TELITA SNYCKERS: With the ban lifted, what’s next for dirty tobacco?
It’s taken 141 days, but from Tuesday, the tobacco ban will finally be lifted. Unfortunately, it may be too little, too late. The fact is, illicit cigarettes are likely to dominate the local landscape in the foreseeable future.
What does the lifting of the ban mean for the balance of power in the industry? Who stands to win, and who stands to lose?
Clawing back market share: playing dirty or crafting new alliances?
The market has seen some radical changes: British American Tobacco (BAT) used to dominate the local market by some margin; estimates suggest it now controls as little as 9% of the market.
While BAT will undoubtedly be able to claw back some of the loss, it has most likely permanently ceded some of its smokers to companies like Gold Leaf Tobacco, Carnilinx, Best Tobacco and Amalgamated Tobacco.
This is worrisome. Even before the lockdown, when BAT’s market share was under far less pressure than it is today, it was clearly not averse to playing dirty to get rid of the competition.
We will most likely see an increase in both allegations and enforcement activity against the smaller players (much of it probably well deserved) as BAT exerts its influence over our law enforcement agencies.
With the Tobacco Institute of Southern Africa (Tisa) having shut down at the end of 2019, BAT lost its main ally and mouthpiece. But in that vacuum, the Fair-Trade Independent Tobacco Association (Fita) – the organisation representing the smaller, independent tobacco firms like Carnilinx – has assumed greater public prominence.
So it perhaps wouldn’t be surprising if BAT made overtures to craft some kind of alliance with Fita, in an effort to create a more unified front for the tobacco industry in its engagements with the government.
New kids on the block: loose tobacco and vaping
In recent weeks, we’ve seen an increase in alternatives to cigarettes. In particular, we’ve seen a surge in the roll-your-own (RYO) market, with vendors cryptically selling “kriekgif” (cricket poison) or “molgif” (mole poison) online, delivered by courier.
Indications are that many smokers have migrated to RYO, finding it convenient during the lockdown and far cheaper than buying ready-made cigarettes.
This trend poses a significant challenge from an enforcement perspective: regulating the supply chain of cigarettes is relatively straightforward. But regulating and tracking loose tobacco? That’s a far more difficult task.
While we saw lots of enforcement action against small-scale cigarette smugglers, there was not a single reported case of illegal vape sales being taken to task. Not a single one.
This shows that the vaping industry’s ability to operate under the radar — with attention instead on the usual suspects — is arguably its biggest strength. Expect it to continue to leverage this.
While legal packs of cigarettes will regain ground fast now that the ban has been lifted, the prevalence of illicit packs is likely to end up being far higher than the 35% we saw pre-lockdown. Much of that is driven by the simple economics of illicit packs being both widely available and cheap: as news broke of the ban being lifted, pack prices fell almost instantly, from around R70 a pack to R10.
Still, considering that a pack of cigarettes costs around R1.50 to make, manufacturers are still making a killing, and consumers will continue to get their fix.
With no minimum pricing policy in SA, it’s a race to the bottom, in which most of the local manufacturers will be happy to compete.
BAT will likely continue to focus on the premium market, which is where it plays best. Of course, this doesn’t necessarily mean all its packs are legal — paying R50 or more for a pack doesn’t in any way guarantee that tax has been paid on it.
Systemic weaknesses remain
Rather like rusty leaking pipes in a condemned building, the ban exposed the weaknesses in SA’s ability to control the supply chain of excisable goods like tobacco.
It was a weakness that was being exploited before the ban, and it’s a weakness that will surely continue to be exploited now that the ban has been lifted.
It’s no secret that the SA Revenue Service’s (Sars’s) capacity hasn’t suddenly increased — it continues to suffer from the same constraints and systemic weaknesses it faced before the ban.
With nothing having changed in terms of the government’s ability to measure production volumes, to securely mark cigarette packs, to trace packs back to their source, to stop purported exports being used to fuel a local illicit market, and to take down the kingpins (instead of arresting hapless truck drivers and soapie actors), contraband tobacco will continue to flourish.
A taste of revolution
Low prices aside, one of the reasons we can expect contraband cigarettes to keep doing well is that some South Africans have acquired a taste for insurgency.
The danger of a tax revolt has never been greater. Before the lockdown, a low 66% of taxpayers had a positive attitude towards paying their taxes. The past months have seen confidence and trust in government dwindling, exacerbated by heavy-handedness and looting.
The problem is, this is not a government that citizens want to fund any longer. Buying cigarettes tax free, or ordering some “kriekgif” online to roll your own is a small but significant act of mutiny.
What it means is that unless government acts now to significantly tighten the tobacco supply chain, illicit cigarettes are likely to dominate the local landscape.
*Snyckers, an independent illicit trade expert and former SA Revenue Service executive, is the author of an exposé released in May on the role of big tobacco in fuelling illicit trade ‘Dirty Tobacco: Spies, Lies and Mega Profits’
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