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European tobacco legislation forces a second small family-owned pipe tobacco company to close

By September 13, 2019 No Comments

After Peterson of Dublin closed its doors in 2018, another small pipe tobacco company ceases manufacturing. Planta Tobacco Company from Berlin closed its doors due to the significant costs resulting from the EU Tobacco Products Directive adopted in 2014 and the subsequent EU regulations.

When proposing the EU Tobacco Products Directive, the European Commission admitted that smaller and mid-sized companies would be impacted much more than large multinational cigarette manufacturers, but from its point of view that was a price worth paying. However, few real impacts were calculated and, in the cases, where they were, they hugely underestimated the real compliance costs.

The European Commission and the other EU institutions involved could have simply avoided forcing small tobacco companies out of business, if better legislation had been developed. The adopted regulations were mainly written having factory-made cigarettes in mind, with other niche tobacco products being an afterthought. Differentiation based on product, consumers, manufacturing or companies was simply disregarded.

Pipe tobacco is a niche traditional tobacco product representing less than a one percent of the total tobacco market, enjoyed on occasion by mature adults as a relaxing pleasure, and manufactured, up till now, by several small family-owned companies.

Pipe tobacco is a tobacco product which is not smuggled. Nonetheless, the overly expensive EU track and trace system, aimed at curtailing smuggling of cigarettes, will also apply to pipe tobacco meaning further costs for those small producers.

The introduction of large health warnings meant packaging and machine changes. Again, pipe tobacco was simply disregarded when regulators decided the size of health warnings, designed with cigarette packaging in mind.

Faced with the need to make further machine changes to comply with the new track and trace system and alarmed by the threat of future packaging changes – publicly advocated by the Commission – after the adoption of the law in 2014, small companies simply cannot absorb the costs of continuous disruptions to their manufacturing.

ESTA’s Secretary General Peter van der Mark said: “The EU has failed time and time again to make legislation that does not unduly impact small and medium sized companies. We hope that the Commission’s proposed SME Envoy, announced by the incoming Commission, will be able to ensure that legislation from the Commission does not threaten the viability of European SMEs.”

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ESTA members manufacture fine‑cut tobacco, pipe tobacco, traditional European nasal snuff and chewing tobaccos in 10 Member States and export their products across the entire world. Skilled craftspeople expertly apply age old techniques, perfecting the mixture of dozens of varieties, tastes, smells and flavours, continuing a centuries‑old tradition of fine European heritage. Up to the end of the last century, the manufacture of tobacco in Europe encompassed hundreds of small producers creating thousands of signature products. Over the past 30 years, smaller firms have been acquired by larger multinational companies or have ceased activities altogether, leading to employment reductions and the disappearance of traditional brands. In the manufacturing countries, tobacco production is often rooted in less advantaged regions and plays locally a key economic and social role. It deserves protection and at the minimum should be considered when developing regulation.

Read more about the European tobacco industry

Between 2008 and 2012, consumption of  fine-cut tobacco in the EU28 increased by 37%, even though the increase varies heavily per Member State. Because of the severe economic crisis, consumer disposable income was under pressure, impacting the growth of  fine-cut tobacco consumption. This increase demonstrates the price sensitivity of  fine-cut tobacco smokers. 
 
As the economic crisis subsided between 2012 and 2015, fine-cut tobacco consumption declined in the EU and the market adjusted, returning to its pre-crisis normal order. 
 
In 2016, sales of  fine-cut tobacco kept declining by 1.09% in the EU28. This long=term downward trend follows to an extent industry consolidation. 
 
Seemingly out of step, several eastern countries still experience percentage increases in fine-cut tobacco sales whilst starting at very low sales levels. This demonstrates the buffer function of fine-cut tobacco: cigarette consumers who can no longer afford this product find in  fine-cut tobacco a legal alternative to illegal cigarettes that are often smuggled from neighbouring countries outside the EU (see London Economics Study, June 2015). 
Sometimes fine-cut tobacco is mistakenly presented as a “hook” to smoking because of its relatively higher affordability when compared to cigarettes. 
The reality of the market shows a very different picture. In most European countries,  fine-cut tobacco was and still is a niche tobacco product enjoyed by “specialist” consumers and traditional tobacco enthusiasts who enjoy fine European craftsmanship. 
 
Few exceptions exist with high market shares in countries where fine-cut tobacco has a long history and forms part of the cultural heritage. In these specialised tobacco markets, the significance of fine-cut tobacco stems from its century-old local manufacturing. 
 
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Every year, taxes on tobacco products raise more than €100 billion for EU governments. Tobacco tax policy must be delicately balanced to safeguard government revenues, protect fair competition, jobs and public health, whilst also deterring trade in illegal tobacco. Tobacco smuggling and sales of illegal tobacco products threaten this income and society at large. The fight against illegally traded tobacco is part of a wider effort to protect EU citizens. 
 
A successful implementation of Track & Trace will be of crucial importance, and requires workable standards that fit business and trading practices, making them likely to be internationally shared.
 
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The EU is characterised by a very diverse and flexible excise structure, which allows each Member State to set a balanced taxation of tobacco products respecting its national circumstances, interests and objectives.  Last year, excise revenues from smoking tobacco increased across the EU, even though sales declined. This clearly demonstrates the efficiency of the current flexibility left to national governments and that a “one size fits all” approach should not be considered. The few Member States (e.g. France, Netherlands) casting economic theory and the tax-bearing capacity of smoking tobacco aside had adverse effects with declining revenues whilst sales increased.

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An obvious correlation exists between the highest levels of illegal and non-­domestic consumption (e.g. France, UK, Ireland, Poland and Finland) and the highest taxation rates applied to fine-cut toconsbacco, in comparison with cigarettes.  The figures clearly show that any alignment of tobacco taxation, regardless of the products’ specificities, will prevent  fine-cut tobacco from fulfilling its buffer function, leading to increased illegal trade of cigarettes and driving down government revenues.

Read more about the relationship between tax and illegal trade