Anti-tobacco control industry strategies in Turkey

We examined the trends in cigarette sales by tar level, thickness and flavour to shed light on the use of product innovation strategy to sustain smoking. The data source was Passport Database of Euromonitor International. Firstly, we compared the sales of high tar, low tar, ultra low tar and mid-tar¹² cigarettes for the period of 2007–2015. Then, we evaluated the sales of slim and super-slim cigarettes in comparison to regular cigarettes between 2008 and 2015. Thirdly, we explored the changes in sales of cigarettes with flavour in comparison to standard cigarettes between 1999 and 2015.

We evaluated advertising-promotion strategy on the basis of the review of the academic literature, as well as company and market reports (Euromonitor). Given the advertising bans, we focused on the use of the indirect channels for the promotion of consumption which are distribution networks, the Internet and CSR projects.

We firstly reviewed the findings in the academic literature and company reports (Euromonitor) regarding cost management strategy. Then, we focused on changes in the cost of tobacco in the 2000s. Firstly, we calculated decreases in the cost of imported tobacco between 2010 and 2015. To this end, the following data was retrieved from Tobacco and Alcohol Market Regulatory Authority (TAPDK): dollar values of the Tobacco Fund, an excise tax levied on imported tobacco per ton; and, volumes of domestic and imported tobacco used by tobacco manufacturers. We subtracted the Tobacco Fund in the relevant year from the value of the Fund that was imposed in 2010. The difference was multiplied by the quantity of imported tobacco in the relevant year. Afterwards, we calculated the savings from the costs of tobacco over the period. Secondly, we aimed to see whether the industry increasingly provided tobacco from the low-cost regions in Turkey. Thus, by using the data from TAPDK, we explored the regional trends in volumes of domestic tobacco purchases by the manufacturers for the period 2010–2015.

Pricing strategy was analysed for three brand segments: the economy, mid-priced and premium brands. Because of data constraints, the analysis was restricted to the period 2005–2012 and also to the average annual prices per pack of only seven cigarette brands. The premium segment consists of Parliament and Marlboro, both produced by PhilSA; in the mid-priced segment, there is Winston, produced by JTI; and in the economy segment there are Monte Carlo, produced by JTI, and Tekel 2001, Maltepe and Samsun all produced by BAT. The price data was retrieved from Passport Database of Euromonitor International. To calculate real values, we used the Consumer Price Index (CPI) (2003 based) released by Turkish Statistical Institute (TurkStat). The brands were categorized according to the price classification adopted by Euromonitor International: cigarette brands with a price of 10 TL and above per pack were classified as premium; between 8.1–9.99 TL as mid-priced; and, 8 TL and below as economy [16].

The analysis followed four steps: Firstly, after-tax real weighted prices¹³ for pack of 20 cigarettes were calculated for the three brand segments. Then, to identify the trends in net prices, before-tax (net) real weighted prices¹⁴ were calculated. Thirdly, we looked at the performance of different price segments in share of market volume. However, because of the limited number of cigarette brands for which the data was available, the sample underrepresented the total cigarette sales in the period under consideration. Indeed, the sample represented the premium cigarette market well; and the representative power of the sample increased for the mid-priced segment after 2006. The market for economy brands, however, became underrepresented by the sample after 2007 (Table 1) since sales volumes of newly introduced economy brands increased (Fig. 1). This situation would have resulted in misrepresentation as it may have been thought that sales volumes and net revenues in the economy segment declined over the years. In fact, the total market data showed that the economy segment achieved the highest sales volume (almost 54% of the market in 2012) (Fig. 2). Therefore, the total market sales data was more reliable than the sample data. Consequently, the changes in before-tax (net) nominal sales revenues for the three brand segments have been examined by taking into account total market sales (Additional file 2). To find net revenues, net nominal weighted prices of the sample brands were multiplied by the total market sales volumes. In the evaluation of the changes in total volume of market sales and net nominal sales revenues, trends in price margins between different brand segments were taken into accounts.

TTCs perpetuated smoking firstly by lowering tar levels. Consumers began to prefer reduced tar cigarettes since they perceived them to be less harmful than high-tar cigarettes: The sales of high-tar cigarettes ended by 2010; during the period 2007–2015, sales of mid-tar cigarettes increased by only 2.9% while the rate reached 66.3% for low-tar cigarettes and 204% for ultra-low tar cigarettes (Fig. 3).

Secondly, TTCs released slim and super-slim cigarettes that are longer and contain less tobacco. The sales of regular cigarettes decreased by 6.2% while the sales of slim and super-slim cigarettes increased by 132.1% and 236% respectively during the period 2008–2015 (Fig. 4).

Thirdly, cigarettes were made more attractive by adding flavour. As the sales of standard cigarettes had a tendency to decrease in the period 1999–2007, sales of cigarettes with flavour (menthol (non capsule) and flavour capsule (all flavours)) fluctuated until 2007 and then increased by 218% between 2007 and 2015 (Fig. 5).

As a result, rapid product differentiation makes Turkey a special case. While the market for tobacco products had included only a few brands during the state-monopoly period, there were 589 domestically produced and licensed products as of April 2014 [26]. Furthermore, due to insufficient regulation, cigarette manufacturers could use more than 600 additives and consequently designed more attractive and addictive products [26].

Although FCTC Article 13 [6] forbids all direct and indirect advertising, promotion and sponsorship activities, the Turkish tobacco industry violates this rule. The retail ban on minors under the age of 18 is commonly violated [27] at points of sale. There are about 158 thousand points of sale registered by the TAPDK. Tobacco manufacturers use their own distribution channels to deliver cigarettes to points of sale which include groceries, markets, supermarkets, hypermarkets, kiosks, sellers of dried nuts and specialty outlets that sell only tobacco and alcoholic beverages [9]. The distribution channels play an important part in the operation of the tobacco industry: PhilSA reaches 143 thousand points of sale with 828 employees out of 1613 [28]; JTI reaches 150 thousand points of sale with 132 employees out of 600 [29]; and BAT distributes to 125 thousand points of sale [30]. Employees who work in the sales, marketing and distribution departments of the TTCs in question carry out regular visits to pre-established points of sale, renewing display racks although advertising of tobacco products is forbidden in Turkey [31]. Points of sale are often grouped into four or five segments according to the income level and social status of the neighbourhoods; and, while renewing display racks, different branding and marketing strategies are employed in those segments to increase sales [31].

A recent survey in seven city centres shows that nearly 91.4% of retailers were engaged in at least one type of violation of the display ban [23]. Tobacco product displays at points of sale could not be prevented because of insufficient inspection mechanisms to monitor the wide distribution channels of TTCs [23]. Besides, brand promotion and advertisements were made via the internet and electronic mail; new advertising strategies were developed on social media; and an image of reputable and legitimate corporations was created via CSR projects against prohibitions for direct advertising [9]. For instance, in 2011 PMI allocated 25.3% of its worldwide CSR spending to projects in Turkey [32]. Smoke-free violations in indoor places are also high [9]. The industry tried to build cooperation with the representatives of cafes, hotels and restaurants in order to reverse the indoor smoking ban in 2008 [33].

While TTCs preferred to shut down manufacturing plants in certain countries [34], they selected Turkey as a manufacturing base and rationalized their plants for efficiency. After the purchase of the state monopoly TEKEL in 2008, BAT rationalized the widespread manufacturing network of TEKEL: it closed down most of TEKEL’s plants; and around 12 thousand workers were fired. BAT had located cigarette factories in both Izmir and Samsun, then closed down the Izmir factory (established in 2002) and moved the means of production to the Samsun facility [30]. Likewise, PMI and JTI established high capacity manufacturing plants equipped with the latest technology. The leading manufacturer PhilSA has a factory in Izmir that is the fourth biggest PMI factory in the world with the capacity to manufacture 40 billion sticks per year [28]. Moreover, JTI‘s single factory (established in 1993 in Izmir) can produce 8 to 10 thousand cigarettes per minute, and its annual production is around 35 billion sticks [29]. Also, without any curtailment, the tobacco industry in Turkey can benefit from state subsidies for the production, export and import of tobacco products, helping to reduce costs [19].

TTCs were also able to reduce the cost of tobacco. What facilitated this was firstly the Tobacco Law (No. 4733) passed in 2002 upon the commitment to the IMF. By Law, the state’s subsidized purchases of tobacco had ended and contracted farming started, leaving tobacco farmers without any pricing power to produce and sell at the request of TTCs. The abolition of subsidies and the low pricing policy has driven tobacco farmers into poverty, resulting in a substantial contraction in cultivation [9]. From 1989 to 2015, the population of tobacco farmers and volume of production contracted by 89% and 72% respectively, making Turkey a net importer of tobacco since 2012 [35, 36]. Secondly, a legal amendment to the Tobacco Fund helped the industry to reduce costs. The Fund was levied to improve tobacco cultivation and support farmers in 1986 [37]. In 2008 Turkey made a commitment to eliminate the Fund between 2010 and 2018 as the European Union (EU) argued that it discriminated against imports [9]. The abolition of the Fund allowed TTCs to import American tobacco more cheaply, contributing to industry profitability.

The Fund was reduced from 3000$/tons in 2010, 2250$/tons in 2011, 1800$/tons in 2012, 1500$/tons in 2013, 1200$/tons in 2014, and to 900$/tons in 2015 [38]. As a result, the use of imported tobacco exempted from the Tobacco Fund increased by 61.2% and those purchased with a lowered fund increased by 22.8% in cigarette manufacturing [36].¹⁵ As TTCs increasingly used imported tobacco, the cost of tobacco decreased significantly during the period 2010–2015 (Table 2). In 2015, the total savings achieved due to the removal or reduction of the Tobacco Fund reached $226,926,300 (=101,025,000 + 125,901,300).

Aside from cost saving through the Tobacco Fund, TTCs were also able to reduce cost by purchasing tobacco at the lowest price. In that sense, the purchases of tobacco from the low-cost Mediterranean, Eastern Anatolia and South-eastern Anatolia Regions increased compared to the lower share of Aegean, Black Sea and Marmara Regions in total domestic tobacco use (Fig. 6).

The analysis shows the trends in cigarette prices, volumes and revenues by brand segment in Turkey between 2005 and 2012. The after-tax real prices went up in all price segments except in 2008 and 2011 when the global financial and Euro debt crises adversely influenced Turkey (Fig. 7).

Figure 8 depicts before-tax (net) real weighted prices. During 2005–2009 when the minimum specific SCT per pack changed only marginally (Table 3), net real prices tended to rise in all categories, supporting profitability (except for the year 2007 for premium brands and for the crisis year 2008) (Table 4). In 2010 when SCT per pack (% of retail price) increased, the tobacco industry passed on taxes to consumers by increasing net real prices in all price segments. Yet in 2011 when SCT per pack (% of retail price) continued to increase, TTCs lowered net real prices to reduce the amount of tax that consumers had to pay. This increased sales volumes of the mid-priced and premium brands (Fig. 1), limiting the decrease in total sales revenues (Fig. 9). However, in 2012 when taxes remained constant, tobacco manufacturers increased net real prices in all segments (Fig. 8) and due to the higher sales of mid-priced and premium brands, their revenues improved (Fig. 9). As a result, according to market conditions, TTCs adjusted their prices by brand segments to maintain their revenues.

While TTCs were adjusting prices to offset rises in tax, the tobacco industry gathered the highest net nominal sales revenue in the economy segment during 2007–2012 (Fig. 9). This is because economy brands had the highest market share (Fig. 2) despite their unit revenue being low. Even though they had a similar market share to mid-priced brands (Fig. 2), premium brands accrued more revenues (Fig. 9) due to higher per unit revenue. Furthermore, sales revenues from the mid-priced segment increased after 2008 (Fig. 9) accompanying the rise in its market share (Fig. 2). This outcome was related to the changes in price margins. The price margins between the premium and economy brands as well as between the mid-priced and economy brands tended to decrease especially after 2007 (Fig. 10). Along with the declining price margins, consumers tended to shift to mid-priced brands, leading to the rising market share in this segment (Fig. 2). Meanwhile, the market share of the economy brands decreased after 2009 while the fall in the share of premium brands stopped in 2011 (Fig. 2). Lastly, in spite of the adoption of tobacco control policies, the trend of increasing total sales revenues was noteworthy (Fig. 9).

Even though our analysis had to be restricted to the period of 2005–2012, some points about pricing strategy pursued after 2012 can be emphasized. Firstly, tobacco manufacturers took advantage of the existing tax structure in Turkey. In the process of harmonization with EU regulations, a specific tax was added per cigarette pack as of 1 January 2013 and this tax increased over the years (Table 5). However, ad valorem taxes (SCT and VAT) account for more than 80% of the 10 TL retail price of a packet of cigarettes while specific tax accounts for a very small ratio of only 2% of the total tax burden. Bakir indicates that the very high ad valorem taxes in contrast to the EU led tobacco manufacturers in Turkey to price competition [39]. This increased after mid-2013, especially for some mid-priced and premium brands. As a result, consumption was encouraged due to the lowered tax burden on consumers. Moreover, to avoid tax increases, price-sensitive consumers tended to shift to cheaper brands because of their lower ad valorem taxes. Due to the increases in the specific tax per pack (Table 5), moreover, low-priced cigarettes became more expensive and thus demand for the mid-priced brands was boosted [39].

Although total registered cigarette sales did at first decrease marginally between 2008 and 2012 in response to tobacco control interventions, as a result of the above-discussed industry activities, they persistently increased from 91.6 to 105.5 billion sticks between 2013 and 2016. SCT revenues from tobacco products meanwhile consistently increased from 20 to 25 billion Turkish Lira between 2003 and 2015 and the share of tobacco products in total SCT revenues reached 26% in 2015 [40].

In the discussion of the effectiveness of tobacco control policies, there is a need to consider the consumption of contraband products. It is estimated that 10–15% of cigarette consumption in Turkey was based on illegal products during the period 2002–2007 [33]. This shows that actual consumption has been much higher than the official cigarette sales indicate.¹⁶ Moreover, as a result of increasing sales taxes,¹⁷ price-responsive consumers tend to use tobacco that consists of cut tobacco sold in a packaged format for use in roll-your-own (RYO) cigarettes (Fig. 11). RYO tobacco is preferred to cigarettes especially among young smokers as it is cheaper [41]. Figure 11 only depicts official sales, but industry experts believe that the total size of the RYO tobacco market - including illicit sales - was around 14,000 tons in 2014, although no official data for illicit trade exists [41]. Therefore, for 2014, total cigarette consumption increased from 94.7 to around 122.7 billion sticks when the sales of official and illicit RYO tobacco (1 g = 1 cigarette stick) as well as contraband cigarettes¹⁸ are considered.

Next, there is the need to regard the consumption of non-cigarette tobacco products that are currently manufactured by domestic firms in Turkey. Firstly, waterpipe smoking (hookah) has accelerated worldwide since the 1990s but most markedly in the Middle East and North Africa. Waterpipe tobacco (WT) is falsely marketed as being less harmful than cigarettes. In reality, it makes it more difficult to quit cigarette smoking and leads young adolescents to start cigarette consumption [42]. Drawing on the Global Adult Tobacco Survey (GATS), it is claimed that overall waterpipe smoking prevalence declined in Turkey between 2008 and 2012 from 2.3% to 0.8% [43]. However, the prevalence in the 15–24 age group was much higher (4.3%) and the prevalence did not decline among females and non-graduates as the GATS found in 2012 [44]. Waterpipe smoking is spreading especially among the younger population; GATS shows that the use of cigarettes and other tobacco products among the young in Turkey increased by 51% and 88% respectively between 2003 and 2012 [44]. New studies raise serious concerns about the rapidly growing hookah sector in the country: illicit products constitute 99% of the total WT consumption, revealing that the informal economy dominates the WT market [42, 45]. It is estimated that 15,500 waterpipe smoking businesses were in operation while the number of TAPDK registered businesses was only 1220 as of October 2016 [42]. Also, while the official annual production volume of WT was only 9 tons in Turkey, the total annual consumption was estimated approximately 1500 tons in 2015 [42]. Rising consumption, therefore, was based on both domestically produced and imported contraband WT [42, 45]. All these point to significant inspection and enforcement failures in the Turkish WT market.

The consumption of cigars and cigarillos has also been a rising trend in Turkey. As a consequence of the TAPDK’s lifting of the restriction on the import of cigars and cigarillos by non-manufacturing companies in 2011, the import of foreign brands and consumption was found to have increased dramatically by 2012 (Fig. 12). In that year TAPDK stipulated that only those cigars and cigarillos with specific ingredients conforming to the standards released by the Turkish Standards Institute could be sold [46]. As a result in 2012 official sales decreased while the sales of the products that could not be imported increased in the contraband cigar and cigarillo market [47]. As reported by trade experts, around 85% of the sales of cigars and cigarillos in 2013 were illegal [47]. Therefore, the decrease in official sales of cigar and cigarillo after 2011 masks the high magnitude of real consumption (Fig. 12).