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Characteristics of FCT consumption

A single EU market for tobacco products does not exist, especially not for fine-cut tobacco but instead there are many interdependent markets in the EU with specific consumer preferences and consumption patterns. Taxation policies and taxation structures as well as policy objectives differ greatly across Member States.

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The prevalence of FCT consumption varies significantly country by country. Using information on total volumes of FMC and FCT in 2016 from the European Commission’s Directorate for Taxation and Customs Union (DG TAXUD), and using a comparison standard of 1kg equating to 1,000 cigarettes, as used at EU-level for comparison purposes, the analysis presented in Figure  indicates that some markets are particularly mature, with approximately one-half of all tobacco released for consumption accounted for by FCT (Luxembourg (57%), Belgium (47%) and the Netherlands (40%)).

In a number of other (predominantly) western European jurisdictions, the proportion of total tobacco consumption represented by FCT stands at between 15% and 25% (for instance, Germany (25%), France (17%), and the United Kingdom (17%)). With the exception of Hungary (where the proportion of FCT consumption stands at 46% of total tobacco consumption), the proportion of FCT consumption in Northern/Central/Eastern and Southern Europe is relatively low, and generally below 10% of total tobacco consumption.

Legal FCT consumption as proportion of total legal tobacco consumption

Source: London Economics’ analysis of EC DG TAXUD (2016) data

There is significant variation in fine-cut tobacco products and use across the EU as well as in smoking prevalence between various product categories. The prevalence of everyday smokers differs greatly amongst fine-cut consumers from one country to another.

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In a further representation of the variation across countries, the information in Figure 8 (which is derived from analysis of country-level Eurobarometer data) demonstrates the difference in current everyday FCT smoking prevalence between EU Member States. Amongst current everyday smokers, respondents are asked the incidence of either FCT and/or FMC consumption. The analysis suggests that across the entire EU, approximately 23% of smokers consume FCT every day. However, reflecting the differing maturity of FCT across Member States, the prevalence of FCT consumption amongst smokers varies significantly. In the Netherlands, Belgium, United Kingdom, France and Hungary, more than 33% of smokers indicated that they consumed FCT every day, while in Germany, Greece, Cyprus and Ireland, FCT prevalence amongst smokers was between 26% and 31%. In contrast, in Romania, Estonia, Latvia, Sweden and Austria, the prevalence of FCT consumption was very low (standing at less than 5%).

Proportion of current everyday smokers (of either FCT or FMC) consuming FCT
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Source: London Economics’ analysis of Eurobarometer 458, May 2017.

Being a semi-finished product from the consumer’s perspective, and being relatively labour-intensive compared to cigarettes, fine-cut tobacco has a lower tax-bearing capacity than cigarettes. The tax-bearing capacity reflects the amount of tax that a product can absorb without distorting the functioning of the market.

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The tax bearing capacity of FCT

One of the key economic principles underpinning tobacco taxation and the economics of FCT in particular is the different tax-bearing capacity for each specific product category. The tax-bearing capacity reflects the amount of tax that a product can absorb without distorting the functioning of the market. In other words, “in most countries, the various categories of manufactured tobacco carry different levels of taxation, reflecting differences in the fiscal policy objectives as well as in the perceived tax-bearing capacity of the different product categories. In particular, hand-made or more labour-intensive products, products made mainly by small and medium-sized enterprises, as well as products predominantly consumed by consumers in the lower income groups, often benefit from preferential tax treatment”.

FCT has a lower tax-bearing capacity than cigarettes being a semi-finished product from the consumer’s point of view, who must also buy rolling papers or tubes to prepare a fine-cut smoking article. The purchased weight of FCT cannot be completely consumed as a part is normally unfit for consumption (too short, tobacco stems, crumbs). As many FCT smoker do not use filters, part of a hand-rolled cigarette is a handpiece which is not being smoked but discarded as a butt. In addition, the FCT manufacturing process is relatively labour-intensive as compared to factory made cigarettes, with a substantial proportion of small and medium-sized companies, often family-owned, engaged in the manufacture of FCT.6 This lower tax-bearing of FCT compared to cigarettes is even further demonstrated by the price-sensitivity which characterises FCT consumers.