Standardised packaging, minimum excise tax, and RYO focussed tax rise implications for UK tobacco pricing

Abstract

Background Standardised packaging for factory made (FM) and roll your own (RYO) tobacco was fully implemented in the UK in May 2017. Around the same time, several changes to the tax system were applied (a Minimum Excise Tax (MET) for FM products and tax increases weighted towards RYO products). The tobacco industry claims that standardised packaging will lower prices (a disincentive for quitting) by commoditising the product, yet had itself taken advantage of the previous tax regime to achieve large profits from premium brands while also keeping some products' prices relatively low. Here we evaluate the impact of standardised packaging, the MET and the RYO focussed tax changes on price and industry profitability. Methods and findings Nielsen electronic point of sale (EPOS) data (May 2015 to April 2018) were used to calculate real (inflation adjusted) monthly price per stick overall, by cigarette type (FM and RYO) and by seven market segments. Trend estimation, using additive mixed models, assessed weighted average price (weighted by volume of sales) and tobacco industry net revenue changes. The beginning and end of the data series were compared in terms of: (a) average monthly price growth, (b) average monthly net revenue growth, and (c) undershifting and overshifting patterns after tax changes. FM and RYO real prices changed little over the 3year period-overall prices rose by about 1p per stick. There was no evidence of commoditisation with prices of all FM segments (but not RYO) rising faster after the implementation of standardised packaging than immediately beforehand. The prices of the cheapest FM brands rose with the implementation of the MET. RYO price increases did not close the gap to FM pricing levels despite RYO focussed tax increases. Tax changes following the implementation of standardised packaging and the MET were more widely and quickly passed on to smokers in the form of higher prices than the tax change pre-implementation. The main limitations are first that because we do not know the exact mechanism by which Nielsen scales up sample data to provide UK estimates, we could only use data for a set three year

Quantile regression of tobacco tax pass-through in the UK 2013–2019. How have manufacturers passed through tax changes for different tobacco products?

“…Previous evidence showed the introduction of standardised packaging did not lead to a long-term decline in cigarette prices. 15 We also show that the rates of tax pass-through for branded versus standardised packaging do not differ significantly since the implementation of standardised packaging and have a longer follow-up period.…”

“…Due to commercial sensitivity, we are unable to obtain the exact ad valorem rate payable or RRP suggested by the TI for each SKU in the Nielsen data. Instead, we use similar methods from the previous literature [13][14][15] as well as conversations with Her Majesty's Revenue and Customs to calculate the ad valorem tax for each SKU. Following this guidance, we are confident that our estimates are close to those paid.…”

“…Our period of study is January 2013 to March 2019, which covers a longer period both prestandardised and poststandardised packaging than previous work. 15 We adjust for inflation over the period, and compute expected counterfactual prices if all tax changes had been passed through to smokers exactly. The statistical analysis extends previous work by applying panel data quantile regression methods to the monthly pricing data in order to produce estimates of undershifting or overshifting of the tax changes at different price points covering the cheapest to most expensive products.…”

“…This also follows previous literature that has used similar data. [13][14][15] FM products were classified as being in either 'fully branded packaging' which is the old-style colourful packaging sold in a variety of stick sizes, or standardised packaging 19 which was introduced in the UK between May 2016 and May 2017. Branded packaging could further be either price-marked (price printed on the packaging) or non-price-marked.…”

“…However, the effectiveness of tax increases on health-related outcomes relies heavily on the tobacco industry (TI) passing on such tax increases to smokers, also known as tax pass-through. [13][14][15] Previous work revealed that, between 2000 and 2015 in the UK, the TI passed on tax increases to smokers differently depending on the market segment of the product. They did this by absorbing tax increases on the cheapest products in the price distribution (undershifting), while simultaneously increasing the price, above the tax increase, of the relatively more expensive products (overshifting) in order to try and maximise revenue or maintain profits.…”