The tobacco industry by the numbers
The dwindling cigarette market may seem to be a good-news story, but it means tough times for the tobacco industry, a major player in the South African economy.
“Is this a growth industry? No. It is a mature industry and it is in decline,” said Brian Finch, the managing director of British American Tobacco South Africa.
Tobacco companies are switching to survival mode amid stifling regulation and a growing illicit market.
Still, research shows that more than 7.7-million South African adults consume 11.4 cigarettes a day. The local industry, which has estimated annual revenue of more than R22-billion, loses a further R8-billion in revenue to the illicit cigarette trade.
British American Tobacco owned the lion’s share of this market in 2011 with 86% of the legal local cigarette trade. It is also the world’s second-largest tobacco company and has a presence in more countries than any other. It is listed on both the London Stock Exchange and the JSE, the company’s only secondary listing. Depending on currency fluctuations it is, at times, the top listed company on the local share trading platform and has a market cap of R830-billion.
With 150000 retail outlets and 14000 employees, the tobacco company plays a big part in the economy.
Thirty-one percent of its tobacco is sourced from South African farms, mostly in Mpumalanga. Its factory in Heidelberg then produces more than 26-billion cigarettes each year and exports to most of Africa and parts of the Middle East.
The excise rate on the legal product is 52%, contributing an annual R10.8-billion to the government, making it in some ways the biggest shareholder, said Finch.
But a big industry player such as British American Tobacco stands to gain or lose the most.
At present, 29% of cigarettes are illicit or do not comply with regulation in some way. That is seven billion illicit cigarettes of a total of 29-billion sold.
“It’s our biggest strategic challenge and we are working with the authorities to address it,” Finch said.
In 2011, 1.2-billion cigarettes were seized and the onslaught was largely because of product from Dubai and Zimbabwe.
Quality standards need to be subscribed to and there are costs associated with that.
Illicit cigarette market
“We have no problem with it,” said Leslie Rance, the tobacco company’s corporate and regulatory affairs manager. “We just want to compete with everybody on the same terms.”
Once the illicit cigarette market reaches 40% or 50%, Finch believes it will be game over. “I don’t think there will be any recourse — it will just be too difficult to stop.”
It is becoming an impossible battle in the light of tighter regulations and heavy taxes.
Regulations are tightening over public-place smoking, point-of-sale communication and display, graphic health warnings and plain packaging. By November 16, all cigarettes in South Africa will have to comply with a reduced ignition propensity requirement according to which lit cigarettes that are not drawn on for a certain amount of time must extinguish themselves. “It is not for the benefit of the consumer. It is an irritation, in fact, but it is in the name of regulation,” Finch said.
Until now South Africa’s cigarette sales have not dropped dramatically despite one in three adults quitting smoking in recent years. The prevalence of smoking has dropped from 32% to 22% since 1994.
Sales rose to 28.7-billion sticks in 2011, almost back to 2005 levels. The reasons for this could be numerous. “What we need to work into the equation is income and the economy,” said Yussuf Saloojee, executive director of the National Council Against Smoking. “When people have money, they smoke more.”
Four cigarette companies, including British American Tobacco, have recently taken the Australian government to court to stop a law that requires that all cigarettes be sold in olive-green packs with health warnings, graphic photos and an absence of brand logos. Only company names in a small standard font will be allowed.
Finch said the case was being watched closely and with some anxiety by the global tobacco industry.
“It takes away branding and the ability to differentiate product,” he said. “We recognise that the government’s priority is to look at regulation across the world, but what is the intention? There are unintended consequences of making it easier for illegal players.”
As a defensive stock, one that does not fluctuate with the rest of the market, the effect of the recession on South African cigarette purchasing was a lot greater than expected, Finch said.
Research and development is now a priority in the quest for sustainability.
“We have to find alternative tobacco products that are acceptable to the industry and consumers,” Finch said.
The aim is also not to be at odds with the government of the day. “We never want to be adversarial, we want to be collaborative,” Rance said.
But Finch added: “Our survival is at stake. We spend a lot of time getting the left hand of government to meet the right hand just to get things to move … I wouldn’t say the government is trying to put us out of business, but as an unintended consequence that will happen.”
Illicit cigarettes ‘keep smokers in the market’
Dr Yussuf Saloojee, executive director of the National Council against Smoking, said tobacco companies were not victims of the illicit cigarette trade but in fact its beneficiaries.
Because illicit cigarettes were cheaper, people who would have quitted remained in the market and continued to smoke, he said. “When their income situation changes, they go back to the well-known brands.”
Tobacco companies, he said, had an interest in exaggerating illicit cigarette quantities.
“The treasury believes the nonsense British American Tobacco puts out and so it keeps the excise down.”
Saloojee said the excise of 52% had remained at the same level since 2004.
But Francois van der Merwe, chief executive of the Tobacco Institute of Southern Africa, said research on the illicit trade was conducted by an independent body and the findings were widely believed to be accurate.
Saloojee said there were many examples of British American Tobacco being accused of smuggling illegal cigarettes into countries such as Vietnam and Canada.
But British American Tobacco South Africa denied that it benefited from smuggling.
“Smuggling undermines our investment in distribution, it undermines brand equity, it fosters counterfeit production and deprives governments of revenue.
“Our operating companies have strict policies in place to ensure that customers, and their customers, do not smuggle our brands.”
The company said it had 100 dedicated people working to fight the illicit trade and operated an intelligence unit that provided information to law enforcement agencies around the world.
“We go to great expense to research the incidence of illicit cigarettes as well as the brands and origins of these products,” it said. – Lisa Steyn