Objective: The purpose of this study was to assess the potential impact of public policies to regulate price discounting strategies on retail cigarette prices and advertising. Philip Morris USA (PM USA) has a policy designed to sanction stores violating state laws banning illegal tobacco sales to minors by temporarily suspending price discounting incentives. This study examined the impact of those sanctions on retail cigarette prices and sales promotion advertising.
Method: In November 2006, the California Attorney General’s Office informed PM USA that 196 stores were found guilty of illegal underage sales. Of these, 109 stores that participated in the PM USA Retail Leaders Program were notified that their merchandising and/or promotional resources would be suspended for the month of April 2007. The remaining 87 stores were not sanctioned and served as a comparison group. Trained raters assessed advertising and prices of selected PM USA brands in these stores pre-penalty and during the penalty phase.
Results: There were no significant differences between sanctioned and non-sanctioned stores on median changes in price and sales promotion advertising from the pre-penalty to the penalty phase.
Conclusion: The lack of impact on cigarette prices and advertising indicate that the PM USA policy may be flawed in its design or execution. If public policies are developed to restrain cigarette price discounting strategies, they should be crafted to ensure compliance and preclude possible compensatory actions by retailers.
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As part of its Corporate Social Responsibility Program,1 Philip Morris USA (PM USA) created a Youth Smoking Prevention Department in 1998 that promulgated an Underage Cigarette Sales Prevention Policy to decrease illegal tobacco sales to minors by imposing financial penalties on stores found in violation of state age of sale laws.2 For first violations, penalties include a 1-month suspension of price discounting incentives including loss of merchandising payments, eligibility for promotional resources and/or product promotions.3
Approximately two-thirds of tobacco retailers in the USA have contracts with PM USA,4 such as its Retail Leaders Program (RLP), which offers financial incentives, special sales promotions and discounted products to retailers in return for prime placement of products and advertising.5 Stores with these types of contracts have more cigarette marketing materials and sell cigarettes at lower prices than stores without such contracts.4 If a store were to temporarily lose these lucrative incentives, one would expect to see higher prices and less promotional advertising during the penalty phase.
This study examines the impact of the PM USA policy on retail cigarette prices and associated promotional materials in California, 1 of the 25 states (as of October 2007) that periodically notified PM USA of stores found guilty of violating sales to minors laws. At 3 months in advance of a penalty, PM USA sends letters to RLP stores informing them that the company has been notified of a violation and that they will be sanctioned by suspending their financial incentives for 1 month. Violating stores not part of the RLP are sent letters about the violation and educational materials.
In 2005, 75% of the $US13.1 billion cigarette companies spent on marketing and promotions was allocated to retailer-based price discounting strategies such as special sale prices and multipack discounts; strategies that the PM USA policy says will be withheld from retailers that illegally sell tobacco products to youth.6 Approximately one-third of retail cigarette advertising promotes a special offer such as a reduced price or multipack discount.7 In the US, such strategies have been found to dampen the extent to which price increases (eg, from state cigarette tax increases) reduce smoking prevalence.8 Retailer-based tobacco advertising and sales promotions also increase the likelihood that youth will initiate smoking initiation or move from experimentation to regular use.9
To develop an effective tobacco control policy that eliminates price discounting and promotions at the point of sale, it is important to understand the impact of eliminating these practices on the retail environment. The present study took advantage of a natural experiment to assess this among retailers for whom PM USA withheld price discounting incentives previously received through the PM USA RLP, because they had violated laws banning tobacco sales to minors. The following hypotheses were posed.
Prices of selected PM USA brands in sanctioned stores will increase in the penalty phase. No increase will be observed in non-sanctioned stores.
Advertising of sales promotions for selected PM USA brands in sanctioned stores will decrease during the penalty phase. This decrease will not be observed in non-sanctioned stores.
The Food and Drug Branch of the California Department of Public Health routinely enforces a state law prohibiting tobacco sales to minors. Fine and conviction information about guilty stores are sent to the Attorney General’s Office (AG). During the fourth quarter of 2006 the California AG sent information to PM USA on 196 stores found guilty of illegal underage sales. The 109 stores participating in the RLP were notified in January 2007 that their PM USA merchandising and/or promotional resources would be suspended for the month of April 2007. The comparison group for this study was comprised of the remaining 87 stores that were guilty of illegal underage sales that did not participate in the RLP. These non-sanctioned stores received letters from PM USA about the illegal sales violation and educational materials.
Trained data collectors conducted store surveys in March 2007 (pre-penalty phase) and in April 2007 (penalty phase). Price (excluding sales tax) and sales promotion information, were collected on four major PM USA brands: Marlboro, Basic, Parliament and Virginia Slims. By brand, price was collected for a single pack of cigarettes or a multipack bundle (excluding cartons), whichever yielded a lower per pack cost. When price was recorded for a multipack, the price of a single pack within the bundle was computed. Sales promotion was defined as an interior or exterior sign or display advertising a special price or a multipack discount. Complete data were collected at both timepoints for 185 of the 196 stores. The final analysis sample consisted of 100 sanctioned stores and 85 non-sanctioned stores.
To determine whether a change in price and number of sales promotions occurred, difference scores were computed. The difference score for price of a single pack by brand was calculated by subtracting the price in pre-penalty phase from the price in the penalty phase. The process was replicated for the number of sales promotions. Non-parametric Kruskal–Wallis tests of medians were performed given the highly skewed distributions of the difference scores. A separate test was performed for each difference score, and the sole predictor was store status (sanctioned RLP stores vs non-sanctioned stores). Because multiple hypothesis tests were performed and outcomes were correlated, the more conservative significance level of 0.01 was employed.
Table 1 presents descriptive statistics for store characteristics and brand-specific price and advertising by store status. Store type distribution differed between sanctioned and non-sanctioned stores: there were proportionally more convenience stores and supermarkets in the sanctioned store group and more donut shops and small markets in the non-sanctioned store group Additionally, the sanctioned stores had more cash registers on average, an indicator of store size. These differences between sanctioned and non-sanctioned stores were expected because stores participating in the RLP sign contracts that contain sales volume and brand selection requirements.10 It is easier for convenience stores and supermarkets to satisfy these provisions than other stores, such as small markets, that offer a limited product selection.
Contrary to our hypotheses, for each PM USA cigarette brand, sanctioned and non-sanctioned stores did not differ significantly in the median change in price between pre-penalty and penalty phases. In fact, the price of Marlboro, Basic and Virginia Slims was the same during the pre-penalty phase and the penalty phase in all stores (sanctioned and non-sanctioned). Similarly, sanctioned and non-sanctioned stores did not differ significantly in the median change in sales promotion advertising for the PM USA brands. Medians are not reported in the table.
The purpose of this study was to assess the effect of the withdrawal of PM USA price discounting incentives on cigarette prices and promotional signage during the month in which PM USA sanctioned RLP stores for having illegally sold cigarettes to minors. The study afforded the opportunity to determine the proximal impact of the PM USA policy on the store environment. It was not designed to assess the impact of these sanctions on illegal sales to minors. The study found that the PM USA sanctions appeared to have no effect on the price or amount of sales promotion advertising of PM USA brands during the penalty phase.
In an effort to understand these findings, we explore several possible explanations relating to the policy itself, its implementation and possible compensatory retailer behaviour.
The retail environment is highly competitive11 and cigarette sales are lucrative, accounting for 34.4% of average store revenue in convenience stores in 2006.12 To protect their customer base, sanctioned stores may have underwritten sale prices during the penalty phase because they perceived the penalty to be small enough to absorb. This explanation is unlikely because merchants report that they only reduce prices when manufacturers provide discounts.13 Because retailers were informed of the impending sanction several months in advance, some may have stockpiled cigarettes and promotions for the penalty period. However, PM USA recommends a 1.5-week “safety stock” of product and promotions.14 Thus, stores should have exhausted promotional products in week 2 of the penalty period and a price increase should have occurred. Either of these scenarios indicates that the advance notice and short penalty period may be insufficient to deter retailers from future violations of sales to minors laws.
Second, the findings may reflect flawed implementation of the policy and sanctions. Although PM USA corporate office notifies all penalised stores of the penalties and timeframe, there is no evidence that other PM USA branches (eg, sales representatives or wholesalers) are also notified. These branches may continue to supply sanctioned retailers with special price offers and multipack specials.
Finally, retailers may have obtained discounted cigarettes through independent relationships with wholesalers instead of relying solely on the manufacturer; however, the remarkably consistent lack of change in all stores makes this explanation unlikely.
There are several limitations to this study. Our hypotheses were tested only in California; the results may differ elsewhere. Generalisability of the findings is limited to stores that violated laws banning tobacco to minors. Future studies should add an additional comparison group of compliant RLP stores. Our comparison group was comprised of stores not participating in the PM USA RLP; compliant RLP stores would provide a better comparison to account for promotional incentives provided them during the penalty phase. Finally, we encourage future research to test the impact of sanctions on the stated policy goal to reduce tobacco sales to minors; however, given that the PM USA sanctions failed to affect prices and promotions, it is unlikely that there would be impact on illegal sales to minors without implementation and enforcement of a stronger, more sustained penalty.
This study has implications for governmental entities attempting to find effective means of raising tobacco prices to reduce consumption. If a public policy to eliminate the use of price discounting incentives were pursued, it would need to be well crafted and effectively implemented so that it actually restricted the ability of retailers to continue offering and advertising discounted prices, and precluded possible compensatory actions by manufacturers and retailers. Individual US states may explore such policies, as could the federal government under recently enacted Food and Drug Administration authority. This type of policy also should be incorporated into comprehensive bans on tobacco advertising, promotions and sponsorship by countries attempting to implement Article 13 of the Framework Convention on Tobacco Control.
What this paper adds
Tobacco manufacturers attempt to shape public opinion and counter challenges by regulators and tobacco control advocates through “corporate social responsibility” programmes such as the Underage Cigarette Sales Prevention Policy. This policy is purported to sanction retailers involved in the Philip Morris (PM) USA Retail Leader’s Program who violate laws banning tobacco sales to minors.
This study, however, failed to detect any impact of the PM USA Underage Cigarette Sales Prevention Policy on retailer cigarette pricing or promotional behaviour, thus calling into question the value of the policy beyond impression management.
The authors wish to thank Alan Lieberman, Deputy Attorney General, California Office of the Attorney General, Tobacco Litigation and Enforcement Section, for his assistance with this study. We would also like to thank Eric Lindblom, Director for Policy Research and General Counsel, Campaign for Tobacco Free Kids, for his helpful comments on a draft of this manuscript.
Funding This study was funded by the California Department of Health Services, Tobacco Control Section, under contract numbers 04-35336. Funding is provided by the passage of Proposition 99, the 1988 Tobacco Tax Initiative.
Competing interests KMR has served as an expert witness for US State Attorneys General in litigation related to internet tobacco sales and point-of-sale tobacco marketing and promotions. None of the other authors have any competing interests.
Provenance and peer review Not commissioned; externally peer reviewed.