RN April 2014 TF

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Tobacco

Deirdre Healy, Corporate Affairs Manager (left) and Carmel Balala, Trade Marketing Manager, John Player.

Ireland: The Regulation Nation When it comes to the tobacco category, the big challenge is dealing with the constant regulatory changes. John Players’ Carmel Balala, Trade Marketing Manager, and Deirdre Healy, Corporate Affairs Manager, discuss the big issues facing the sector.

“WE don’t have a problem with regulation. Tobacco is an adult product, so it has to be regulated. But we believe that regulation needs to be balanced and evidence-based and unfortunately, what we’ve seen in Ireland is that regulation is just pulled from thin air, with no evidence brought forward to support it. When the law is brought into force, nobody looks back afterwards and asks if a certain piece of legislation worked or not.”

The speaker is Deirdre Healy, Corporate Affairs Manager with John Player, and her argument above sums up the challenges facing Ireland’s tobacco sector, which, let’s not forget, is a legitimate product, sold legally by licensed

retailers right across the country.

The issue of regulation without evidence is not confined to the current debate around Minister for Health, James Reilly TD’s proposals to introduce plain packaging on all tobacco products. Indeed, Healy cites the ban on the sale of 10-packs of cigarettes in 2007, which she describes as “an own goal by anti- tobacco lobbyists”.

“When that ban was proposed, we were asked our opinion on the matter in a Department of Health consultation: we said that a lot of people at the time smoked 10’s because they only wanted to smoke 10 per day and a lot of pensioners could only afford 10 per day. But the ban was introduced,

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Tobacco so pack sizes and prices automatically doubled overnight and consumption went up, as we predicted it would.

Sales of non-Irish duty paid cigarettes went up as well.”

Healy is urging the authorities to look sensibly at regulation prior to its introduction and also to carry out retrospective studies to ascertain if said legislation achieved its stated objectives.

“Pictorial health warnings on-pack were brought into force in February 2013, but nobody looked back to see if they stopped people smoking, and yet four months later we had the announcement of the proposal to bring in plain packs,” Healy notes. “There is no culture to examine legislation to see if it has worked.”

The Corporate Affairs Manager stresses that John Player are supportive of the Government’s objective to curb youth smoking but feel that the manner employed is the problem.

“We don’t challenge the objective,” she insists. “We are on the same page.

People who work here [at John Player] have children too and we don’t want children to smoke. But there are other ways rather than regulation for the sake of it.”

The Retail Challenge It’s not just the tobacco manufacturers who suffer with each regulatory change, however. Retailers are so often at the coal-face of regulatory changes and unfortunately, it’s their bottom line that suffers, losing out to the illicit trade.

“It is challenging from a retailer’s perspective,” admits Carmel Balala, Trade Marketing Manager. “They are selling a legitimate product and their cash margin and turnover is being eroded by non-legitimate product. All the regulation and all the hardship is coming on them in terms of trying to sell a legitimate product, not only in tobacco: they have regulation coming at them from all sides. So it is very difficult to be a retailer in Ireland and there don’t seem to be any proposals to make it easier.”

There is no over-stating the importance of the tobacco category to retailers, particularly the convenience channel, where tobacco generally delivers 30-35% of turnover.

“In terms of footfall, a tobacco shopper comes into your store more often and spends more money,” Balala explains. “To a retailer, a tobacco shopper is worth twice the value of a non-tobacco shopper over a year.

“Tobacco delivers a lot for retailers

Deirdre Healy: “We would like to see higher penalties applied to those found guilty of selling illicit cigarettes and tobacco.”

and good retailers understand how important tobacco is for their store.

We’ve often had retailers saying to us, ‘if I didn’t have tobacco, I wouldn’t open my store in the morning’. But it seems that there is a disconnect between

“We don’t challenge the objective. People who work here have children too and we don’t want children to smoke. But there are other ways rather than regulation for the sake of it.” retailing and the amount of regulation that is coming at retailers: they have regulation from the deli, the bakery, from all angles, and it’s making it difficult for them to run their business.”

The Move Towards Value The combination of stringent economic conditions and constant excise hikes in

recent years have seen a swing in the tobacco category, with more consumers than ever now choosing better value products.

“Tobacco isn’t immune to general economics,” Balala stresses. “Like any other category, as people have had less disposable income over the last few years, value products and alternatives from the standard Factory Made Cigarette (FMC) have grown.

Consumers are looking for alternatives that are cheaper.”

Value factory made cigarettes now account for over 17% of the FMC market, according to the latest figures from John Player, while fine cut tobacco, which includes Roll Your Own and Make Your Own, is growing at over 15%.

The latter category, Make Your Own, is one that didn’t exist just a few years ago, until John Player launched Make Your Own John Player Blue and JPS. Instead of rolling papers, the Make Your Own starter pack includes ready-made cigarette tubes, John Player tobacco and a tubing machine, allowing consumers to effectively create their own John Player Blue.

“Adult tobacco consumers still want to buy their preferred brands,” Balala notes. “They might want to buy John Player Blue but they want a value offering within that, so that’s why we have had to be innovative in terms of the products we brought to the market over the last couple of years, like the Make Your Own John Player Blue and JPS offerings.”

Despite the rise in value, however, Balala stresses that Irish tobacco consumers are incredibly brand loyal: “The majority of adult tobacco consumers in Ireland still buy into premium cigarettes and this remains a very important part of the tobacco industry in Ireland, accounting for 70% of the Irish tobacco market.”

The Illicit Trade Other than over-regulation, the biggest concern facing the Irish tobacco sector in recent years has been the size of the Non Irish Duty Paid market i.e. tobacco products that are smoked in Ireland but simply not bought in an Irish shop. As the legitimate tobacco products rise in price, more and more cash-strapped consumers are looking to the black market, where a pack of 20 cigarettes sells for as little as €3.20 or else they or their friends and family are cajoled into bringing tobacco back from holidays.

“You can buy John Player Blue in Portugal and Spain for €4.50, so the more you put up the price here, the

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Tobacco

John Player have innovated within the branded tobacco category with the launch of Make Your Own John Player Blue, whereby consumers can create their own John Player Blue cigarettes via ready-made cigarette tubes, John Player tobacco and a tubing machine.

more you are encouraging tobacco tourism, so you haven’t stopped people smoking: they’re just getting their tobacco somewhere else,” Healy notes.

It seems ironic that with each piece of legislation introduced, it is legitimate retailers who suffer, while black marketeers and illegal tobacco sellers thrive.

“All the new regulation that comes in has the effect of making it difficult for retailers to sell a legitimate product,” Balala admits. “We need to try to reduce the size of the black market, but it’s extremely difficult, because there isn’t the same focus, from a regulatory point of view, to help us to do that.”

John Player, along with the other Irish tobacco manufacturers, are hugely concerned by the size of the illicit trade here. Indeed, John Player took one of their sales reps off the road to work full-time with customers and Gardaí on the illicit trade.

“We’re always talking to

retailers about how we can work with them to make their lives easier, and one of the things they always come back to us with is the size of the illicit market. We have taken a sales person off the road to help us to deal with that but it’s a much bigger picture than just us: we need the support of the Government to do that,” Balala explains.

The Fines Aren’t Fine One area where dramatic changes could be made immediately is in the size of fines handed down to those convicted of illicit tobacco sales, with some fines being as little as €50.

“We would like to see higher penalties applied to those found guilty of selling illicit cigarettes and tobacco,” says Healy.

“The fines are there, but the courts are not applying them. I think it’s a societal issue that it’s seen as a ‘Robin Hood’ thing, where people are taking money off the Government for a few

fags. The fines are getting progressively higher but it’s not moving fast enough as judges are not handing down the fines available to them.”

The trade has welcomed as a step in the right direction the fact that the Revenue Commissioners have started to seize assets, such as cars, from those convicted of widespread illicit tobacco sales, while the Department of Social Welfare are moving to refuse people social welfare payments if they are found to be selling cigarettes illegally.

There have been cases where legitimate retailers were found guilty of selling illicit product, Healy admits: “We had a case two years ago that a retailer was convicted of selling illicit cigarettes, yet he was still on the tobacco register, which is ludicrous.”

However, the vast

“Packaging is not the reason why people smoke.

Otherwise, we’d have a 100% smoking rate.

It is about peer pressure, education etc.

So introducing plain packaging is not going to deal with the issue.”

majority of illicit sales are illegal sales at markets and on the street, as well as casual selling in workplaces.

Plain Speaking Minister Reilly’s proposed move to plain packaging will only exacerbate the problem, according to both Healy and Balala. The entire debate around plain packaging centres around 35% of the front of a cigarette packet, as the other 65% will be taken up with a health warning, when the European Tobacco Products Directive comes into force.

“Where is the evidence that removing our branding on this 35% will make a difference to smoking rates?” asks Deirdre Healy.

“There is no evidence to support its introduction.

The Minister failed to perform a Regulatory Impact Assessment (RIA). The whole idea of carrying out a RIA is to examine various options to meet an objective.

If the objective is to stop children smoking, you then look at all the things that can be done to achieve that objective, including youth education, further legislative controls etc. But that simply was not done.”

Healy points to the fact that in 2010, Ireland’s Department of Health made a submission to the European Commission that they were only in favour of plain packaging if such a move was mandatory for every European country, which Minister Reilly’s plan is not. The result will be that branded product, brought in from other EU countries via tobacco tourism, will still be rife in Ireland, while illicit whites will still be available with fake trade marks, made to look like genuine branded product.

“Branded cigarettes will still exist in Ireland: they just won’t be sold by legitimate retailers,” Healy states. “If plain packaging were to be introduced in Ireland but not throughout the rest of Europe, Irish people will freely travel and

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Tobacco

bring back cigarettes from abroad.

Ryanair will do very well out of it but Irish retailers won’t.”

Australia is the only country in the world so far to introduce plain packaging for tobacco products, and their Department of Health are carrying out a study this December to assess the impact of plain packaging. It would make sense that the Department of Health in Ireland reviews the real world evidence from that study and in the meantime, they could introduce measures such as a ban on proxy purchasing, as well as developing targeted educational initiatives to curb youth smoking.

“Packaging is not the reason why people smoke,” Healy says simply.

“Otherwise, we’d have a 100% smoking rate. It is about peer pressure, education etc. So introducing plain packaging is not going to deal with the issue. We always cite the example of Germany, where there is still billboard advertising for tobacco, full and open display in shops and yet they have half the youth smoking initiation rate that we have. We look to Germany as a role model in the economic sphere, so what is wrong with looking to Germany as a role model for stopping children smoking?

“They focus on giving teenagers the life skills to say no, whether it be for smoking or drinking. I don’t know why there isn’t mandatory education in Irish schools when it comes to areas like tobacco and alcohol. We seem to be more interested in banning things.”

IP Rights There is also the thorny issue of Intellectual Property rights, which are

guaranteed by Ireland’s Constitution, while they are also held as a cornerstone of doing business within the EU. “Our Intellectual Property rights are extremely valuable to us and we will absolutely defend them, just like any other company would,” Healy stresses. “You can’t just take somebody’s rights away, particularly when you haven’t even done the basics of a Regulatory Impact Assessment to give a good reason why you should.”

Both Balala and Healy subscribe to the slippery slope argument that it is tobacco today, but this debate could encompass other sectors in the near future, including alcohol, fast food, carbonated soft drinks, high fat foods etc.

“We know that leading public health lobbyists in Ireland have come out in favour of plain packaging for alcohol products, and they also want health warnings on alcohol,” Healy muses. “There are new measures proposed forbidding fast food outlets within a certain distance of schools.

Just recently, Micheál Martin said that childhood obesity and alcohol abuse should be given the same priority as smoking. So this slippery slope is invariably going to happen because public health lobbyists will move onto the next thing.”

“It comes back to the debate over the nanny state,” Balala adds. “Ireland is now being seen as a country where consumers can’t make a choice: they are being told what to do.”

Maximising Returns From Tobacco Despite all the regulation that has been thrown at the tobacco sector in recent years, 21.5% of Irish adults continue to smoke (Source: HSE), and the tobacco sector remains hugely important to retailers. So how can Ireland’s beleaguered retailers maximise their returns from legitimate tobacco sales?

“The most important thing from a shopper perspective is that their product is available,” Balala stresses.

“Even though the tobacco shopper can no longer see their brand on shelf, it’s vital that when they ask for it, they get it. Having their top SKUs on-shelf 100% of the time will feed turnover and margins. Even though we talk about the shift towards value, tobacco smokers are very brand loyal. The most important thing for them is that their brand is available in store.”

Tobacco manufacturers are as guilty as any other supplier at launching new products, Balala admits. “We have to be very conscious that the products we are asking a retailer to stock are the

Carmel Balala: “To a retailer, a tobacco shopper is worth twice the value of a non-tobacco shopper over a year.”

ones that the consumer is looking for, so we have to work with them on range, on cash-flow etc. If we all start to work together, the benefits are there to be realised. It’s about understanding what products are selling and making sure you have them in-stock all the time.”

John Player recently carried out research on tobacco shoppers, which makes for very interesting reading, particularly for forecourt operators.

61% of tobacco shoppers visit a forecourt to purchase tobacco, but not necessarily to buy fuel: “When we examined these results, we found that it was because they knew their brand would be there and they knew the store would be open.”

John Player have carried out extensive research on out-of-stock rates in tobacco. “The biggest cause of outof-stocks in tobacco is poor ordering,” Balala admits. “Good retailers will be very astute on this but there are some retailers who aren’t looking at what is selling, so they’re not meeting their customers’ demand.”

Managing the tobacco category is about having a dedicated member of staff whose job it is to know what products are selling and in what quantities, each week.

“If the person who manages the tobacco category in your store is on leave, there needs to be somebody else who can manage it. They need to know what is in the stock room, so they are not over or under-ordering,” she explains. “If tobacco is managed properly, it will continue to be a hugely important and valuable category for Irish retailers.”