Large cigarette companies can keep their products
affordable for young people and the poor by shifting the burden of rising excise
taxes from cheaper brands to more expensive cigarettes, according to a new study
from the UK.
The analysis of cigarette makers' behaviour over a decade in that country
found the companies may also often hide price hikes on expensive brands by
timing them to coincide with the tax increases.
"They're playing a clever game with prices. They're making large profits with
their expensive brands, and they're keeping their cheap brands very cheap to
keep young people in the market," said Anna Gilmore, the study's lead author
from the University of Bath and the UK Centre for Tobacco Control Studies.
Taxes imposed to curb use
Typically countries impose taxes on tobacco products as a way to curb their
use - especially by making them too expensive for young people and the poor. But
Gilmore and her fellow researchers write in the journal Addiction that no one
had studied how the UK tobacco industry responded to these taxes.
For example, did the companies absorb the taxes without passing the
additional cost to customers? Did they pass the costs along to some customers
but not others? Or did they raise prices on top of the new taxes to increase
revenue? The answer was all three, depending on which sector of the cigarette
market one examines.
Using consumer and market research from 1999 through 2009, Gilmore and her
colleagues found that the UK cigarette industry put its products into four
categories: premium, mid-priced, economy and ultra-low priced.
UK tobacco firms started selling ultra-low priced cigarettes in 2006, when
the companies bought the brands from supermarkets.
The category's price to consumers has remained virtually unchanged since
then, but their share of the market has doubled, according to the
Overall, Gilmore and her colleagues found the tobacco companies tend to pass
on the cigarette taxes to consumers on the most expensive cigarettes, but taxes
on ultra-low priced cigarettes are not always passed to consumers.
Monitor prices by type
For example, the pre-tax price of a pack of ultra-low priced cigarettes
dropped by 3 pence in the year after the companies took over the brands, while
the price of a pack of premium, economy or mid-priced cigarettes increased
between 2 pence and 4 pence from 2006 to 2007.
One pence is equivalent to about 0.02 US cents. The tobacco companies then
made up for the initial price cut on ultra-low priced cigarettes during the next
year by increasing their pre-tax price more than 4 pence, compared to increases
for premium, mid-priced and economy cigarettes of about about 1 pence to 3
After that, the prices of ultra-low priced cigarettes remain virtually static
while the other categories continued to rise. Gilmore said that the tobacco
companies win by volume among ultra-low priced cigarette smokers, and by keeping
the young and poor in the market - instead of letting the taxes price them
"The idea is to keep those people in the market and one day they'll trade up
to one of the more expensive brands," she said.
The researchers also note a distinct difference between categories in the
timing of cigarette price changes - for the more expensive brands, pre-tax price
increases happened between November and May, which is when new tax rates would
For the ultra-low priced brands, the prices dropped during that period and
rose again between May and December.
The researchers conclude that governments should monitor cigarette prices by
type - premium, mid-priced, economy and ultra-low priced - and consider the
industry's pricing strategies when setting taxes.
Gilmore said that she suspects these findings are also
applicable to other countries.
But the UK's Tobacco Manufacturers' Association said tobacco pricing is a
matter of competition, and that the new study's findings are based on a time of
change in the industry.
"This report is based on 2001-2009, when tobacco duties rose by inflation and
combined with greater enforcement action led to a gradual, but very much welcome
decline in smuggled products, stabilising Government tax receipts," the
Association said in a statement.
Moreover, the Association noted, tobacco taxes have increased significantly
That increase, the statement said, is leading smokers to get their products
from other sources and ultimately costing the government money.