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.
Buy marlboro cigarettes from this shop.
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. Strategic challenge 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.
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