How can we address tobacco companies’ manipulation of cigarette prices?

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Philip Gendall, Janet Hoek, J Robert Branston, Richard Edwards, Nick Wilson*

Pricing is one of the most potent influences on consumers’ behaviour. Governments around the world have used this knowledge to implement tobacco excise taxes, which raise the price of tobacco thus reducing tobacco consumption and smoking prevalence. However, tobacco companies have undermined the intended impact of excise taxes by creating new lower-priced brands or brand variants, and by manipulating excise tax increases in their brand pricing. In this blog, we discuss the findings of our just published paper on pricing and changes in the NZ tobacco market during a period of sustained excise tax increases, and explain how minimum pricing could help prevent tobacco companies from undermining measures designed to encourage smoking cessation and discourage smoking uptake.

Image by Tony Hisgett from Creative Commons

There is very strong evidence, including from Aotearoa/New Zealand (NZ), that tobacco price increases reduce consumption, stimulate quit attempts, deter young people from experimenting with smoking, and impede development of regular smoking practices.1-3 Acutely aware of these impacts, tobacco companies have consistently opposed excise taxes.

Preferring robust empirical evidence to tobacco industry rhetoric, several governments have introduced excise taxes on tobacco products as part of broader strategies to reduce smoking. However, tobacco companies have undermined these measures by differentially ‘over-shifting’ or ‘under-shifting’ the tax increases, (i.e., increasing prices beyond the tax increase, or not applying the tax fully).6 7 These approaches reduce the impact of excise taxes and thus reduce the motivation of price sensitive people to quit smoking. As well as manipulating how excise taxes are applied, tobacco companies have launched more budget brands and variants; these options appeal to price sensitive people and enable them to trade down from their favoured brand rather than quit when tobacco prices increase.

The NZ setting offers an interesting context to review market changes following excise tax increases because, from 2010 to 2020, the excise tax on tobacco products increased by ten percent each year (with an added inflation adjustment). These policies made NZ tobacco prices among the highest in the world. NZ requires tobacco companies to supply data on the number of cigarette sticks released each year and the retail price of each of their brands; using these data,8 we examined market place changes during this period of sustained tax increases.9

Markets comprise price partitions that have similar attributes. We identified four price partitions in the NZ factory-made cigarette market: super value; budget; everyday and premium.9 Between 2010 and 2020, the market share of the super value partition grew from 3.2% to 24.4%, while the premium partition declined from 27.3% to 10.7%. These changes occurred because tobacco companies introduced new budget brands while withdrawing premium brands; by 2020 the number of brands in the super value partition had nearly doubled, while the number of premium brands had nearly halved. Overall, as excise tax increased, people who smoke traded down to less expensive brands. Figure 1 below outlines how these strategies affected the market share of each brand price partition over time.

In further analyses, we compared the cigarette stick prices we would have expected to see, if the excise tax had been appropriately passed on by tobacco companies to all retail prices, as intended by government policy. We saw over-shifting in all price partitions in most years (that is, increases in the price of brands by more than the excise tax increase). However, over-shifting was greatest among premium brands, where it was nearly twice that among lower price brands.

What implications do our findings have for smokefree policy?

First, they illustrate how tobacco companies’ behaviour changed the tobacco market structure over the period examined. In particular, the industry’s proliferation of budget and super value brands, which included new variants within established brand families (e.g., Rothmans Royals) ensured people who smoked could switch to alternative, cheaper brands. The introduction of new lower-priced variants such as “Royals” and “Crafted” within existing brands created prestigious connotations that arguably offset the potentially negative perception of trading down to a cheaper option. Freezing the cigarette market would prevent the deliberate brand proliferation we observed and would help ensure the aim of excise tax increases could not be easily circumvented by the introduction of new, less expensive brands or brand variants.

Second, we found tobacco companies had generally increased prices beyond the increase in excise tax (including the annual inflation adjustment), a strategy that will have increased their overall profitability. Prices of everyday and premium brands, the two more expensive market partitions, had increased more than the prices of budget and super-value brands. The differential over-shifting among more expensive brands expanded the price gap between lower and higher priced brands, and meant the super value and budget partitions became relatively cheaper compared to the everyday and premium partitions. Thus, at the same time as increasing their overall profits, tobacco companies ensured lower priced brands and variants remained available as alternatives to quitting. Although changes in net real stick prices were often small, when aggregated over hundreds of thousands of sticks, these changes had considerable revenue, and hence profit implications.

Policy makers could address this latter finding by introducing a minimum retail price, which could eventually eliminate the super value and budget price partitions.10 Or, to avoid this strategy enhancing the overall profitability of tobacco companies, policy makers could set maximum wholesale prices and impose higher taxes, thus ensuring retail prices did not drop and increased profits go instead to the government.11

Any pricing strategy that increases the costs to people who smoke needs to manage the risk that they may displace other purchases as a way of accommodating rising tobacco costs.12 13 Evidence that the vast majority of people who smoke want to be smokefree behoves policy makers to strengthen policies that will cue quitting (e.g., denicotinised tobacco and fewer retail outlets) and increase the community-based cessation support available. The widespread availability of vaping products in NZ provides a relatively low-cost alternative to smoking and offers people who cannot stop a reduced-harm option, though further work is required to prevent access to vaping products by non-smoking youth.

Setting a minimum tobacco retail price or setting maximum wholesale prices and imposing higher taxes, would greatly limit tobacco companies’ ability to undermine pricing measures, which have played an important role in reducing smoking in NZ. Health Committee members considering submissions on the Smokefree Environments and Regulated Products (Smoked Tobacco) Amendment Bill have an important opportunity to ensure the Bill includes pricing measures that reduce tobacco companies’ ability to undermine the intent and impact of government policy. Including such strategies in NZ’s legislation would support the core measures of denicotinising tobacco, reducing retail outlets, and introducing a tobacco-free generation.

* Authors: Philip Gendall, Janet Hoek, Richard Edwards and Nick Wilson are members of the Department of Public Health, University of Otago, Wellington. Robert Branston is a member of the School of Management at the University of Bath, UK.

References

  1. Ernst & Young. Evaluation of the tobacco excise increases as a contributor to Smokefree 2025. Wellington, 2018.
  2. US National Cancer Institute and World Health Organization. The economics of tobacco and tobacco control. National Cancer Institute Tobacco Control Monograph 21. NIH Publication No. 16-CA-8029A. Bethesda, MD: U.S. Department of Health and Human Services, National Institutes of Health, National Cancer Institute; and Geneva, CH: World Health Organization; 2016.
  3. Chaloupka FJ, Yurekli A, Fong GT. Tobacco taxes as a tobacco control strategy. Tobacco Control 2012;21(2):172-80.
  4. Janazzo D. Thoughts on “why are the poor blamed and shamed for their deaths?”: Foundation for a Smoke-free World; 2018 [Available from: https://web.archive.org/web/20180524135606/https:/www.smokefreeworld.org/blog/tag/smoking accessed 12 October 2021.
  5. British American Tobacco. Proposed smokefree Aotearoa 2025 Action Plan Submission British American Tobacco; 2021 [accessed 12 October 2021.
  6. Marsh L, Cameron C, Quigg R, et al. The impact of an increase in excise tax on the retail price of tobacco in New Zealand. Tobacco Control 2015;25(4):458-63. doi: 10.1136/tobaccocontrol-2015-052259 [published Online First: 2015/07/04]
  7. Gilmore AB, Tavakoly B, Taylor G, et al. Understanding tobacco industry pricing strategy and whether it undermines tobacco tax policy: The example of the UK cigarette market. Addiction 2013;108(7):1317-26.
  8. Ministry of Health. Tobacco returns undated [Available from: https://www.health.govt.nz/our-work/preventative-health-wellness/tobacco-control/tobacco-returns accessed June 08 2021.
  9. Gendall P, Gendall K, Branston JR, et al. Going ‘Super Value’ in New Zealand: cigarette pricing strategies during a period of sustained annual excise tax increases. Tobacco Control 2022:tobaccocontrol-2021-057232. doi: 10.1136/tc-2021-057232
  10. Ribisl KM, Golden SD, Huang J, et al. Addressing lower-priced cigarette products through three-pronged comprehensive regulation on excise taxes, minimum price policies and restrictions on price promotions. Tobacco Control 2022;31(2):229-34. doi: 10.1136/tobaccocontrol-2021-056553
  11. Scollo M, Branston JR. Where to next for countries with high tobacco taxes? The potential for greater control of tobacco pricing through licensing regulation. Tobacco Control 2022(31):235–40. doi: doi:10.1136/tobaccocontrol-2021-056554
  12. Barbalich I, Gartner C, Edwards R, et al. New Zealand smokers’ perceptions of tobacco endgame measures: A qualitative analysis. Nicotine & Tobacco Research 2021;24(1):93-99.
  13. Hoek J, Smith K. A qualitative analysis of low income smokers’ responses to tobacco excise tax increases International Journal of Drug Policy 2016;37(Nov.):82-89.

 

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