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Principles of Promoting Cigarettes: The Greek Case by K. E. Kioulafas* Athens University

Introduction The sales of cigarettes in Greece present a stable growth over time. In 1956, 9,341 million pieces of cigarettes were sold while in 1981 that figure was 24,095 million pieces. The average annual growth for these years is estimated to be 3.71 per cent. It should be mentioned that only 0.26 per cent of these sales were pipes, tobacco and cigars.

Six companies constitute the Greek cigarette industry and the largest one of them, in 1982, accounted for 43.7 per cent of the total domestic production of cigarettes, while the smallest one of them accounted only for 2.2 per cent of it.

Today there are five varieties of cigarettes sold in the market under the names of "basic", "special", "semi-fine", "fine" and "extra-fine" cigarettes. This classification into varieties is done by the companies themselves on the basis of several criteria, like quality of tobacco, quality of package and so on.

The main objective of this research is to find out the factors which have a decisive influence upon the level of sales of cigarettes, the factors which affect customers' decision in buying a specific brand of cigarettes. See[13,1,11,14,12,2,10,12,16,17, 3,4].

A Review of the Factors We considered the following factors as the most important ones to examine.

(a) The sales of cigarettes in one period must be linked with those of the previous period. This linkage is probably explained by the so called "consumption pattern" of the market; the behaviour of the smokers at a given time is not largely different from that of the previous period. It constitutes a "consuming reasoning" which is valid, especially in our case since we refer to a short period of time, and, additionally, the habit of smoking one brand of cigarettes is strong and not easily changeable within the period of one month (see [12,3,14,13]).

*The author would like to thank C. Manolis for research assistance.

Promoting Cigarettes: The Greek Case 39

(b) Another decision variable is the sales of competitors. Our reasoning is that increased sales by one firm should draw customers away from its competitors and thus decrease their sales. This variable, in connection with the previous one is expected to give us an appreciation of the extent to which smokers insist or not on smoking "their own" brand of cigarettes.

(c) The retail selling price of cigarettes is a particularly important factor for social decisions. It is an overwhelming consensus among scientists that cigarette smoking increases mortality. And price increases are a possible sanction that any government might use to decrease cigarette consumption. Therefore, the average level of cigarette selling prices has been included as a decision variable in our study.

(d) The cigarette industry is frequently cited in discussions about advertising due to large advertising outlays by the cigarette companies. In 1978 the cigarette companies spent more than 85 million drachmas in advertising their products, and, in 1982, 347 million drs, a figure which is about 3.76 per cent of their total expenditure. This amount of money had been spent on advertisements on radio, newspapers and journals. This huge increase of advertising outlays is due to the fact that advertising is widely believed to be the main avenue of competition among the cigarette companies.

Furthermore, cigarette companies have competed for consumer favour by introducing many new brands and varieties of cigarettes. This product innovation together with advertising seems to be, now, the chief avenue of competition in the industry. A number of models that have been presented in the literature have introduced advertising expenditure as a decision variable. Borden argued that advertising is one of the most important determinant factors of selective brand demand (see[13]).

In our case, we assume that the demand for each cigarette variety is certainly influenced by its own advertising and the total advertising of its competitors. The advertising of other industries may also matter, but we neglect it, since it is likely to have only a minor influence.

(e) The population, aged 15 and over, and the number of tourists visiting Greece could be important variables affecting the sales of cigarettes. A decreased or increased population entails less or more smokers, thus lower or higher sales of cigarettes.

The Method To investigate the cigarette industry alternative models and many versions were used which included log forms, dummy variables and first differences of the real values. The necessary number of estimates were computed for all five cigarette varieties by employing both OLSO method and Co-Orcutt iterative technique. The results achieved using the above-mentioned method are presented below.

The Results With reference to the "basic" cigarette variety, it should be noted that their sales are decreasing over time, are actually very low, and there is no advertising effort being

40 European Journal of Marketing 21,7

made to overcome this. According to the findings, this variety's sales are positively affected by the number of tourists and the Greek male and female population. Tourists apparently have a positive attitude towards these cigarettes, most probably attracted by the unknown taste of them. The population, male and female, have a positive effect on the sales of these cigarettes due to their popular character.

Furthermore, the sales of "fine" and "extra-fine" varieties of cigarettes are positively related to the sales of the "basic" cigarettes; the higher the sales of the first categories, the higher are those of the latter category. This constitutes a rather surprising result. However, the heavy advertising of these two varieties can most probably have a general positive impact upon the smoking tendency, thus bringing up sales of other varieties of cigarettes. It can also be due to the confusion which is created by the structure of the advertising campaign, (see[5-9]). Finally, as it was expected the average selling price of the "basic" variety is negatively related to its sales. The higher the price is, the lower the sales of this category are.

In the case of the "special" variety cigarettes, it should be mentioned that their sales present a steady decrease and that there is no advertising effort being made to promote them. In addition to these, the results presented above showed that the sales of all the other varieties and the male Greek population have a positive impact on the sales of "special" cigarettes for the same reasons presented above. However, the average selling price of this variety's cigarettes are negatively related to their sales. Price appears to be a negative factor as in the previous variety of cigarettes.

"Semi-fine" cigarettes present a decrease in their sales over the time, while advertising effort does not exist at all as a means of promotion of sales. The sales of these cigarettes are positively related to the sales of "fine" and "extra-fine" cigarette varieties. Here again, the sales of these two varieties have the same effect as in the case of the "basic" cigarettes. The population, male and female, has a positive impact upon the sales of this variety of cigarettes. Evidently, the population is a factor with positive effects upon the sales of cigarettes. There is a negative relationship between the sales of this category and its average selling price.

The main characteristics of the fourth variety, "fine", are the following. First of all, its sales present a slight decrease up to 1980 when they abruptly shrink to a very low level (July, August, 1980). This may be attributed to the fact that brands of this variety were transferred to the fifth variety, "extra-fine", as a reaction of the cigarette firms to the preference of smokers. Second, this variety of cigarettes is one of the two varieties for which advertising is made as a means of promotion of its sales. Its advertising outlays, however, account for 4.28 per cent of the total advertising budget for cigarettes.

Furthermore, the analysis we did showed that the sales of "fine" cigarettes are positively affected by their own sales of the previous period, as well as by the sales of "basic", "special" and "semi-fine" of the present period. They are also positively affected by their advertising effort, the competitors' advertising effort of the previous period and the level of their price. The only negative impact on the sales of this variety of cigarettes comes from the advertising outlays for "extra-fine" cigarettes, due to the stiff competition between these two varieties. As we can see, price does not affect negatively the sales of this variety, probably being part of the image of the cigarettes of this variety.

Promoting Cigarettes: The Greek Case 41

Finally, and with reference to the "extra-fine" variety of cigarettes, it should be noted that there is a stable increase of its sales, and its advertising outlays account for 95 per cent of the total advertising budget for cigarettes. The analysis showed that there is a very strong positive relationship between the sales at a given period and those of the previous period, due to customers' imitation and habit. Advertising expenditure for this variety affects the sales one period later and this was expected, given that this category is the first, with the largest advertising budget of all varieties.

The number of tourists and the average selling price of this variety are also positively related to its sales. Apparently, tourists buy either "basic" cigarettes which are something unknown to them, or one of the varieties which are more like those they smoke in their country. As for the price effect, it could be said that, as in the previous variety, it is part of the image of the cigarettes of this variety, having a positive effect upon their sales.

Conclusions and Suggestions There are several conclusions that can be drawn from this study.

Advertising is widely believed to be the main avenue of competition among the cigarette companies but, as from the analysis presented above, this statement appears not to hold, for two reasons.

First, because the average selling price per pack of each cigarette variety has a negative impact upon the sales of the first three varieties, and a positive one upon the sales of the last two varieties. This relationship between the average retail selling price and sales, whether that was positive or not, is significant.

The analysis did not show that changes in selling prices explain a large part of the market shares for the five important cigarette varieties and these should be taken into consideration by managers in planning their products' pricing policy, even though the infrequency of price changes in the cigarette industry is a fact beyond any dispute. With regard to these findings, it should be noted that they are not in agreement with those of Schmalensee[13], Tesler[14] and Peles[12], who obtained rather unsatis-factory results with retail price series.

However, Lyon and Simon[10] concluded in their study in the US that elasticity of sales of cigarettes is not strongly a function of size or price change although, they continue, the difference suggests that a bigger change tends to be associated with a higher elasticity. That could be taken as an agreement with our conclusions since we found a positive relationship between price and sales of "fine" and "extra-fine" which are expensive.

Second, firms use advertising to persuade consumers to purchase their product, and it is not evident that they are concerned whether these new customers are new smokers or previous customers of rival firms. As the analysis showed, from the five varieties of cigarettes, only the last two, "fine" and "extra-fine", are heavily advertised. This advertising has a statistically significant negative impact on the sales of the "basic" variety.

Advertising which promotes the sales of "extra-fine" has a positive effect on the sales of both "fine" and "extra-fine" varieties, while advertising promoting "fine" cigarettes has a positive impact on the sales of this cigarette variety only. This must

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be very important for advertising planners, in maximising the benefits of advertising outlays.

In the same way, Teslet[14], concluded that the behaviour of consumers in the market of cigarettes is consistent with the view that they demanded the advertising. Competition by product changes as well as by advertising became important. Peles[12] and Hamilton[4] went beyond this point to conclude that the demand for a given brand of cigarettes is affected not only by the amount of advertising but also by the quality of advertising.

A fairly surprising finding is the positive relationship existing between the number of tourists visiting Greece and the level of sales of "basic" and "extra-fine" varieties. Thus, tourists choose either something completely different to their taste or their usual ones. These findings must be borne in mind by advertisers when they schedule their advertising messages.

The male population have a positive impact on sales of "basic" and "fine" varieties of cigarettes while the female population is positively related to the sales of "basic" and negatively to those of "fine" cigarettes. Therefore, when advertisment makers plan their advertising campaign, they could improve their effectiveness adjusting their plan to this fact.

Finally, the sales-of-competitors variable enters with a positive sign for the first three cigarette varieties, while in the cases of "fine" and "extra-fine" varieties the following must be noted. The sales of the first three varieties have a positive impact on the sales of the last two cigarette varieties, whereas the sales of "extra-fine" variety are negatively related to the sales of "fine" variety and vice versa. This shows the hard competition somewhere between the fourth and fifth varieties of cigarettes rather than among all the varieties. This being so, the managers can increase their efficiency by concentrating on more specific areas of interest.

On the basis of these significant relationships, some policy conclusions can flow. It seems that cigarette advertising does not affect all the varieties of cigarettes because advertising seems to be a not very powerful force in the Greek cigarette market, having little systematic impact on cigarette sales. Advertising planners must take into consideration the number of tourists who visit Greece, and managers who plan firms' pricing policy must bear in mind that average retail selling price has an important impact on sales of all varieties except those of "fine" and "extra-fine". Thus, they can use price to increase sales accordingly, strange as it may sound.

References 1. Borden, N.H., The Economic Effects of Advertising, Chicago, R.D. Irwin, 1942. 2. Barth, R., "Tests of Market Share Stability in the Cigarette Industry, 1950-1960", I. Ind. Econ., Vol.

17, April, 1969, pp. 145-150. 3. Bass, F.M., "A Simultaneous Equation Regression Study of Advertising and Sales of Cigarettes",

Journal of Marketing Research, Vol. 6, August, 1969, pp. 291-300. 4. Hamilton, J., "The Demand for Cigarettes: Advertising, the Health Scare and the Cigarette

Advertising Ban", Review of Economics and Statistics, 1972, pp. 401-411. 5. Kioulafas, K.E., "An Application of Advertising Planning under Inflation", Journal of

Advertising, Vol. 1, 1982, pp. 255-260. 6. Kioulafas, K.E., "An Advertising Planning Process", 1982, European Research, Vol. 11, No. 2,

1983, pp. 72-77.

Promoting Cigarettes: The Greek Case 43

7. Kioulafas, K.E., "A Quantitative Assessment of the Greek Advertising Efficiency, European Research, Vol. 11, No. 3, 1983, pp. 105-109.

8. Kioulafas, K.E., "An Application of Multiple Regression Analysis to the Greek Beer Market", Journal of Operational Research, (forthcoming).

9. Kioulafas, K.E., "A Quantitative Analysis of the Greek Soft Drink Market", European Journal of Operational Research, (forthcoming).

10. Lyon, H.L. and Simon, J.L., "Price Elasticity of the Demand for Cigarettes in USA", Am. I. Agr. Econ, Vol. 50, November, 1968, pp. 888-895.

11. Nicholls, W,H., Price Policies in the Cigarette Industry, Nashville, Tennessee, Vanderbilt University Press, 1951.

12. Peles, Y., "Economies of Scale in Advertising Beer and Cigarettes", Journal of Business, Vol. 44, January, 1971, pp. 32-37.

13. Schmalensee, R., The Economics of Advertising, North Holland Publishing Company, 1972. 14. Tesler, L.G., "Advertising and Cigarettes", Journal of Political Economy, Vol. 70, October, 1962,

pp. 471-499. 15. Taylor, W.F., Industry Advertising and Demand, unpublished AB thesis, Harvard University, 1968. 16. Tennant, R.B., The American Cigarette Industry, New Haven, Yale University Press, 1950. 17. Vernon, J.M., Rives, N.W. and Naylor, T.H., "An Econometric Model of the Tobacco Industry",

Review of Economics and Statistics, Vol. 51, May, 1969, pp. 149-158.