Anti-competitive tobacco marketing tactics alleged

Despite significant reductions in the number of people smoking tobacco in new Zealand, and the increasing restrictions on marketing and escalating prices due to annual tax increases, the tobacco market is still worth $2.5 billion a year.

Market share:

  • British American Tobacco (New Zealand) – cigarettes 65%, roll-your-own 63.7%
  •  Imperial Tobacco New Zealand – cigarettes 23%, roll-your-own 31%
  •  Philip Morris (New Zealand) – cigarettes 12%, roll-your-own 5.4%

In 2016  government received a total of $1.7 billion in duty on tobacco sales.

About 605,000 adults smoke 2 billion cigarettes a year in New Zealand. That’s an average of about 3300 cigarettes per person per year, an average of 9 cigarettes a day, at an average cost of about $4,000 per year.

A statement of claim by Philip Morris that alleges anti-competitive marketing practices has been made public, with a significant number of redactions. However an unedited version had already been revealed.

Scoop Businessdesk: What big tobacco didn’t want you to read

Philip Morris (New Zealand) is suing British American Tobacco (New Zealand) in the Auckland High Court, alleging its larger rival is breaching the Commerce Act in the way it ties up retailers.

They want to publicise the dispute but leave out details that show the lengths tobacco companies will go to protect market share and how the industry organises itself. A redacted statement of claims was released this week. Unfortunately for big tobacco, which has a $2.5 billion market in New Zealand, the original statement of claim was sent to BusinessDesk last week by a PR company.

The biggest slabs of blacked-out text in the redacted claim set out in detail BATNZ’s trading terms with retailers and show how much control it commands in the market it dominates.

The original release from PMNZ says the suit is an attempt to stop BATNZ “from engaging in anti-competitive conduct” such as “unlawfully incentivising and compelling retailers to restrict the availability of competitor products.” PMNZ general manager Jason Erickson said BATNZ’s “conduct restricts consumer choice, and we think it constitutes a clear breach of the law.”

In the lawsuit, filed in the High Court in Auckland, PMNZ alleges BATNZ “is unlawfully incentivising and compelling retailers to restrict the availability of competitor products.” PMNZ is seeking unspecified damages in five causes of action for alleged breaches of the Commerce Act. BATNZ has said in a separate statement that it “categorically denies the allegations.”

PMNZ also says the BATNZ rules have implications for the availability of so-called e-cigarettes

Tobacco advertising and branding has effectively been banned in New Zealand via the Smoke-free Environments Act 1990 and the Smoke-free Environments Regulations 2007, and rules on plain packaging have just come into force. But this doesn’t stop tobacco companies from finding ways to compete over marker share.

BATNZ dominates the market, and according to PMNZ does that in part through unfair practices. They allege:

  • For a retailer stocking BATNZ brands BATNZ’s trading terms give the company the first option on installing any new or additional unitry and the right to remove them at any time, according to the redacted paragraph 36 of the claim.
  • The retailer is required to keep the “primary units”, which are the top area of cabinet, “fully stocked with 100% BATNZ products at all times.”
  • The retailer must stock the BATNZ unitry with tobacco products “in accordance with ‘planograms’ – diagrams supplied by the company “showing which tobacco products must be placed in specified unitry spaces.”
  • Paragraph 39 refers to cash inducements offered to retailers provided they ensure at least “70% of the retailer’s tobacco products available for sale within the outlet are BAT” brands. It also requires that 70% of “low value” tobacco products on offer are from BATNZ.
  • BATNZ’s trading terms require the retailer to “ensure BATNZ is aware of” all rival brands sold instore.
  • The retailer has to agree to compliance spot checks by the company including allowing a BATNZ representative “to enter and inspect the outlet for that purpose as often as is reasonably necessary.”
  • The retailer must show consumers (upon request) the BATNZ price list and that must be done before any other firm’s price list is shown.
  • The retailer must keep the unitry clean and free “of any advertising material unless agreed with BATNZ in writing.
  • Retailers are required to accept and “range” new products, accepting an auto-allocation of a carton of tailor-made cigarettes.

Non-compliance means the loss of the cash inducements,  if the retailer gets two non-compliance notices in a three-month period or three in any 12 months.

Rebates are only given for sales to consumers. The payment is by way of a credit against BATNZ invoices and the company asserts the right to deduct it from any sums it is owed, the document says.

PMNZ says the rules are anti-competitive, breach the Commerce Act and have caused it to suffer loss and damage. The statement of claim alleges BATNZ’s conduct “shows flagrant disregard for its Commerce Act 1986 obligations.”

A BATNZ spokeswoman said in an emailed statement that her company is “confident that we are not engaging in anti-competitive conduct and will defend our position when the case is heard.”

“We are strongly committed, and have actively engaged for some time, to have reduced risk products regulated and legally available to adult New Zealand smokers as soon as possible,” she said.

Marketing practices of tobacco companies have been criticised for a long time, which isn’t surprising given their marketing of dangerous products, the sales of which rely on getting customers addicted.

Tobacco retailer safety

With the continually rising price of tobacco and cigarettes, and a presumption (mine) that people inclined towards committing crime and those associated with them  also tend to be inclined towards smoking, the number of robberies related to tobacco have increased. These robberies are often violent, and dairy owners and staff  are often the victims.

Dairies can choose whether to stock tobacco products or not, but it is a major source of revenue for the small businesses. Who should be responsible for their safety?

Of course the police have a duty to protect any retailer of legal products from theft and violence – to an extent. They cant be at every dairy all the time.

ACT MP David Seymour is suggesting that the Government direct more of the substantial amount of tax and duties they get from tobacco into paying for retailer safety.

Another suggestion is to admit that escalating taxes and prices have created an unintended consequence, and lowering the taxes would alleviate the theft and violence problem but that is debatable.

Today’s ODT editorial looks at the problem, and comes up with what should have been an obvious answer – tobacco product suppliers should protect their retailers.

ODT: The smoking gun of tobacco taxes

Dairy owners are again starting to worry that the next person who enters their shop may be a thief who could turn violent as he or she demands cash and, increasingly, tobacco products.

A search of media outlets shows a pattern of increasing crime against sellers of tobacco products, as their price has escalated through increased excise taxes.

The New Zealand tobacco industry says it makes a significant contribution to the New Zealand economy in terms of government revenue, retail sales and employment. It pays more than $1.8 billion in total taxes each year.

Tobacco products make their largest financial contribution to the economy in the form of excise taxation. The industry also says tobacco is an important source of revenue for about 5000 New Zealand retailers, the vast majority of whom are small, independent retailers and dairies.

A debate has again broken out about who should pay for the protection of the retailers selling the tobacco products. Fewer outlets are now selling tobacco and communities celebrate the success, believing fewer people are smoking as outlets reduce.

However, aggressive cost-cutting has helped some of the largest tobacco companies retain their profits, despite falling sales.

One of the arguments being made to help protect dairy owners is to just stop selling tobacco, of course ignoring the fact tobacco is a legal product and a genuine part of a service dairy owners can offer their customers. Unless another high-margin product emerges to replace it, dairy owners will still sell tobacco.

Act New Zealand leader David Seymour is at the other end of the spectrum, saying after two violent robberies in less than a week, it is only a matter of time before someone is killed.

The money collected by the Government each year in tobacco tax revenue is blood money, obtained by putting the lives of people at risk, he says.

But Mr Seymour is somewhat off the mark when he calls for the Government to direct 10% of tobacco tax revenue to protect vulnerable business owners.

Surely it is time for the tobacco companies themselves to start protecting the people they want to sell their products? Revenues from global tobacco sales are estimated to be close to $965 billion, generating combined profits for the six largest firms of $67.5 billion.

That’s a good point. If tobacco companies want to protect their sales and profits perhaps they should do more to protect their retailers.