While the concept of plain packaging for tobacco products has been around since the New Zealand Department of Health’s Toxic Substances Board first recommended in 1989 for cigarettes to only be sold in white packs with black text, no colors, no logos and non-descript type face, it has taken over two decades for the concept to become reality through the enactment of Australia’s Tobacco Plain Packaging Act in 2012.
Article originally published in Reconnaissance Tax Stamp News. See other Tax Stamp news here
Since, many countries have started to evaluate or reconsider the issue of plain tobacco packaging and legislative proposals are currently under review in France, the United Kingdom, Ireland, Canada, Malaysia and New Zealand. Additional language to encourage member countries to evaluate plain packaging laws has also been included in the FCTC Treaty and the Tobacco Product Directive (TPD) of the EU.
This article is not an argument for or against plain tobacco packaging, but rather a brief examination what the enactment of such laws means to tax stamps and related services such as track and trace. Plain packaging laws historically have been public health driven, as a component of public health’s overall strategy to reduce tobacco consumption. The premise or assumption behind plain packaging laws is that by removing colors, logos, fonts and graphics from the packaging it reduces the appeal of tobacco products, especially among youth.
Illicit Trade Impact For plain packaging to have the intended effect of reducing consumption, illicit trade must not increase. An increase in illicit trade after the introduction of plain packaging would simply transfer tobacco consumption from legitimate tobacco products to illicit tobacco products, negating the intended effect. This article is also not going to argue, if plain packaging does or does not increase illicit trade, but rather what role tobacco tax stamps and related services can have to ensure illicit trade does not increase and ideally decrease after the introduction of plain tobacco packaging.
Assuming the rate of illicit trade initially stays constant after the introduction of plain packaging, the nature, mix and make-up of illicit trade products are likely going to change. The threat of counterfeit and trafficked products will be reduced, while the threat of “Illicit Whites” and undeclared production is likely to increase. In a plain packaging world, illicit whites in plain packaging are likely to make up the majority of illicit trade.
To examine how tax stamps and related services will be impacted by plain packaging and how the can adjust to the new threat pattern, we are going to how key features will be impacted, mainly (i) Authentication, (ii) Revenue Protection, and (iii) Enforcement.
Authentication: Plain tobacco packaging changes the role tax stamps play in product authentication. The role will switch from brand authentication to legal product authentication.
Plain tobacco packaging requires the removal of all branding, including any colors, imagery, logos, trademarks and trademark fonts, only permitting manufacturers to print the brand name in a mandated size, font and place on the pack, in addition to the increased, often graphic health warnings and any other legally mandated information, such as ingredients. By removing all branding, cigarette packages become generic, removing the branding power and, according to public health, the brand’s appeal to the consumer. With brands and therefore brand choice becoming less important, counterfeit cigarettes are likely going to disappear.
Counterfeit products across categories, not just tobacco, but apparel, luxury goods, electronics and pharmaceuticals are all driven by defrauding a famous trademark to capitalize on the appeal of the brand to sell counterfeit goods. However, with plain packaging, there is no brand appeal to rip off anymore. Why would a criminal organization go through the effort of counterfeiting a generic “brand-name” pack, if all packs look the same? Criminal enterprises are more likely to simply produce “Illicit Whites” – cigarettes not legal anywhere and produced for the sole purpose of illicit sales. These illicit white cigarettes do not violate any trademarks, evade all taxes and are often produced in unregulated environments.
But while it will become less important to authenticate genuine brands through tax stamps, the burden to authenticate the legality of the tobacco product will increase, since all branding authentication features (print, logos, colors, fonts) will have been removed. In other words, it will be increasingly important for tax stamps to not simply be counterfeit resistant, but become almost counterfeit proof.
This will provide unique challenges for the tax stamp industry. Almost all overt features can be counterfeited well enough to fool consumers and retailers. Increasing overt features will also drive up costs beyond a reasonable ROI against ever shrinking tax revenue. The challenge will be to develop covert features, which can be authenticated through simple tools by retailers and law enforcement and to incorporate relevant digital technology to allow consumer authentication.
For tax stamps to be truly effective in a plain packaging world, they will need to become incredibly easy for consumers, retailers and law enforcement to authenticate. Without any brand features to help verify of the product is legal, consumers, retailers and law enforcement will need simple effective tools to authenticate through the usage of smartphone readable codes.
Revenue Protection Threat of revenue loss will come from two major sources: Illicit Whites and undeclared production. This will be a major shift from today’s threat environment. As explained above, the threat of revenue loss from counterfeit products is likely to be reduced or disappear.
For the same reason, while the threat of revenue loss due to trafficked genuine cigarettes from lower tax countries might not diminish immediately, the issue suddenly becomes significantly easier to enforce against. While the economic benefits of trafficking would still exist, trafficked genuine cigarettes from countries without plain packaging would be easy to spot and enforce against. The branding of the cigarettes would provide the “tracing” for the trafficked cigarettes and ironically reduce the need for tracking and tracing in the short-term.
However, the issue of smuggled cigarettes will become truly challenging once a group of countries, such as the EU, all adopt plain packaging laws. Without branding identifiers track and trace will become an import tool to enforce against diversion.
In the meantime, the threat of under-reported volume and “illicit whites” would increase. Under-reported volume would need to be mitigated through volume verification codes, which could be incorporated into tax stamps or be printed on packs as stand-alone codes. These codes, if tied together with increased licensing and reporting requirements can mitigate the risk of under-reported production volume.
“Illicit Whites” are likely to become the most significant illicit trade issue in plain packaging countries. “Freed” of the need to counterfeit complex branded packaging, criminal enterprises can focus on producing cheap illegal no-brand “illicit white” cigarettes. These cigarettes will bear the same plain packaging as legal products and the small-standardized plain packaging font will not easily identify illegal product. Since these cigarettes do not comply with any laws, they will not be burdened or hindered by any stamp, no matter how good the overt, covert and authentication features are – they simply won’t carry a stamp.
Enforcement To combat illicit whites, countries implementing plain packaging laws will need to significantly increase their enforcement efforts, funding and manpower to stop these products from being produced, imported and sold. This means increased resources at borders, increased inspections and raids of production facilities in country and significantly increased retail and street enforcement. Finally, to deter the sale of illicit white, penalties will need to be introduced or strengthened.
For plain packaging to be truly effective, it needs to be accompanied by a significant increase in enforcement resources. But since plain packaging is likely to reduce tax revenue further, increased resources will be harder to find, or will have to be found from other sources, such as from budgets cuts in stamp procurement.
A Final Word on Designs, Features and Costs Illicit trade in a plain packaging world will be quite different. Even absent a change in the magnitude of illicit trade, the changed nature of the illicit trade will require adaption by the tax stamp industry. Authentication features will need to be improved and simplified, not to fight counterfeit, but to help authenticate legal product. Codes and technology will become important to combat under-declaration, allow authentication methods and build the foundation for future track and trace systems needed.
But most importantly, the tax stamp industry will need to adapt to the economic realities likely to come from plain packaging laws. Assuming plain packaging laws are effective and illicit trade does not increase, tobacco consumption and therefore revenue will decrease at an accelerated pace. With less revenue to protect, the cost per stamp, ROI and justification for expensive features, especially overt, will become increasingly important.
Some have speculated that plain packaging will open the door for more elaborate, intricate and larger stamp design. Some have even speculated that tax stamps might become larger, more prominent and part of the pack “design”, maybe even collectible tax stamp editions.
The reality however is most likely going to be the exact opposite. After stripping tobacco finally of the “glamour” of all branding, the desire to increase the visual appeal of the tobacco packages through elaborate stamp designs is highly unlikely. Quite to the contrary, the increased pressure on government budgets due to accelerated tobacco revenue decline is likely to result in a demand for reduced costs and streamlined features. With the need for authentication and revenue protection shifting, plain packaging might even increase the desire for digital-only / code only track and trace solutions, which are printed directly on the pack with limited additional overt and covert features.
The shift in illicit trade patterns will require increased investments in enforcement resources, staff and equipment, which will put pressure on expenditures for other illicit trade tools, such as stamps. In a plain packaging world, it will become increasingly important for tax stamp providers to be able to demonstrate a positive ROI not only for the stamp itself or the system as a whole, but also for individual features.
Sven Bergmann is a Managing Partner at Venture Global Consulting and advises brand owners, technology providers and governments on anti-counterfeit strategies, programmes and technologies.
Send your comments to SBergmann@VentureGlobalCo.com.