Business and Regulatory Impact Assessment (BRIA) for the Health (Tobacco, Nicotine etc. and Care) (Scotland) Bill

Annex A: Health (Smoking, Nicotine Etc. And Care) Bill 2015: Competition Assessment

1. This competition assessment analyses the likely economic impact of the proposals to restrict the domestic advertising and promotion of NVPs on the competitive ability of producers and retailers and the consequent impact on consumers.

2. The proposal seeks to introduce a ban on domestic advertising and promotion of NVPs with the exception of point of sale, which would continue to allow distribution of information about, and the accessibility of, NVPs. This is aimed at adult smokers to enable them to make informed choices about whether to use NVPs. The types of advertising that would be affected are: advertisement by way of billboards, leafleting, brand sharing, free distribution, nominal pricing, and domestic advertising events.

3. This would be implemented in addition to the introduction of the European Tobacco Products Directive (TPD), due in 2016, and the CAP and BCAP rules which apply across the UK. The TPD requires member states, by May 2016, to implement a ban on cross-border advertising and promotion to primarily protect young people. The cross-border forms of advertising and promotion of NVPs which will be banned include: telecommunications (communication over a distance by cable, telegraph, telephone, or broadcasting), radio, internet, most publications (e.g. newspapers) and events marketing with a cross-border effect (such as televised sporting events).

4. In November 2014, the UK Committee of Advertising Practice (CAP) and the Broadcast Committee of Advertising Practice (BCAP) published new non-statutory advertising rules for NVPs to ensure they continue to be promoted in a responsible way^[95]. The Committees explained that they "consider that electronic cigarettes' particular characteristics, their potential for harm, for addiction and their relationship with tobacco, carry a reasonable expectation of specific regulatory protection in relation to how they may be advertised". The rules are enforced by the Advertising Standards Authority.

Definition of competition

5. Competition is a process of rivalry between firms seeking to win customers' business. This process of rivalry, where it is effective, encourages firms to deliver benefits to customers in terms of prices, quality and choice. Where levels of rivalry are reduced (say because a proposal restricts the number of firms active in any market) customers have less choice because they have fewer firms from which they can buy goods or services.

6. Firms compete for market share using both price and non-price competition. Competition between firms may focus on offering the lowest price, particularly where the product is standardised (either because of the characteristics of the product in question, or because of regulation). Most suppliers will try and compete in a number of ways in addition to price, for example by developing new 'improved' products, by offering products of differing quality or characteristics, by branding and advertising the differences in their products relative to their competitors', or by using different sales channels.

Definition of markets

7. The Competition and Markets Authority have 4 competition filter questions which can used as an initial assessment of competition. These are as follows:

Will the proposal directly limit the number or range of suppliers?
Will the proposal indirectly limit the number or range of suppliers?
Will the proposal limit the ability of suppliers to compete?
Will the proposal reduce suppliers' incentives to compete vigorously?

8. Markets and sectors which could potentially be affected both directly (downstream) and indirectly (upstream) have been identified and are listed below.

Directly affected markets/sectors (downstream):

• Sales of NVPs
• Sales of other products by retailers which sell e cigarettes

Indirectly affected sectors (upstream) might include:

• E cigarette manufacturers
• Distributors/wholesalers

Overview of industry

NVPs

9. There is no one simple definition of an "NVP". These are relatively new products which continue to evolve in form, and defining them is not straightforward. They are also known by a range of terms. NVPs or electronic cigarettes are sometimes referred to as ENDS (electronic nicotine delivery systems) or vapourisers and a variety of types have alternative names either for the whole device or parts of the device (e.g. 'tanks', e-shisha, cigalikes, vapes, etc)

10. Electronic cigarettes/NVPs are consumer products which deliver a vapour, which may or may not contain nicotine, for inhalation by an individual. In the Bill a 'nicotine vapour product' is defined as:

(a) device which is intended to enable the inhalation of nicotine-containing vapour by an individual,
(b) a device which is intended to enable the inhalation of other vapour by an individual but is intended to resemble and be operated in a similar way to a device within paragraph (a),
(c) an item which is intended to form part of a device within paragraph (a) or (b),
(d) a substance which is intended to be vaporised by a device within paragraph (a) or (b) (and any item containing such a substance).

It does not include medical products or devices, nor does it include tobacco or smoking related products.

11. The proposal examined in this competition assessment covers devices and liquids which do not contain nicotine as well as those which do. Most NVPs are used with some nicotine content. NVPs normally contain a carrier liquid of propylene glycol and vegetable glycerine, either on their own in combination; nicotine is include in the majority of products in different concentrations; and most products contain flavouring. A huge variety of flavours are available, including menthol (the most popular), tobacco, and a vast range of fruity and sweets-based ones (such as caramel, cherry cola, chocolate, bubble gum, vanilla ice cream, and gummy bear flavours). Flavour is understood to be an important dimension of their appeal for smokers who wish to reduce or stop their tobacco use.

12. Inclusion of products which do not contain nicotine in the proposal is on the basis of two factors in particular. One is that it would be extremely impracticable for enforcement authorities to test individual products. Secondly, products which may or may not contain nicotine are still used in a way which resembles smoking and, so, pose the risk of confusion and a hypothetical re-normalisation of smoking behaviours. In addition some devices are re-fillable and so even if the original liquid did not contain nicotine, a refill could.

13. These detailed descriptions illustrate that NVPs are not a standardised product. Producers and suppliers may be involved in the production and/or supply of a part of the device, e.g. liquids, or the device itself, or both.

14. Electronic cigarettes or NVPs were invented in China in 2003 and were initially designed for the delivery of inhaled doses of a vapour which contains nicotine. They were introduced to Europe around 2005 and, in the past five years especially, their availability and their popularity have rapidly increased. Most NVPs are manufactured in China. The products have evolved and diversified considerably and there is now a wide variety of devices on the market, produced by a diversity of manufacturers. Worldwide there is estimated to be more than 500 brands, but the contents of very few have been independently analysed. Products can be poorly or incorrectly labelled and the quality and safety of different devices and liquids are inconsistent. The introduction of the TPD will help address these issues.

15. The Scottish Government is aware of only one manufacturer in this market in Scotland. It manufactures e-liquids. There are no manufacturers of NVPs in Scotland. The Scottish manufacturer of e-liquids sells its liquids within and outwith Scotland. The Scottish Government does not have data on how much of its revenue is generated from Scottish sales.

16. The model of ownership across the industry is diverse: from small independent companies to multinational tobacco companies including PMI, Japan Tobacco and Lorillard. This is a young industry with products and market structure still evolving. ECigIntelligence estimate that the UK market was worth £225 - £300 million in 2014^[96]. They observed a number of mergers and acquisitions in 2014. It seems likely that as the market continues to mature, there will be consolidation, with many mainstream brands wholly or partly owned by large tobacco companies.^[97]

17. In consultation with Scottish Government the Electronic Cigarette Industry Trade Association (ECITA) were able to identify 405 electronic cigarette businesses in the UK, the majority being independent small and medium sized enterprises (SMEs) and only 6 being tobacco owned. ECITA also identified that 12 of these companies (1 tobacco owned) were based in Scotland. They estimate that turnover in the industry is approximately £2bn per annum in the UK supporting 41,000 jobs, 1,200 of which are in Scotland. The Scottish Government cannot validate these figures. It is not possible to identify employment in the industry from National Statistics.

18. There is also diversity in retail locations. Consultation responses suggest that outlets that already retail conventional tobacco cigarettes are also likely to sell NVPs. Tobacco retailers range from small corner shops to supermarkets and in Scotland must be registered on the Scottish Tobacco Retailers Register in compliance with the Tobacco and Primary Medical Services (Scotland) Act 2010. In 2013 Nielsen estimated that the UK spend on electronic cigarettes in convenience stores was over £90m. As of September 2014, there were 9,803 retail premises selling tobacco products on the Register in Scotland. In addition e cigarettes are sold in specialised NVP shops, pop-up shops and stalls, and lounges. Many of these outlets individually represent a very small volume of sales. A survey carried out by Trading Standards Officers in various Local Authorities in Scotland confirmed the breadth of types of retailers selling e cigarettes.

19. The number of specialist shops continues to grow. Convenience Store^[98] reported in Dec 2014 that there were 600 across the UK with more continuing to open. ECigIntelligence state convenience stores, supermarket and petrol stations are the predominant retail outlets. It seems likely that the number of retail outlets is significantly larger than simply the number on the tobacco register but it is not possible to quantify, with any degree of accuracy, how many retailers there are in Scotland.

20. In addition much of the sales volume takes place via the internet, in particular for experienced users and the refillable e-cigs market^[99]. Convenience Store^[100] reported in December 2014 that Nielsen estimated that 45% of sales are now online^[101]. UK firms, including those based in Scotland, have an internet presence. The internet is becoming a very cluttered market place with a large number of firms and a diversity of products available.

21. In a report commissioned by Public Health England,^[102] Bauld et al found that NVP companies use a wide variety of advertising and marketing strategies. These include celebrity endorsements, competitions, mobile phone apps, discount vouchers, and computer games, as well as more traditional forms such as billboards, magazines, print media and television. Across the UK, in 2013, they reported that approx £8m was spent by 4 large brands - Skycig, Vype, Gammucci and E-lites. The report concluded that both independent manufacturers and those owned by tobacco companies were investing in almost every kind of advertising and promotion available.

22. Data on marketing spend within Scotland is limited. Nielsen data suggest that over 3 years from 1^st Jan 2012 approximately £828k was spent on outdoor advertising for e cigarettes in Scotland.

23. One of the features of NVPs that is emphasised in marketing and advertising is the claim that they are a cheaper alternative to smoking. As described, this is not a market with an homogenous product. Table 1 shows the price of some typical products.

Table 12. Average prices of products available in the Scottish market Feb 2015

Average prices of products available in the Scottish market Feb 2015
Ciga like starter kit	Cartomiser	Disposable	tank starter kit	clearomiser	10ml e liquid
£13.99	£2.09	£5.98	£20.34	£4.42	£4.49

Source: ECigIntelligence: Electronic cigarette market in Scotland : February 2015

24. Websites for retailers of NVPs may contain claims around the value of the financial savings that a smoker might make if switching to e cigs and also a calculator to allow individuals to estimate their own potential savings^[103]. It is not possible to validate these estimates as they are based on assumptions of patterns of use. The pattern of usage with NVPs, and different types of NVPs, is at present under researched. In a report commissioned by the Scottish Government^[104] ECigIntelligence estimated that the value of sales of electronic cigarettes in Scotland in 2015 would be £30-42 million.

25. ASH has estimated that around 2.1 million adults in Great Britain use electronic cigarettes, up from an estimated 700,000 users in 2012.^[105] UK surveys showed a rapid increase in use by smokers from 2.7% in 2010; to 6.7% in 2012,^[106] to 18% in 2014.^[107] This suggests that in Scotland there will be around 180,000 users. (pro rata with population size: Scottish population is approx. 8.6% of GB^[108] ). So far studies have consistently shown extremely low levels of experimentation in non-smokers (ranging from 0.1-3.8%)^[109] and limited use by people under the age of 18.

Impact on producers, wholesalers, retailers

Will the proposal directly limit the number or range of suppliers?

26. The proposal will not directly limit the number or range of firms within the market.

Will the proposal indirectly limit the number or range of suppliers?

27. The proposal may indirectly result in a reduction in the number of firms in the market. Restrictions on advertising remove firms' ability to use certain types of advertising. This will constrain the type of non-price competition open to them as they will be restricted in their ability to communicate product information via the types of advertising affected (advertisement by way of billboards, leafleting, brand sharing, free distribution, nominal pricing, and domestic advertising events). This may be particularly disadvantageous to small start-ups with limited budgets for advertising and marketing. It is difficult to predict the impact but at its most extreme it might result in the failure of some, especially, small companies. The cross national nature of the industry, however, should be considered. Although the BCAP/CAP advertising rules and the TPD restrictions will apply across the UK, these proposals are restricted to Scotland. The SG is not aware of proposals to restrict domestic advertising in other countries of the UK. This may mitigate the impact on individual companies who trade across all countries of the UK.

28. To date, this has been an industry characterised by many small independent companies, although recent acquisitions by large tobacco companies mean that the structure of the market is changing. They have tended to acquire companies producing the cigalike form of product, not just because of their physical form but also because they fit well with their existing marketing and distribution networks^[110].

29. Restrictions on advertising will act as a barrier to entry to new entrants as they will be restricted in their ability to communicate product information via the types of advertising affected (advertisement by way of billboards, leafleting, brand sharing, free distribution, nominal pricing, and domestic advertising events). This may be particularly disadvantageous to small start-ups with limited budgets for advertising and marketing.

30. Restrictions on the ability to offer new products free, or with nominal pricing so that consumers can sample a product, closes off another possible marketing device for new entrants.

Will the proposal limit the ability of suppliers to compete?

31. The proposal constrains the type of non-price competition open to them as they will be restricted in their ability to communicate product information via the types of advertising affected (advertisement by way of billboards, leafleting, brand sharing, free distribution, nominal pricing, and domestic advertising events). This may be particularly disadvantageous to small start-ups with limited budgets for advertising and marketing.

32. Restrictions on advertising could dissuade product development and innovation as, in conjunction with the restrictions proposed by the TPD, there would be extremely limited means of communicating these to the consumer within Scotland. Again, the international nature of the industry may facilitate continued product development and innovation.

Will the proposal reduce suppliers' incentives to compete vigorously?

33. It is difficult to predict the impact of the advertising restriction on this market. It is a market with many diverse products, not all in direct competition with each other. The lack of ability to use particular forms of advertising may lead to an increase in price competition. Currently, it is seen as a market with high profit margins. The figure of 40% is often quoted^[111]. It seems unlikely that this level of profit margin will be maintained as the market matures.

Impact on consumers

34. Consumers will experience reduced exposure to advertising about e cigarette products. For children, this protects them from marketing about (what is proposed to be) an age restricted product^[112]. For adults who use NVPs this could result in them having limited product knowledge resulting, effectively, in a reduction in consumer choice.

35. Equally the restriction on offering the product free, or at a nominal price , to allow consumers to sample the product prior to purchase may reduce consumers ability to gain experience of a breadth of products, or a new product, thus restricting consumer choice.

36. For adults who have not yet used NVPs, the Scottish Government anticipates that a reduction in advertising would result in a reduction in the number of adults who are motivated to buy them for the first time.

37. Point of sale advertising is not affected so consumers would still be able to access this, however, it may be that point of sale in any one retail outlet would not cover a large range of products. So although information will be available consumer choice is likely to be limited.

38. It should be noted that it is estimated^[113] that almost half of e cig sales are made via the internet. Limited information about products will continue to be available there.

39. It is difficult to predict the resulting impact on retail price. In some parts of the market, if restriction on advertising results in a smaller number of firms and less competition, there may be an increase in price. Conversely the restrictions on the type of advertising permitted may lead to an increase in price competition. Consumers could then benefit from lower prices.