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plain packaging tobacco identity crisis

Plain packaging, lessons to learn from the (possibly) coming tobacco identity crisis

October 26, 2012

I recently enjoyed a debate with an economic consultant friend of mine on the implications of plain packaging for cigarettes. As an occasional smoker myself, I was very interested in what proposals to restrict branding opportunities for manufacturers might mean for my own habits.

A study by the British Brands Group found that removing on-pack branding would “make it harder for consumers to identify the brand at the point of purchase” and that “This has the potential to distort competition by focusing attention on price rather than quality, opening up the prospect that a regulation intended to reduce demand might perversely increase demand and sales if the intensification of price competition leads to lower prices and reduced average quality”.  Although increased demand might sound promising for the industry, the authors suggest that not only would the tobacco sector lose out  from smaller revenues, but so would the government, through a reduced tax take.

An important policy consideration identified by that study is the problem of parasitic copying, and the crucial role of regulation in protecting intellectual property: “the branding and packaging investments made by established brands can be undermined by copycat products free-riding on these investments and diverting sales … so distorting competition”. This reminded me of a series of adverts I’ve noticed recently, I caught the below image in the New Statesman, and it was also in the Daily Telegraph:

The point being made by Japan Tobacco International was that plain packaging will make it more difficult to identify counterfeit cigarettes. The ad argues that this would “be a dream for organised crime, but a nightmare for everyone else”, noting that fake cigarettes have been found to contain undesirables such as ground glass and even rodent faeces. In the same edition of the New Statesman, Imperial Tobacco had taken out a full page advert, claiming that plain packaging will “make life easier for counterfeiters” and threaten the livelihoods of those directly employed in the supply, distribution and retail of tobacco.

On the other side of the debate, the Guardian offered an interesting perspective recently, arguing that “introducing plain packaging for cigarettes could certainly help to reduce the brand marketing appeal of cigarettes to teenagers”, and so stop them developing a habit in the first place. The article points to research by the University of Stirling’s Management School, which led to a government consultation on standardised packaging. That research is far too comprehensive to summarise here, but some of the issues it highlights include five ways in which the visibility of branded packaging may function as a marketing tool:

  1. By acting as an advertisement at the point of sale
  2. By making cigarette use appear ubiquitous, and more normal to consumers
  3. By inciting cravings in smokers who want to quit
  4. By ensuring long term loyalty from new users by “providing favorable and compelling images they can continue to experience”
  5. By reducing the effectiveness of health warnings, by reducing their potential size, and due to competition from ‘eye-catching’ logos

Conflicting views abound, and the findings of the British Brand Groups’ study, mentioned above, were echoed by London Economics in a report which found, by employing online simulation techniques, that “If consumers can’t differentiate between brands in the market, they opt for cheaper brands, whether it’s beer, cigarettes or almost any other product. If manufacturers respond by competing on price to maintain market share, prices may decline.”

So, perhaps intuitively, as prices are reduced traditional thinking suggests that demand will grow. I’m no economist, but from my own experience I suspect that, if I found it more difficult to identify premium brands, and was less affected by their marketing at the point of sale, then price would have a greater impact on my decision.  As a result I might tend to buy cheaper cigarettes, and have no difficulty in accepting that this means I might buy more cigarettes. On the other hand, I also believe I get satisfaction from knowing I’ve opted for a premium brand, and I’m sure the appeal of the packaging holds some sway in my decision. Which of these factors will have the stronger impact I don’t know, but it’s a moot point given that I’ve made up my mind to try and stop altogether, and hope to have done so before plain packaging arrives.

Opinion is clearly divided on the economic implications, but a common thread throughout is the resounding importance of branding. There is an important lesson hiding in plain sight here – though much of the comment is focused on how effective standardised packaging will be in reducing tobacco consumption, the more widely applicable analysis tells us how vital it is to growth, or even survival, that businesses are free to differentiate their products from those of competitors. On the one hand, a failure to differentiate yourself may mean a race to the bottom on price, increasing demand but destroying your margins, and on the other it risks hampering sales and loyalty because your products are less memorable, and lose some of their glamour.

It is surely a good idea to tackle smoking, and standardised packaging may or may not be one way to do this, but for businesses which are not subject to such regulation, what is clear is that ownership of your brand, as secured through trade mark registration, and the freedom to leverage that brand to set yourself apart from competitors, will help you to get ahead.