Global C-Store Focus November 2009 - Focus on Global Challenges for Tobacco Category with International Case Studies

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Global Convenience Store Focus > November 2009 issue > Focus on Global Challenges for Tobacco Category

Focus on Global Challenges for Tobacco Category with International Case Studies

November 1, 2009

Read about the different regulatory experiences in different countries and states including Australia and New Zealand and issues surrounding tobacco smuggling in global markets.

Tobacco regulation: Irregular in Global Markets

Tobacco regulation: Australia and New Zealand

Tobacco regulation: UK Market

Tobacco regulation: Impact in Ireland

Tobacco regulation: Display Ban & The Illicit Tobacco Trade

In parts of Canada nearly half of all cigarettes smoked are illegal, often sold at less than $6 for 200

Tobacco regulation: Irregular in Global Markets

Many countries around the world are stepping up their controls on the sale of tobacco products with several moving to ban retail displays altogether. But regulations, far from producing a picture of global conformity, differ from country to country and, within markets including Canada and Australia, from state to state. There is also increasing evidence display bans are driving illicit tobacco trade. Fiona Briggs reports

Tobacco control is gathering pace in countries around the world but that is where the similarity starts and ends. Regulations regarding the sale of tobacco products vary enormously between one country and another and even within international jurisdictions.

For convenience retailers, keeping informed and up-to-date with the latest developments in a domestic market is tough enough. If a business spans international markets - retailing or supply - then understanding different sets of legislation and operating within those guidelines is a minefield, particularly given the penalties involved for non-compliance.

Controls take many guises - restrictions on advertising, health warnings on pack and in store, limits on the number of pack facings permitted per outlet and the size of the retail display plus bans on smoking in public places etc.

But increasingly, the biggest global trend is to implement restrictions on point-of-sale tobacco displays including legislation to ban all tobacco displays.

Iceland was the first country to ban retail displays of tobacco products in 2001. Its Tobacco Control Act states that “Tobacco and tobacco trademarks shall be so placed at points of sale that they are not visible to the customer”.

The typical solution in Iceland is for tobacco products to be kept in drawers under the counter but Icelandic retailers have been able to choose the compliance that suits their businesses best.

Thailand introduced a tobacco display ban in September 2005. It was met with strong resistance from convenience stores, particularly 7-Eleven retailers, who initially refused to remove their displays. After several months fighting the ban, the stores agreed to comply. Tobacco has been removed from display at more than 500,000 points of sale across the country.

In Canada all of the 10 provinces and three territories have gone dark. However, the scope of the retail display bans is wide-ranging. In Ontario, for example, the rules are prescriptive requiring retailers to fit gravity-fed flaps that allow a display area of 1,800sq cm during transactions. A price list or binder can be used for a customer to select a product. The unit can only be opened to get a product once one has been chosen by the customer and only one customer can be served at any one time.

In New Brunswick, the permitted display space during transactions is 3,600sq cm while in Nova Scotia, the display is banned completely, even during transactions.

Tobacco regulation: Australia and New Zealand

Convenience stores in Australia face different rules, depending on their location too (see Australia: all states legislation pdf in reference library).

New South Wales (NSW) and Australian Capital Territory (ACT) have passed and ratified legislation for display bans, which will be introduced on 1 January 2010. The Western Australian (WA) government has passed legislation for a display ban but it still requires Royal Assent.

Legislation in New South Wales is the most stringent, however. It requires a single point of sale for tobacco products. According to a Deloitte report, commissioned by the Australian Association of Convenience Stores (AACS), the legislation will hit retailers in New South Wales hardest due to increased transaction time and new operating procedures.

In addition, the report claims retailers in New South Wales will be further disadvantaged compared with those in Western Australia because its retail display ban disallows the use of both a price board and price ticket, while proposed changes to the legislation in Western Australia, suggest retailers can use both price mechanics.

Even before total display bans are introduced in Australia, retailers already face display restrictions, which differ from state to state.

The display size in Queensland, for instance, is restricted to 1sq m versus 4sq m in Victoria. In Tasmania, tobacco displays are restricted to one pack facing per product line and a maximum of 150 packets within a space of 4sq m. In addition, a graphic health-warning poster, A4 in size, must accompany the display.

None of the Australian states, meanwhile, allow retailers to display cigarette cartons.

Sheryl Moon, newly appointed executive director at the AACS, says the new display ban legislation severely limits what can be displayed and the Association is working with member retailers to help them comply.

“The guidelines are still being understood by retailers. The Association has a prime role in ensuring that members know the state of play for the new legislation which comes into effect in two states at the beginning of 2010.”

Despite the vagaries of the Australian regulations, Moon is steadfast in the Association’s approach: “The AACS has strategy in place to lobby stakeholders in the political arena for pragmatic, unambiguous national legislation and regulations,” she says.

However, the cost of doing business will increase through the “black out” legislation, says Moon.

“AACS estimates that the cost to retailers of the new infrastructure and operational setup will be between $10-$20,000 and the ongoing costs will be between $8-$18,000 per annum. There is no doubt that transaction times will be longer thus disadvantaging retailers and consumers.”

Given the severity of Australia’s legislation and measures for tobacco control, it comes as a surprise that New Zealand, the country’s near neighbour, has overturned calls for a display ban. Campaigners, including the AACS and the Stay Displays group of retailers, this year successfully persuaded the incoming National Government a ban would be expensive and ineffective.

According to the AACS, a ban had been on the cards. David Killeen, former executive director at the ACCS, says:

“The outgoing Labour Government was dead set to introduce retail display bans but the incoming National Government had taken on board some of our work and that of a band of small retailers who came together under the Stay Displays group. The National Government shelved the plans to introduce retail displays ban on the basis that there was a lack of evidence to show they actually work.”

Historically, New Zealand has been at the forefront of tobacco control (see Review of Tobacco Displays in New Zealand Consultation Document - Ministry of Health, December 2007 in pdf reference library). From 1990 tobacco products were prohibited from being advertised in the media, on television or in magazines. Retailers were also banned from advertising the sale of tobacco products (this ban did not come into force until 1995, however). The Act also outlawed tobacco product displays if they were visible from outside the retail store.

In 2003, New Zealand became only the third country in the world to ban smoking in bars and restaurants and make all indoor workplaces 100% smoke free.

The Smoke-free Environments Amendment Act 2003 included further restrictions on how tobacco could be displayed including limiting tobacco displays to a maximum of 100 cigarette packets and 40 cartons at each point of sale; restricting each tobacco display to a maximum of two packets of the same variant; displaying no tobacco products within one metre of children’s products such as confectionery, soft drinks and ice cream; removing any counter top displays and introducing ‘smoking kills’ signage at the point-of-sale, where tobacco is sold.

While the new National Government in New Zealand claims there is no international evidence a display ban works and that it is hugely expensive to do, Killeen finds it ironic that it was a director of ASH New Zealand who spoke in front of the House of Lords in the UK and got them fired up to introduce retail display bans, citing New Zealand as a leading light.

Gravity-fed flap display solution in Canada

Tobacco regulation: UK Market

In the UK MPs voted on 12 October 2009 to ban the display of tobacco products in shops and, in an amendment, opted for a total ban on cigarette vending machines (see Department of Health Consultation on proposed tobacco control regulations for England (under the Health Bill 2009) pdf in reference library.

The UK Association of Convenience Stores (ACS) immediately slammed the draft regulations, published a few hours ahead of the parliamentary debate, claiming the tobacco display ban will be the most expensive and inflexible in the world.

The Government’s consultation paper sets out what a retailer will have to do to implement the new law. Like Ontario in Canada, it requires retailers to fit doors or flaps, which only allow an area slightly larger than a sheet of A3 paper to be seen by a customer when they are being served. According to the ACS, this would mean a typical small shop would be required to fit at least 20 separate doors or flaps to their existing unit.

ACS chief executive James Lowman says: “The Minister has proposed regulations that are the most inflexible of their type anywhere in the world. It makes a mockery of the repeated reassurances that Ministers have made to Parliament and businesses that they will take a light touch approach to compliance.”

The Government’s official estimate is that the cost of compliance will be £1,000 per store. However, the ACS claims ministers have repeatedly suggested to MPs and media that the cost would be much lower for smaller stores.

“The technical challenges in fitting a solution to existing units that meet the Ministers’ demands could be insurmountable,” says Lowman. “This would mean retailers having to rip out and replace existing units and the costs will be far higher than previously suggested.”

Lowman adds: “The evidence that a display ban affects smoking rates is weak, but there is absolutely no evidence to suggest that a tiny permitted display area during transactions is necessary for the policy to succeed.”

The draft regulations on the display of tobacco and vending are for England only.

They are intended to come into force on 1 October 2011 for large shops and 1 October 2013 for all other businesses. A large shop is defined using the Sunday trading laws, as having a relevant floor area exceeding 280sq m.

The regulations on vending machines would come into effect on 1 October 2011. In its response to the Health Bill proposals Imperial Tobacco says it is yet not possible to say how the regulations will be affected by the decision to ban cigarette vending machines altogether.

“As currently worded, the draft regulations would require that vending machines could only be operated by staff, after seeing proof of age. There are stipulations on location (so that it is always under the supervision of a member of staff) and design (activated by remote control),” it says.

“The Government is running a consultation on the regulations and retailers should take this opportunity to continue to make their views known now that the details have been released. They have until the 4 January 2010 to respond.”

Imperial Tobacco outlines the impact of the display ban regulations for convenience retailers.

As highlighted by the ACS, the regulations allow for a prescribed area of tobacco products - 1500sq cm - to be temporarily shown to adult smokers on request.

“It will not be an offence for other customers to see the tobacco products if they are being shown to an adult smoker,” it says.

“Restocking will be able to take place during business hours as long as the products are not on display any longer than necessary.

“A tobacco product brand name, pack size and the price can be displayed on the closed unit to help staff identify the products, although this is heavily prescribed,” it says.

A price list will be allowed at each till point where tobacco products are sold. Imperial Tobacco claims the content of the price list is again heavily prescribed.

“A picture price list is able to be displayed when requested by an adult smoker. This is also heavily prescribed,” it says.

Cash & Carrys and duty free outlets will be able to continue to display tobacco products (in minimum units of 200 cigarettes or 250g loose tobacco) and their prices as long as they are in a separate adult only room and cannot be viewed from outside.

Tobacco regulation: Impact in Ireland

Commenting on the display regulations, Amal Pramanik, general manager of Imperial Tobacco UK, says: “Imperial Tobacco has consistently expressed its concerns about the effect this legislation will have on small retailers and the illicit trade in tobacco products. The latest evidence from Ireland, where a display ban has been in place for three months, strongly suggests that a ban on the display of tobacco will exacerbate the problem of smuggled and counterfeit product.

“Retailers are justifiably concerned about the lack of evidence and the public have a right to know why the Government has been wedded to such an ineffectual proposal when the collateral damage from it is likely to be so great.”

The ACS also points to the experience of retailers in Ireland, where a tobacco display ban was introduced on 1 July 2009.

The Association has recently published findings of research it commissioned to understand the compliance burden on smaller retailers and those with similar displays to those prevalent in the UK (see ACS: Implementation of the Tobacco Display Ban in Republic of Ireland in pdf reference library).

At this early stage the Irish experience is one of confusion and disruption,” says Lowman. “The Irish market place is one tenth the size of the UK. Given this fact, it would be fair to assume that problems in the UK are likely to be at least ten times bigger than in Ireland.”

The tobacco display ban legislation in Ireland stipulates that:

All tobacco advertising at POS must be removed – counter mats, A5 posters, till covers, wobblers etc
Retailers must put up a designated sign advising that they sell tobacco
All tobacco products must be kept out of sight in a sealed container

A retailer can show the person wishing to buy tobacco one pack only of each tobacco product stocked or a ‘menu board’ of skus

If retailers do not comply they could be fined up to €3,000 for non compliance with advertising laws and €1,900 for display violations. They could also lose the right to sell tobacco for up to 30 days in the shop where the offence took place. Stricter penalties, including imprisonment can apply in certain circumstances.

Retailers can under the existing legislation:

Store tobacco in their current tobacco unit if it complies with the regulations
Keep the tobacco unit in its current place – it does not have to be under the counter
Have more than one unit
Replenish stock in the tobacco unit at any time

Tobacco regulation: Display Ban & The Illicit Tobacco Trade

In the ACS study researchers interviewed retailers about the impact of the display ban and the solutions they had chosen in order comply.

It found the overriding perception was the display ban was ineffective and 80% of retailers believed sales had not been affected since the changes were made. The majority of retailers questioned had fitted a display solution to their existing gantry.

Interestingly, the majority of retailers believed there had been no enforcement activity to check if their new display solutions were compliant.

However, while the majority found customers have noticed no change, the study found there was a perception the display ban has contributed to an increase in illicit trade.

One retailer surveyed in the research said: “I do think that smokers will always smoke so in that sense, I don't think that the ban will accomplish very much. I think that more people will be going to get their cigarettes from the black market.”

While another retailer responded: “I don't think that any of this has been thought out properly and I don't think that it is going to work either. I don't know what they think they are going to achieve, all that they are going to do is to send people to the black market.”

Of those retailers reporting the changeover had had a negative impact on sales, a massive 71% believe sales have migrated to buying in the illegal market versus 24% who believe sales have migrated to larger stores.

According to the ACS, there has been an explosion in illegal trade in Ireland.

“The scale of the problem of Irish-non-duty-paid tobacco consumption is growing at an alarming rate,” it says. Reporting surveys of the collection of discarded packs, it says the prevalence of non-duty-paid cigarettes has increased from 7.8% in 2005 to over 35% in 2009.

However, the display ban is just one possible contributing factor.

Ireland has one of the highest prices of tobacco in Europe with a minimum price per packet of €7.75. It has also endured a worse than average impact of the global recession.

“It is not possible at this stage to conclude whether the ban has had on this problem, however some of the retailers surveyed see the ban has making a bad situation worse,” says the ACS study.

Exxon Mobil, which operates 150 forecourt sites in Ireland including 30 On the Run convenience stores, claims the display ban has exacerbated the problem of illicit sales.

Sam Acquaye, tobacco category manager, reports: “The market has gone way south because of this whole ban and recession has fuelled illicit trade in terms of illegal imports.”

Acquaye says there is a considerable discrepancy between the penalties for smuggling cocaine and tobacco in Ireland. The former attracts a 16-year prison sentence while perpetrators of the latter, “get a slap on the wrist”, he says.

Acquaye reports on a recent conversation with a taxi driver who has brought back cases of cigarettes from Spain, sold them on and made €1,500 in profit.

“Goodness knows what you can get on a whole container,” he says. “All the big drug barons are into smuggling tobacco into Ireland,” he adds, and Ireland’s high minimum price per packet is a contributing factor - €7.75 versus €3 on the dark market.

Applegreen, Ireland’s largest independent forecourt operator, agrees. “Government increases excise on cigarettes (to bring in revenue) which in turn increases the price differential between Ireland and other countries, encourages the illicit trade within Ireland,” it says.

The company reports that one in five cigarettes smoked in Ireland is a smuggled product and the cost to Irish tobacco retailers is €487m with a €500m loss to Irish revenue. Smuggled product is also estimated to account for the the loss of approximately 4,000 jobs, it says. The display ban is simply deepening the problem, says Applegreen.

“The display ban will diminish for the customer the difference between legal cigarettes bought ‘under the counter’ and smuggled cigarettes bought in a street market,” it says (for further information see Irish newspaper cuttings and JTI presentation on Non Irish Duty Paid Cigarettes in pdf reference library).

Imperial Tobacco reports on seizure figures to highlight the growth in smuggling of counterfeit cigarettes into the Republic of Ireland.

Irish customs officials seized 60.5 million non-duty paid cigarettes between January and August 2009 and more than half of those seized – 32 million – were counterfeit, it says. There were around 7,000 seizures of illegal cigarettes between January and August, compared to around 10,000 for the whole of 2008.

The figures were highlighted in a report for the Tobacco Retailers Alliance (TRA), which represents 25,000 independent retailers in the UK. The TRA says the €500m Irish retailers lost to the illicit trade last year could rise to €651m by the end of 2009.

“In some cases mainstream retail outlets have been found selling counterfeit products,” reports Imperial Tobacco. “There is also evidence of some smugglers selling counterfeit cigarettes through wholesalers in Ireland.”

Illicit trade - smuggled, tax-evaded or counterfeit product - is however, a global problem.

British American Tobacco (BAT) estimates that it now accounts for over 6% of global cigarette consumption – more than 300 billion cigarettes – losing governments some £11bn in tobacco taxes in 2008 alone, with legitimate businesses losing millions of pounds in profits.

Illicitly supplied cigarettes include genuine cigarettes supplied on the black market, driven where there are high taxes on tobacco products and lower prices in neighbouring countries. In addition, there is the problem of counterfeit cigarettes which can be virtually impossible to distinguish from the genuine article. The majority of these come from illegal operators in China, Paraguay, the Middle East and Eastern Europe.

JTI fears the UK tobacco display ban would provide an open door for distributors of counterfeit products and will do nothing to reduce youth smoking. Imperial Tobacco reports cross-border sales and illicit trade in tobacco products costs the UK Treasury between £2bn and £3.1bn a year in lost revenue.

Between 17% and 25% of all cigarettes consumed in the UK are non-UK duty paid (between 9% and 17% of that total, by HMRC estimates, is as a result of illicit trade), it says. Seizures of genuine smuggled Imperial Tobacco cigarettes are reported to have reduced by more than 99% since 2001, however.

“The high share of non-duty paid (NUKDP) hand rolling tobacco in the UK (around 60%) is the direct result of the differential in excise duty rates that exist between the UK and other EU Member States and most of the rest of the world,” says the company. “Whilst UK tobacco tax remains amongst the highest in the world (along with Norway, Ireland and France), there will continue to be an incentive for smugglers to purchase tobacco products in lower-taxed markets and resell them illegally in the UK.”

A retail display ban will exacerbate the already significant levels of illicit trade taking place throughout the UK, as already acknowledged by HM Treasury and by HM Revenue & Customs, says Imperial Tobacco.

“The distinction between tobacco products that are sold legally and counterfeit or other non UK duty paid tobacco that is illegally traded on street corners, in pubs and at car boot sales will become further blurred. If consumers are further displaced from the legitimate retail chain to illicit channels, it is inevitable that public health objectives and government revenue streams will be compromised.

“Any proposal to hide tobacco from view will increase opportunities to stock and sell smuggled or counterfeit products which will make the work of Trading Standards and anti-illicit trade authorities more difficult. “Consumers are unlikely to be able to differentiate between legal products (which they could reasonably assume would be displayed correctly) and illegal products, which are currently more likely to be stored under the counter and out of sight.”

Imperial Tobacco claims a display ban could lead to an eventual reduction in the number of retail outlets selling tobacco too.

“This is an inappropriate policy at a time when at least 17% of the UK cigarette market and 59% of the UK hand-rolling tobacco market is already non-UK duty-paid. “A display ban will increase participation in illicit and non-UK duty paid trade at all levels.”

In Canada, meanwhile, illicit sales account for more than half the market in Ontario and 45% in Quebec. Dave Bryans, president at the Canadian Convenience Stores Association (CCSA), expects 65% of the market will be illegal in the next five years.

“There is uncontrolled growth in illicit sales,” he says. Byrans reports that in Ontario, where tobacco is most highly regulated, 750 stores went out of business in the first year the display ban was implemented. “When you cover tobacco people start sourcing products on the black market,” he says. “It all goes hand in hand.”

More draconian regulations are now being introduced in Ontario including a ban on flavoured tobacco products, a ban on smoking in parks and in cars when a child under the age of 16 is present.

Bryans fears UK stores will also close as a result of the display ban. “Those that are hanging on will go out of business because they have lost the relationship with one of their biggest categories,” he says.

“Chains will survive - they will reinvent themselves and/or move out of the category. The health groups have put more profits into the tobacco companies’ pockets at the cost of small business.” Far from being reduced, teen smoking in Canada is increasing as a result of illicit trade, he says. Bryans reports that in Ontario, for example, 1m people have access to illegal smokes by word of mouth alone. “There is something wrong with the whole model,” he says.

Back in Ireland Applegreen says a multi-pronged approach to tackle illicit trade is required including:

Custom & Excise must be provided with additional recourses in line with magnitude of the problem
Penalties for smuggling and illegal selling must be robustly applied to ensure they act as a true deterrent
Future excise increases must take account of unintended consequences
New criminal offenses should be created(for buyer and seller)
Enforce actual limits on quantities of cigarettes legally allowed into country rather than indicative level

Imperial Tobacco says the bedrock of its success in reducing seizures of genuine smuggled Imperial cigarettes in the UK lies with the Memorandum of Understanding (MoU) signed with HMRC in 2003, which formalised jointly developed protocols to combat smuggling and counterfeiting activities.

“In 2006, HMRC used our MoU as the basis for a common UK tobacco industry MoU, replacing the individual agreements and reflecting developments in illicit trade (e.g. the rise of counterfeit),” it says.

The company is now seeking to replicate this success in other markets and has signed 13 additional MoUs agreements in countries including Ireland, Morocco, Turkey and China.

Retailers around the world will watch such measures with interest and will be keeping a watchful eye on the full impact of tobacco control on their business.

It is estimated that more than 330 billion cigarettes smoked in 2008 were illegal