Philip Morris NZ's redacted statement of claim: What big tobacco didn't want you to read

Thursday 29th March 2018

Philip Morris (New Zealand) is suing British American Tobacco (New Zealand) in the Auckland High Court, alleging its larger rival is breaching the Commerce Act in the way it ties up retailers.

They want to publicise the dispute but leave out details that show the lengths tobacco companies will go to protect market share and how the industry organises itself. A redacted statement of claims was released this week. Unfortunately for big tobacco, which has a $2.5 billion market in New Zealand, the original statement of claim was sent to BusinessDesk last week by a PR company.

The biggest slabs of blacked-out text in the redacted claim set out in detail BATNZ's trading terms with retailers and show how much control it commands in the market it dominates. PMNZ says BATNZ has 65 percent of the local market for cigarettes and 63.7 percent of sales of roll-your-own (RYO) tobacco. It competes with Imperial Tobacco New Zealand, which has 23 percent of cigarettes and 31 percent of RYO, while PMNZ has 12 percent and 5.4 percent respectively.

In the lawsuit, filed in the High Court in Auckland, PMNZ alleges BATNZ "is unlawfully incentivising and compelling retailers to restrict the availability of competitor products." PMNZ is seeking unspecified damages in five causes of action for alleged breaches of the Commerce Act. BATNZ has said in a separate statement that it "categorically denies the allegations."

PMNZ also says the BATNZ rules have implications for the availability of so-called e-cigarettes, which deliver nicotine to the user via a vapour rather than with smoke and are regarded as a less harmful alternative to smoking.

Thanks to the Smoke-free Environments Act 1990 and the Smoke-free Environments Regulations 2007, tobacco advertising and branding has pretty much disappeared from the New Zealand landscape, with plain packaging coming into effect this month as well. That has meant tobacco products are now stored in anonymous cabinets, typically near a store's checkout and these cabinets, known in the industry parlance as "unitry" are the new front line of the battle for market share.

For a retailer stocking BATNZ brands - most of the market, given their dominance - BATNZ's trading terms give the company the first option on installing any new or additional unitry and the right to remove them at any time, according to the redacted paragraph 36 of the claim. The retailer is also required to keep the "primary units", which are the top area of cabinet, "fully stocked with 100% BATNZ products at all times."

The retailer must also stock the BATNZ unitry with tobacco products "in accordance with 'planograms' - diagrams supplied by the company "showing which tobacco products must be placed in specified unitry spaces."

Paragraph 39 refers to cash inducements offered to retailers provided they ensure at least "70 percent of the retailer's tobacco products available for sale within the outlet are BAT" brands. It also requires that 70 percent of "low value" tobacco products on offer are from BAT.

Low-value product placement is important because that's where competition is most fierce. PMNZ says that traditionally, adult smokers have been loyal to their preferred brand but in recent year, as taxes have increased, price has become a key factor and the tobacco firms all offer so-called 'value brands.' The value segment "is now the most contested part of the tobacco market," PMNZ says.

Redacted paragraphs 41 and 42 set out what happens if the retailer doesn't play ball. BATNZ's trading terms require the retailer to "ensure BATNZ is aware of" all rival brands sold instore. The retailer also has to agree to compliance spot checks by the company including allowing a BATNZ representative "to enter and inspect the outlet for that purpose as often as is reasonably necessary." Non-compliance means the loss of the cash inducements and kick in if the retailer gets two non-compliance notices in a three-month period or three in any 12 months.

An estimated 605,000 adults burn their way through 2 billion cigarettes a year in New Zealand, where PMNZ says the tobacco industry is "mature, highly regulated and heavily taxed." BATNZ's brands include Rothmans, Dunhill, Benson & Hedges, Winfield, Holiday, Pall Mall, Freedom and Club along with RYO brands such as Park Drive. PMNZ sells Marlboro, Longbeach and Choice cigarettes and Craftsman and Longbeach RYO products. Imperial Tobacco's brands include Peter Stuyvesant, West, Horizon, Camel and JPS and in the RYO category, Drum, Pocket Edition and Horizon.

Also redacted from the claim are more detailed extracts from BATNZ's trading terms and an appendix of ranging rebates - a table that showed a scale of rebates paid to retailers. For markets where BATNZ held 90 percent or more, the rebate for low-value brands amounted to $11.60 per mille/kg and for low-value RYO, $12. A mille is the equivalent in tailor-made cigarettes (TMC) of a kilogram of RYO.

Rebates are complex and broken up into four parts relating to the specific targets in the trading terms on the range rebate and compliance, according to a schedule at the back of the claim titled extracts from the BATNZ Trading Terms. Another appendix sets out BATNZ's 'Virginia' core range stock keeping units (SKU).

The rules get more specific. The retailer must show consumers (upon request) the BATNZ price list and that must be done before any other firm's price list is shown. The company sets a maximum resale price that can't be exceeded and gives the retailer responsibility for keeping the unitry clean and free "of any advertising material unless agreed with BATNZ in writing."

Rebates are only given for sales to consumers. The payment is by way of a credit against BATNZ invoices and the company asserts the right to deduct it from any sums it is owed, the document says. Retailers are also required to accept and "range" new products, accepting an auto-allocation of a carton of tailor-made cigarettes.

The original release from PMNZ last week says the suit is an attempt to stop BATNZ "from engaging in anti-competitive conduct" such as "unlawfully incentivising and compelling retailers to restrict the availability of competitor products." PMNZ general manager Jason Erickson said BATNZ's "conduct restricts consumer choice, and we think it constitutes a clear breach of the law.”

Tobacco has three channels to market - 'general trade', which is dairies and independent retailers; 'organised convenience', which is retail store chains such as those operated by oil companies and liquor retailers, and 'grocery' - stores owned by the major supermarket chains.

PMNZ says the rules are anti-competitive, breach the Commerce Act and have caused it to suffer loss and damage. The statement of claim alleges BATNZ's conduct "shows flagrant disregard for its Commerce Act 1986 obligations."

A BATNZ spokeswoman said in an emailed statement that her company is "confident that we are not engaging in anti-competitive conduct and will defend our position when the case is heard."

"We are strongly committed, and have actively engaged for some time, to have reduced risk products regulated and legally available to adult New Zealand smokers as soon as possible," she said.

The government received a total of $1.7 billion in duty on tobacco sales in 2016 from the big three producers - British American Tobacco, Imperial Tobacco and Philip Morris - which all lifted sales in New Zealand that year.

(BusinessDesk)

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