons to inform monopoly-focused endgame strategies

Background

Many countries have started pursuing tobacco ‘endgame’ goals of creating a ‘tobacco-free’ country by a certain date. Researchers have presented models to attain this goal, including shifting the supply of tobacco to a monopoly-oriented endgame model (MOEM), wherein a state-owned entity controls the supply and distribution of tobacco products. Although not designed to end tobacco use, the Regie in Lebanon exhibits some of the key features identified in MOEM and hence can serve as a practical example from which to draw lessons.

Methods

We comprehensively review previous literature exploring tobacco endgame proposals featuring a MOEM. We distil these propositions into core themes shared between them to guide a deductive analysis of the operations and actions of the Regie to investigate how it aligns (or does not) with the features of the MOEM.

Results

Analysing the endgame proposals featuring MOEM, we generated two main themes: the governance of the organisation; and its operational remit. In line with these themes, the investigation of the Regie led to several reflections on the endgame literature itself, including that it: (i) does not seem to fully appreciate the extent to which the MOEM could end up acting like Transnational Tobacco Companies (TTC); (ii) has only vaguely addressed the implications of political context; and (iii) does not address tobacco growing despite it being an important element of the supply chain.

Conclusion

The implementation of tobacco endgame strategies of any type is now closer than ever. Using the Regie as a practical example allows us to effectively revisit both the potential and the pitfalls of endgame strategies aiming to introduce some form of monopoly and requires a focus on: (i) establishing appropriate governance structures for the organisation; and (ii) adjusting the financial incentives to supress any motivation for the organisation to expand its tobacco market.

Where to next for countries with high tobacco taxes? The potential for greater control of tobacco pricing through licensing regulation

Optimising the taxation of tobacco products should be among the highest priorities for health and hence economic policy in every country. The WHO Technical Manual on Tobacco Tax Policy and Administration released in April 2021 provides invaluable advice, including 26 best practice recommendations on policy design, administrative efficiency and addressing industry tactics to circumvent tobacco tax increases. Introducing and increasing tobacco taxes is the most important tobacco control measure for any jurisdiction. The effects of simple tax structures, high tax levels, and frequent above-inflation increases in specific excise duties can be enhanced through strict controls on packaging (including pack size), product design, and discounting. However, even with such measures, tobacco companies can continue to undermine the effectiveness of tax policy by offering some products in their ranges at very low prices, as well as gradually and selectively increasing the prices of some but not all products after tax increases. This paper is aimed at policymakers in countries that have already adopted best practice tax policy. It explores the idea of wholesale price capping combined with retail licensing to address the problems of brand proliferation, dispersion of prices, cushioning and strategic under/overshifting of tax increases, thereby radically and sustainably increasing the effectiveness of tobacco tax policy while also raising additional tax revenue for governments by reducing industry profitability.

Longitudinal evaluation of the impact of standardised packaging and minimum excise tax on tobacco sales and industry revenue in the UK

BACKGROUND

Standardised packaging for factory-made cigarettes (FM) and roll-your-own tobacco (RYO), and a minimum excise tax (MET) were fully implemented in the UK in May 2017 following a 12-month transition period. This paper is the first to examine effects on tobacco sales volumes and company revenues.

METHODS

Analysis of UK commercial supermarket and convenience store electronic point of sale data on tobacco sales. FM and RYO products' data (May 2015-April 2018) yielded 107 572 monthly observations. Expected values from additive mixed modelling were used to calculate trends in: (1) volumes of tobacco sold overall, by cigarette type (FM and RYO) and by seven market segments; and (2) company net revenues. A 10-month period (June 2015-March 2016) before the transition to standardised packs was compared with a 10-month period after the introduction of the MET and full implementation of standardised packs (June 2017-March 2018).

RESULTS

Postimplementation, the average monthly decline in stick sales was 6.4 million (95% CI 0.1 million to 12.7 million) sticks faster than prelegislation, almost doubling the speed of decline. Sales of cheap FM brands, previously increasing, plateaued after implementation. Company monthly net revenues declined from a stable £231 million (95% CI £228 million to £234 million), prelegislation, to £198 million (95% CI £191 million to £206 million) in April 2018.

CONCLUSIONS

The concurrent introduction of standardised packaging and MET in the UK was associated with significant decline in sales and in tobacco industry revenues, and the end of the previous growth in cheap cigarette brands that appeal to young and price conscious smokers.

What does Brexit mean for UK tobacco control?

In January 2020 the UK left the European Union (EU), although a transition period extends EU rules/regulations until the end of 2020 while a longer-term relationship agreement is negotiated. After almost 50 years of membership the UK economy is tightly integrated into that of the EU single market, and many UK laws and regulations have their origins in the EU, including those concerning tobacco. This paper provides an overview of potential implications of Brexit for UK tobacco control. We examine the key areas of the supply, cost, taxation, and regulation of tobacco products, and the impact of commitments in regards to the border between Ireland and Northern Ireland (NI). We find that Brexit provides an opportunity for improved tobacco control with potential for particular enhancements in the areas of taxation and product regulation. However, commitments in regards to NI mean these benefits either won't extend to NI (which will continue to follow EU rules), or could lead to the whole UK having to follow most EU rules/regulations despite no longer being involved in the decision making process. The details of any future deal will be important, especially since virtually all UK tobacco products come from the EU, and hence would be subject to disruption/considerable new tariffs (i.e. taxation on imports) without a trade deal. We conclude that political will by the UK government to secure conditions which protect the UK's world leading tobacco control measures will be key to whether Brexit helps or hinders tobacco control in the UK. In this regards the signs are mixed.

Impact of tobacco tax increases and industry pricing on smoking behaviours and inequalities: a mixed-methods study

Background

Increasing tobacco prices through taxation is very effective for reducing smoking prevalence and inequalities. For optimum effect, understanding how the tobacco industry and smokers respond is essential. Tobacco taxation changes occurred in the UK over the study period, including annual increases, a shift in structure from ad valorem to specific taxation and relatively higher increases on roll-your-own tobacco than on factory-made cigarettes.

Objectives

Understanding tobacco industry pricing strategies in response to tax changes and the impact of tax on smokers’ behaviour, including tax evasion and avoidance, as well as the effect on smoking inequalities. Synthesising findings to inform how taxation can be improved as a public health intervention.

Design

Qualitative analysis and evidence synthesis (commercial and Nielsen data) and longitudinal and aggregate cross-sectional analyses (International Tobacco Control Policy Evaluation Project data).

Setting

The UK, from 2002 to 2016.

Data sources and participants

Data were from the tobacco industry commercial literature and retail tobacco sales data (Nielsen, New York, NY, USA). Participants were a longitudinal cohort (with replenishment) of smokers and ex-smokers from 10 surveys of the International Tobacco Control Policy Evaluation Project (around 1500 participants per survey).

Main outcome measures

(1) Tobacco industry pricing strategies, (2) sales volumes and prices by segments over time and (3) smokers’ behaviours, including products purchased, sources, brands, consumption, quit attempts, success and sociodemographic differences.

Review methods

Tobacco industry commercial literature was searched for mentions of tobacco products and price segments, with 517 articles extracted.

Results

The tobacco industry increased prices on top of tax increases (overshifting), particularly on premium products, and, recently, the tobacco industry overshifted more on cheap roll-your-own tobacco than on factory-made cigarettes. Increasingly, price rises were from industry revenue generation rather than tax. The tobacco industry raised prices gradually to soften impact; this was less possible with larger tax increases. Budget measures to reduce cheap product availability failed due to new cheap factory-made products, price marking and small packs. In 2014, smokers could buy factory-made (roll-your-own tobacco) cigarettes at real prices similar to 2002. Exclusive roll-your-own tobacco and mixed factory-made cigarettes and roll-your-own tobacco use increased, whereas exclusive factory-made cigarette use decreased, alongside increased cheap product use, rather than quitting. Quitting behaviours were associated with higher taxes. Smokers consumed fewer factory-made cigarettes and reduced roll-your-own tobacco weight over time. Apparent illicit purchasing did not increase. Disadvantaged and dependent smokers struggled with tobacco affordability and were more likely to smoke cheaper products, but disadvantage did not affect quit success.

Limitations

Different for each data set; triangulation increased confidence.

Conclusions

The tobacco industry overshifted taxes and increased revenues, even when tax increases were high. Therefore, tobacco taxes can be further increased to reduce price differentials and recoup public health costs. Government strategies on illicit tobacco appear effective. Large, sudden tax increases would reduce the industry’s ability to manipulate prices, decrease affordability and increase quitting behaviours. More disadvantaged, and dependent, smokers need more help with quitting.

Future work

Assessing the impact of tax changes made since 2014; changing how tax changes are introduced (e.g. sudden intermittent or smaller continuous); and tax changes on tobacco initiation.

Funding

This project was funded by the National Institute for Health Research (NIHR) Public Health Research programme and will be published in full in Public Health Research; Vol. 8, No. 6. See the NIHR Journals Library website for further project information.

The failure of the UK to tax adequately tobacco company profits

BACKGROUND

A key driver of the global tobacco epidemic is the massive profit earned from manufacturing tobacco products despite high levels of product taxation. Two of the four major Transnational Tobacco companies are based in the UK, where there is growing evidence of corporate tax avoidance by transnational firms and where there are calls for the industry to pay more towards the harms caused by tobacco products.

OBJECTIVES/METHODS

UK tobacco company profit and corporation tax data between 2009 and 2016 is obtained from publically available sources. The intention is not to perform a piece of forensic accounting but to establish the broad pattern of profit and taxation in order to inform consideration of tobacco product and firm taxation, and hence public health.

RESULTS

Very little profit based taxation has been paid in the UK despite high levels of reported profits, both in the domestic market and globally.

CONCLUSIONS

The UK needs better reporting and corporate taxation standards. Tobacco companies should be made to pay more profit based taxation, such as by extending the surcharge on corporation tax currently paid by UK banks, and by making sure companies pay appropriate taxes when reorganizing corporate structures.

Standardised packaging, minimum excise tax, and RYO focussed tax rise implications for UK tobacco pricing

BACKGROUND

Standardised packaging for factory made (FM) and roll your own (RYO) tobacco was fully implemented in the UK in May 2017. Around the same time, several changes to the tax system were applied (a Minimum Excise Tax (MET) for FM products and tax increases weighted towards RYO products). The tobacco industry claims that standardised packaging will lower prices (a disincentive for quitting) by commoditising the product, yet had itself taken advantage of the previous tax regime to achieve large profits from premium brands while also keeping some products' prices relatively low. Here we evaluate the impact of standardised packaging, the MET and the RYO focussed tax changes on price and industry profitability.

METHODS AND FINDINGS

Nielsen electronic point of sale (EPOS) data (May 2015 to April 2018) were used to calculate real (inflation adjusted) monthly price per stick overall, by cigarette type (FM and RYO) and by seven market segments. Trend estimation, using additive mixed models, assessed weighted average price (weighted by volume of sales) and tobacco industry net revenue changes. The beginning and end of the data series were compared in terms of: (a) average monthly price growth, (b) average monthly net revenue growth, and (c) undershifting and overshifting patterns after tax changes. FM and RYO real prices changed little over the 3-year period-overall prices rose by about 1p per stick. There was no evidence of commoditisation with prices of all FM segments (but not RYO) rising faster after the implementation of standardised packaging than immediately beforehand. The prices of the cheapest FM brands rose with the implementation of the MET. RYO price increases did not close the gap to FM pricing levels despite RYO focussed tax increases. Tax changes following the implementation of standardised packaging and the MET were more widely and quickly passed on to smokers in the form of higher prices than the tax change pre-implementation. The main limitations are first that because we do not know the exact mechanism by which Nielsen scales up sample data to provide UK estimates, we could only use data for a set three year period during which the same adjustments are made. Second, the tax and standardised packaging events were sometimes too close in time to separate their consequences statistically. Third, tobacco prices may also be affected by external factors such as changes in smokers' disposable income or availability of electronic nicotine delivery systems.

CONCLUSIONS

There was no long-term lowering of tobacco prices after the implementation of standardised packaging as predicted by the industry. The introduction of the MET was successful in increasing the price of the cheapest FM cigarettes and narrowing the price gap between FM brands. The RYO tax increases were, however, insufficient to narrow the price gap between RYO and FM. Overall, undershifting became less extensive indicating that tobacco industry manipulation of the tax system which had previously kept cheap products available had declined. This suggests that standardised packaging and a MET will likely contribute to further declines in UK tobacco use.

Availability and Use of Cheap Tobacco in the United Kingdom 2002-2014: Findings From the International Tobacco Control Project

Introduction

Raising tobacco prices is the most effective population-level intervention for reducing smoking, but this is undermined by the availability of cheap tobacco. This study monitors trends in cheap tobacco use among adult smokers in the United Kingdom between 2002 and 2014 via changes in product type, purchase source, and prices paid.

Methods

Weighted data from 10 waves of the International Tobacco Control policy evaluation study were used. This is a longitudinal cohort study of adult smokers with replenishment; 6169 participants provided 15812 responses. Analyses contrasted (1) product type: roll-your-own (RYO) tobacco, factory-made packs (FM-P), and factory-made cartons (FM-C); (2) purchase source: UK store-based sources (e.g., supermarkets and convenience stores) with non-UK/nonstore sources representing tax avoidance/evasion (e.g., outside the UK, duty free, and informal sellers); and (3) prices paid (inflation-adjusted to 2014 values). Generalized estimating equations tested linear changes over time.

Results

(1) RYO use increased significantly over time as FM decreased. (2) UK store-based sources constituted approximately 80% of purchases over time, with no significant increases in tax avoidance/evasion. (3) Median RYO prices were less than half that of FM, with FM-C cheaper than FM-P. Non-UK/nonstore sources were cheapest. Price increases of all three product types from UK store-based sources from 2002 to 2014 were statistically significant but not substantial. Wide (and increasing for FM-P) price ranges meant each product type could be purchased in 2014 at prices below their 2002 medians from UK store-based sources.

Conclusions

Options exist driving UK smokers to minimize their tobacco expenditure; smokers do so largely by purchasing cheap tobacco products from UK stores.

Implications

The effectiveness of price increases as a deterrent to smoking is being undermined by the availability of cheap tobacco such as roll-your-own tobacco and cartons of packs of factory-made cigarettes. Wide price ranges allowed smokers in 2014 to easily obtain cigarettes at prices comparable to 12 years prior, without resorting to tax avoidance or evasion. UK store-based sources accounted for 80% or more of all tobacco purchases between 2002 and 2014, suggesting little change in tax avoidance or evasion over time. There was a widening price range between the cheapest and most expensive factory-made cigarettes.

UK tobacco price increases: driven by industry or public health?

Background

Tobacco companies claim that higher taxes will force smokers into buying illicit tobacco, but if they were truly concerned about increasing illicit sales with higher prices they would only increase retail prices in line with changes in taxation. In this paper, we explore UK pricing of both factory-made cigarettes (FM) and roll-your-own tobacco (RYO) to explore the extent to which price increases were due to government tax rises or industry strategies to increase profit per pack.

Method

Nielsen commercial data on UK tobacco sales data (2010–2015) were combined with official UK data on inflation and tax rates, to identify the source of real price increases.

Results

Between 2010 and 2012, when there were unexpected large tax increases, industry driven price changes were small (16% of the price rise in FM and 20% in RYO), and changes were similar between market segments. Between 2013 and 2015, when tax increases were smaller and expected, industry behaviour generally accounted for a larger share of price rises (33% FM, 48% RYO), but changes varied considerably by segment.

Conclusion

The industry has increased its prices beyond that required by tax changes, even when tax rises were larger and unexpected, although were notably smaller in such conditions. This suggests (1) that the industry is not actually concerned by the threat of illicit, especially since RYO had the highest levels of industry driven price increases despite higher levels of illicit, and (2) there remains scope for further tax increases, which should be relatively large and unexpected.

Exploiting a low tax system: non-tax-induced cigarette price increases in Taiwan 2011-2016

Introduction

This study aims to analyse the non-tax-induced price increasing strategies adopted by tobacco industry in Taiwan, a high-income country with comprehensive tobacco control policies but low tobacco taxes and a declining cigarette market.

Methods

Using governmental tax, price and inflation data, we analysed cigarette sales volume, affordability, affordability elasticity of demand, market share, pricing and net revenue of the top five tobacco companies in Taiwan from 2011 to 2016 when no tax increases occurred.

Results

Total revenue after tax grew significantly for all the major transnational tobacco companies between 2011 and 2016 at the expense of the state-owned Taiwan Tobacco and Liquor Corporation. In terms of market share, Japan Tobacco (JT) was the leading company, despite experiencing a small decline, while British American Tobacco and Imperial Brands remained stable, and Philip Morris International increased from 4.7% to 7.0%. JT adopted the most effective pricing strategy by increasing the real price of its two most popular brands (Mevius and Mi-Ne) and, at the same time, doubling the sales of its cheaper and less popular brand Winston by leaving its nominal retail price unaltered.

Conclusions

Low and unchanged tobacco taxes enable tobacco companies to use aggressive pricing and segmentation strategies to increase the real price of cigarettes without making them less affordable while simultaneously maintaining customers’ loyalty. It is crucial to continue monitoring the industry’s pricing strategies and to regularly increase taxes to promote public health and to prevent tobacco industry from profiting at the expense of government revenues.

Keeping smoking affordable in higher tax environments via smoking thinner roll-your-own cigarettes: Findings from the International Tobacco Control Four Country Survey 2006-15

BACKGROUND

Roll-Your-Own tobacco (RYO) use is increasingly popular in many countries: it is generally cheaper than factory-made cigarettes (FM), and smokers can further reduce costs by adjusting the amount of tobacco in each cigarette. However, the level of risk of RYO compared with FM cigarettes is similar and does not meaningfully change with cigarette weight. We assessed the weight of tobacco in RYO cigarettes across jurisdictions with differing tobacco taxes/prices and over time.

METHOD

Six waves of the International Tobacco Control 4 Country longitudinal study of smokers and recent ex-smokers, providing 3176 observations from exclusive RYO users covering 2006-15, are used to calculate the weight of tobacco used in RYO cigarettes in the US, Canada, Australia, and the UK. Multilevel regression analyses were used to compare weights across countries, socio-demographic factors, and over time.

RESULTS

Smokers in the UK and Australia, where tobacco is relatively expensive, show higher levels of exclusive RYO use (25.8% and 13.8% respectively) and lower mean weights of tobacco per RYO cigarette (0.51 g(sd 0.32 g) and 0.53 g(0.28 g)), compared with both Canada and especially the US (6.0% and 3.5%, and 0.76 g(0.45 g) and 1.07 g(0.51 g)). Smokers in the UK and Australia also exhibited a statistically significant year-on-year decrease in the mean weight of each RYO cigarette.

CONCLUSIONS

Taxation of RYO should increase considerably in the UK and Australia so that RYO and FM cigarettes are taxed equivalently to reduce RYO attractiveness and inequalities. Other measures to reduce the price differentials, including taxing RYO solely on weight, are also discussed.

Individualised tobacco affordability in the UK 2002-2014: findings from the International Tobacco Control Policy Evaluation Project

OBJECTIVE

The existing measures of tobacco affordability (smokers' purchasing power for tobacco) use national estimates of income and average cigarette prices, and exclude roll-your-own (RYO) tobacco. This study developed an individualised measure of tobacco affordability using smokers' own incomes and factory-made (FM) or RYO tobacco purchase prices, and explored how it was impacted by taxation changes, individual characteristics and purchase patterns.

DESIGN

Cross-sectional survey data collated from 10 waves of a longitudinal cohort study.

DATA SOURCES

Adult smokers (n=4062) from the International Tobacco Control Policy Evaluation Project United Kingdom (UK), surveyed between 2002 and 2014, providing 8943 observations over 10 surveys.

ANALYSIS

Affordability was calculated as the percentage of annual income remaining with the individuals after their annual tobacco expenditure. Multilevel linear regression models were used with affordability as the outcome using time, sex, age, geographical region, ethnicity, education, nicotine dependence and tobacco purchase source as the predictor variables.

RESULTS

Affordability of FM cigarettes decreased significantly from 91.5% (±95% CI: 91.0% to 91.9%) in 2002 to 87.8% (87.0% to 88.5%) in 2014; and RYO from 96.3% (95.7% to 96.9%) in 2006 to 93.7% (93.0% to 94.4%) in 2014. Affordability was significantly lower for FM than RYO. Year-on-year decreases were not statistically significant. Tobacco was more affordable for males, those with higher education, less dependent smokers and those purchasing from non-store (potentially illicit) or non-UK sources.

CONCLUSIONS

An individualised measure of tobacco affordability provided useful insights on the impact of tobacco taxes, social inequalities and purchase patterns in the UK. Although tobacco became less affordable, the annual rate of decline was low, suggesting annual tax rises were not large enough.

Tobacco industry strategies undermine government tax policy: evidence from commercial data

OBJECTIVE

Taxation equitably reduces smoking, the leading cause of health inequalities. The tobacco industry (TI) can, however, undermine the public health gains realised from tobacco taxation through its pricing strategies. This study aims to examine contemporary TI pricing strategies in the UK and implications for tobacco tax policy.

DESIGN

Review of commercial literature and longitudinal analysis of tobacco sales and price data.

SETTING

A high-income country with comprehensive tobacco control policies and high tobacco taxes (UK).

PARTICIPANTS

2009 to 2015 Nielsen Scantrak electronic point of sale systems data.

MAIN OUTCOME MEASURES

Tobacco segmentation; monthly prices, sales volumes of and net revenue from roll-your-own (RYO) and factory-made (FM) cigarettes by segment; use of price-marking and pack sizes.

RESULTS

The literature review and sales data concurred that both RYO and FM cigarettes were segmented by price. Despite regular tax increases, average real prices for the cheapest FM and RYO segments remained steady from 2013 while volumes grew. Low prices were maintained through reductions in the size of packs and price-marking. Each year, at the point the budget is implemented, the TI drops its revenue by up to 18 pence per pack, absorbing the tax increases (undershifting). Undershifting is most marked for the cheapest segments.

CONCLUSIONS

The TI currently uses a variety of strategies to keep tobacco cheap. The implementation of standardised packaging will prevent small pack sizes and price-marking but further changes in tax policy are needed to minimise the TI's attempts to prevent sudden price increases.

The case for Ofsmoke: the potential for price cap regulation of tobacco to raise £500 million per year in the UK

OBJECTIVE

A system of price-cap regulation has previously been suggested to address the market failure inherent to the tobacco industry. This would benefit public health directly (eg, by making it extremely difficult for the industry to sell cut-price cigarettes, or use price as a marketing strategy) and indirectly (eg, by reducing the available money the industry has for spending on marketing and lobbying). This paper explores the feasibility of applying such a scheme in the UK.

METHODS

The impact of price-capping is modelled using optimistic and conservative scenarios, each with different assumptions, and using 2009 and 2010 profit data for the major companies selling tobacco in the UK. The models are used to calculate by how much would profit be reduced through the imposition of price caps, and thus, how much revenue could be raised in additional taxes, assuming the end price the consumer pays does not change.

RESULTS

Tobacco companies enjoy massive profit margins, up to 67%, in the UK. The optimistic scenario suggests a potential increase in UK tobacco tax revenue of £585.7 million in 2010 (£548.4 million in 2009), while the conservative model suggests an increase in revenue of £433.6 million in 2010 (£399.2 million in 2009). This would be approximately enough to fund, twice over, UK-wide antitobacco smuggling measures, and smoking cessation services in England, including the associated pharmacotherapies, to help people stop smoking.

CONCLUSIONS

Applying a system of price-cap regulation in the UK would raise around £500 million per annum (US$750 million). This is likely to be an underestimate because of cautious assumptions used in the model. These significant financial benefits, in addition to the public health benefits that would be generated, suggest this is a policy that should be given serious consideration.

The case for OFSMOKE: how tobacco price regulation is needed to promote the health of markets, government revenue and the public

Mainstream economic theory outlines four main causes of market failure and it is already well established that two of these (information failure and externalities) exist in a tobacco market. A third cause of market failure, market power, is also a serious problem in many tobacco markets. Market power--combined with unintended and often overlooked consequences of tobacco tax policies, notably that gradual increases in specific taxes may allow the industry to disguise significant price increases--has, at least in high income countries, given cigarette manufacturers considerable pricing power and profits. This paper examines ways this market failure could be addressed and proposes as a solution a system of price cap regulation wherein a cap is placed on the pre-tax cigarette manufacturers' price but not on the retail price that consumers face. Well established in the utilities industry, price cap regulation would set a maximum price that cigarette companies can charge for their product based on an assessment of the genuine costs each firm faces in its operations and an assumption about the efficiency savings it would be expected to make. Such a system would achieve three main benefits. First, it would address the problem of market failure and excess profits while simultaneously allowing current tobacco control policies, including tax and price increases, to expand--thus tax increases would remain a central tenet of tobacco control policies and retail prices could continue to increase. Second, it would increase government revenue by transferring the excess profits from the industry to the government purse. Third, it would bring numerous public health benefits. In addition to addressing market power, while simultaneously allowing tobacco control policies to expand, it could offer a means of preventing down-trading to cheaper products and controlling unwanted industry practices such as cigarette smuggling, price fixing and marketing to the young. The paper outlines in some detail how such a system might be developed in the UK, while briefly exploring how it could be applied elsewhere, including in markets with state monopolies.