13.3 The price of tobacco products in Australia

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As in other industries, the costs of raw materials, manufacturing, promotion and distribution of tobacco products are important in determining profits to tobacco growers, manufacturers, wholesalers and retailers. However, because tax is such a substantial component, the level and nature of tobacco duties, fees and taxes—rather than production and marketing factors—have been the main determinants of the final retail price of cigarettes over time in most developing countries. In Canada for instance, tobacco taxes increased by 500 percent between 1982 and 1992. This resulted in real increases in the price of cigarettes of about 170 percent.98

This section examines the extent to which increases in tobacco taxes have resulted in rises in the price of cigarettes and other tobacco products in Australia. It outlines efforts by manufacturers to reduce the impact of increases in taxes, both by minimising tax liability and by encouraging discounting at the retail level.

13.3.1 Recommended retail price of tobacco products

Since 1940, the NSW Retail Tobacco Traders' Association has been printing and distributing to small retailers in all states and territories lists of the wholesale and recommended retail prices for all cigarettes, cigars, pipe and roll-your-own tobacco sold in Australia.99-101 Monthly copies of the publication preserved at the National Library of Australia and several other libraries throughout the country provide recommended prices for any tobacco product available for sale in any state or territory since that date.

13.3.1.1 Changes over time in the recommended retail price of a standard pack

Prices for Craven A cork tip 20s, a brand of cigarettes popular in the 1940s, 50s and 60s in Australia, and one of a handful of brands available in 1940 that was still available in 2005[20], are listed in Table 13.6. When examining the cost of tobacco products over time, it is also useful to take into account the effects of inflation—the costs of buying all goods and services. Table 13.6 also indicates the price adjusted to take into account changes in the Consumer Price Index. (As is standard practice by the Australian Bureau of Statistics (ABS), the year 1989–90 is used as the base year.)

Figure 13.5 plots the price of Craven As in $1989–90 at five year intervals between 1940 and 2005.

Table 13.6 shows that the price of a packet of Craven As increased 67-fold between 1940 and 2005. However, adjusting for inflation, until 1993, Craven As cost no more than they did in real terms during and immediately after the Second World War. As is evident from Figure 13.5, in real terms the price in 2005 was just under double what it was in 1940—a real price increase of just over 80%.

13.3.1.2 The large pack: a peculiarly Australian phenomenon

In response to rising awareness about health effects and the introduction and steady increase in state business franchise fees on tobacco, over the 1960s, 1970s and 1980s manufacturers introduced many new brands and variants of existing brands that differed in the amount of tar measured and the number of cigarettes in each pack.

Most cigarettes were unfiltered in the early part of the century but by the end of the 1960s most were sold with filters. Cigarettes in the early part of the century were also commonly sold in packets of 10 or 20 or in tins of 50. These were similar in size to the tins in which loose tobacco was commonly sold. With the advent of plastic wrapping however, these tins disappeared and by 1960 the vast majority of cigarettes were sold in packets of 20. The increasing rate of state licence fees had a significant impact on the price of brands popular until the early 1970s. However the tobacco industry fought back to retain its customers and the introduction of Winfield 25s '5 smokes ahead of the rest' in 1976 marked the advent of the large pack size in Australia.

Until 1999, Australia was virtually the only country in the world that combined an excise based on weight with ad valorem fees based on wholesale value of sales. Until 1999, lighter cigarettes attracted less federal excise and customs duty than heavier cigarettes. This effect was amplified by the manner in which ad valorem fees were imposed and final retail price calculated, providing an incentive for lighter cigarettes and for packaging many cigarettes in the same packet.67 The introduction of large pack sizes in Australia closely followed the introduction in 1975 and the subsequent doubling in about 1987 of state franchise fees throughout Australian states. In most other countries in the world, cigarettes are virtually always sold in packets of 20.

Budget brands in Australia were on average about 10 percent lighter per stick than premium brands, however they attracted almost 20% less tax and were more than 20% cheaper.67 Table 13.7 sets out the recommended price per stick for Rothmans brands in Victoria between 1980 and 1993, together with the weighted average price of all brands in each year, taking into account the actual prices for which cigarettes were sold and the market share of each brand.

Figure 13.6 plots the recommended prices for each price category.

As can be seen from Table 13.7 and Figure 13.6, while the recommended retail price of premium cigarettes sold in packs of 20 rose sharply, manufacturers such as Rothmans were able to cushion consumers by providing cigarettes in larger pack sizes that were substantially cheaper per stick. Each year when increases in state fees caused a rise in prices, manufacturers introduced a larger pack size that provided more cigarettes at a cost only slightly higher per stick than that of cigarettes in smaller pack sizes prior to the tax increase. Thus the immediate effects of the introduction of and increases in state fees was largely offset by the introduction of larger and larger pack sizes providing cigarettes at a cheaper price per stick.

Not surprisingly, large packs quickly became a dominant component of the market—see Figure 13.7.

To give an additional sense of the price of cigarettes commonly used in Australia over time, Figure 13.8 plots the real price per stick of Craven A 20s together with the price per stick of the recommended price per cigarette for whatever was the leading brand for selected years between 1940 and 2005. Prices are expressed in $1989–90.

It is apparent from Figure 13.8 that, while the recommended retail prices of premium brands of cigarettes such as Craven A rose steadily since the early 1980s, consumers concerned about price have always been able to purchase cigarettes that were substantially cheaper per stick.

Figure 13.9 plots in more detail the recommended retail price of the leading brand of cigarettes over time, indicating some of the major changes in taxation arrangements between 1948 and 1999, and some of the major innovations with which the industry responded to those changes.

Once again Figure 13.9 shows that the effects of early increases in state licence fees were mitigated by the introduction of larger and larger pack sizes providing cigarettes at a cheaper cost per stick than those available in smaller pack sizes.

It was not until the very large increases in state fees and excise duty in the mid-1990s that cigarettes became significantly more expensive.

Recommended retail prices increased steadily over the late 1990s so that, in real terms, by 2001 the recommended retail price of cigarettes was almost three times greater than what it had been in 1948.

Figures 13.10 and 13.11 provide further detail about price movements.

Using 1973 as a base year, Figure 13.10 depicts the recommended retail price of a single Winfield cigarette, one of the leading brands, since that date. It also shows the price of one of the cheapest of the leading brands available in each year, and the price of Benson and Hedges, one of the more expensive brands. Finally it shows the Australian Bureau of Statistics overall Consumer Price Index and the component of the index that measures tobacco prices.

Figure 13.10 shows, while the overall price of cigarettes rose steadily and well above the increase in prices of other goods and services, budget brands available to price-sensitive smokers in the early 1990s were actually less expensive in real terms than they were in the mid-1970s.

As outlined in Section 13.2.1, health groups argued for reform of tobacco taxes67, 68, 106-108 and a new system was introduced between 1999 and 2001, after which time the price per stick of cigarettes in large pack sizes became much closer to the price per stick in smaller pack sizes.

Figure 13.11 plots price movements since 1990, reflecting the effects of increases in excise duty and state fees throughout the 1990s and the impact of the implementation between November 1999 and February 2001 of the government's New Tax System.

Figure 13.11 shows that between 1990 and 2001 cigarette prices increased well above the inflation rate. The biggest increases occurred in the cheapest and most popular brands corresponding with the change to the per stick system in 1999 and the introduction of the GST in July 2001. Between 1998 and 2001, prices of value brands of cigarettes increased between 30 percent and 40 percent.111

Following these large increases over the 1990s, recommended retail price has changed very little in real terms since the large increases associated with taxation reforms in late 1999 and June 2000.

13.3.2 Prices at which tobacco products are sold/purchased

Working out the price of cigarettes and other tobacco products is by no means a straight-forward matter. The prices at which cigarettes are offered for sale may differ significantly from those recommended by manufacturers. Many different brands of cigarettes are sold—almost 50 in Australia in 2007112—from many different outlets—more than 35,000 outlets in Australia in 2004. 113, 114 [22] Some types of outlets are more likely to sell at discounted prices, but not all brands are discounted to the same extent within the same periods of time. Obtaining a representative sample of prices for even a single brand over time would be a costly exercise. Obtaining a representative sample of prices for a large number of brands is simply not feasible.[23] Many researchers attempt to address this difficulty by using prices of just the brand of cigarettes most popular in the population they are studying, but this may not give a picture representative of the entire cigarette market due to consumers seeking to minimise costs by shifting to cheaper brands or pack sizes, bulk purchasing, or shopping at lower-cost outlets.

In the study by Ross and Chaloupka28 discussed in Section 13.1.5 above, the average cost of cigarettes in a particular state (as calculated by industry sales records) correlated only weakly with the cost (in their local store) of the brand of cigarettes preferred by secondary-school students. The study found that consumption fell much more dramatically in response to changes in prices reported by teenagers than to changes in state-average cigarette prices. The choice of indicator for price may critically affect the outcome of research on price effects, and as demonstrated in Section 13.3.1.2, the pricing policies adopted by companies may undermine the effectiveness of tax policy as a means of discouraging tobacco consumption.

13.3.2.1 The Cigarettes and Tobacco Sub-group of the CPI

The longest-running indicator available of the actual price of cigarettes for sale in Australian shops is provided by the component of the Tobacco and Alcohol Sub-Index of the CPI that covers tobacco products.[24] The CPI and its sub-indexes are constructed each quarter by the Australian Bureau of Statistics in in-shop surveys monitoring a 'basket' of goods that might be purchased by a typical Australian household.115 Table 13.8 shows the average Cigarettes and Tobacco Sub-group of the Tobacco and Alcohol sub-index of the CPI for each year since it was first published in 1973.

Figure 13.12 plots the Cigarettes and Tobacco Sub-group of the CPI against the overall index since 1973.

It is evident from Table 13.8 and Figure 13.12 that prices as determined in the ABS price survey have risen significantly over time, and well above increases in other goods and services since the early 1990s.

But how accurate is the Cigarettes and Tobacco Sub-group of the CPI as an indicator of actual prices paid for cigarettes by Australian consumers? The accuracy of the sub-group index depends on the adequacy of sampling of brands and store types, and whether sampling takes into account shifts in brand preferences and store types over time. The exact brands and store types included in ABS surveys are unknown and need to be confidential to protect the integrity of the CPI as a consistent and internationally comparable indicator of prices over time, so it is not possible to make an assessment of accuracy.

Figure 13.10 above shows that, between 1973 and 1992, the Cigarettes and Tobacco Sub-group seemed to follow the recommended retail price of premium rather than the most popular brand of cigarettes. Figure 13.11 would seem to indicate that, from the early 1990s, the sub-index more closely followed price increases in the most popular brands of cigarettes.

13.3.2.2 Discounting in the tobacco market

While many small retailers such as proprietors of local corner stores[25] and fast-food outlets sell cigarettes at the recommended prices, the majority of cigarettes in Australia are sold at considerably lower prices. As well as selling single packets of cigarettes at well below the recommended prices, most supermarkets and tobacconists also sell cigarettes in cartons at a discounted rate. In its 1994 report on the cigarette industry, the Prices Surveillance Authority noted various common forms of discounting, including lower prices for stock bought in high volumes, and the phenomenon of 'specialling' where manufacturers encourage high volume retailers (especially tobacconists and supermarkets) to discount one or two of that company's brands for a week or longer periods.116

An in-shop study undertaken through the period May 1997 to February 2001 by the Centre for Behavioural Research in Cancer117 indicated significant discounting of cigarettes over that period. The study surveyed the prices of the five most popular brands of cigarettes in each state in a selection of all the major types of stores in a sample of suburbs in each major urban centre throughout Australia. On average, cigarettes in Australia were sold at 5.75% lower than the recommended retail price, with considerable variation between brands and outlet types. Average discounting ranged from 4.4% for Benson and Hedges 25s to 6.8% for Horizon 50s. Petrol stations tended to sell cigarettes at slightly higher than the recommended retail price (about 0.3% higher across the study period) but discounting was common in supermarkets and tobacconists (with an average discount of 9.3% and 10.9% respectively). Prices of cigarettes sold in cartons were about 14% lower than those sold as single packs.

While the Cigarettes and Tobacco Sub-group of the CPI probably now does reflect trends in prices of brands popular with smokers, it seems unlikely that it reflects the extent to which consumers are shifting to discount outlets.

13.3.2.3 Prices paid as reported by smokers

An alternative approach to calculating prices of tobacco products is to ask smokers what they paid for their last packet of cigarettes or smoking tobacco. While not suitable for all research purposes, such data do provide very accurate information about price as actually experienced by consumers.

Studies based on interviews with US tobacco users have indicated significant recent increases in the percentages of smokers turning not just to cheaper brands, but also to cheaper forms of tobacco (roll-your-own and chewing tobacco), cartons in preference to packets, discount outlets and where this is convenient, duty-free and illicit tobacco products.118 In Australia, following the abolition of state business franchise fees on tobacco there was a similar shift to roll-your-own including illicit 'chop-chop'—see Section 13.7—, to cartons and to discount outlets.119 Changes to tobacco taxes in 1999 made it much less attractive for smokers to turn to larger pack sizes and budget brands as a means of cushioning themselves from tax increases, and as intended, following introduction of reforms, smokers shifted back to smaller pack sizes with a lower up-front purchase price.111 An annual survey undertaken to track the effects of the National Tobacco Campaign120 provides data on prices paid by Australian smokers between 1997 and 2000.121 Comparing the results of this survey with the data collected in the price monitoring survey, it is clear that a significant proportion of smokers in Australia must be purchasing cigarettes at discounted prices.

Figure 13.13 plots the recommended retail price of Peter Jackson 30s, one of the top-selling brands against the average reported prices paid by a representative sample of consumers. It also plots the average price of Peter Jackson 30s observed in the price monitoring survey when purchased in packs from convenience stores and when purchased in cartons in discount stores.

As is evident from Figure 13.13, the actual price that consumers report they pay is significantly lower than the recommended retail price and the average price of packets of cigarettes sold in convenience stores. It is much closer to the average price of packets sold in cartons from discount outlets.

Table 13.9 sets out data on prices paid for cigarettes collected from Australian smokers interviewed as part the International Tobacco Control Policy Evaluation Study for the years 2002 to 2004.122

Between 2002 and 2004, the prices reported paid by consumers continued to be substantially lower than those recommended by retail trade associations.

While it is possible that consumers misremember and round down prices, clearly the recommended retail prices overestimate the actual prices paid by consumers. Indexes such as the CPI based on price monitoring surveys may also significantly overestimate prices experienced by consumers unless sampling is adjusted to take account of changing sales patterns, in particular those reflecting consumer efforts to seek lower prices.

13.3.3 International comparisons of the price of tobacco products

To accurately assess the prices[28] of Australian cigarettes comparative to those sold in other countries, it is important to use consistent methods for collecting price data. Estimated prices for a single country will vary widely depending on the brand and brand variant selected and the sorts of retail outlets from which data are collected.

13.3.3.1 International comparisons of cigarette prices

Many different brands of cigarettes are sold in any country, but Philip Morris' Marlboro is one brand that is sold in just about every country in the world. Figures 13.14 and 13.15 show data from the Economist Intelligence Unit, which surveys the price of a range of consumer products twice each year in most major cities throughout the world. Figure 13.14 shows the price (expressed in US dollars) of Marlboro cigarettes sold in a sample of moderately priced stores in 34 major capital cities in 2006. In many countries however, Marlboro is seen as a luxury brand, and the majority of smokers regularly use much cheaper locally produced brands. Figure 13.15 shows the price charged by supermarkets for the most popular brand of cigarettes in each city.

Marlboro cigarettes in (Sydney) Australia are among the most expensive in the world, cheaper only than Marlboros sold in the UK, Canada, Singapore, New Zealand and some states in the US. The most popular brand in Australia also appears to be more expensive that the most popular brand in nearly all other jurisdictions.[29]

13.3.3.2 International comparisons of prices paid

The International Tobacco Control Policy Evaluation Study provides ongoing data for the countries involved in the study, on a range of tobacco control policy indicators, including the type of venue from which smokers purchased cigarettes and what they paid.124 Analysis of data from the first two waves of the study (between October and December 2002, and then May to July 2003) shows that, while Australian smokers were much less likely to purchase from untaxed sources, they were much more likely to purchase from groceries and other discount stores in preference to petrol stations and other convenience stores. The average price per stick paid by smokers in each country in phase two of the study—excluding prices paid for untaxed cigarettes—adjusted to $US 2002, were 35c in the UK, 23c in Canada and the US, and 20c in Australia.