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November 13th, 2014:

Plain cigarette packs do not exert Pavlovian to instrumental transfer of control over tobacco-seeking



To gain insight into the potential impact of plain tobacco packaging policy, two experiments were undertaken to test whether ‘prototype’ plain compared with branded UK cigarette pack stimuli would differentially elicit instrumental tobacco-seeking in a nominal Pavlovian to instrumental transfer (PIT) procedure.


Two experiments were undertaken at the University of Bristol UK, with a convenience sample of adult smokers (experiment 1, n = 23, experiment 2, n = 121).


In both experiments, smokers were trained on a concurrent choice procedure in which two responses earned points for cigarettes and chocolate, respectively, before images of branded and plain packs were tested for capacity to elicit the tobacco-seeking response in extinction. The primary outcome was percentage choice of the tobacco- over the chocolate-seeking response in plain pack, branded pack and no-stimulus conditions.


Both experiments found that branded packs primed a greater percentage of tobacco-seeking (overall mean = 62%) than plain packs (overall mean = 53%) and the no-stimulus condition (overall mean = 52%; Ps ≤ 0.01, ŋp (2) s ≥ 0.16), and that there was no difference in percentage tobacco-seeking between plain packs and the no-stimulus condition (Ps ≥ 0.17, ŋp (2) s ≤ 0.04). Plain tobacco packs showed an overall 9% reduction in the priming of a tobacco choice response compared to branded tobacco packs.


Plain packaging may reduce smoking in current smokers by degrading cue-elicited tobacco-seeking.

© 2014 The Authors. Addiction published by John Wiley & Sons Ltd on behalf of Society for the Study of Addiction.

British American Tobacco whacked with £650,000 fine by HMRC for “oversupplying” Belgium cigarette market

British American Tobacco (BAT) has been hit with a fine of £650,000 by HM Revenue & Customs for oversupplying cigarettes to Belgium, which has substantially lower tobacco taxes than Britain.

Apparently, that causes more low-cost cigarettes to be smuggled into the UK.

According to papers seen by the Wall Street Journal, it is the first time a big tobacco company has been fined for “oversupply of products to high-risk overseas markets”, high-risk markets being classified as those that sell cigarettes much cheaper than in the UK.

The penalty for such practises can be up to £5m. But BAT has rejected the charge of oversupplying Belgium and intends to challenge the fine in court. A pack of cigarettes in Britain will set you back £8.47, whereas in Belgium it costs £4.75, according to the Tobacco Manufacturers’ Association.

The Exchequer estimates one in 10 cigarettes sold in the UK is counterfeited, and the government loses as much as £2.5bn each year to the black market. Cigarettes and their producers are seen as an easy target for chancellors seeking to raise money. It has become par for the course in Britain to expect almost every budget to include a rise in tobacco duty.

However, the high price of cigarettes in Britain combined with strong demand has proved an enticing prospect for smugglers. Many cigarette manufacturers fear the scope for black market activity may increase further as a result of the EU tobacco products directive, which will be implemented into national law by mid-2016.

The measures ban flavoured cigarettes, such as menthols, as well as certain pack types like those which contain only 10 cigarettes. In total 45 per cent of the market is set to be impacted by the tobacco products directive.

Impact Of Illicit Cigarettes On Philip Morris In Asia

Illicit cigarettes represents a threat to tobacco companies and tax authorities by subverting the regulation of sales and consumption of cigarettes. This thwarts the attempts made by governments to increase their revenue from taxation and achieve the public health objective of reducing the ill effects of cigarette smoking. As we have written earlier, all forms of illicit cigarettes other than smuggled original cigarettes impact the revenue of tobacco companies such as Philip Morris International (NYSE: PM) adversely (See Excise Taxes, Illegal Cigarettes And Altria: The Case Of Massachusetts).

In this article we analyze the impact of illicit cigarettes on Philip Morris’ Asia Division, which contributes ~36% of the stocks value as per our analysis. This is more than any other division, even though in terms of EBITDA margins, Asia trails the European Union, the largest market by revenue before excise taxes. The cigarette market (in terms of number of units sold) in Europe however is forecast to decline at an alarming rate and drop by almost 20% by 2021. Asia on the other hand is expected to show a small but steady growth rate of a little less than 1% CAGR in the same period. This makes Asia the largest component of Philip Morris in our discounted cash flow model, and hence makes any threat to its revenue potential in this region a matter of serious impact.

International Tax and Investment Center and Oxford Economics were contracted by Philip Morris to study the illegal cigarette market in 14 Asia Pacific region countries. They are the 10 ASEAN member countries, Australia, Hong Kong, Pakistan, and Taiwan. The study found that while people in these countries smoked ~760 billion cigarettes in 2013, 10.9% of these were illicit. In countries excluding Laos, Cambodia and Myanmar, the number of illicit cigarettes increased over 20% year on year. The major contributor to this increase was Philippines which tripled its illicit cigarette consumption in one year. [1]

Types Of Illicit Cigarettes

The study under consideration has classified the illicit cigarettes consumed in Asian countries under four heads. Counterfeits, which constitute~3% of illicits and have been defined by the researchers as cigarettes that are illegally manufactured and sold without permission of the trademark rights holder. Contrabands are cigarettes bought legally in low excise tax countries and smuggled to high excise tax countries to be sold below the tax-inclusive market price of these products. They constitute 13% of the illicit cigarettes consumed in Asia in 2013. Domestic illicits are manufactured and sold in the same country without paying the excise taxes. These constitute 40% of the illicit cigarettes consumed in Asia in 2013. Cigarettes that cannot be identified as legal or falling into any of the three categories above are classified as unspecified, and constitute 44% of illicit cigarettes which seems too large a chunk to be uncertain about. [1]

Aspersions Cast On The Study

Industry independent research has suggested that the estimates of illicit cigarettes from industry sponsored research may be biased towards the higher side. [2] This is because the tobacco industry has vested interests in overstating the illicit tobacco problem. The first of these is the need to leverage the dependency of illicit cigarettes on high excise taxes as an argument against high excise taxes on cigarettes. Secondly, the existence of counterfeits are blamed on plain packaging laws, and cited as a reason for repealing these. Thirdly, since the regulator does not hold Philip Morris responsible for illicit variants other than contrabands, there exists the motive for these to be over-stated. ((Towards A Greater Understanding Of The Illicit Tobacco Trade In Europe))

Quantifying The Impact On Philip Morris

With the uncertainty about the size of illicit cigarette market in Asia and the composition of its unspecified component notwithstanding, we try to ascertain the likely losses to Philip Morris in Asia from illicit tobacco under certain restrictive assumptions. The first of these will be that the rest of Asia follows the same patterns of illicit tobacco consumption as that of the countries under study. While this includes countries as diverse as India and Japan, we are encouraged to gloss over this diversity on account of the inclusion of countries similar to them such as Pakistan and South Korea in the study. Our second major assumption is that cigarettes under the category unspecified have not been purchased from Philip Morris and hence do not contribute to the company’s revenues. Thirdly, we assume that all tobacco companies’ revenues are affected equally by illicit cigarettes, so that we can apply industry-wide data to individual firms without further consideration.

The loss of revenues to Philip Morris occurs because of the incidence of counterfeiting, domestic illicits and unspecified illicits. Contrabands are expected to augment company revenues in countries where they are purchased by the smugglers. Of the ~760 billion cigarettes consumed in the countries under study in 2014, ~83 billion were illicit, of which ~11 billion was contraband. Hence, the tobacco industry lost out on 72 million units worth of sales due to illicit tobacco. This represents 9.5% of total tobacco consumption. Therefore, for every 90.5 dollars earned by the tobacco companies through legal sale of cigarettes, 9.5 dollars was lost to illicit cigarette sellers, an opportunity loss of 10.5%. Given that Philip Morris earned $10.5 billion net of excise taxes from Asia in 2013, it lost out on potential sales worth ~$1.1 billion in Asia due to the incidence if illicit cigarettes.