One of the most effective ways of cutting smoking rates is to increase tax on tobacco, discouraging people from buying with higher prices. However, the tobacco industry is known to use a series of tactics to undermine these taxation policies and avoid losing customers. In this piece, Dr Zaineb Sheik and Dr Rob Branston of the Tobacco Control Research Group explain the common strategies used, and consider how these might be overcome.
Alcohol, tobacco, and foods high in sugar and salt are all implicated in the development of non-communicable diseases (NCDs) – that is, diseases that cannot be spread from person to person - and premature death. Each year, 41m people die from NCDs, 17m of these prematurely. The vast majority of these premature deaths happen in low- and middle-income countries. Globally, over 8m deaths each year can be attributed to tobacco use, 1.8m to excess salt in the diet and over 1.5m to alcohol use.
It is a widely accepted principle of economics that demand responds to price. Pushing up the price of a product makes it less affordable, forcing customers to seek cheaper alternatives, or to stop buying the product altogether. Increasing the price can be a useful means of influencing consumer spending, as well as an important tool in public health policy by discouraging consumers from buying unhealthy commodities.
To reduce the potential harms of unhealthy products, governments can raise prices through taxation. In the UK, tobacco duty is currently 16.5% of the retail price plus £5.26 per pack of 20 cigarettes. Higher prices, driven by increases taxation, are one reason that smoking rates have declined rapidly in England – by a rate of more than 1bn cigarettes a year, according to research published in 2019.
There is, however, another principle of economics that can’t be ignored – that companies need to make a profit. When prices are pushed up by taxation and the number of consumers falls, companies need to take action to protect profits and deliver for their shareholders.
Adapt to survive
This might mean adapting their products. Fizzy drinks manufacturers are a good example of this. In 2018, the UK government implemented the ‘sugar tax’ – a levy on manufacturers and importers of soft drinks. A soft drink that contains 5-8g of sugar per 100ml is taxed at 18p per litre. But if the drink contains more than 8g of sugar per 100ml, it’s taxed at 24p per litre. In 2016, the announcement of the impending charge drove more than half of soft drinks manufacturers to reformulate their products in order to reduce the sugar content in their drinks, thereby avoiding the sugar levy (to some extent) when it came into effect. As a result, they could keep prices lower, keep their customers happy, while the public health benefitted from the resulting lower levels of sugar consumption.
Another approach is for a company to adapt its pricing, as the tobacco industry does. Tobacco is massively profitable for its manufacturers so they have every incentive to try to keep selling it. Despite claims of industry ‘transformation’, virtually all tobacco industry profits come from combustible tobacco products. British American Tobacco’s 2021 operating profits of £10.2bn were built on £22bn revenue from combustibles, and only £2.1bn of revenues from its new category products (on which it admitted to making losses).
These companies rely on tobacco burning products for their profits and so the survival of their business. When their profits are threatened by higher taxes on these products, they respond by using targeted pricing strategies to undermine the tax increase.
Pricing strategies to keep their customers
Researchers from the Tobacco Control Research Group and School of Management have identified six pricing strategies the tobacco industry uses in response to tax increases:
- Differential ‘shifting’ of taxes between brands/products: Tobacco companies may ‘undershift,’ where tax increases are not fully passed onto customers. Prices may rise, but not by the full amount to shelter price sensitive consumers. Alternatively, tobacco companies may ‘overshift,’ where they increase the price beyond the tax increase, most often on premium products, so the company can earn even more profit from those less sensitive to price.
- Introducing new brands, variants, segments or products: Tobacco companies introduce cheaper brands or products so smokers can ‘down-trade’ instead of reducing consumption or quitting.
- Price discrimination and price-related promotions: Tobacco companies target price-sensitive customers with coupons, bulk purchase discounts or free gifts, but charge the full price to other customers.
- Price smoothing: Tobacco companies gradually increase prices over time so the rise in cost isn’t as noticeable.
- Shrinkflation: Instead of charging customers more for a product, tobacco companies keep prices the same, but reduce the number of cigarettes or amount of loose tobacco per pack to disguise the price increase.
- Changing product attributes or production processes: In places where tobacco is taxed differently based on its characteristics (such as length, weight or product type), tobacco companies change the product or how it’s made so it falls in a lower tax category.
The tobacco companies use different strategies according to their target market. Undershifting tends to be more frequently used in more price-sensitive low- and middle-income countries, whereas overshifting is more common in high income countries. In addition to their pricing strategies, the industry takes advantage of different legislative loopholes in different countries, adapting product supply accordingly.
The result is that the public health benefits that would come from increased taxes – effectively pricing people out of the market so they’re less likely to start smoking and more likely to quit altogether – are undermined.
There are numerous policy measures that could be introduced to counter these tactics, for example limiting the number of times prices can be changed, banning promotional discounts, specifying tobacco pack size, and freezing the market so no new brands can be launched. Ultimately, the strongest response would be to directly set tobacco prices so that these pricing strategies can’t be used as a weapon against public health measures.
For more information see the STOP report, ‘The Price We Pay: 6 Industry Pricing Strategies that Undermine Life-Saving Tobacco Taxes‘.
The Tobacco Control Research Group (TCRG) is a multidisciplinary, international research group at the University of Bath. Our work focuses on the commercial determinants of health. We specifically examine how major corporations influence health and policy; evaluate the impacts of policy change on health; and provide evidence to inform the development of new policy.
TCRG is a partner in the Bloomberg Initiative to Reduce Tobacco Use (BI) and is part of STOP, a global tobacco industry watchdog whose mission is to expose the tobacco industry tactics that undermine public health.