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British American Tobacco scales down operations in SA due to illicit cigarette trade

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In a blow to local jobs, British American Tobacco South Africa said it has been forced to scale down its direct retail product distribution and delivery operations, as its sales volumes continue to decline due to the heightened illicit trade.

British American Tobacco has decided to stop direct deliveries to lower-volume retailers due to the increasing illicit trade in tobacco products. File picture

IN A BLOW to local jobs, British American Tobacco South Africa (BATSA) said it has been forced to scale down its direct retail product distribution and delivery operations, as its sales volumes continue to decline due to the heightened illicit trade.

Johnny Moloto, the area head of Corporate and Regulatory Affairs for BAT Sub-Saharan Africa, said their estimates showed that illicit trade now accounted for more than 70% of all cigarettes consumed in the country, leaving the legal market with less than a 30% market share.

“For a long time, BATSA has been reluctant to scale down distribution operations in view of the impact on our integrated supply chain. However, the business must take urgent action to enhance efficiencies, as we try to mitigate the impact of illicit trade and an uncertain regulatory environment,” he said.

The growing extent of the illicit cigarette trade was also confirmed last week in research by the University of Cape Town (UCT) academics Dr Nicole Vellios and Professor Corné van Walbeek, which showed that the government has been losing billions of rand every year because of illegal cigarettes, since 2010.

In 2019, BATSA permanently employed about 1,800 staff. Since 2020 it has to cut its workforce by more than 30% because it has lost around 40% of its cigarette sales in the same period, mainly because of the growth of the illicit market.

Globally, cigarette sales have also been declining, but at a much slower rate, as more smokers opt to quit or begin smoking alternatives such as vapes. For instance, British American Tobacco’s global sales of cigarettes fell 8.2% to 555 billion cigarette sticks in the year to December 31, 2024.

“The decision to stop direct deliveries to lower-volume retailers is an unfortunate consequence of the increasing illicit trade in tobacco products, which has continued since the Covid-19 tobacco ban,” said Moloto.

He appealed to the Minister of Finance, the South African Revenue Service (Sars) and National Prosecuting Authority to properly deal with the menace.

“Until now, BATSA has had substantial contracts in place with third-party logistics and security companies to safely deliver its products directly to retail stores. However, these contracts have now been discontinued, with an estimated 500 jobs in the security and logistics part of the company’s value chain being impacted,” he said. Twenty employees at BATSA would be impacted.

Vellios, based at UCT’s Research Unit on the Economics of Excisable Products (REEP), said in 2022 the government lost R17.6bn in excise and VAT revenue due to illegal cigarette sales.

“If Sars had collected the R17.6bn, an additional 1% would have been added to total revenue. If we look at a longer period from 2002 to 2022, the total lost excise and VAT revenue is R119bn. The majority of the lost revenue occurred from 2010 to 2022, when R110bn in excise and VAT revenue was lost.

“This is because the illegal market started to grow in 2010. We estimate the illicit cigarette market comprised 5% of the market in 2009, peaked at 60% in 2021, and decreased marginally to 58% in 2022,” said Velios.

He said the government would lose about R24bn in tax revenues to the illegal cigarette trade every year – revenue that is otherwise critical for the development of the country.

Van Walbeek said in the context of a market with such a large illicit component, an increase in the excise tax becomes much less potent as a tobacco control tool.

“An increase in the excise tax will have an impact only on the price of legal cigarettes, but it will have no impact on the price of illicit cigarettes. A huge illicit market is problematic because it makes it easy for smokers to switch to the illicit market, and because cigarettes are cheap, more young people are likely to try smoking. It is, therefore, critical to reduce the availability of illicit cigarettes,” he said.

Vellios said they were often told that people might not know if the pack they buy was illegal or not.

“There is a very simple way to know – by considering the price. Each packet of 20 cigarettes now carries an excise tax of R21.77. Add the manufacturing costs, transport costs, wholesale and retail mark-ups and VAT, and the minimum price at which a legal pack of cigarettes can be sold is around R32 per pack,” he said.

Despite many appeals by academics and civil society organisations, South Africa has also not ratified the Protocol to Eliminate Illicit Trade on Tobacco Products.

Van Walbeek said the protocol aims to eliminate illicit trade in tobacco products. Countries that ratify the protocol commit themselves to implement, among other things, licensing requirements for all producers in the tobacco supply chain and a track-and-trace system to monitor the flow of tobacco products.

Moloto said the illicit trade problem would also likely be exacerbated by a rushed attempt to pass the Tobacco Products and Electronic Delivery Systems Control Bill, which he said appeared to be tailor-made to benefit the illicit sector.

“The bill is not likely to result in a reduction in smoking incidence because the market has been flooded with illicit products,” he said.

The DA’s Dr Dion George MP said last week that recent reports on the illicit tobacco trade’s substantial impact on the South African economy, costing it over a hundred billion in revenue, points to a failing government.

A study published by the University of Cape Town found that between 2002 and 2022, due to government’s inability to secure the tobacco industry supply chain from the point of production to the point of sale, the South African economy lost approximately R119 billion in excise and VAT revenue.

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