BACKGROUND: This study offers a comprehensive examination of the pricing strategies/dynamics used by the tobacco industry in response to tax increases using Ukraine as a case study during the 2019-2022 tax reforms. This period saw the introduction of new tax categories for Heated Tobacco Products (HTPs) and e-cigarettes with concomitant tax increases, thus the study represents the first systematic consideration of these products. The primary objectives are to examine how tax changes influence product pricing and how HTPs are priced relative to cigarettes, particularly in the context of harmonised tax rates.
METHODS: The study utilises NielsenIQ monthly price and sales data for cigarettes, HTPs and e-cigs, and official tax information from the Parliament of Ukraine. Tax pass-through analysis was conducted to examine the relationship between tax increases and changes in retail prices across different products.
RESULTS: The industry usually overshifted taxes on cigarettes (mid-price and premium), HTPs, and e-cigs while undershifting taxes on economy cigarettes and HTPs at the point of big tax increase, showcasing its nuanced approach to price segmentation. The industry also employed price-smoothing strategy where initial price increases following tax increases were kept moderate, with further increases introduced gradually throughout the year. HTPs were priced between mid-price and premium cigarettes after the 2021 tax reforms, reflecting strategic efforts to sustain profitability despite increased taxes. E-cigarettes exhibited the most variability in pricing, with significant declines in net revenue, highlighting the evolving nature of this market segment.
CONCLUSIONS: These insights fill critical gaps in understanding how the industry navigates tax harmonisation across novel products and traditional cigarettes. The industry has used tax increases on HTPs and e-cigs as an opportunity to raise prices and increase revenue per stick. It underscores the potential for higher taxes on HTPs and e-cigarettes to curb consumption, increase government revenues, and align with international public health goals.