Plain Packaging Revisited

Source from:  Tobacco Asia 08/26/2014

Eighteen months after Australia’s first of its kind plain packaging law came into effect, it remains to be seen whether forcing companies to remove their branding and logos and replace them with graphic images of smoking-related diseases on a plain background has actually achieved the government’s goal of lowering the number of people smoking.

On one side of the debate are supporters of the Australian government’s law, saying that tobacco plain packaging has, in fact, helped lower the number of smokers. Supporters of this train of thought are, understandably, government officials and anti-smoking advocates, many of whom quote figures from the Australian Bureau of Statistics (ABS) that show a decline in smokers in Australia since 2001. It would be worthy ofnote, however, that the "downward trend" seen in ABS’ figures covers a period prior to the introduction of the plain packaging law, which came into effect in December 2012. ABS has yet to release data on smoking rates after that.

On the other side of the debate are those who disagree with the idea that tobacco plain packaging would really make people smoke less. Both Philip Morris International (PMI) and British American Tobacco (BAT) have released data that show that instead of reducing the number of people smoking, plain packaging has actually caused the opposite effect. British American Tobacco Australia (BATA) spokesperson Scott McIntyre said that since plain packaging was introduced, industry volumes had actually grown for the first time in over a decade while the decline in the number of people smoking had dropped by over half. PMI’s data said that there was a 0.3%/59 million stick increase in 2013, and KPMG found an increase in total tobacco consumption (including illicit tobacco) in 2013.

"From 2008 to 2012, smoking incidence, or the number of people smoking, was declining at an average rate of 3.3% a year. Since plain packaging was introduced, that decline rate slowed to 1.4%,"  McIntyre said.

"Over the five years in the lead-up to the introduction of plain packaging, total tobacco industry volumes were declining at an average rate of 4.1%. Subsequently, since plain packs were introduced on December 1, 2012, industry volumes have actually grown for the first time in yearsup 0.3%. Further, the number of cigarettes smoked on a daily basis declined at a rate of 1.9% in the five years leading up to plain packaging, while it declined 1.4% after green packs hit shelves," Mcintyrefurther explained.

Chris Argent, PMI’s director of corporate affairs, said: "Industry sales data collated by the independent firm InfoView, confirm that the downward trend within legal tobacco has accelerated since the introduction of plain packaging. The only market segment in growth is "deep discount", which grew by nearly 90% in 2013, and is continuing to grow in 2014. Consumers looking for perceived value are also moving to roll-your-own tobacco products, which saw a 3% increase in 2013, and was responsible for the slight increase in total tobacco sales. Competitor discounting in the lowest price segment and the 12.5% tax increase in December 2013 have exacerbated these trends."

Figure 1: InfoView chart showing change in price segments over recent years.

Countering claims that lower tobacco clearances signal fewer smokers, Argent explained, "Proponents of plain packaging have pointed to comments from the Australian Treasury that tobacco clearances fell by 3.4% in 2013 relative to 2012, as evidence that plain packaging is reducing smoking. While we don’t know the full detail of the Treasury’s tobacco clearances from their statement, you cannot simply compare 2013 tobacco clearances to 2012 tobacco clearances due to the replacement of branded stock on retailers’ shelves with plain packaged stock. This does not mean sales volumes were double-counted in 2012, it does however mean that from a tobacco clearance perspective it was double-counted as we must pay tax on every packet we sell and most refunds for the payment of excise tax on the branded stock to be destroyed were not processed until the first quarter of 2013."

"Assuming a similar approach by other companies, it’s therefore not surprising that the Treasury’s tobaccoclearances in 2013 may have been below the inflated 2012 figures, nor is it incompatible withthe industry data that shows a 0.3%(59 million stick) increase in actual sales for the 2013 calendar year."

Another unfortunate effect of plain packaging has been a jump in sales of illicit tobacco, since the packs are easier to counterfeit, which in and of itself poses a much bigger health concern and a de facto security threat. Accounting firm KPMG estimates that illicit tobacco, whether smuggled, counterfeit or illegal, jumped from 11.8% of the Australian tobacco market to 13.3% from June 2012 to June 2013. Since plain packs were introduced over 400 million additional illegal cigarettes have been smuggled into the country. The illegal tobacco market in Australia is now equal to around 2.7 billion cigarettes overall.  The key driver of this growth has been a large increase in the consumption of illegal, branded cigarettes, primarily in the form of contraband. Consumption of counterfeit cigarettes has also increased. The 151% increase in black market, branded cigarettes has come at the same time as volumes of illicit unbranded tobacco, known as "chop chop" in Australia, have declined by 31%. If these black market purchases had been made in the legal market, the government would have collected A$1.1 billion (US$1.03 billion) in additional excise tax revenue.

"With growth in industry volumes, fewer people quitting, and a jump in the amount of cheap illegalcigarettes on the streets, you could draw the conclusion that people are actually smoking morenow than before plain packaging came into effect," said BATA’s McIntyre.

Complaints against Australia’s plain packaging laws are not limited only to home ground. Ukraine, Honduras, the Dominican Republic, Cuba, and Indonesia have all filed complaints against Australia with the World Trade Organization (WTO) because of the threats to both trademarks and economies posed by this law. Since the WTO Dispute Settlement Understanding (DSU) was created in 1995, there have been more than 500 cases initiated. In the single case involving tobacco control regulations – the Indonesia-US case on clove cigarettes – the WTO ruled in favor of Indonesia, stating in no uncertain terms that the US measures had "discriminatory intent."

Significantly, Australia’s actions in relation to plain packaging of tobacco products have begun to impact the way some countries view other products. Indonesia’s trade minister, GitaWirjawan, has said that Indonesia should implement plain packaging of Australian wine as a form of "retaliation". Following these comments, the director general of international trade cooperation of the Ministry of Trade, ImanPambagyo, said that there was a possibility that the Indonesian government would impose the plain packaging policy on wine from Australia.

"Put simply, there's no consistent, credible evidence that plain packaging is working as a public health measure," said Mr. Argent. "But there is clear and credible evidence that the black market is booming and Australia has exposed itself to potentially damaging trade sanctions."
Retailers are also being affected by the Australia’s plain packaging law, with dwindling retail bottom lines despite the same volume of tobacco being sold. According to the Australasian Association of Convenience Stores (AACS), the actual volume of tobacco sold by convenience stores in Australia remains stable, with some reporting an increase in tobacco sales since plain packaging was introduced. Yet, it is the additional costs that small retailers in Australia have been forced to absorb that has seriously impacted their bottom line.

"Plain packaging has triggered a variety of additional costs for retailers to bear, including costs associated with staff training, labor, product handling errors, increased inventory management procedures, and customer frustration," said AACS c.e.o. Jeff Rogut, "all the while volumes of legal tobacco sold remain constant and the black market trade of tobacco in Australia escalates to unprecedented levels."

The AACS represents the interests of over 6,000 stores in Australia. While member stores retail legal tobacco products, the AACS is not an arm of, or lobby group for the tobacco industry.

According to the AACS, tobacco makes up 35.5% of convenience store sales on average. In 2013, tobacco sales in stores increased by 5.4%, a US$120 million increase from 2012 (when the plain packaging law had yet to come into effect). This increase could be attributed to the 58% increase in the 'sub-value’ segment as individual consumers gravitated to cheaper tobacco products.

Australia’s plain packaging program is being closely watched by other countries including the United Kingdom, which is looking to implement similar measures but has not made any final decisions as to whether it will introduce the policy.

However, there has been concern that the British government is considering the introduction of plain packaging before they have even assessed the full impact of the display ban. The phased implementation of the display ban, which removes tobacco products from the sight of consumers, started in large supermarkets in April 2012, and will be implemented in smaller stores from April 2015. As such, it would seem to make sense for policymakers to evaluate the effectiveness of existing tobacco control measures before implementing new regulations.
Giles Roca, director general of the Tobacco Manufacturers Association, said, "Currently 4% of under 15s smoke in England – the lowest figure for a generation. The focus for government and public health policy-makers should rightly be on reducing this further by preventing children’s access to cigarettes: not by regulating their appearance."

The British government issued a written ministerial statement on standardized packaging on the June 26, 2014 along with a new public consultation document and draft regulations. The consultation will run in the UK for six weeks until August 7, 2014.

When asked about the effects on the UK tobacco industry should plain packaging become law, Roca said, "Plain packaging is a dangerous precedent for all businesses. Once the premise is established that Government can censor packaging irrespective of manufacturers’ rights, then anything that health lobby groups disapprove of in the future could be subject to additional regulation. Tobacco-control groups may claim that tobacco is a unique case, but the current debate on mandatory labelling information on items such as alcohol, food, and confectionery mirrors the experience of tobacco control initiatives over the last decade."

"Plain packaging will also harm British exports and have implications for any business that creates wealth for the UK economy through IP, brands, and trademarks. That is why organizations such as the CBI,Business Europe,and the British Brands Groupare opposed to it."
He also said, "The associated businesses of tobacco manufacturers, such as retailers,logistics, warehousing, distribution, marketing, design, and packaging companies – who collectively support approximately 53,000 UK jobs – are also likely to be affected by the introduction of the policy. Such businesses will need to deal with additional, unnecessary red tape; this seems to fly in the face of current UK policy, which aims to reduce unnecessary business regulation – especially as far as smaller businesses are concerned.

"Plain packaging will lead to an increased risk of illegal tobacco, as any brand can be replicated easily if they all look alike. The regulations would effectively provide instructions to counterfeiters on how to fake the pack. Counterfeit tobacco products are already easily available in markets and car-boot sales across the UK. Criminals do not care who they sell to – and frequently target children. Increasing illicit trade will drive up criminality and could increase children’s access to illegal tobacco."

The Australian government is going to conduct its own review of plain packaging in December 2014. Enditem