Wednesday 15 August 2012

Australia lights the fuse, prepares for a price war

Australia has moved a step closer to implementing plain packaging after the High Court rejected Japan Tobacco's complaint that the government was stealing its trademarks. In a nutshell, the court ruled that the government is not taking the trademarks to use itself, only preventing the tobacco companies from using them on their packs.

This has naturally induced squeals of delight from antipodean crusaders and "Simple" Simon Chapman was quick off the block to celebrate Australia's lurch towards the black market. In his excitement, he even told the truth about what will happen when plain packaging comes in...

First, we will see dramatic price falls in the retail price of tobacco. Many will think “these [famous name brand] cigarettes are costing me $3 to $4 a pack more than cheap unknown brands in exactly the same packaging except for the small brand name. They taste pretty much the same as cheap brands, so why should I pay out all the extra?”

Er, yes. I told you that would happen back in January when I wrote the following...

Plain packaging will result in people paying less for their cigarettes for other reasons. The first is that manufacturers operating in a completely “dark market”—ie. one in which they have no communication with their customers—are only able to compete on price. The second is that many consumers will drift towards cheaper brands when the premium brands lose their identity.

The bug-eyed sociologist continues...

Tobacco companies today chase the “value market” because they know that total sales volume is steady and the margins on high-end brands is where they profit most.

That's right. Again, I said all this in my paper for the Adam Smith Institute...

Knowing the power of packaging to imply quality, companies often produce two barely distinguishable versions of the same product and give the budget brand a consciously inexpensive-looking package, even though it would cost no more to make it look glitzier. The same is true of cigarettes which are branded and packaged according to the price point. One in two smokers cannot distinguish between similar cigarettes in blind trials and it is reasonable to expect many of them to downgrade to cheaper brands under a regime of plain packaging. This is the main reason the tobacco industry is so vehemently opposed to plain packaging: its top brands are worth billions of pounds and any government which misappropriates them can expect to be sued, as is already happening in Australia.

... It is the profitability of premium brands which is at stake in the plain packaging issue, not cigarette consumption per se.

This is all quite obvious stuff to anyone who has ever dabbled in logic, but throughout the whole campaign for this ridiculous policy, Chapman has continually claimed that Big Bad Tobacco objects to plain packaging not because it values its trademarks (as any industry would) nor because it wants to protect its more profitable premium brands, but because it's going to reduce the number of smokers. To take just a handful of his many tweets on the subject:

But now the truth can be told. The money is in the premium brands. The premium brands are about to lose much of their appeal and so people are going to turn to cheaper cigarettes. Pushing people onto cheaper cigarettes is not generally considered to be best practice in public health. But fear not, because Chapman has the solution...

But the Australian government can simply raise tobacco tax overnight as often as it needs to effectively maintain a floor price for cigarettes that will deter smokers from buying more than they could have afforded previously.

The man's a genius! Make cigarettes more expensive and fewer people will buy them. Why has no one thought of this before?!

Since this is such a cunning plan, why not double the price of cigarettes? In fact, why not triple it?

Oh, that's right. Because higher prices give massive incentives for people to buy cigarettes on the black market and it gives black marketeers further incentives to increase supply. That would explain why Ireland—the home of Europe's most expensive cigarettes—has an illicit tobacco market which is off the frickin' scale. Add plain packaging into the mix and you have cigarettes that are easier to counterfeit, combined with bigger profit margins from escalating tobacco duty. And, of course, organised criminals don't care how old their customers are. Jeez, what could possibly go wrong?

None of this will worry our Simon because he has what can most charitably be described as a simplistic view of how the black market can be policed. You may recall this gem from last year, a classic example of why people who have no sense of irony should not attempt sarcasm:

So while one in six smokers apparently know where they can repeatedly buy illegal tobacco, strangely, with more than a billion dollars supposedly being lost, the gormless Federal Police with all their intelligence and resources and impressive history of major smuggling busts cannot find any of these same retail outlets and prosecute.

I can only repeat what I said at the time about this stupefyingly dim-witted comment:

It's a measure of Chapman's immense talent that he can solve the centuries old problem of smuggling in one throwaway sentence, but this is a true Eureka moment, is it not? If the public can get hold of illicit substances, so can the authorities. Like all the best ideas, the beauty lies in its simplicity. All the police have to do is go undercover, find out where people are getting illicit goods and then find out who supplied them to them, and so on until you get to the top of the chain. Then make a few arrests and—ta-da!—the problem is solved. If only the DEA and the FBI had thought of this 100 years ago, we could have made a success of Prohibition and the War on Drugs. I look forward to reading this guy's next webitorial when he will solve the Palestinian problem and the common cold.

When this policy comes in it will be open season between the tobacco industry and the anti-smoking crusaders, with the black marketeers waiting in the wings. BAT's press release shows that they expect the government to jack up prices to bring about a reduction in smoking prevalence which it can then attribute to plain packaging:

As there’s no proof that plain packaging will actually work we expect the Federal Government to impose [on] the industry a large excise increase alongside plain packs to try and get more people to quit so it can say ‘look green packs worked’.

Chapman, meanwhile, expects the tobacco industry to reduce prices to maintain smoking prevalence for the same reason:

Australia is a tiny market for Big Tobacco, and it may well be willing to treat us in the way as when supermarkets place drastically reduced “loss leader” items on special to get customers into the store. The industry will be so desperate to demonstrate to watching nations that plain packs “don’t work” that it might even be prepared to wear local losses for a year or so.

Time to get out the popcorn. It's war!


Anonymous said...

Dave youve got to read this story on the AUSSIE PLAIN PACKS BEFORE YOU GO ON CNN.


although it has withheld its reasons for the judgment until later this year.

They dont state why because their ruling breaches international trade TREATIES which are a higher court and law than the Aussie supreme court!The fact is this shows just how illegal the courts have become in their alliance with tobacco free advocacy. Plainly the courts are no longer impartial but more a JUDGE ROY BEAN hang em high sort of law! Dont expect the laws to be upheld in any court any longer! Big tobacco should immediatly shut down all operations within Australia and let the chinese bootleggers take over the void and the revenues the government would lose!


Mark Wadsworth said...

You make some good points.

As to the intellectual property, I think that the court will find this easy to justify.

Most trademark protection which the government does is preventing other people from using YOUR trademark. As long as the government stops people from putting out fake goods using YOUR name or logo, then your IP is protected.

But as a trade mark owner, you cannot then automatically expect to be allowed to use your own trade mark in all circumstances and at any time. The government does impose standard designs for certain things which manufacturers must adhere to, like seat belts in cars.

It's the second bit which the Australians have done. If the standard design for fags is green, then so be it.

There would be, for example, no point in a car manufacturer saying "Aha, but my trademark is not having seat belts".

Anonymous said...

I'd love it if Philip Morris and BAT and the other tobacco houses just shut up shop and pulled out of the Australian market altogether. Then the Australian government would have a very hard time explaining to the electorate why there is billions of dollars shortfall in the budget.

Ivan D said...

Did you mean sociologist or socialist Chris?

It is notable that Chapman, Scally and co are of the far left so see themselves as warriors taking on the vested financial interests of big business whilst conveniently ignoring the fact that they and the rest of their kind are paid to do so.

I suppose that there aren't many career opportunities for intellectually challenged extremists with degrees in sociology so the state has to provide somehow.

Anonymous said...

Outstanding blog you guys have preserved there, I totally valuate the effort.


Bill Budd said...

The logic behind plain packaging is really quite bewildering.

For the last few years cigarette packets in Australia have been festooned with all kinds of very graphic and revolting images of medical conditions caused by smoking cigarettes. It could only be the smoker with a very strong stomach, or possibly a morbid fascination with oncology, that could look at a cigarette packet.

In this context it seems rather bizarre that anyone would think removing what design or brand remains, or making all cigarette packets green, is going to make any difference to someone contemplating buying a packet of cigarettes. They buy them to smoke not to own and admire a little cardboard box with a design logo conceived in the 1950's.

Its equivalent to attempting to reduce gun crime by introducing legislation to make all Glocks bright-pink with Upsy Daisy motifs. Of course no self respecting gang-banger would like it but its hardly going to stop them whacking someone with it?

I also doubt that Tobacco companies really see any aesthetic value remaining in the packaging of their products.

So why are they fighting this in the court?

As Sun Tzu or someone once said, "all war is deception" and this couldn't more apt in this most recent battle in the Tobacco War.

The Australian Government is deceiving us that they are doing something really useful to reduce Tobacco use. Of course they could quite easily ban the sale of Tobacco products, but the $9bn tax revenue loss would be just a little bit too hard come the next election. Although this loss of tax revenue probably pales by comparison when considering the other costs to the economy. For example, nursing home expenses go up by more that a quarter of a billion dollars a year. Crikey! That is a lot of Knees up Mother Brown!

The long-term impacts on the pharmaceutical industry alone would probably be several orders of magnitude greater, everything from the nicotine replacement therapies to cancer treatments. Does anyone know how much it costs for a few rounds of chemo? Me neither but I bet its heaps!

The Tobacco companies defending these actions are just playing along with the gormless twits we elect here Down Under. I doubt BT could give a three-day-old fag end what their packets could look like anymore...most continuing obviously smokers don't.

If I was a BT exec this is a battle I would be delighted with since its as plain as the packaging on your smokes that its not going to make a scrap of difference to sales and certainly no difference to the attractiveness of their products.

It also serves an excellent distraction to any consideration of alternative legislation that might actually have some impact on Tobacco usage.

So in this last round of the War on Tobacco everyone's a winner, except the smokers of course. Day by day they keep get poorer and sicker, derided and ostracised for an addiction they probably have much less control over than Big Tobacco, Big Pharma and the Australian government would like us all to believe.

Karl Fasbracke said...

So the net effect will be to divert some of the smoker's money from the tobacco industry to the government and some to the black market?

Ivan D said...
This comment has been removed by the author.
Ivan D said...

Yes Karl and a percentage of that government money will be used to keep the likes of Chapman in the manner that they have become accustomed to. It is in their interests to continue to dream up new campaigns, no matter how ridiculous as the other "purpose" they serve is to make talentless public health leeches and their political allies feel like they are achieving something. It is hardly surprising that Oz is leading the world when it comes to repressive, pointless legislation when you think about the "quality" of their government and it's leader

Bill Budd said...

Karl, I'm thinking it will make absolutely no difference at all, to anything, and that is my point. The plain packaging legislation is a pointless political stunt that I strongly suspect the tobacco companies are just as happy to be involved in as the Australian Government.

Prices Wars? Maybe pricing would influence occasional smokers or beginning smokers. However, the overwhelming majority of the market are chronic long-term smokers and they smoke brands they can afford and that taste the least unpleasant to them. They are otherwise rusted on consumers of their cigarette brand and although they might occasionally switch brands, this is rare and infrequent. Any influence that cigarette packet appearance might have had has long since ceased to play any significant role. The information about the brand type obviously remains and for most addicts this is the only information contained on a packet of cigarettes they would ever use.

Its not that I'm opposed to plain packaging and I even think putting revolting images and health warnings would undoubtedly have some effect on reducing the number of smokers. However that option has long been exhausted and so any further changes to packaging will make little difference to the millions of addicted smokers who continue to smoke or people who would have taken up smoking pre-plain packaging.

If I was a tobacco exec I would be busily designing gorgeously attractive cigarette cases that are widely available at minimum cost ... where only my particular brand of cigarettes would fit. No amount of Australian taxpayers money would ever produce legislation to prevent that.

However this is ultimately pointless as tobacco smoking is on the slippery slope to oblivion. The electronic cigarette tsunami is about to thunder through the global tobacco market carrying away most of its major consumers, that 80% of smokers who don't want to smoke and regret ever starting. The nicotine addict who just cannot quit.

My advice is to buy a few packets of cigarettes soon, particularly ones with the oncology imagery as they are about to become serious collector items. eBay pages will be full of collectors looking for that very rare bowel cancer Malboro, or the Kool with the whole-of-packet gum disease, or the ridiculous plain packaging Australian Winfield Blues with the bleedingly obvious health warnings. All permanent testament to the gob-smacking hypocrisy that currently represents global tobacco health policy.

Anonymous said...

Kairos has me confused. His logic sounds a little Rollo-ish.

He argues against standardised packaging (which gives Tobacco Control control of THE SIZE of packets, and thus the contents at their discretion) but claims with certainty that tobacco is strongly addictive (against the evidence).

Clearly, he is a smokerphobe Holy Zealot. He is not really arguing against standardised packaging, as appears:

It also serves an excellent distraction to any consideration of alternative legislation that might actually have some impact on Tobacco usage.

He is arguing for more vicious persecution.

Tobaccodeath said...

Good grief! If the tobacco industry were forced to list all of their toxic ingredients on each package of cigarettes (as every other product you stick in your mouth does!) you would not legally be able to throw one into a landfill, let alone TOUCH one or (heaven forbid!) stick it in your mouth and SMOKE it! Cadmium, hydrogen cyanide, formaldehyde, nicotine, acetone, ammonium hydroxide, Drano, 619 additives, 4,000 to 8,000 deadly chemicals, 63 known cancer-causing carcinogens.... Why is this murdering industry still in business? Oh... I know. Because all of their victims are too sick to sue them by the time they are dealing with radiation, chemo, and operations... or they are already DEAD... like all my friends and family that were murdered by the tobacco industry. And people are haggling about the stupid PACKAGING???? I say cover the ENTIRE PACK with pictures of the reality of what tobacco does. Wake up people. Tobacco KILLS when used as intended!

Bill Budd said...

Junican, Yes you are correct..I'm not against plain packaging, I just think it's a political stunt that is as pointless as it is deceptive. Cleverly crafted to appease the anti-smoking lobby without damaging the extensive financial interests of those who profit from the tobacco industry.

I'm also not really pro or anti-smoking, I think this is a pointless debate that seems to often derive from an individual's moral or political views. I guess that's why some of the posts seek to justify their views by criticising an individual's political orientation?

Obviously you must be a pro-smoking type person and my guess is you probably need to believe tobacco companies are being persecuted and cigarettes are not addictive in order to maintain pro-smoking views? Whatever, you're entitled to them and while I'm not sure these views necessarily stack up, I do appreciate your contribution.

Personally, I'm more the harm reduction type person. I'm not sure I'm a Holy Zealot (although mum would be pleased) but I am stridently opposed to the hypocrisy reflected in the plain packaging legislation. If governments wanted to do something useful about tobacco they could very easily just ban it.

Of course that isn't going to happen, there are just too many self serving politicians and multinational financial interests at stake. So I'm thinking harm reduction provides a more practical and immediate option for smokers and will save lives.

Currently some of the major cigarette companies are looking at developing types of cigarettes that are supposed to be safer but I'm thinking its too little too late. Others are buying into the exploding electronic cigarette market, but my guess is they have well and truly missed the boat there as well.

I think its time for public health and governments to realise that tobacco isn't really the problem here, its the nicotine stupid!

Nicotine addiction is what needs to be better understood and it is nicotine (not tobacco)that needs to be regulated and controlled. When I say controlled I don't mean the use of nicotine. Just those who would seek to continue to profit from it's use and that includes the health, pharmaceutical as well as the tobacco industry.

Anonymous said...


I am not a 'sock puppet' for the tobacco industry. I care not one jot about them. All they do is supply the products which I wish to consume. I am against the Tobacco CONTROL Industry because of the lies, deceits and emotional propaganda which they parrot over and over again.

Smoking is a habit which one can indulge more or less whenever one wants to (especially if, like me, you are retired). It is a habit which is difficult to break, and I do not doubt that there are psychological 'hooks', but an addiction? Good heavens no! I enjoy my beer and my wine and I would find it horribly difficult to stop enjoying alcohol, but am I an alcoholic? Heavens no! I have become used to not smoking in airports or on the aircraft. It bothered me at first, but not now. It just doesn't bother me. It never bothered me not smoking in a church or a lecture hall. When I go to bed I don't even think of a cigarette until I rise the next morning. Smoking is a habit.

During the McTear versus Imperial Tobacco court case (ended 2005), the expert witnesses for McTear (who included Richard Doll) had ample opportunity to produce evidence to show that nicotine is addictive. They failed to do so, citing 'ipse dixit's from the Surgeon General's reports and their own reports. On the other hand, the experts for Imp Tobacco produced ample evidence that nicotine is NOT adictive. May I suggest that you read my summary of the Judge's summing up? You can access it here:

If you can bring yourself to read it, you will see that, when it came to hard facts, Tobacco Control had no case. The Judge saw through their blandishment with the greatest of ease. You will see that the Tobacco Control have no evidence. Their surveys are not evidence. Their studies are epidemilogical correlations and not evidence (and they failed event to produce those).
Here is a little something for you to think about. Shortly after the last war, the divorce rate shot up. At the same time, the import of apples shot up, uncannily following almost the exact growth rate as that of divorces. Question: Was it the increase in divorces which caused the increase in apple imports, or what was it the apple imports wich caused the divorces?

As for second hand smoke - don't get me started....

Tobaccodeath might like to read the above also.