Legal Tobacco Sales Up in Smoke?

October 1, 2009

The tobacco category is feeling the heat around the globe as plans to ban in-store displays take hold. To date, there is no sound evidence they curb underage smoking but do cost retailers in terms of compliance and lost sales. There is also mounting proof of increased illicit trade in markets where bans have been introduced. Over the next three issues, Insight and NACS will be exploring the challenges in the global tobacco category.

This month we discover how trade bodies and tobacco companies are helping convenience retailers through an increasingly dark passage.

Rarely a week goes by without tobacco hitting the headlines in one form or another, be it a study in the British Medical Journal that smoking shortens life expectancy, a sting investigation by a trading standards body into underage sales in England or the recent ban on the sale of most flavoured cigarettes in the United States. Keeping on top of the latest rules and regulations, developments and trends, is hard at the best of times. In a tough economic trading environment when retailers are already digging deep to grow sales in less challenging categories, it is harder still.

Cigarettes: key category for c-stores

It is against this backdrop Insight and NACS are exploring the new tobacco trading environments around the world and finding out how industry is helping retailers manage the tobacco category and the expectations of adult smokers.

In spite of the news-grabbing headlines, tobacco remains a key category for convenience stores around the world.

Some quick statistics are a good reminder of that fact. In the UK, tobacco is reported to account for an average 24% of convenience turnover (Association of Convenience Stores). In Australia, tobacco sales in a convenience store represent in excess of 30% of in-store sales (Australian Association of Convenience Stores). In the US tobacco plays an even bigger role, accounting for nearly 33% of total in-store sales (Progressive Grocer 2008 Consumer Expenditure Study).

Big numbers and big challenges - no wonder proposals for tobacco display bans and their implementation in markets around the world cause such a furore.

Display bans

In December 2008 the UK government announced plans to ban the open display of tobacco in shops in England and Wales in a phased approach - displays would be removed from larger stores from 2011 and smaller stores by 2013. It stopped short of an outright ban on tobacco vending machines while plans to remove cigarette branding on packs and smaller pack sizes were scrapped.

Ministers claimed displays of tobacco products encouraged young people to take up smoking and pointed to evidence in Canada and Iceland - where displays have already been removed – which showed a reduction in the prevalence of smoking among young people of up to 10%.

Trade associations and tobacco manufacturers vehemently disagree and argue display bans will damage the income of smaller shops, which rely heavily on tobacco sales and cost millions in implementation.

The UK Association of Convenience Stores (ACS), which represents 33,000 local shops, claims a tobacco display ban will cost convenience stores more than £250m and claims there is no compelling evidence display bans lead to a reduction in smoking.

ACS James Lowman chief executive says the proposal “makes a mockery of government claims to be the friend of small and local businesses”.

The Health Bill, of which the tobacco display ban is part, will be debated in the UK House of Commons on 12 October 2009.

The ACS is now urging all local shop retailers to write to their MP again, asking them to oppose the tobacco display ban.

In Scotland, meanwhile, the Tobacco and Primary Medical Services (Scotland) Bill, which includes plans to ban the display of tobacco products, had its first reading in the Scottish Parliament on 24 September 2009. The bill also aims to ban cigarette vending machines and introduces a registration scheme for retailers. In addition, fixed penalty notices will be issued to retailers who sell cigarettes to under 18s and banning orders preventing shops from selling cigarettes at all if they flout the law will be introduced.

In a similar vein to the ASC, the Tobacco Retailers Alliance has attacked the Scottish legislation saying it would prove costly for shops to implement and has accused the government of breaking its promise to help small businesses through the economic downturn.

Back in England, the British Retail Consortium, claims a display ban will pile on costs for retailers and inconvenience customers.

BRC director general Steve Robertson says: “This will hit small stores, which lack the space and resources particularly hard. It will impose thousands of pointless refit costs on stores, ultimately met by customers, and create delays and inconvenience for customers and staff.”

Over in Canada, where total retail display bans have been now implemented in Ontario, Québec, Saskatchewan, Manitoba, Prince Edward Island and Nova Scotia, the Canadian Convenience Stores Association (CCAS) says the ban targets small business disproportionately.

CCAS president Dave Bryans claims a third of Canada’s convenience stores will close in the next five years as a result of the display ban.

* “Consumption has gone down nowhere,” he says. “Governments don’t lose out because the volumes don’t go down … The only person that suffers is the family-run store."

Bryans adds the Canadian convenience market has also lost between $70-$90m of in-store display support due to the tobacco display ban.

Initial reports from Ireland [see video link A], where a display ban was introduced on 1 July 2009, suggested the sales were unaffected in first few weeks.

But three months down the line and Joe Barrett, director at leading forecourt retailer Petrogas, which operates the Applegreen brand, reports sales are down by as much as 20% in Ireland, as a result.

In Australia, where a display ban has been implemented in New South Wales, which includes a single point-of-sale for tobacco products, and proposed for Victoria and Western Australia, the Australian Association of Convenience Stores (AACS) has been lobbying hard against legislation. It has also commissioned a report by Deloitte to investigate the compliance costs of a display ban for convenience stores in these three states.

Deloitte’s survey of retailers found the cost associated with fitting new tobacco storage units as well as the refitting of old display units for the purpose of other displays would cost between $5,000 and $10,000 per store.

However, Deloitte has also analysed the recurring annual economic costs of the ban due to increased transaction time and new operating procedures. On this measure, Deloitte found the cost to stores would be between $7,530 and $17,560 per store in Victoria and Western Australia but between $9,530 and $19,560 per store in New South Wales, where the display ban legislation is more stringent.

“This is a huge slug for retailers - we don’t believe the Government has had time to consider the full economic impact of these changes,” says David Killeen, the outgoing executive director of the AACS. Killeen says that compared to proposals in Victoria and Western Australia, the Rees Government’s laws will cost New South Wales tax payers $38m for the same thing.

“At a cost of $38m extra that is equivalent to 1,200 jobs in New South Wales,” he says. “This is an unnecessary and significant cost.”

In New Zealand, meanwhile, campaigners against tobacco displays have successfully persuaded the government that a ban would be expensive and ineffective.

Interviewed earlier this year, New Zealand’s prime minister John Key, said the ban did not have support of his National Government: “The reason is there is no international evidence that it actually works, and it’s hugely expensive to do,” he said.

Killeen said campaigning had paid off for once: “As for New Zealand we have tried a similar approach (to Australia). To be honest we got lucky. 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 can together under the Stay Displays group (see link). 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.

“Interestingly it was a director of ASH New Zealand that got 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!”

Youth smoking

While governments argue display bans will help stop future generations of children smoking, opponents including BAT provide evidence to the contrary.

When Saskatchewan became the first Canadian province to ban retail displays, the percentage of adults who smoked increased from 21% in 2002 to 24% in 2003.

"We don’t believe display bans are justified and there is no proper evidence to suggest bans would have any impact on smoking rates, including under age take up,” it says.

In the UK, meanwhile, the ACS and JTI highlight the latest NHS figures, which show the number of young people regularly smoking has dropped to 6% compared to 13% in 1996.

But concerns about youth smoking and underage sales, specifically, persist. Last month (September) trading standards officers in England released new figures which showed sales of cigarettes to underage children have risen by almost 50% in the past year. The survey found one in five retailers tested selling to children.

LACORS (Local Authority Coordinators of Regulatory Services), which carried out the survey, said the results showed retailers were not doing enough to make sure they aren’t selling cigarettes to kids and the penalties were too low.

The ACS disagrees. Lowman again: “LACORS’ concerns regarding the penalties for retailers who sell tobacco to someone under 18 have been very recently addressed by a change in the law. Any retailer that persistently sells tobacco to an under-18 faces a ban from selling tobacco of up to one year as well as the fine of up to £5,000.

“Retailers take these penalties very seriously and many retailers faced with a large fine and tobacco ban could be put out of business.”

Lowman also claimed the test purchases were a poor measure of retailers’ overall since they often targeted stores that have been the subject of complaints or other local intelligence.

“The figures show that the vast majority of shops do not sell tobacco to those underage and work incredibly hard to be the first line of defence against young people getting hold of tobacco when underage.” Of greater concern to the ACS and its members and the British Retail Consortium is the issue of proxy purchasing.

ACS has urged the Department of Health to follow the Scottish Parliament’s lead by addressing the issue of proxy purchase of tobacco. The Health and Sports Committee has recommended that measures to criminalise adults supplying tobacco to children be added to the Tobacco and Primary Services (Scotland) Bill.

In light of this new development ACS has written a letter to the Public Health Minister Gillian Merron urging her to begin discussion on this issue.

Lowman says: “We welcome this move toward tackling the issue of proxy purchasing. Most people will be surprised to know that an adult that buys cigarettes from a shop and then walks outside and hands them over to a child is not breaking the law. We are calling on the Government to make these irresponsible actions illegal so as to punish and deter adults that encourage underage smoking.”

Robertson at the BRC agrees: “Enforcing existing and new regulations and stopping parents and older peers supplying tobacco to children is the real answer,” he says.

The tobacco industry is mindful of its role and but says there are better ways of reducing youth smoking uptake than hiding tobacco products from display in retail outlets, for instance. JTI says more proportionate solutions include:
criminalisation of proxy purchasing and the purchase or attempted purchase of tobacco products by youth;
greater resources and manpower for effective, targeted enforcement strategies by the HMRC, the UK Border Agency and Trading Standards Officers;
the use of adult identification functions for vending machines;
reinforcing retail access prevention measures, such as the ‘No ID No Sale’ programme;
targeted public information campaigns to quickly and effectively raise awareness of the negative licensing scheme and the criminalisation of proxy and youth purchasing BAT agrees that working with retailers is a vital part of effective industry action against under age smoking and says retail access prevention programmes aim to block sales of tobacco products to minors at the point of sale.

These include proof-of-age schemes, teaching retailers about laws and effective ways to block sales to minors, and raising awareness of the issues among politicians, educators and the media.

Tools include posters, badges for retail staff, point-of-sale materials showing that under age sales are illegal, booklets explaining the law and training videos for retail staff showing how to refuse sales to children.

BAT warns retail display bans may have an unwelcome impact on youth smoking too. Under-the-counter sales may actually make smoking seem more appealing to rebellious or curious teenagers, it says.

Illicit trade

Growing illicit trade in tobacco markets is another major challenge for the industry and it is being given oxygen by the display ban.

In Canada Bryans reports the illicit trade in cigarettes is increasing and accounts for 50% of sales in the two largest markets, Quebec and Ontario.

“It’s not for me to say that it is because of dark markets but convenience stores have lost the display dollar and illicit cigarettes are in growth. Sixty five percent of all cigarettes will be illegal in the next five years.”

Over in Ireland, Barrett at Petrogas is chairing a new campaign group, which is examining the impact of the display ban on tobacco smuggling.

Joe Barrett: Ireland's display ban is fueling illicit sales

Barrett reports illicit sales are increasing with contraband cigarettes even being supplied with pizza deliveries. Figures from the Department of Public Prosecutions show one in four cigarettes consumed in Ireland is purchased on the black market, equating to €500m a year or €35m in tobacco margins to the retail sector.

According to Ronan Barry, head of legal and corporate affairs at BAT UK & Ireland, illicit trade is costing every retailer €45,000 a year. The display ban will only deepen the problem, he says. “It’s going to get worse because it will be easier for the illegitimate trade to blend in with regular traders.”

Regulation is increasing at pace in the US since President Barack Obama signed off a new tobacco bill putting the FDA in control of tobacco regulation in June 2009.

In addition to banning fruit and candy-flavoured cigarettes, the Family Smoking Prevention and Tobacco Control Act:

* Eliminates the use of the terms ‘light’, ‘low’ and ‘mild’ on tobacco products Authorises the FDA to create a new Center for Tobacco Products to oversee tobacco regulation in the United States Requires tobacco manufacturers and importers to fully disclose information about ingredients and additives in tobacco products Requires large, graphic warning labels on the health risks of smoking Growth in illicit sales is also a key concern.

Michael Davis, VP member relations at NACS, reports ‘sticks’ are being supplied and sold in clear plastic bags at very low cost in the US.

Operational issues

Display bans bring with them numerous operational challenges for convenience store retailers.

In Australia, Deloitte’s report for the AACS has put a figure on the increased operational costs resulting from increased transaction time and operating procedures such as re-stocking for convenience retailers in New South Wales.

Killeen says: “The single point of sale means that stores with more than one cash register - and a large volume of orders - will have to significantly change how they operate their businesses.

“The regulation will increase queuing - frustrating customers - and also increase security risks.”

The Deloitte report found retailers in New South Wales are disadvantaged compared with those in Victoria and Western Australia because its retail display ban disallows the use of both a price board and price ticket, while the proposed changes to the legislation in Victoria and Western Australia suggest retailers can use both price mechanics.

Service has also slowed in Canada, says Bryans, where most convenience retailers have covered tobacco gantries with screens or flaps. Retailers are also at increased risk, he says.

Brand loyalties have been decimated too.

“Customers think it is the stupidest thing they have ever seen and, as a result, they are just buying the cheapest products,” he says.

BAT fears display bans will encourage shoppers to choose solely on price while Vincent Jennings, chief executive of the Convenience Stores & Newsagents Association in Ireland, anticipates brand casualties.

On the ground, Barrett at Applegreen reports 95% of sales are already migrating to the top brands.

That will make introducing new products and limited editions extremely challenging for any supplier.

Shane Brennan, public affairs director at the UK’s ACS, says providing product information is challenging. “Retailers in most dark markets are permitted to hold price and stock lists for shoppers to use but the extent to which customers use these appears limited. Getting information to customers about products will be very difficult,” he says.

A display ban will lead to possible compliance confusions and possibly slow down service in the shop, adds Brennan.

Keeping retailers in the loop will be key too.

“Educating retailers about any guidelines is a major challenge - there are often significant complexities and, in a store where there are many other products and business priorities, making sure retailers know the rules is a major challenge for the trade,” he says.

Back at BAT Barry highlights further practicalities of the display ban in Ireland including the use of menu boards featuring the cigarette brands, which retailers stock. In city stores with a high proportion of tourists - some from markets where there are no display bans – these boards will be in high demand among shoppers whose first brand may not be available in store, he says.

Insight partner, Dan Munford, has recently visited Ireland and reports retailers need urgent clarification on how they can convey product information to customers, especially in tourist locations.

“This is a crucial issue where industry can really make a difference. Retailers desperately need to know how they can provide shoppers with product information within the guidelines,” he says.

In Australia, the AACS reports retailers are severely limited in what can be displayed and on the need to avoid unintended consequences of the ban including discrimination against non-English speaking consumers who are unable to use visual cues to buy products when black-outs are in place.

Keeping in stock also becomes critical in a dark market because shoppers cannot identify if their brand is available until they are at the checkout. It will also avoid migration to larger stores, he adds.

In America NACS is engaging with the FDA to ensure rule making reflects the interests of convenience retailers. While display bans are not on the FDA’s immediate agenda, some retailers, including Wegmans, have already opted to quit the category. Elsewhere, others have been pressured to cover displays by lobby groups.

Tobacco will continue to be a challenging category for convenience retailers in all markets. The key will be to remain informed and involved.

Shane Brennan: think ahead about changes

As Brennan at the ACS states: “Retailers have to be both vocal in their opposition to measures that impose unnecessary cost and burdens and pragmatic in making sure that they are thinking through how changes coming down the road will affect their business.”

Tobacco retail display bans in Australian jurisdictions (source Deloitte/AACS)

Although none of the Australian jurisdictions have formally tabled their specific regulations for a retail display ban, it is worth noting that each jurisdiction’s policy appears to have different implementation periods and will have different specific rules. Exemptions for specialist tobacconists also vary between jurisdictions. Table 21 indicates the current position of Australian states and territories and their position with respect to the introduction of a retail display ban.

New South Wales

Current status: New legislation has been assented. Regulations have not been tabled. Start date: Small retailers (under 50 staff) will have 12 months to comply with new regulations and large retailers will have 6 months.

Victoria

Current status: No legislation has been enacted or introduced to parliament. Start date: 1 January 2011

Tasmania

Current status: New legislation has been assented. Regulations have not been tabled. Start date: 2 February 2011

Australian Capital Territory

Current status: New legislation has been assented. Regulations have not been tabled. Start date: 1 January 2010 for retailers and 1 January 2011 for specialist tobacconists.

Queensland

Current status: Has not announced (or indicated it is considering) a RDB.

Western Australia

Current status: A cross-party parliamentary committee recommended that the Western Australian Government introduce a RDB. Start date: Not announced

South Australia

Current status: Has not announced (or indicated it is considering) a RDB.

Northern Territory

Current status: Government has announced an intention to introduce a ban but has not set a date or timetable. Start date: Not announced

The ACS update on tobacco display ban: Health Bill - Report Stage vote 12 October 2009

The Report Stage of the Health Bill is taking place on Monday 12 October. An amendment has been tabled which would see the removal of Clause 21 from Bill, which relates to the Government’s proposals to prohibit the display of tobacco products. The Conservative party has indicated they will give a free vote on this issue.

Association of Convenience Stores (ACS) and the British Retail Consortium (BRC), who jointly represent much of the affected retail industry, support this amendment and urge you to take part in this debate. Please vote in favour of removing the clause and stop the ban of tobacco displays, which will be costly to retailers while having no proven impact on youth smoking rates.

We hope you find the points made in this paper helpful as you prepare for the debate.

Evidence

The stated intention of a display ban is to reduce youth smoking. There is no conclusive evidence to suggest this:

In Iceland though smoking rates has declined, this has been after a programme of tobacco control which extends far beyond prohibiting displays. Indeed academics have identified the in-depth work done at community level as the most crucial aspect in declining smoking rates

In Canada there is no link between the implementation of a ban and reduction in youth smoking. The States with the longest running bans, Saskatchewan and Manitoba, have both seen increases in youth smoking and Ontario with the best reductions achieved these before bringing in a ban.

The New Zealand Prime Minister John Key has recently rejected the introduction of a Display Ban because his Government did not find conclusive evidence that this is the most effective strategy for combating youth smoking. The Government recognised that there are more effective ways to tackle youth smoking.

Cost

We are concerned about the cost burden these proposals will have on retailers. The Government’s Regulatory Impact Assessment estimated an average cost of £1000 per retailers, which would be a cost to the sector of £88 million. From discussion with our members, both the ACS and BRC fear the cost could be significantly higher than this estimate, once labour, materials and sustainable disposal methods are considered.

While the Government has committed to implementing low cost solutions, as yet there has been no draft regulations published, though the Minister has committed to publishing them prior to the vote. However, from discussions we have had, it is clear Government is planning to rule out some of the low cost solutions, such as sliding doors or curtains, which have been favoured in Ireland.

We do not believe that now is the right time to introduce complex and costly measures which are not proven to be effective.

It has also been suggested that tobacco companies will fund the changes. However, there is no clear indication this will be the case. In Ireland, where a ban on display was implemented on 1 July 2009, 52% of retailers had to fund their own solution in its entirety. This increases to 63% of unaffiliated independent stores who are likely to have problems finding extra money at this difficult time.

For further information:
http://www.aacs.org.au/
http://www.acs.org.uk/
http://www.conveniencestores.ca/
http://www.csna.ie/
http://www.nacsonline.com/NACS/Pages/default.aspx
http://www.staydisplays.co.nz/
Legislation overview in all Australian states