With an appropriate tax regime, fine-cut tobacco can provide a useful buffer between high-priced cigarettes and illicit products.
By Stefanie Rossel
Across Europe, three countries offer showcase examples of unintended consequences created by ill-designed tax policies. The fiscal frameworks in France, the United Kingdom and the Netherlands prevent fine-cut tobacco (FCT) from fulfilling its buffer function in the nicotine ecosystem, leading to high levels of illicit trade. When taxed at comparatively low rates, FCT products can serve as a “shock absorber” between higher taxed factory-made cigarettes and illicit smokes. If the tax rates and retail prices of combustible cigarettes and FCT become too similar, fine roll-your-own (RYO) and make-your-own (MYO) products may lose their appeal to smokers with lower disposable incomes.
In the European Union, home to some of the world’s leading RYO and MYO markets, France presents a prime example. “The market is riddled with illicit trade, as the taxation levels prevent FCT to fulfill its buffer function,” says Peter van der Mark, secretary general of the European Smoking Tobacco Association (ESTA). “Since 2020, volumes of FCT have consistently declined, by 8 percent in 2021, 13.7 percent in 2022 and 10.2 percent in 2023.” This decline is slightly more pronounced than that in other tobacco segments.
On the bright side, according to van der Mark, French authorities appear to have belatedly recognized the negative impacts of their policies. Last month, the responsible minister acknowledged that beyond a certain point, raising taxes becomes counterproductive and boosts contraband, which benefits neither public health nor public finances. “We can only regret that it took one-third of the market to be illegal to come to that conclusion,” laments van der Mark.
The U.K. faces a similar situation. According to van der Mark, that country’s government has nearly aligned the tax rates on FCT with those on cigarettes—and without consulting the industry. As a result, legal volumes have been declining substantially, benefiting smugglers and illicit traders. According to van der Mark, this is not only impacting manufacturers, distributors and retailers but also the finance ministry (and therefore U.K. citizens), which last year saw its tobacco tax receipts drop by nearly 15 percent compared to 2022—a loss of approximately £1.5 billion ($1.91 billion).
Germany, the largest EU market for hand-rolling products, also hiked FCT taxes but managed to avoid the negative effects experienced by Britain and France, thanks to its incremental approach. “The ad valorem component on FCT increased progressively and moderately whilst step increases of the specific or minimum were always kept below 10 percent,” explains van der Mark.
“In general, we consider the German tax model to be well crafted as it allows for predictability and ensures the market functions smoothly whilst allowing the government to pursue its treasury and health objectives,” says van der Mark.
“Volume-wise, of course we note a decline in comparison with 2020 [consumption], which was exceptionally high due to the Covid-19 outbreak. In 2023, volume declined by 5 percent compared to 2022, confirming a declining trend in general.”
This year, however, Germany’s market has benefitted from rising FCT taxes in the Netherlands. According to van der Mark, a 50 gram pouch now costs approximately €25 ($27.02) there, encouraging Dutch smokers to source their tobacco elsewhere, including in neighboring Germany.
Across Europe, the general trend is toward less tobacco consumption, and FCT is no exception. “Inflation had a massive impact on consumer ability to buy tobacco products in 2022–2023,” says van der Mark. “Consumers down-traded or moved to FCT or illicit cigarettes. Although inflation has decreased, it remains very unequal from one country to another. Where inflation remains high, we expect sales of FCT to slightly increase, demonstrating once again the buffer function this product category can fulfill, provided it is taxed approximately.”
“We consider the German tax model to be well crafted as it allows for predictability whilst allowing the government to pursue its treasury and health objectives.”
STG Buys Mac Baren
As the market contracts, the fine-cut industry has been consolidating. In June, Scandinavian Tobacco Group acquired family-owned Mac Baren Tobacco from Halberg for DKK535 million ($76.87 million). Founded in 1826, Mac Baren’s portfolio includes pipe tobacco brands such as Mac Baren, Amphora and Holger Danske as well as fine-cut tobacco brands such as Amsterdamer, Choice and Opal. The company also produces and sells nicotine pouches with the brands Ace and Gritt.
Mac Baren sells its products in 74 countries and generates most of its net sales in the U.S., Denmark and Germany. Other key markets include the U.K., France, Spain and Italy. Headquartered in Svendborg, Denmark, the company has production facilities in Denmark and the United States (in Richmond, Virginia), and employs approximately 200 people full time.
Both Mac Baren and STG are members of ESTA. “The reduction of family-owned companies in our sector is always regrettable, but at the same time, we are pleased to see that its traditional know-how will remain in the very capable hands of STG, a company that is committed to high-quality traditional smoking tobaccos,” says van der Mark.
The FCT sector has consolidated at regular intervals, with the last wave being triggered by the EU Tobacco Products Directive (TPD) in 2014. At this time, van der Mark sees no indications of a new consolidation wave, however.
New Regulations on the Horizon
Whether the pending TPD revision will change that situation is up for discussion. The European Commission’s evaluation report, expected toward the end of 2024, should provide some insights into the future regulatory environment. According to van der Mark, a 2021 report on the TPD application identified topics likely to be discussed further in the future.
“This includes the field of ingredient regulation, where we have seen several member states taking cavalier initiatives and establishing outright bans of certain ingredients,” he says. “In general, we fear that the notion of ‘flavors’ has been largely misunderstood and will be subject to debates that will most likely be based on assumptions more than on actual scientific underpinning. Labeling and packaging, where the commission is no longer hiding its preference for plain packaging, will also be an issue, and, of course, the regulation of novel tobacco products.”
With a new commission poised to take office in November, van der Mark expects more emphasis on novel nicotine products and less impact on the FCT segment. “For fine-cut tobacco, the whole legislation has already been there since TPD2,” he says.
“We are more concerned about the ingredients regulation. We believe that the ingredients which are in tobacco products, representing between 1 percent and 3 percent of the total weight, are nonconsequential, but the commission is continuously looking at the ingredients as if they would make the product even more problematic from a health perspective. We think that the commission simply has the wrong end of the stick.”
Whether the EU’s approach toward tobacco products will change with the new crop of lawmakers remains to be seen. “At this stage, it is not sure whether the ‘shift to the right’ will affect the functioning of the EU Parliament and its ‘great coalition’ made of the Socialists and Democrats, Renew and center-right European People’s Party groups,” says van der Mark.
“An interesting statistic, however, is that about 60 percent of the elected members of the European Parliament are coming from parties that are not governing in their national jurisdictions. This means that we could see a European Parliament ‘free’ from the guidance of the national government, at least to a certain extent.”
