‘Law broken’ on pricing by tobacco firms and stores including ‘petrol stations operated by Shell UK’

‘Law broken’ on pricing by tobacco firms and stores

· Collaboration alleged after fair trading inquiry
· Major companies named will respond within month

Simon Bowers
The Guardian, Saturday April 26 2008

Supermarkets and tobacco groups have illegally collaborated on prices of cigarettes and rolling tobacco, according to an investigation by the Office of Fair Trading.

The regulator has unearthed what it believes is a complex web of indirect communications between retailers and two tobacco groups on prices in supermarkets, off licences, petrol stations and convenience stores – though it stopped short of using the term price-fixing.

The allegations centre on products by Imperial Tobacco and Gallaher Group – two firms which dominate the market with brands such as Lambert & Butler, Richmond, Golden Virginia and Mayfair. Excluding the black market, they make close to nine out of every 10 cigarettes and roll-ups smoked in the UK.

Yesterday morning both firms – together with 11 retailers, including Tesco, Asda, Sainsbury’s and Morrisons – received a 400-page statement of objections from the competition watchdog setting out its provisional findings. Other retailers to which the statement has been addressed include petrol stations operated by Shell UK, the convenience store group Somerfield, and First Quench, the company behind the Threshers off-licence chain.

The allegations centre on the sharing of details of future prices between the tobacco firms via various retailers acting as middlemen. The OFT also said it had evidence to show retailers and manufacturers had put in place arrangements linking the retail price of brands made by one tobacco group to the price of the closest competitor brand, made by the rival group. “For markets to work well for consumers it is a fundamental principle that pricing decisions should be made independently,” the OFT chief executive, John Fingleton, said yesterday. “If we find evidence of anti-competitive activity we are prepared to use the appropriate powers to punish the companies involved to deter other businesses from taking part in such behaviour.” He said the allegations, if proven, amounted to “a serious breach of the law”.

Firms targeted could face fines of up to 10% of their UK turnover. All those named said they were fully cooperating with the OFT and would respond to the statement of objections within a month. In 2005 Gallaher said it would “vigorously defend” itself against any adverse finding; under its new ownership of Japan Tobacco, it did not reiterate this position.

The full OFT statement will not be published, but falls short of an allegation of price-fixing, finding rather that the companies were engaged in anti-competitive behaviour between 2000 and 2003. The regulator said such behaviour might have the effect of increasing retail prices, but insisted the underlying behaviour was the focus of its investigation.

The provisional conclusions come after a five-year investigation and are believed to rely on mountains of confidential correspondence demanded from retailers and manufacturers in 2003 and 2005. The inquiry is understood to have stemmed from an initial look at the narrower market for rolling papers for cigarettes. British American Tobacco, once linked to the inquiry, is not named by the OFT.

The average price of a packet of 20 cigarettes is now £5.66, with 77% of this going to the Treasury in excise duty and VAT, according to the Tobacco Manufacturers’ Association. From 2000 to 2003 – the period of the inquiry focus – prices rose 16%, driven by duty rises.

Smokers often blame tax rises, driven by a health agenda, for steep increases in prices. Increasingly they trade down to cheaper brands, roll-ups or smuggled and counterfeit products. Revenue & Customs estimates up to one in five cigarettes smoked in the UK is smuggled, half being counterfeit.

Meanwhile, makers stubbornly defend their UK profit pool, making it one of the most lucrative markets in the world. Market leader Imperial Tobacco in Bristol sells 23.4bn cigarettes in the UK – where it has its highest operating margins, comfortably above those in other markets around the world. Similarly high margins were recorded at Gallaher before it was acquired last year by Japan Tobacco.

http://www.guardian.co.uk/business/2008/apr/25/tobaccoindustry.regulators

Headline by John Donovan of www.royaldutchshellplc.com

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