Barbara Bierach in Sydney investigates how illicit cigarettes driven by plain packs are damaging business for legitimate retailers and wholesalers
In Australia, a pack of Marlboros costs AU$15.95 (£8.90). For that, smokers get 20 cigarettes in a drab, olive-grey packet with a large picture of gangrenous feet or rotting teeth.
In December 2012, the Tobacco Plain Packaging Act made Australia the first country in the world to remove all branding and design from cigarette packets, dedicating 75% of the surface to health warnings. However, smuggled brands such as ‘Manchester’ cigarettes, while illegal, are sold for a bargain AU$6 (£3.35) per pack and without the disgusting imagery.
As a result, in just one year, Manchester’s market share grew from 0.3% to 1.3%, according to a manager at a major tobacco company. In fact, Manchester sells better than legal brands such as Camel or Kent.
In October of this year alone, police in Melbourne seized 71 tonnes of tobacco and 80m cigarettes in 16 shipping containers. It turns out that Scott McIntyre, spokesperson for British American Tobacco Australia (BATA), may have been right when he announced that the Plain Packaging Act was a “bad law that would only benefit organised crime groups”.
Illicit Tobacco in Australia, a report commissioned by the three major tobacco companies operating in Australia (BATA, Philip Morris International and Imperial Tobacco) but produced by KPMG, claims that the strict legislation has failed to achieve both of its goals: to reduce consumption and combat the illicit trade of tobacco.
Government is losing out
According to KPMG, consumption in Australia is up for the first time since 2003 and in the year to June 2013, demand for counterfeit tobacco grew from 11.8% to 13.3%. Had these purchases been made through retail, the government would have collected AU$1bn (£560m) in tax.
The government is not the only one losing out. Retail suffers, too. According to market research firm IBISWorld, the Australian tobacco product wholesale industry is in decline.
“Increasing legislation prohibiting the consumption of tobacco products in public places, retail display bans, the introduction of plain packaging and rising excise taxes are factors plaguing the entire sector, including wholesalers,” wrote researcher Ryan Lin.
These factors are expected to cause a 1.9% decline in industry revenue in the financial year 2013/14 to AU$2.2bn (£1.2bn), especially as the industry still struggles with the effects of the government’s 25% increase in tobacco excise tax from 2010. Lin expects the wholesalers’ business to further shrink by 2.3% annually in the five years from 2014.
The plain packaging does not help: “The introduction of generic packaging will undoubtedly affect industry participants as the prospect of lower consumer demand flows into lower retail demand.”
And it was not an easy market for wholesalers in the first place.
Imperial Tobacco has outsourced its manufacturing to BATA and is therefore regarded as a wholesaler in Australia. BATA and PMI not only dominate manufacturing, but also sell their products directly to retailers, thus squeezing independent wholesalers out of the market.
IBISWorld’s Ryan Lin calls this the “wholesale bypass” and expects the number of wholesalers to further decline over the coming five years, as they find themselves unable to compete with the big players. Of the 46 firms in 2008, 41 are now left.
Gerard Munday, owner of independent Patterson Road Wholesalers in Melbourne, survives by stressing the one-stop-shop model of his business to his clients. Rather than dealing with PMI or BATA, his clients can buy all their tobacco products with one order, one delivery and one payment.
They can also purchase online without a minimum order.
Plain packaging disrupts business
BATA, for example, has introduced a minimum purchase of 10 cartons and only allows payment by bank transfer. In this environment, Munday caters successfully to smaller clients.
“After the law changed and retailers had to put tobacco behind closed doors within the shop, the need to showcase opulence was gone and retailers started to order more often but smaller volumes,” he says.
Munday also has a franchise from specialist tobacco retailer Cignall and so receives extra specials and rebates from the big manufacturers. This is impressive, given the introduction of plain packaging seriously disrupted his business: “It took a lot of work to get us organised: all the branded goods had to go and the non-branded had to be sorted into the shelves. That’s not easy when everything looks the same.”
All is now back to normal, but Munday does not feel that the law is a success for the government. “We don’t see reduced demand at all.”
He believes that price is far more important a factor than branding for many people deciding if and what they smoke. Therefore he expects nothing good for his business from an anticipated additional tax-induced price hike for cigarettes of 12.5% that is due on December 1, even if it increases his margins: wholesalers are paid a percentage of the retail price by the manufacturers.
For suppliers, not much is left to market by themselves. All they can do, says Munday, is educate wholesalers and retailers about their products and then reward them for their knowledge.
They still fight for the best place in the shelves, though, even behind closed doors. “We get a reward if a particular product is at the top end of the shelves,” says Munday, “PMI is particularly good at this game.”
The conclusion of the boss of Patterson Road Wholesalers is: “You cannot fight the government head on – all you can do is find your own niche.