- The Guardian, Saturday 17 April 2010
Cigarette fine is the largest ever levied by the OFT. Photograph: Peter Byrne
A dozen tobacco manufacturers and retailers, from supermarkets to petrol station operators, have been fined a record £225m by the Office of Fair Trading (OFT) for unlawfully inflating the cost of cigarettes.
The fine, the largest ever levied by the watchdog, comes after a seven-year investigation found that tobacco manufacturers had struck deals with retailers that linked the price of their cigarettes and tobacco with rival brands, restricting the retailer's ability to set its own prices. The OFT said the companies had "engaged in unlawful practices in relation to retail prices for tobacco products in the UK".
The largest fine, of £112m, has been imposed on Imperial Tobacco, makers of Lambert & Butler and Golden Virginia, followed by a fine of £50m imposed on Gallaher, home to Benson & Hedges and Silk Cut and owned by Japan Tobacco. Between them the two companies make close to nine out of every 10 cigarettes and roll-ups smoked in the UK. The tobacco market in the UK is worth an estimated £13bn.
The OFT also fined the retailers Asda, Co-operative Group, First Quench, Morrisons, One Stop Stores (formerly T&S Stores), Safeway, Shell, Somerfield and TM Retail – with the heaviest fines of £14m being imposed on both Asda and the Co-Op.
The OFT added that it had decided not to pursue allegations against Tesco because of insufficient evidence.
"Practices such as these, which restrict the ability of retailers to set their resale prices for competing brands independently, are unlawful," said Simon Williams, OFT senior director of goods. "They can lead to reduced competition and ultimately disadvantage consumers. This enforcement action will send out a strong message that such practices, which could in principle be applied to the sale of many different products, can result in substantial penalties for those who engage in them."
Imperial Tobacco said it was "disappointed" by the decision "and continues to reject any suggestion that it acted in breach of the Competition Act or in any way contrary to the interests of consumers".
The company is considering an appeal to the Competition Appeal Tribunal.
Morrisons also disputed the OFT's ruling, which it called "illogical and without foundation", and vowed to launch an appeal.
"At all times Morrisons set its retail prices for tobacco products independently, and endeavoured to get the very best deal for its customers. It is therefore disappointing that the OFT has claimed that legitimate arrangements between Morrisons and its suppliers, aimed at reducing the price paid by Morrisons customers, are unlawful," said the supermarket chain.
Sainsbury's exempt from fine
The investigation looked at the price of UK duty-paid cigarettes, hand rolling tobacco, pipe tobacco, and cigars and cigarillos between 2001 and 2003. The OFT has stopped short of accusing the retailers and tobacco companies of "price fixing" as there is no evidence that Gallaher and Imperial Tobacco communicated directly with each other to set prices.
Imperial Tobacco said the probe centred on a series of promotional arrangements that it entered into with several retailers before August 2003. The company said the purpose of these arrangements was to encourage its brands to be priced competitively and that the promotional discounts given to retailers were passed on to consumers in the form of lower retail prices.
"Imperial Tobacco categorically denies that these promotional arrangements had the purpose or effect of restricting competition," the company said in a statement this morning.
The final decision of the OFT comes after its initial findings were published in April of 2008. In July 2008, the watchdog announced that it would be fining six of the firms involved a total of £173m after they agreed to co-operate with the investigation.
In Friday's ruling the OFT said Asda, One Stop Stores, Sainsbury's and Somerfield had benefited from discounts in their fines under the regulator's leniency programme, which provides co-operating parties with a discount in fines where they proactively volunteer information which assists the OFT's investigation. Sainsbury's alerted the OFT to the infringements, and as the first to apply to the OFT for leniency it received complete immunity from fines.
In addition, Gallaher, Asda, First Quench, One Stop Stores, Somerfield and TM Retail received reductions in their fines because, following the OFT's initial report two years ago, they each admitted liability in respect of the infringements alleged against them and agreed to a streamlined procedure enabling parts of the case to be resolved more quickly, reducing the costs of the investigation.
Dr Andreas Stephan, of Norwich Law School at the University of East Anglia, said the agreements had restricted competition both between the tobacco manufacturers and the retailers who entered into these agreements.
"Public health concerns over smoking do not mean that smokers deserve to get ripped off," Stephan said.
Frances Murphy, a competition partner at law firm Jones Day, said it was significant that the supermarkets had admitted liability quickly.
"The likes of Sainsbury's and Asda are currently under investigation by the OFT for cartel activity in relation to other goods, where Asda is thought to be the whistleblower. The fact of that investigation may have acted as an incentive to those companies to work co-operatively with the OFT to get this investigation settled quickly," Murphy said.
The fines:
• Imperial Tobacco £112,332,495
• Gallaher £50,379,754
• Co-op £14,187,353
• Asda £14,095,933
• Safeway £10,909,366
• Morrisons £8,624,201
• Somerfield £3,987,950
• Shell £3,354,615
• TM Retail £2,668,991
• First Quench £2,456,528
• T&S Stores (now One Stop Stores) £1,314,095
• This article has been amended to make clear that Sainsbury's received complete immunity from fines.
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