SA has the world’s biggest illegal tobacco trade: Fita

During the five-month ban on the sale of tobacco products, companies belonging to the Fair-Trade Independent Tobacco Association (Fita) felt the wrath of the lockdown as they saw their products completely overtaken by those offered in illicit trade, says British American Tobacco South Africa (Batsa).

In response, Fita has called on the government to urgently ratify the World Health Organisation’s (WHO’s) Illicit Trade Protocol to help eradicate the sale of illegal cigarettes.

It says South Africa signed the comprehensive set of international rules seven years ago but has still not formally ratified it.

It believes ratification would see the country, which it says has by far the biggest illegal trade in tobacco in the world, implement the global WHO track and trace guideline.

Batsa says it can confirm that the black market overtook Fita product sales because the University of Cape Town’s Research Unit on the Economics of Excisable Products (Reep), under the directorship of Professor Corné van Walbeek, has been tracking cigarette sales during the lockdown.

It says Van Walbeek and his researchers established from 23 000 respondents, that almost all smokers (93%) were able to purchase cigarettes during the ban.

“However, the brands they have been purchasing have changed dramatically, even though it has been established that some retail outlets improperly sold properly obtained and taxed cigarettes out of their own stores during the lockdown,” Batsa says.

Batsa hit hardest

It says Van Walbeek confirmed that Batsa has taken the biggest knock as a result of the sales ban.

According to the research, Batsa’s market share dropped from 48% prior to lockdown to 8.7% in June.

“The relatively minuscule amount of people who have reported being able to buy Batsa brands almost certainly obtained them out of pre-lockdown shipped retail stock,” Batsa says.

The researchers found that one in three cigarettes (33.7%) bought during the ban was purchased in retail outlets, including formal shops, petrol stations and spaza shops.

“Prior to the ban, Batsa owned six of the top 10 selling brands in South Africa. Now it has none,” Batsa says.

It noticed an explosion in the availability of the RG brand, from the Zimbabwean-owned and controlled Gold Leaf Tobacco Corporation, during the past five months.

“At 11.6% of the market, this one brand saw approximately 10 million cigarettes purchased every day during lockdown, at prices that were up to five times higher than prior to lockdown despite no tax being paid,” Batsa says.

The extent of the damage to the industry is estimated to be R35 million a day.

Batsa says that before the ban, its market share was 32 times larger than that of Fita member Best Tobacco – yet in June Best Tobacco’s market share was already bigger than Batsa’s, according to the Reep report.

Hence it has warned that any aggressive increase in excise on tobacco will only exacerbate the control illegal producers have on the market.

“Tax is only paid by people and companies who obey the law,” says Batsa.

“South Africa now has a tobacco market that is controlled by people who don’t obey the law.”

Batsa head of external affairs Johnny Moloto describes the ban as the greatest gift given to the illicit trade.

“Our company has not shipped a single cigarette to South African retail or wholesale customers since the ban came into effect in March. This is why we, as the previously largest tobacco company in the country, are barely a footnote in the Reep reports now,” he says.

South African Revenue Service (Sars) Commissioner Edward Kieswetter said last week that it would take years to root out the corruption and illegal activities that have taken root in the past five months.

Read: Consumer criminalisation could encourage a culture of tax avoidance

Batsa says it remains committed to cooperating with Sars and other law-enforcement authorities to address the illicit trade and ensure a speedy return to the legal and tax-compliant trade in tobacco products.

Legal battles continue

Despite the ban being lifted, the tobacco industry will continue with its legal battles – partly in fear of the government making a U-turn on its decision, and partly to establish where the law stands on the matter.

Read: Government chokes on Batsa’s urgent court application

Batsa began legal proceedings in May against the government’s decision to extend the ban on tobacco sales during lockdown Level 3. While it has noted the state’s decision to move to lockdown Level 2, it says “legal clarity is needed.”

“For the time being, we can resume our business in South Africa, supporting thousands of jobs in our value chain, while combatting the grip of illegal cigarettes in the marketplace.”

Despite the government verbally confirming that the sale of tobacco products is permitted during Level 2, this had not yet been gazetted by Monday afternoon.

And as Fita chair Sinenhlanhla Mnguni says: “There still exists the possibility that we may shift up levels, under which levels the sale of cigarettes and tobacco-related products are currently banned in terms of the regulations as they currently stand.

“Further, the matter raises novel issues of law and fact, and we are of the view that it is in the public interest that the provisions of the Disaster Management Act be tested in the higher courts.”

Fita was recently granted leave to appeal its court application in the Supreme Court of Appeals.

Recovering lost market share

Mnguni says it is difficult to determine how the different manufacturers will recover from the ban and the fact that the illicit trade has taken over their markets.

He says the industry warned government that it would be faced with challenges after lifting the ban.

“We warned them that it would be difficult for manufacturers to compete, because what would have happened is that the criminal syndicates who pride themselves in illicit trade will have entrenched themselves firmly on the market.”

He says the coming few weeks will be educational for the industry.