Tuesday, 17 June 2014

Khaki is the New Black

There's been a lot of chatter on twitter and the net in the past week regarding the effectiveness (or not) of Plain Packaging for cigarettes in Australia.  As best as I can tell, it started with the publication of a report in the Australian by Christian Kerr purporting to show that not only was plain packaging ineffective in reducing smoking rates, they had in fact gone up!  The report claims an increase in 0.3% in the number of cigarettes sold in 2013 compared to 2012 (when PP started).  Not much, and certainly less than population growth, but this is against a slide of 15.6% of quantity sales over the previous four years

Whoops.  Is it possible that plain packaging has actually reversed the long term trend in reduced smoking rates?

Of course, one of the main source for the article is an unreleased report from InfoView, compiled on behalf of the tobacco industry, which makes it a little hard to verify.  There are other (unreferenced) sources listed as well, although most of them could be said to have an interest in continued healthy sales of tobacco, so what are we to make of all this?

The report was jumped on straight away by "Australia's Leading Economist & Speaker" (his own words), Stephen Koukoulas in a blog entry in which he explains that there is no possible way in which cigarette sales have gone up since plain packaging was introduced.  To back this up, he wasn't using dodgy, unpublished statistics from the tobacco industry. No.  Nothing short of the ABS (Australian Bureau of Statistics) for him.  Unimpeachable.  And he's right on that score.  The ABS cannot be said to be carrying a torch for anyone - impartial and independent.

Here's his helpful tweet referencing the document (he doesn't reference it in his blog), and here's a link to the relevant table from the ABS.  (The actual page linked to is here)
It's actually row 12 in the Excel spreadsheet you want.  Click the link in row 12 and it takes you to a set of data (in Column C) that measures 'volume' of tobacco sales in Australia quarterly from September 1959 to the present.  You can see that it rises steadily to peak in the early 80s, and then starts to drop off again.

Sems an open and shut case.  Tobacco volumes are down!  An Stephen Koukoulas self-righteously jeers at The Australian for being so transparent in just making up shit to make the Gillard government look bad (it might be worth pointing out here that The Kouk was, at one stage, the economic advisor to PM Gillard).

At some point, Judith Sloan from the Australian weighs in, TheKouk then has a go at her, Jack the Insider has his say, and even the dearly departed Dr Craig Emerson, PhD (Economics) has to put his two cents in (on twitter, 16 June 2014)

Except the ABS data doesn't show actually quantities of tobacco sold.  It uses a measure called Chain Volume Measures (the ABS explains it here - how's your maths?).

This is where the analysis gets interesting.  

Chain Volume attempts to measure the volume of a good (where volume is defined as price times quantity) bought by Australians each year, taking out distorting factors like inflation or CPI, changes in price from year to year and so on.  For most products, where the price for all individual items in a category roughly rise or fall at the same rate, Chain Volume does a pretty good job of measuring 'Volume' of a product sold in a quarter.  The ABS article shows a series of calculations, and I have recreated Table 5 in Excel*, using the formulae in the article linked above.

It clearly shows that the Chain Value Estimate increasing as time goes on, as both quantity sold and price increase.  This is a pretty normal situation for most goods in an economy that is growing.  Note in the above table that there is a clear preference for Apples over Oranges, probably because they're cheaper.

But cigarettes are different.  Brand is everything!  People tend to buy not so much on price, but on 'flavour' and other unquantifiable properties.  Cheap cigarettes sell in fairly low quantities (ok, I haven't got a reference for this, but hang in there.)  Let's be honest, this argument was a big selling point for Plain Packaging in the first place. Take away the brand and people won't want to keep smoking.  Apparently cigarettes in Plain Packaging taste worse anyway.

But what if instead of giving up or reducing, they switch to cheaper ciggies?  I mean, if there's no Brand allegiance, and they're going to taste worse anyway, why not save a few quid?  And with a price saving of up to $7 a pack for the cheapies, what's to lose?

So, I fiddled with the Excel table above, and plugged in some values** modelling two cigarette brands, where the premium brand had the most sales, despite quite a large price difference in Period 0.  Suddenly in Period 2, this switches over, with the bulk of purchases now coming form the cheaper brand.  I have also built in first a decrease of total quantity sold from Period 0 to Period 1, and then a slight overall increase, in line with the data from Christian Kerr and Jack the Insider.  It's interesting to see the results. (I've also extended the model by an extra Period)

The model shows, as per the ABS data, a drop in the Chain Value Estimate (in yellow) across all three years, while at the same time, an increase in actual consumption (in green).

Now, I'm not suggesting that this is actually what has happened, merely showing that there are circumstances in which this can happen.  However, with various bits of data around the country showing increases in quantities sold, increases in the number of smokers, and a decrease in the Chain Value (ie money spent on cigarettes), this model would go a long way to explaining all the disparate and seemingly contradictory data surrounding Plain Packaging and smoking rates.

In Summary

  • Smoking rates have been dropping for a long time, primarily due to price signals and public health campaigns.
  • Plain Packaging was introduced in Dec 2012 in order to reduce smoking rates further.
  • There appears to be some evidence that since PP was introduced, smoking rates have not fallen at the same rate as previously, and may even have increased slightly, despite Australians spending less on tobacco.
It seems at this point in time, the best case scenario for PP is that it has had no effect on smoking rates.  We really need more time and data to tell for sure.

*Here's a screen shot showing the formulae I used, for anyone that wants to play around with it or verify my maths.

**The values have not come from any research on actual sales in Australia.  They were chosen to model a situation where the price profile of a group of products made a significant and unusual change, to show a weakness in the Chain Volume Measure model used by the ABS.  I believe that the way I have used the model reflects the behaviour of smokers following the introduction of Plain Packaging.


  1. Not certain, but there may be a mistake in your spreadsheet. When I compare it with the ABS example of chain vol calculations, the ABS hold their prices constant through each time period where they are calculating chain volumes, whereas you don't.

    The ABS example is Table 6 in this pdf: http://www.abs.gov.au/AUSSTATS/abs@.nsf/0/95ce2d6796bd15aeca256db800754639/$FILE/ATT4T7WF/Demystifying%20Chain%20Volume%20Measures_1.pdf

    Clem P

    1. Hi Clem, you are exactly right, and the effect of the error is basically nothing.
      I have used an incorrect formula in cells M4 & M5.
      The way that the formulae in cells were written in M10 and M12 however counteracted this (in that they were written to use the data from M4 & M5 the way they were calculated), so the end results are still spot on. I will post updated table later this evening. (I'll keep the old one's around somewhere so people can verify the errors if they wish. Transparency matters!)

      This is still a clear example of how chain volume can be decreasing when price profiles change in specific ways ie a significant number of consumers move from expensive to cheaper products, resulting in more of a particular product being consumed.

  2. This comment has been removed by the author.

  3. Treasury has just released data showing that the volume of cigarettes sold has been dropping.

    This reinforces the point that I made on twitter about not looking at the ABS chain volume figures in isolation - that British American Tobacco reports lower volumes and higher prices makes idea of a significant shift towards cheaper tobacco unlikely.

    Added to the Health Department's website quietly last week amid debate over the effectiveness of plain packaging, the Treasury data shows 3.4 per cent fewer cigarettes were sold last year than 2012. Plain packaging became mandatory on December 1, 2012.

  4. Hi, thanks for your contribution.
    The data on tobacco clearances from the Health Department adds to the debate, however I've struggled to find a clear definition for tobacco clearance so far (I haven't asked the Department of Health directly to date).
    The fact that the clearance measure explicitly includes excise and custom duty makes me believe that is a measure of $ of tobacco sold, so is still not a clear measure of quantity. Otherwise, you are trying to add kg and $ together, and that is not feasible. It also doesn't include smuggled and counterfeit trade, and a rise in both of those is consistent with plain packaging (makes people less brand conscious, and makes it easier to counterfeit products). Thus it is not inconsistent with increased sales of cheaper cigarettes.
    So I'm still sticking with my statement that there isn't yet enough data to decide if smoking is on the rise or if it is falling. My personal best guess (gut instinct on what data I have seen) is that smoking rates are clearly not falling faster then before plain packaging, so at best plain packaging has had no impact.

    I don't smoke myself, never have, and would love to see smoking disappear from Australia altogether. For that to happen, we need good, data driven policy, and I'm not sure that the data yet supports Plain Packaging as an effective policy.

    Would you be happy to add your twitter tag to your comment?

  5. The tobacco clearance data comes from Treasury, not the Department of Health. I presume that they get it from the tobacco tax data (which is charged per stick for normal sized cigarettes and per kg for loose leaf).

    My random thoughts on this are as follows:

    1) The current available data (ABS, British American Tobacco Annual Report, Imperial Tobacco and Treasury) strongly suggests that volume of legal tobacco sold in Australia is dropping since the introduction of plain packaging.

    2) There is no good data (that I'm aware of) on illegal tobacco sales. As more recent data on smoking rates becomes available, it will provide some clues on this.

    3) I don't think that you can safely make claims about the efficiency of plain packaging on the basis of a very short time spans.

    4) Disentangling the effect of plain packaging from other measures (such as excise increases, anti smoking campaigns) will be very difficult.

    5) The Australian's reporting of this has been abysmal. Koukoulas was absolutely right to challenge them.

    Twitter is https://twitter.com/ClemPowell

  6. G'Day Clem,
    Totally agree about points 2, 3 & 4.
    Point 3 contradicts Point 1. If there is no good data to make claims about the efficiency of Plain Packaging, then you cannot make solid claims about the quantity of tobacco being sold in Australia. I make that very clear in the blog that we need to wait for more data to be certain about the effects of Plain Packaging. I do suspect based on the data that we have that smoking rates are not falling as rapidly as before Plain Packaging was introduced (which would indicate a failure of the policy), but I do make that conditional on more substantial data being available in coming years.

    Point 5 I will partially disagree with you. The Australian probably has jumped the gun a little. Stephen Koukoulas has clearly deliberately misrepresented data that he understands well.