*The downloadable report (link below) has been revised slightly in light of comments from industry stakeholders

 

Key findings

 

The key findings of our study of the economic impact on the UK economy of a policy of plain packaging for tobacco follow below.

 

Lower prices for legal tobacco, increased illicit trade and a shift by customers from convenience retailers to larger retailers as a result of increased transaction times and longer queues are expected to have the following economic impacts:

 

• Increased insolvency rates in convenience retailing with the loss of between 2,000 and 3,500 jobs in ‘small independent retailers’ (SIRs) – this is the effect solely of the reductions in the gross earnings of SIRs from tobacco of between £12 and £20 million.

• Estimated job losses of up to 30,000 jobs in convenience retailing when the impact on non-tobacco sales is also taken into account – this is based on an estimated reduction in SIRs’ overall gross earnings of up to £300 million.

 

A drop in consumer expenditure on legal tobacco products of between £0.9 and £1.6 billion despite increases of 3 and 7 per cent in legal and overall (legal and illicit) tobacco purchases, respectively.

 

The loss of between 2,250 and 3,850 full-time equivalent (FTE) jobs through the direct impact on the tobacco manufacturing industry and the resulting multiplier impacts on the wider economy, despite a boost to tobacco manufacturing’s supply chain as a result of increased tobacco consumption.

 

• A reduction in the direct contribution of tobacco to UK GDP from 0.84 per cent to between 0.78 and 0.81 per cent.

• A reduction in tobacco’s aggregate annual contribution to the Exchequer of between £219 and £348 million.

 

A fall in the overall retail sector’s gross earnings from tobacco of between £110 and £185 million, resulting in a 12 to 22 per cent reduction in tobacco’s indirect contribution to UK GVA through the retail sector.

 

The expected impacts of plain packaging for tobacco are, however, broader in scope than this study was capable of considering. There are other impacts that we have flagged in the report as limitations of the study. These other impacts include, but may not be limited to:

 

• The impact of plain packaging on tobacco consumers’ disposable incomes; and

• The risk that government could be forced to pay compensation to tobacco companies.

 

Each is examined briefly below.

 

Disposable incomes

 

The reduction in tobacco prices as a result of plain packaging can be expected to provide a boost to smokers’ real disposable incomes. While this could be expected to mitigate to some extent retailers’ lost tobacco earnings due to plain packaging, any mitigation could only be expected to occur at the aggregate retail sector level because the problems of increased transaction times and longer queues would still arise.

 

The boost in tobacco consumers’ disposable incomes is unlikely, therefore, to mitigate the potentially stark impacts – under reasonable assumptions – of plain packaging on SIRs presented in this report.

 

Furthermore, the extent to which it mitigates the effects of plain packaging on the retail sector as a whole can only be expected to be limited given the prevailing economic conditions – specifically, continued widespread household ‘de-leveraging’ meaning any spare disposable income is used to pay off debts or saved, rising food and energy prices and the real decline in average levels of pay. In any case, any mitigating impacts that do filter through the broader retail sector are likely to be dwarfed by the compensation issue below.

 

Compensation

 

The tobacco industry has filed lawsuits against governments challenging restrictions on the marketing of tobacco products introduced over the last few decades. Logic suggests, therefore, a not insignificant risk of legal challenges to plain packaging, possibly under Article 17 of the EU Charter of Fundamental Rights or Article 1 Protocol 1 of the European Convention on Human Rights.

 

According to legal experts, if plain packaging legislation was passed and the tobacco industry challenged that legislation, it would likely be struck down as illegal absent fair compensation to the tobacco industry for the deprivation of its trademark rights.  That compensation could run into the billions of pounds.

 

The tobacco analyst at Citigroup Investment Research, using simplified discounted cash flow modelling of tobacco industry profits calculated a fair value for tobacco industry brand designs (which are lost with plain packaging) of £5 billion. An alternative estimate, based on the implicit value of the intangible assets of Gallaher when it was bought by Japan Tobacco, suggests a figure of a bit under £4 billion.

 

Combined with the economic implications of plain packaging covered in our report, the consequences of such a compensation bill could be dire for the Government’s deficit and debt reduction policy.