18 August 2012

Cigarette plain packaging - understanding some of the basic economics of branding

For those who are not aware, the latest "make it look like the billions we are spending are actually accomplishing anything" effort by the anti-tobacco industry, particularly in Australia and Britain, is to remove the branding from cigarettes (and presumably eventually from low-risk alternatives also -- except those made by their patrons in pharma, of course).  The claim by the industry's puppet masters to their legions of useful idiots is that this will reduce the appeal and thus the uptake of smoking, and indeed that this has been proven.  The anti-tobacco useful idiots can be counted on to not exercise enough scientific insight to think "how can it have been proven if it has never even been tried?", let alone show enough understanding of their pet cause to think, "um, no one smokes because of what appears on the packages".

The leaders of the industry -- at least the ones who are not bright enough to lie consistently -- have basically admitted that this is not motivated by any real hope of reducing smoking.  Rather, the goal is merely to make it more difficult for manufacturers to charge a premium price for some brands, or put another way, to confiscate the value of the major cigarette companies' high valued brands.  E.g., see what Snowdon and Puddlecote have written about this.

Almost every honest commentary about the topic notes that rigidly-defined simple plain packages make counterfeiting considerably easier.  Commentators often further observe that black marketeers, unlike legal branded manufacturers, do not care about such niceties as not selling to children or product purity.  Actually, to say that more precisely, it does not actually matter what the relative degree of caring is (e.g., many ANTZ apparently think that people who work for tobacco companies are morally worse than people who work for organized crime).  Rather, it is that they have no incentive to worry about those niceties.  And it is there that the economics gets a little more subtle and a little more interesting.

A recent article by an expert on branding fleshed out this thought with this observation:
why spend on corporate social responsibility (CSR)? Brands empower and enable consumers to select those companies they approve of. The environmental policy of a company or how they treat their employees influences my decision to buy a given branded product. Without the brand, however, that power is removed and, by default, the business's interest in CSR. The business's fear factor and liability is reduced substantially.
Take that concept and circle back to the discussion of the black market.  It is actually an application of the same principle.  Manufacturers of non-monopoly, branded consumer goods have the incentive to behave well, sponsor good causes, not break marketing laws, etc. because they get more business by appearing to be good citizens.  Of course, many of these friendly "good" "citizens" still support all kinds of policies that are bad for 99% of the population, so do not mistake this for praise of big corporations at their core.  Rather, it is praise for one way of making them behave a bit less like the purely selfish rapacious entities that they otherwise would be.

Manufacturers who do not sell to the public do not face these constraints because few business-to-business transactions hinge on warm feelings about anything beyond the product being purchased.  Monopoly seller do not have to worry about being responsible either (how often does someone avoid buying a pharmaceutical due to seemingly constant deluge of news about pharma's bad behavior?).  But those who sell to the public and have competitors need to care, at least as long as they have an identifiable brand.

As further elucidated in the linked article, creating a brand with equity is not an easy thing.  It requires a lot of advertising, among other things.  Since tobacco produce manufacturers cannot effectively advertise anymore, there is almost no chance of creating a new high-equity brand.  (And, no, as any non-idiot will know, just putting graphics on a package does almost nothing to promote brand equity.)  For comparison, consider the efforts of e-cigarette makers to create brand equity -- sometimes including efforts to position themselves as more socially responsible -- and how they have largely failed.  If the existing high-value brands lose their value, there will be no more high-value brands.

There will be no more sponsorship of events or high-profile donations that provide some social value while supporting these brands at the expense of their low-end competitors.  Oh, wait, that value has already been taken away.  What will be newly lost is much of the incentive to support corporate responsibility initiatives and units, harm reduction research, and the like.  Indeed, the profits that support those come from the high-value brands.  Some cigarette makers spend a lot on these things, and some spend basically nothing at all.  Guess which ones benefit when the brand reputation value goes to zero? 

It is the black market that benefits the most, though, since they have none of the expenses of maintaining a respectable brand.  This includes the costs of obeying the laws, but also the costs of not being seen as hateful -- even if they do something despicable, it will not follow them because there is no brand.

Of course, the anti-tobacco industry would probably respond to that paragraph by claiming that all manufacturers are equally despicable and that no cigarette brand can be respectable.  But this is because they only ever talk to other members of their fringe clique, and are bizarrely unaware that most of the population -- including those who matter, the consumers of cigarettes -- do not share their view.

Their narrow vision also does not extend (except when begging for more money to fight the "global epidemic") to the vast majority of smokers who are not in rich countries like Australia.  Thus, there seems little chance that they have ever asked the question, "once we provide a training ground for manufacturers of low-quality-control unbranded or counterfeit products who avoid taxes and other constraints, whose lack of branding saves them from having to worry about their brand reputation, just what do you think they are going to do with their new found skill and infrastructure?"  If the anti-tobacco industry succeeds in their present efforts, there seems little doubt that they are building the low-value, low-quality, cheap, and criminal brands that will come to dominate the cigarette market for many poor populations.

[Update:  Some more on this in my next post.]


  1. Although I agree with 99% of what your argument is, I question that harm reduction research will be stopped. Since the FDA will allow advertising of modified risk tobacco products, the first company to make one will earn huge profits. Surely that is enough reason to maintain this research. Thoughts?

  2. Fair enough. It is true that the primary motive for THR research is profitable product development, not reputation. But the latter will play some minor role. It would play a lot more if anti-THR people had not already made it very difficult to get credit for doing the right thing, though. Even still, I think there are some companies (not all) who might decide "if we never get credit for doing good and they are destroying our brands, what is the point in even trying".

    I am not so optimistic about what the FDA will allow (at least in time to matter much). But to clarify, in this case I was thinking mostly about the companies that are the major players outside the US rather than in the US.


Note: Only a member of this blog may post a comment.