Cape Town – As South Africa emerges from a five-month ban on tobacco sales, the country’s biggest cigarette company has implored the government to implement measures to clamp down on competitors it accuses of supplying the black market during the prohibition and usurping its dominance.
British American Tobacco South Africa (BATSA) on Tuesday called on the government to ratify the World Health Organization (WHO) Illicit Trade Protocol, which it signed in 2013, to stem the illicit cigarette trade that flourished during the 142-day ban.
“Ratification would mean that the country, which has the biggest, by far, illegal trade in tobacco in the world, implements global WHO track-and-trace guidelines,” the company said.
Johnny Moloto, BATSA’s head of external affairs, said had South Africa ratified the treaty and implemented a tracing system, the country would not have seen the rampant smuggling that helped some 90% of the country’s smokers continue the habit during the ban, which was imposed as part of the government’s response to the Covid-19 crisis.
The statistic on continued smoking comes from a study done by academics at the University of Cape Town, who found the most prominent brands on the black market during the ban were produced by four companies, of which three are members of the Fair-Trade Independent Tobacco Association (FITA).
Drawing on the UCT study, BATSA fingered Gold Leaf Tobacco Company and BEST, both FITA members, as the biggest culprits. Gold Leaf had sold some 10 million cigarettes a day and “exploded in sales” during the ban, while BEST had by June increased its market share to 32 times that of BATSA, which makes Dunhill and Peter Stuyvesant cigarettes.
Professor Corné van Walbeek, the head of UCT’s Research Unit on the Economics of Excisable Products (REEP), said there were indications that BATSA brands were also traded during the ban, though in lesser volumes. Gold Leaf’s RG brand is seen as having become an alternative for regular Peter Stuyvesant smokers.
BATSA disputes this, saying its brands sold in such small quantities during the prohibition that the sales could be attributed to retailers moving stock acquired before the ban.
Moloto said BATSA’s market share fell from 48% in March to just 8.7% in June as its brands were lucratively usurped by FITA members in an environment where taxes no longer applied, since all trade was illegal.
“South Africa now has a tobacco market that is controlled by people who don’t obey the law,” Moloto said.
With companies vying for the loyalty of some eight million smokers in the wake of the ban lifted on Monday at midnight, the attack on FITA is perhaps surprising only for the form it has taken.
Illicit trade expert Telita Snyckers pointed out that until recently, BATSA was one of the most vocal opponents of the government’s plans to put in place a track-and-trace mechanism. A tender for this process stalled and was cancelled amid criticism from the industry.
“It is very surprising,” Snyckers said. “BAT was actually one of the biggest opponents of the system. By contrast, FITA welcomed it.”
As late as last year, BATSA argued that rather than focus on the WHO requirements of higher excise duties and tracking, the authorities should clamp down on the illicit trade, which the company quantified as costing the country R7 billion (about US$404 million) in tax revenue annually.
“The media onslaught was relentless: the system had been ‘rushed’, would capture only the legal market, would drive illicit trade up further, accused SARS (the South African Revenue Service) of ‘wasting billions of rands’, and the industry raised concerns about rolling out such a ‘sophisticated system’,” according to Snyckers.
On Tuesday, Moloto qualified that he was not opposed to taxing cigarettes to the WHO-recommended level of 70% of the retail price and was in full support of a track-and-trace system, but said it was a matter of how both were implemented.
“Without proper enforcement, higher taxes simply becomes a blunt tool and leads to more illicit trading as some manufacturers undercut higher prices by not paying excise duties.”
He said BATSA questioned the tender because the plan was to award it to a single service provider for eight years and would standardise the equipment used to mark cigarettes at all manufacturing plants.
“If you have such a long tender with one company, and the system that it implements falls short of the standards of the WHO treaty, you cannot exit it,” he said, adding that in BATSA’s view, South Africa should adopt the WHO standards and then allow each manufacturer to choose a tracking system and service provider.
Snyckers likened the proposed scenario to “letting the fox guard the chickens” and pointed out that if it were to come about, BATSA would almost certainly call into doubt the efficacy of measures chosen by FITA’s members.
She noted that well before the ban, which was challenged in court by both BATSA and FITA, the former’s position was weakened by scandal that embroiled its local and international operations.
The rivalry between the two players in recent years include an industrial espionage scandal that ultimately decimated SARS investigative capacity, emboldening illicit trade before the ban entrenched it further.
FITA chairman Sinenhlanhla Mnguni said the association was not denying that its members’ brands were “in the market during lockdown” but BATSA’s broadside was a disingenuous way of distracting from its own foul play.
Mnguni claimed the market was more fluid than the UCT survey suggested as smokers were simply buying what they could find, and would stabilise as they returned to their preferred brands.
Snyckers said it was ironic that BAT was one of the big players internationally that implemented the Codentify system that sees cigarette packets branded with a bar code that allows them to be traced to source.
Hence it should in theory be able to follow the trajectory of its stock that sold during the ban and prove its claim that its hands were indeed clean.