Plain packaging and brand differentiation in the Australian cigarette market

¶ … Plain Packaging on the Cigarette Market Demand and Supply in Australia

The Australian cigarette market is reported to be a "subset of the global industry." (Carter, 2003) There are three companies operating in Australia including: (1) British American Tobacco Australia (BATA); (2) Philip Morris International (Australia) PMA and (3) Imperial Tobacco Australia (ITA) all whom are wholly owned subsidiaries of their overseas parent. While the Australian tobacco market is a mature market with per capita consumption in decline the tobacco companies "remain highly profitable entities and business is strong…the equivalent of 1100 packs of 25 cigarettes are sold in Australia every minute." (Carter, 2003) Because the tobacco companies are owned by overseas companies, none of them are listed on the Australian Stock Exchange and that means that the information available on the specific local company operations is limited.

Australian Cigarette Brand Examined

Carter (2003) examines brand identity in Australian cigarette brands, brand positioning, brand image and brand equity. Results from the study report that cigarette manufacturers benefit from their competitors brand equity as well as their own. Australian smokers are viewed by the industry as less brand loyal and more strongly oriented to low tar cigarettes. There are three categories of successful Australian brands: (1) premium; (2) mainstream; and (3) supervalue. Premium cigarettes are 'quality' while mainstream is a "fair go" for ordinary Australians with Supervalue being "value for money." (Carter, 2003) Brand equity has been undermined in Australia by tobacco control activities. (Carter, 2003, paraphrased) In 1976 Federal Australian, law made the majority of forms of tobacco marketing illegal and this was strengthened in the 1992 Federal Tobacco Advertising Prohibition (TAP) Act.

It is reported that the Australian cigarette market is "far simpler than the complex matrix of brands available internationally." (Carter, 2003) In supermarkets, it is reported that ten brands account for approximately 95% of the volume. (Carter, 2003, paraphrased)

III. Effects to Plain Packaging of Cigarettes

There will be several effects to plain packaging of cigarettes according to Padilla including: (1) product differentiation will be reduced within the cigarette market "thereby increasing price competition and leading to a reduction in prices; (2) market entry for non-branded products will be made easier increasing competition and further reducing prices; (3) it will be easier and cheaper to produce counterfeit cigarettes that sell at lower prices than legitimate products; (4) it will be more attractive to consumers to import contraband cigarettes from abroad that sell at lower prices. (Padilla, 2010) All of this, according to Padilla will result in lower prices and an increase in increased cigarette sales. (2010) Carlton and Perloff note in their work that: "in a market that is protected from entry, price remains above marginal cost because not firm can enter the market and drive down price..Thus restrictions on entry are the reason that many markets are not perfectly competitive, that that prices are above marginal cost." (Padilla, 2010) It is additionally stated by Carlton and Perloff that if: "large sunk costs are associated with entry and if entry is unsuccessful, the entrant's losses are large" and "in such a setting, threats of strategic behavior may prevent new entry." (Padilla, 2010) The competition level within a market and the price levels are dependent on the "existence and impact of any barriers to new entry." (Padilla, 2010) Padilla writes that plain packaging will affect the supply of both contraband and counterfeit cigarettes and states as follows:

(1) It will make counterfeit cigarettes easier to produce.

(2) It will make contraband cigarettes relatively more attractive to consumers.

The increase in illicit trade is reported to be likely to result in a reduction in the price of cigarettes that are legally traded. This indirect effect on price is reported as having been observed in pharmaceutical markets and it is stated that legal parallel imports have resulted in an impact on the price of patented drugs. " (Padilla, 2010) The European Commission in an investigation on AstraZeneca stated finding that "cheaper parallel imports combined with market forces also exert further downward pressure on the prices of original medicines, especially in high price countries." (Padilla, 2010) Cigarette consumption is reported to be found to be "negatively related to price." (FAO Economic and Social Development Department, nd) Padilla in his work estimates the impact of plain packaging on prices and market size respectively for four different plain packaging scenarios. Padilla states that each scenario "depicts a combination of market elasticity of demand (-0.5 and -1) and an increase of the cross-price elasticity between brands within the same price category." (2010) Padilla states that plain packaging would result in an increase in price competition as well as in lower prices and higher consumption of cigarettes. (2010, paraphrased) Padilla concludes that tobacco control activities have served to undermine cigarette brand equity and that more research is needed because it is likely that smokers "…may respond more positively to tobacco control messages consistent with the identities of their chosen brand, and brand-as-organization elements may assist."

Summary and Conclusion

The research conducted in this study finds that as the price for cigarettes is lowered that the demand for cigarettes increases and as the price for cigarettes rises the demands for cigarettes lowers. In light of these findings, the plain packaging initiative for cigarettes in Australia is erroneous and will prove ineffective in reducing the levels of smoking among Australian individuals.