Prohibitionomics

ASH have produced an amusingly inept report today which has received a justifiable lack of interest from the media. The document - Counter-arguments - is designed to soften up retailers for the day when ASH push for full prohibition. It makes a ham-fisted attempt to persuade them that selling tobacco, despite all appearances, is not a good way of making money.

The "counter-arguments" are ridiculous, bordering on dishonest...

Profits. Despite the high volume of tobacco sales in convenience stores, accounting for 25% of total sales income in our sample, small retailers make very little money from tobacco. The margin on tobacco products is around 6% compared to an average of 24% for the other products they sell.

This is a pathetic claim. 80 per cent of the price of a pack of cigarettes is tax. If 80 per cent is tax, it is impossible to make a 24 per cent margin. The main job of a tobacco retailer is to collect tax for the government. The real question is how much of the pre-tax price goes to the retailer. The answer is closer to 40 per cent. Elsewhere in the report, they mention that retailers make an average 44p profit on tobacco transactions. Given that the pre-tax price of a pack of cigarettes is barely more than £1 this is a pretty generous margin.

If ASH are so concerned about retailer margins, they should support a cut in tobacco duty. Every cut in tax would increase the margin as a percentage of the price. That won't actually make retailers any more money, though, because it is the amount earned not the percentage that matters to their livelihoods. On such a heavily taxed product, the post-tax margin is an irrelevance.

Footfall. Tobacco manufacturers claim that retailers do well from tobacco sales because smokers buy other products while they are in the shop. However, other than the money they spend on tobacco, smokers do not spend significantly more than people who do not buy tobacco.

This is a bit of a straw man. The importance of footfall is not getting smokers to spend more money than nonsmokers - though they do - it is getting them in at all. If smokers bought their cigarettes from supermarkets rather than newsagents, they are likely to buy their drinks and newspapers from supermarkets at the same time. The small shops would get nothing.

Variety of stock. Tobacco manufacturers encourage retailers to maintain the availability of their own brands and brand variants. Yet the cost to retailers of ignoring this advice is low: a few disappointed customers per week add up to a very small cut in profits.

I don't know if the cut in profits would be small or not, but it shows how little ASH know about small shopkeepers, who work incredibly long hours in a difficult trading environment, that they think they would be prepared to sacrifice any size of profit - or disappoint any customers - on the whim of an extremist single issue pressure group.

Opposition to new legislation. The claim that tobacco control measures increase the size of the illicit market does not stand up to scrutiny. In Britain, the market share of illicit tobacco has declined since 2000 despite all the changes to how tobacco is sold. The size of the illicit market is determined principally by the effort put into law enforcement.

ASH always use 2000 as their starting date for measuring the illicit trade - and it is true that the illicit trade is smaller now than it was then. What they don't mention is that 2000 saw a massive spike in cross-border shopping to the EU after successive tobacco duty rises in the 1990s. This taught the government that it could not keep hiking up taxes ad infinitum and for the next eight years, it froze tobacco duty in real terms. In the last five years, however, there have been steep tobacco duty rises and - surprise, surprise - the illicit market has grown. Even by the questionable estimates of HMRC, the share of tobacco that is non-duty paid has risen by a third since 2011/12. We shall see what effect the display ban and plain packaging have, but the news is unlikely to be good for legitimate retailers.

As a point of fact, there is a direct relationship between tobacco taxation and illicit tobacco sales. The UK, Ireland and France have the highest taxes on cigarettes and, not coincidentally, also have the largest illicit markets in Western Europe. The belief that black markets can be eliminated through enforcement is a myth dating back to the Anti-Saloon League.

A new approach. Retailers could benefit from a declining population of smokers if they reduce their stock of tobacco to core products, shift their gantries out of customers’ line of sight, and use the freed-up space to promote and sell higher margin products. They can keep regular smokers among their customers while reducing the burden of smoking on their cash flow and, potentially, increasing their profitability.

I suspect that shopkeepers know rather more about how to make a living from running a shop than an economically illiterate, state-funded, nanny state lobby group. The reason retailers keep tobacco products close at hand is that they need to be reached many times a day and need to be kept out of the way of shoplifters; thanks to the aforementioned taxes, they are worth thousands of pounds.

ASH live in such a world of fantasy that they can make claims like 'in Australia, the introduction of standardised packaging actually increased the efficiency of retail sales' with a straight face. Their latest report will raise a hollow laugh from shopkeepers in the real world.