Cape Town - South Africa's R30bn tobacco industry could see profits dive and consumption increase through the proposed introduction of plain tobacco packaging, a study has revealed.
In the light of World No-Tobacco Day last week, Health Minister Aaron Motsoaledi vowed to strengthen the Tobacco Products Control Act implemented in 1999, which bans all advertising, to fall in line with the World Health Organisation (WHO) Framework Convention on Tobacco Control.
The biggest change would see plain packaging on cigarette products in an effort to drive down the incentive for people to smoke.
However, a small study into the proposed law found that removing cigarette packaging alone would not be enough to reduce the consumption of tobacco products, and that this would in fact have a significant impact on law enforcement and taxes.
Helvin Manuel, as part of his MBA at the University of Stellenbosch Business School (USB), studied the potential impact of non-branded packaging on the purchasing behaviour and product experience of cigarette consumers drawing on additional learning from Australia, the first country in the world to implement such a strategy in 2011.
The participants in the research study all started smoking between the ages of 12 and 21 years with well over 80% starting whilst at school. They had to complete a daily online journal, expressing their interaction with the plain packs over the five days by way of pre-set questionnaires prepared by Manuel and a live online forum on completion.
Manuel’s simulation study of 22 South African smokers who each had to smoke their brand in plain white packs for a period of five days, found that the longer consumers interacted with the plain tobacco packaging, the more familiar they became with the packs and that seemed to lessen the initial negative perceptions.
However, he also pointed out that non branded packs are seen as less attractive and this could potentially deter younger people from taking smoking up in the first place.
“Smokers are emotional in their behaviour and brand choices. Many took up smoking due to peer pressure, the perceived social acceptance and the status the brand equity of premium cigarettes portrayed.
"My study found that the psychological impact of the non-branded packs led to some consumers experiencing a change in the taste and performance of the cigarettes, although the product itself had not changed. This will even have a direct impact on new consumers considering taking up smoking.”
Manuel said since all brand equity had been removed from the cigarette packaging and without product differentiation tobacco manufacturers cannot charge a premium for their various products.
"Some consumers indicated that they did not get the same value from their brands and felt that the prices of cigarettes should be standardised across the board. This could potentially increase the demand and usage of cigarettes mirroring what happened in the Australian market where the decline in prices resulted in an increase in consumption.”
Manuel also found that the value for money consumer approved more of the plain packs.
“The taste of the cigarettes and the price of the packs are more important than the image of the brand.”
Although governments have good intentions with the implementation of plain tobacco packaging, Manuel said there are certain unintended consequences that have to be taken into account when such legislation is drafted.
With the legal market size of the SA tobacco industry estimated to be more than 20 billion cigarette sticks, the possibility of this new legislation is a concern to the local tobacco industry as it could potentially have a direct impact on profit margins.
“Plain tobacco packaging will make counterfeiting of original products easier and pose a challenge for law enforcement. This illicit trade could also lead to governments losing money from possible taxes that could have been received from the legal tobacco industry."
Manuel said a study conducted by KPMG in 2013 in Australia found that the increase in illicit products since the implementation of plain tobacco packaging has resulted in a loss of £560m (R12bn currently) in taxes.
This concern was echoed by JSE-listed BAT spokesperson Will Hill. He told Fin24 last week that a quarter of all cigarettes currently sold in South Africa are on the black market, meaning South Africa already misses out on tax revenue.
“South Africa already has a problem with this criminal activity and the plans to have plain packaging will only increase the criminal activity.”