December 6, 2010 - A sharp rise in illegal cigarette imports in South Africa over the past 18 months is eroding sales by legitimate manufacturers and in response British American Tobacco (BAT) is funding an awareness campaign that will highlight the links between illegal cigarettes and organised crime.
BAT South Africa corporate and regulatory affairs director Fay Kajee said yesterday that the sale of illegal cigarettes was a growing concern due to its link to the arms trade. “It is not just about the effect on legitimate volumes, profits and tax revenue,” she said.
But the impact on legal sales has been significant. Kajee said the campaign, which is costing it R8.5 million, was also about protecting market share. BAT has an 85.7 percent share of the legal tobacco market in South Africa. “We have seen volumes decline as sales of illegal trade has risen to about 20 percent of total sales. This compares with the international norm of 6 percent to 12 percent.” [1 USD = 6.87634 R]
British American Tobacco (BAT) South Africa is the leading manufacturer of cigarettes in South Africa. The company has an estimated 65% share of the total tobacco market in a country where one in every four adults chooses to smoke. (British American Tobacco South AfricaIn the past three years sales of legitimate products have declined from 25 billion cigarettes in 2008 to 21 billion this year. Over the same period the sale of illegal cigarettes has more than doubled from 3 billion in 2008 to 6.3 billion this year. It is estimated that one in five cigarettes is illegal.
The estimated annual revenue loss to the government is R2.5 billion in unpaid taxes as just more than half of the cost of a packet of cigarettes goes to excise and VAT. Legitimate sales of cigarettes by the tobacco industry generate about R10bn in revenue for the government, according to BAT.
Adrian Lackay, the spokesman for the SA Revenue Service, said the loss in revenue from illegal sales was about R1bn. “Illegal cigarettes are very lucrative as they are light, compact and can be distributed quickly,” Lackay said
Kajee attributed the rise in the sale of illicit cigarettes to opportunity, specifically the fact that supplies from Zimbabwe could be smuggled into the country easily, despite the government’s efforts. Financial pressure on consumers has also created greater demand for cheap products.
Kajee said illicit cigarettes were more prevalent where there was greater demand for cheap products, but it was not only street vendors that sold them, but also cafes and other formal retailers.
Illegal cigarettes are those that are smuggled into the country to evade tax or are counterfeit. A dead give away of an illegal cigarette is the price. Any cigarettes that retail for less than R13.50 for a pack of 20 should ring an alarm bell. Kajee said when you factored in manufacturing costs, transport and the margin the retailer would add on, it could not be sold at this price if it was a legitimate product. Other signs are missing, misplaced or incorrect health warnings.
Gauteng accounts for half of the illegal trade in South Africa, followed by the Western Cape. See map of provinces upper right-hand corner. This is where the campaign, which is supported by the Tobacco Institute of SA, will begin. Retailers and shoppers have been targeted with information letters, signage and leaflets. The campaign, which will also include print and billboard adverts, aims to change consumer and retailer behaviour by sending the message that money from illegal cigarettes funds violent crime.
The consequences for retailers selling these products could be a R20 000 fine, five years in jail or three times the value of the goods found, under the Customs & Excise Act for tax evasion, or up to R1m under the Tobacco Products Control Act. - Business Report
Reference: BAT lashes out at illegal cigarettes by Samantha Enslin-Payne, IOL.co.za, 12/1/2010.
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