If you’re a business selling cigarettes in Australia, you’ve likely felt the strain of rising taxes and fluctuating prices. A pack of cigarettes now costs over $A40, and with the recent 6.8% excise tax hike, the pressure is mounting. The government claims that the recent cigarette price increase aims to reduce smoking rates and improve public health. 

 

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But is that the whole picture? For many in the cigarette business, it feels more like an attack on profitability than a public health strategy. This raises important questions about the real impact of these taxes on your business and the broader market.

 

The Impact of Cigarette Tax Rate and Price Increase in Australia

 

Picture this: Every time a customer buys a pack in your tobacco store, they wince at the price—over $A40 compared to around $A13 in the United States. Despite this significant price difference, smoking rates in both countries remain remarkably similar. Australia’s smoking rate is 10.1%, and the US isn’t far behind at 11.5%. This comparison challenges the assumption that the cigarette price increase significantly reduces smoking.

 

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From the government’s perspective, the rationale is clear: make smoking unaffordable, and people will quit. But for businesses like yours, this policy doesn’t translate so easily. Instead of seeing fewer smokers, you might notice fewer customers buying legally, turning instead to the illicit market for cheaper alternatives. The emotional and financial strain on your customers is real, and it directly affects your bottom line.

 

Unintended Consequences of Cigarette Price Increase

 

One of the biggest mistakes businesses make is assuming that higher prices will always drive up revenue. However, as cigarette prices rise, many Australians aren’t giving up smoking—they’re simply finding cheaper, illegal alternatives. In fact, unregulated tobacco products and vapes have surged in popularity because they’re easy to find and much more affordable.

 

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This shift is a major concern for legal retailers. The illicit tobacco market now makes up an estimated 25% of total sales, and every illegal product sold is a lost opportunity for your business. Organised crime groups, particularly in Melbourne, are cashing in on this demand. Violent turf wars have broken out as rival groups compete for control, with businesses being firebombed in these struggles. What started as a pricing strategy to reduce smoking has backfired, pushing customers away from legal channels and into the black market.

 

Do Cigarette Taxes Reduce Smoking in Australia?

 

It’s hard not to feel frustrated. The government’s strategy, intended to reduce smoking and improve public health, seems to be hitting businesses like yours the hardest. While the legal cigarette market shrank by 34% between 2015 and 2021, the government’s tax revenue increased by nearly 44%. In other words, the government is collecting more from fewer sales, but at what cost to you?

 

 

Rather than supporting a healthier population, these price hikes are driving customers into the arms of criminals. Meanwhile, the price-sensitive smokers who continue to buy from legal retailers like you are feeling the financial pinch. This creates a complex situation where your business is caught between maintaining profitability and complying with ever-increasing taxes.

 

Protect Your Business and Customers Amidst the Cigarette Price Increase

 

So, what’s the solution? The current government approach may not be ideal and convenient. A more balanced approach to pricing and taxation could help protect your business while still supporting public health goals.

 

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One possible solution is advocating for a more gradual approach to price increases. By working with industry groups, you can push for policies that take into account the realities of both addiction and the economic pressures your customers face. Gradual price increases could help prevent the mass exodus of customers to the illegal market, while still contributing to the goal of reducing smoking over time.

 

Loyalty programmes or promotional discounts for bulk purchases might also encourage customers to stay with you instead of turning to the black market. Additionally, ensure your business remains compliant with government regulations to avoid penalties and strengthen your standing as a reputable retailer.

 

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Advocating for fairer taxation and price after-tax policies is another step you can take.

 

By joining industry groups or engaging directly with policymakers, you can voice the concerns of your business and contribute to shaping future tax strategies that balance public health and economic realities.

 

If you’re feeling the pressure from rising taxes and shrinking profits, you’re not alone. As a business selling cigarettes, the landscape is tough—but it’s not impossible to navigate. If you need support or want to discuss strategies, reach out. Together, we can find solutions that help your business thrive while supporting the broader goal of public health.

 

For a comprehensive view of maximising growth in your company, Download a complimentary whitepaper on A Capability Framework for Pricing Teams.

 

Are you a business in need of help aligning your pricing strategy, people and operations to deliver an immediate impact on profit?

If so, please call (+61) 2 9000 1115.

You can also email us at team@taylorwells.com.au if you have any further questions.

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