cigarette pack Tobacco. UK budget increases. Ease of substitution.
UK and Belgian tobacco prices.
cigarette pack

Three part post:

1) Tobacco. Just a commodity.  Continue.

2) Ease of substitution & making cheap cigarettes.  Continue.

3) A revenue generator. UK & Belgian tobacco prices May 2104.  Continue.

Tobacco. Just a commodity.

I've a keen interest in anything to do with agriculture. My family had close ties to the land so I learned from an early age about the whole cycle from seed to planting to harvesting. From there on in the product gets bought by someone and, whether it's carrots or tea or tobacco, they become commodities. And that involves a whole new set of people who want to buy as cheaply as possible and sell for a higher price. Quite straightforward on paper though not so easy in practice with things like the weather, disease, bugs and theft making the whole business of farming a non stop challenge.

And this has spawned an enormous infrastructure. Brokers, bankers, auctioneers, warehouses, ships, lorries, ports, roads and so on. And lots of paperwork and tax. But it's still the bedrock of international trade and it's huge, with lots of people each taking their cut as it wends its way from some field to us the consumer.

A case in point is a pack of instant noodles. It's mainly wheat plus about a dozen ingredients from all over the place and it's shipped half way round the world to end up in your supermarket for prices that range from 20 to 80 pence. That's a really cheap snack and a real bind to try to copy yourself. Making one portion of noodles from scratch involves a huge amount of work, however it won't include all those nasty e-numbers or trans fats and it certainly won't taste the same. Get it right and it'll taste better, but the convenience aspect is lost. Convenience is the name of the game for so many things - and consumers seem perfectly happy to pay well over the odds for it.

Cigarettes are a perfect example of straight convenience. The amount of tobacco in your average pack of 20 King Size ranges from 12 to 14 grams depending on the brand and the manufacturer. What we're paying for is consistency, taste and quality. Most of us couldn't care less about the country of origin of the tobacco, nor the shipping, processing, distribution and all the rest that goes to getting your pack to a shop near you. We know the filters won't leak, we know the tobacco won't fall out the end and we know it's good to go right there. Pull the tab, flip the top, sling the foil and that's it; any time, any place with no difference in taste. That, in my opinion, is quite an achievement and certainly warrants a fair premium over the alternatives.

I grow some of my own tobacco because I was curious and fancied the challenge. Turns out that growing the plant is the easy part and the yield is very impressive. Ten plants produce an awful lot of leaves that have to be dried then stored. Fortunately I've the garden to grow them and the space to dry them - and that would be dandy if all it took was storage and ageing. However not all leaves are the same and they dry to different colours and while they mellow with age and make a passable smoke, I found that fermenting gives them a consistency and the real tobacco taste. Unfortunately that's the part I'm none too fond of; fermenting is slow, fiddly, smelly and unpleasant.

Yes the end result is worth the effort, but only as a minor diversion. I enjoy taking care of the plants and I suspect I'll get better at fermenting with time and practice. Curiosity is still my driving force, so I've acquired seeds from others to try out different varieties. Got three types on the go this year and about 20 plants, so the attic will be brought into play for drying purposes.

My home grown certainly doesn't taste the same as commercial stuff, however it's never compressed, is guaranteed 100% organic and it's free of all additives, except for a squirt of 50% water / 50% white vinegar in the pouch to rehydrate the shredded leaves and to add a touch of flavour. But the most important thing is it tastes pretty good, to the point that my first fag of the day, and after each meal, has to be 50% home grown!

It's been an enjoyable learning experience and it's given me an insight into the processes employed by tobacco companies. Now I can say, with some degree of understanding, that it's their expertise in curing, fermenting, blending, shredding and hydrating the tobacco leaf is what I'm paying for. That warrants a premium, but not a big one.

Not everyone has the time, patience, room to grow, space to dry, nor is willing to put up with the pong given off by drying and fermenting the leaf. For the majority of folk the convenience of ready made, professionally packed fags or tobacco is worth the money. Up to a point... and with £8.00 being close to the average price for a pack of 20, and £17.00 for a 50g pouch of rolling tobacco, that's far too much for many budgets.

Ease of substitution & making cheap cigarettes.

Seems everyone is in agreement that price is a huge deterrent for many. It's certainly the prime reason why every person I know has tried vaping. I'm told that vaping can cut consumption of cigarettes by up to 75% and even results in some people quitting cigarettes altogether. Vaping machines are clean, hassle free and, if they rock your boat, then go for it. That's lots less tax to the government and - depending on your choice of machine - lots less profit to the tobacco companies.

Rolling or tubing is another option, however both take time to make and the results of rolling can be very erratic for a beginner. Get the 8 mm cigarette tubes and the cost of a tube is almost the same as buying ready made (they need 0.85 to 0.90g of tobacco according to Junican or Legs'). I use 6.5 mm cigarette tubes with 20 mm filters and they need about 0.55g of tobacco, however they don't last very long. In some circumstances that's an advantage; quickies are always useful. However I, like many others, find them perfect when filled with a mix of home grown and commercial tobacco.

Leaves can be bought very easily. Nothing to Declare does regular posts on this subject and even has his own favourite supplier (1). I'm told it's ready to shred straight from the parcel, so saving all the space and palaver that goes into drying, storing and fermenting the stuff - and with 500 g of Virginia leaf for £15 that's a no-brainer. My experience is the weight of tobacco leaf is not very important. You have to remove the central vein of the leaf so you'll lose some of the weight, however because pure leaf is not compressed and not full of moisture, it shreds to produce a far greater volume, so it's far cheaper and goes further. My seat of the pants estimate is 35g of dry leaves fill about the same space as 50g of commercial tobacco. I do so love virtuous circles!

I know I'm not the only person who's meandered down this path. And it's not just in the UK; it got to be such a nuisance to the tobacco companies that they petitioned the Polish government to slap a tax on whole leaf tobacco in January 2013. That's resulted in a network of shops along the Czech border with Poland where you can buy the leaf and even use their shredders (for a fee) to make your own rolling tobacco (2).

All these things help reduce the cost of smoking and for couples or close friends, the expensive part - the shredder - can be shared. Certainly it's perfectly feasible to get the cost of 20 cigarettes to less than £1, simply by avoiding the markups made by the exchequer and the tobacco majors. Cheap cigarettes indeed!

A revenue generator. UK & Belgian tobacco prices May 2104.

It's not simply that some of us have moved to roll-ups and tubes, it's the fact that by so doing we may be changing our manufacturer. In the case of myself, I used to smoke BAT products exclusively, however I now smoke Golden Virginia Yellow (Imperial Tobacco), Amber Leaf (Japan Tobacco) and Cutters Choice (BAT). And people who make their own cigarettes, especially those who tube, are far less likely to remain loyal to a brand, or even commercial suppliers.

What I've noticed with the BAT and Imperial Tobacco Annual Reports are phrases like "increased margins" and "repositioning brands". With Imperial Tobacco they saw stick volumes decline, fine rolling tobacco remaining static and were hit by having to quit the market in Syria. On the other hand - as one might expect - they saw a dramatic increase in sales of fine rolling tobacco in Poland and an increase in sales of Rizla rolling papers as well as tubes (3). Despite all that, they still managed to post a 4% increase in revenues in 2012.

Reading into what Imperial says about Rizla and tubes, it seems to me that an awful lot of people are shifting to rollups as well as cigarette tubes, yet they're not buying their rolling tobacco from Imperial. My gut tells me very few are taken in with this business of repositioning their brands and are averse to their attempts to charge a premium for them. Customers are either buying from their competitors or using whole leaf, or growing their own to make perfectly acceptable cheap cigarettes. (As an aside, if Rizla papers and tubes are such hot items, I'd love to see the sales figures for Poundland papers, filters and cigarette tubes! They must be through the roof!)

BAT shows a similar picture with volumes down by 1.6% and adjusted net profit up by 8%. They have a slightly different approach to increasing shareholder value with a share buyback programme of £1.25 bn in 2012 and £1.5 bn in 2013 cheering their investors no end, while reducing the possibility of becoming a takeover target. And they have a far more upbeat story to tell about rolling tobacco, stating that Pall Mall is "by far the the largest Fine Cut brand in Western Europe" (4). (That may help explain why Imperial Tobacco changed their pouches last year for Golden Virginia. The old ones used to say "Golden Virginia has been made in England since 1877 and is the world's number 1 hand rolling tobacco". The new ones don't carry that claim and, to top it off, they're closing their last remaining factory in England (5)).

Unfortunately repositioning and increased margins translate to obscene price hikes by all the tobacco majors. Its a strategy I witnessed years ago with British Airways, who chose to ignore things like Easyjet and Ryan Air. Same with Marks & Spencers, who now battle it out with Primark. Then there are the Banks that got so caught up in their self-importance, with corporate lending and off balance sheet trading that they left openings for Credit Unions to snaffle their retail customers, Crowd Funding for business start ups, and Pay Day Loan companies for the rest. It's a short term strategy and it may look good for a couple of years, but it's a lousy business tactic and unsustainable.

Below are the effects of the budget hikes for 2013 and 2014 (coloured blue). Yet over the course of 2013 almost all brands of rolling tobacco have gone up by around 7%, except Players Gold Leaf, which has been "repositioned" with a swingeing 13.7% hike on a little bitty 12.5 g pouch. And Drum; that shows a year on year (YOY) hike of 10%, again a part of the grand strategy by Imperial Tobacco to reposition their most popular brands as "premium". All prices taken from the Waitrose site.

Brand Weight Feb '13 May '13 % inc Feb '14 YOY  Apr '14 % inc
Golden Virginia Green 50 g £16.18 £16.77 3.6 £17.30 6.9% £17.80 2.9
Old Holborn Blue 50 g £15.98 £16.47 3.0 £17.10 7.0% £17.60 2.9
Amber Leaf 50g £14.93 £15.30 2.5 £16.00 7.2% £16.50 3.1
Drum 25 g £7.64 £8.15 6.7 £8.40 10% £8.63 2.7
Cutters Choice 25 g £7.44 £7.70 3.5 £7.95 6.8% £8.20 3.1
Players Gold Leaf 12.5g £3.39 £3.39 0 £3.85 13.6% £3.97 3.1

Osborne, against all expectations, reverted to the 2% escalator in 2013 and stuck with it in 2014. What that means in 2014 is 24p added to the price of a pack of cigarettes and 23p to a 25g pouch of tobacco (it was 18.5p on rolling tobacco in 2013) (6). Unfortunately he's chosen to retain the escalator until the end of the next parliament though he was under no obligation to do so, however he has clarified it will be 2% in 2015. It's a blunt instrument and he, as with Gordon Brown, would like people to believe it helps us want to quit.

But what galls are the tobacco companies whining on about the effect budget hikes have on the poor, the former servicemen, the pensioners and so on, then calling for tobacco duty to be lowered to a "European Average". The chart shows they're shedding crocodile tears while hiking prices well above inflation themselves and, most cynically, they're concentrating their largest percentage hikes on the smaller pouches: the ones the poor, the former service personnel, pensioners and so on buy.

This sort of hyperbole - and business strategy - is far too transparent and that's left the budget end of the market open to others who don't care about 5% dividends for shareholders or 68% profit margins. Nor do they care about fancy packaging, or deep discounts to volume sellers at the expense of tobacconists and little corner shops. That's why we see tobacconists offering "Golden Blends Virginia" hand rolling at £14.85 for 50g (7), while Asda has an interesting range of "Ashford Virginia" that retails from £13.14 for 50g (8) and they offer a bulk tin for tubers.

Far from responding to these tiny upstarts by competing with them head on in the market, the tobacco majors have been petitioning Osborne to hike taxes on budget brands through a "minimum excise tax" (9), something he seems keen to pursue. The tobacco majors don't care about personal imports; they're perfectly happy for people to go to places like Bruges and buy their favourites because, even at Belgian prices, they're still making handsome a profit. As at 10 May 14 this place (10) was selling 50g pouches at:

Golden Virginia Green €6.80
Old Holborn Blue €6.80
Drum Blue €6
Cutters Choice €6.20
Amber Leaf €6.40

and Imperial Tobacco has not seen fit to "reposition" their Players Gold Leaf in Belgium. That sells at €5.00 for 50g. (For people who prefer to go to Calais, there's another outlet in Belgium with a similar business strategy and more or less the same prices (11), or Dunkirk, where yet another carries a larger selection with a similar pricing structure (12)).

Gordon Brown made a lot of mistakes during his term as Chancellor. Going with piss-poor advice, founded on bare faced lies that originated in New Zealand (13), of increasing tax on rolling tobacco as if it was manufactured cigarettes was one. His "escalators" were another. Price is certainly a deterrent to people who want to smoke, however it only works in places that are isolated, the entry points limited and can be easily policed by Customs (places like NZ). It does not work in modern day Britain that's part of the EU.

Keith Vaz can set up as many inquiries as he likes (14). He can bemoan the £2 bn forfeit from the exchequer; the simple fact is tobacco in its various forms is fearsomely popular. The market exists and try as they might to make us comply with their diktats, all that's happened is a free-for-all that ranges from Romanian-man-with-van and a couple of hundred quids worth of 'baccy, that'll net him a 100% return in a couple of days, to seriously well funded operations that can shift hundreds of thousands of Pounds worth of the stuff and sneak it into the supply chain, thereby netting a 200% return on their investment. And we're only too pleased to buy their offerings without the slightest qualm of conscience.

The fact there are fewer seizures does not indicate any success by our Revenue people. All that suggests to me is they're not receiving tip offs from competitors because there's more than enough for everyone. And, for the moment, there's even enough for the tobacco majors to increase their margins in Britain (15). It's a shrinking market and they have experience of managing these. What they do not have elsewhere is a Chancellor who makes it very easy for them to plan price hikes to coincide with his "escalator" and to top it off with increases during the year, whilst also making sure they compete aggressively in offshore retail outlets.

When Osborne stated "This escalator was due to end next year - but there are no sound health reasons to end it, so it will be extended for the rest of the next Parliament", I had to question his grip on reality. He may be marginally more competent than Mr. Darling and there's little doubt he's streets ahead of Mr. Balls, but with tobacco he's as disingenuous as the rest.

Brown helped create the conditions that now allow the tobacco majors to act as a loose cartel. They don't want to compete with each other in the British market and they want any real competition to their monopoly stamped out via the minimum excise tax. Osborne helps perpetuate this cozy arrangement that in turn results in massive price inflation for people who genuinely play by the book. They're still the majority of smokers, which I find quite depressing because they're being exploited by the government, fake charities, tax funded pressure groups and the tobacco majors. That - perversely - is good for shareholders of tobacco companies, but not so good for government coffers.

As more people cotton on to this insidious arrangement they have several choices. Whatever route they chose will result in fewer sales of UK Duty Paid tobacco. Those on the tobacco control side rather like this because it gives the impression that more people are quitting. That makes them appear to be successful and therefore relevant. What the facts show is we're not quitting smoking, we're just quitting the system, because it's corrupt - from top to bottom and sideways.

Smoking Scot
May 2014