Saturday, 7 January 2017

Smokers are paying more for their cigarettes. Coincidence? I think not.

Somewhere in Canada there is a cache of almost three-quarters of a billion dollars, the fate of which is hanging on the decisions of higher courts on the  Quebec class action suits.

This money was set aside after Justice Schrager ordered two of the defendant companies to lock it up while the appeals of Justice Riordan's ruling were ongoing. He made this decision after the plaintiffs raised concerns that the companies might not honour a ruling against them and might find ways of escaping the penalty.

Ten of the 13 payments required by this October 2015 security order will have been posted by now.

Rothmans, Benson and Hedges was told to put aside about $400,000 per day. Imperial Tobacco was required to save almost three times as much ($1.18 million).

That's a fair chunk of change, as they say! Yet there seems to have been little discussion about the impact of this on the companies, their shareholders or their clients. (Last year, BAT informed shareholders that it was consider the money "an asset to be recovered upon successful appeal" and PMI made a similar disclosure.)

Today, by chance, I came across some information on price increases implemented by the companies around the time that the request for the security order was being made.

In the first week of August 2015, both Imperial Tobacco and Rothmans Benson and Hedges increased the prices of their premium brands by $2.00 a carton, with somewhat smaller increases on mid-priced ($1.50) and discount ($1.00) brands. JTI, which escaped having to make security as a result of a scheduling conflict, matched these price increases two weeks later.

There were at least three more rounds of price increases: in January 2016 prices went up by $1.00 to $1.50 per carton, as they did again in May 2016, September 2016 and again this month.

All told, Imperial Tobacco now charges $5.00 cents more for a carton of du Maurier, $3.20 for Player's, $2.50 for Pall Mall than it did in July 2015. RBH charges $7.5 more for a carton of premium brands like Dunhill or Rothmans, and $4.00 more for a package of its discount brand, NEXT.

Has this allowed them to fully offload the costs of the security order onto smokers?  More data would be needed to know for sure. The market share per brand is considered confidential business information by those who collect it (industry, government, trade analyists) and not available to the likes of me.

But enough data is available to conclude that this may be the case.  Health Canada recently reported that about 29 billion cigarettes were sold in 2015, or slightly more than 36 million cartons per quarter. Of these, the market share for RBH and ITL (87%) would be approaching 32 million cartons each quarter. To recoup the quarterly security payments of $146 million, the companies would have to raise prices per carton by about $4.60.

The price increases over the past 18 months are about equal to the last federal tax increase of $4 per carton in February 2014. Interesting that wholesale price increases do not result in the same cries of alarm from the industry about contraband that tax increases of the same magnitude do.