Plain packaging: destructive and counterproductive, according to a new study from the Institut économique Molinari (IEM)
Paris, Thursday February 14, 2013 – In the name of public health, authorities have issued a flurry of regulations limiting companies’ use of their brands. A growing number of products – tobacco as well as alcohol and various food products – are already in the crosshairs.
In December 2012, Australia became the first country to introduce “plain” packaging for cigarettes. France is examining this, while European authorities will be discussing it as part of a review of their directive on tobacco products.
Limits on the use of branding have been already considered for other products such as alcoholic drinks in Thailand and the UK. Such limits have also entered public debate over food items judged to be too fatty or too sweet.
Brands do, however, play a vital economic role, and putting them to political use provides no guarantee of better health.
A valuable and indispensable economic role
Brands fulfil a primary economic role.
• A means of identifying companies and their products.
• A source of information on a product’s characteristics.
• A guarantee of quality.
• Lower costs in seeking out a desired product.
• A means of standing out from competitors.
• An incentive to invest and innovate as a way of anticipating consumers’ preferences and improving products.
• An intangible asset for solidifying customer loyalty and developing goodwill, potentially worth tens of billions of dollars.
A policy with dubious health effects
Two cases are logically possible:
• Either consumers remain able to identify their favourite products and do not alter their behaviour; neutral packaging and prohibition of brand names is then useless.
• Or consumers are unable to do so and turn away from brand name products, giving manufacturers the choice of lowering their prices or going out of business; a policy of destroying brands may then result in lower prices for the targeted products.
Reduced prices generally lead to higher rather than lower consumption. Paradoxically, this is the opposite of the effect officially being sought, the study notes.
California’s experience in the early 1990s confirms this.
• Market breakthrough of “generic” cigarettes at the expense of brand name products, with the market share of generics going from 11% in 1988 to 40% in 1993.
• Prices 20% to 50% lower than brand name cigarettes.
• Higher smoking initiation rates among 12 to 17 year olds.
• No noticeable reduction in adult smokers quitting.
Might raising taxes help overcome these unintended effects of plain packaging and offset the price declines?
Taxing even more? A gift for the black market
This idea disregards the flourishing black market in cigarettes, nurtured by taxes equal to 80% of the retail price (as in France, but the situation is similar elsewhere). Raising the tax burden could lead to a huge upsurge in the black market.
Where tobacco or alcohol are concerned, consumption of illicit products is more hazardous for the health.
When it comes to soft drinks, fatty foods, sweetened products and so on, the risk is not that a black market will develop but rather that consumers will turn to other products that are just as high in calories, if not higher, as has been observed in the case of “soda” taxes.
The destruction of brands creates an unnecessary market failure. It is not a solution to public health problems, the study concludes.
Titled Is the destruction of branding a solution for tobacco, alcohol and obesity problems?, the study is available on our website.
* * *
The Institut économique Molinari (IEM) is an independent, non-profit research and educational organization. Its mission is to promote an economic approach to the study of public policy issues by offering innovative solutions that foster prosperity for all.
– 30 –
Information and interview requests:
Cécile Philippe, PhD
Director, Institut économique Molinari
+33 6 78 86 98 58