British American Tobacco SA (BATSA) has cut cigarette deliveries to some stores as the illicit cigarette trade overwhelms the legal market, putting at risk about 500 jobs at third-party logistics companies.
The company, which now sells 40% fewer cigarettes than it did in 2020, is in retrenchment talks with 20 office staff who manage its external deliveries.
It has cut 584 jobs since 2019 of a total 1,800 as profits plummeted in the face of a surge of illicit trade triggered by the Covid-era tobacco ban.
The area head of corporate and regulatory affairs for BAT Sub-Saharan Africa, Johnny Moloto, said BATSA’s “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”.
He said: “In the past, it has been direct jobs impacted. And now it’s starting to spill over into our suppliers as well.”
The cut in truck deliveries will reduce employment among the security guards who accompany each delivery truck to prevent hijackings.
The illegal cigarette market accounted for about 58% of the SA market in 2022, up from just under 5% in 2009, UCT researchers Nicole Vellios and Corne van Walbeek found in a report on a study published last month in BMJ Open titled “Tax revenue lost due to illicit cigarettes in SA: 2002-2022”.
BATSA said up to 70% of cigarettes consumed in SA were illicit, based on external research that measured self-reported smoking rates.
Though figures vary on the size of the illegal market, consensus is that its growth has devastated the legal industry, reduced tax collection and made smoking much cheaper and more accessible.
“The illicit trade is too big,” Van Walbeek told Business Day.
Van Walbeek and Vellios, of UCT’s Research Unit on the Economics of Excisable Products, argue in their article that the illegal market burgeoned when legal cigarettes were banned for five months in 2020.
The losses in unpaid excise tax and VAT from illicit cigarettes amounted to R18bn in 2022, the UCT academics found, with government losing R119bn from 2002 to 2022.
The researchers measured how many people reported smoking in various nationally representative surveys and compared this with the number of registered tax-paid cigarette sales. This shows the gap in what is smoked and what is declared for tax.
BATSA puts tax losses as high as R24bn a year as it assumes smoking rates would be the same even if all cigarettes were taxed and thus higher priced.
The growth in illicit trade is not only costly but also has severe health consequences in part as nicotine and tar limits are not enforced in illegal cigarettes.
Higher prices also reduced smoking rates, said Van Walbeek and Vellios. If prices of cigarettes had remained high “some people would have quit smoking or would have reduced their consumption, because cigarettes would have been unaffordable”.
Illicit cigarettes include those smuggled from Zimbabwe and other places, stolen cigarettes and some that are produced without their sale being declared and without tax being paid.
The excise and sin tax on a box of 20 cigarettes is R25.04, so cigarettes selling for less than about R32, taking into account the cost of production, were likely to be illicit, argue Van Walbeek and Vellios.
“It is unfortunate that the government hasn’t done more to tackle SA’s illicit tobacco trade. As such, BATSA calls on the minister of finance to ensure the SA Revenue Service [Sars] and the National Prosecuting Authority are properly equipped to deal with the menace,” said Moloto.
Sars had not responded to requests for comment at the time of publication.
The NGO Tax Justice SA blames the illicit industry for funding crime instead of tax. In a recent press release, founder Yusuf Abramjee said, “kingpins in organised crime have been helping themselves to money that should have been spent on education, healthcare and housing”.
DA spokesperson on finance Dion George asked how the new and much stricter Tobacco Products and Electronic Delivery Systems Control Bill would help reduce illicit trade.
This bill, which is before parliament, proposes plain packaging of cigarettes, a ban on cigarette vending machines and a ban on the display of cigarettes or adverts at the point of sale.
But BATSA said the government was not even implementing existing regulation such as nicotine limits. “The bill puts in place extreme measures and we are not sure how they’re going to be enforced,” said Moloto, calling for an enforcement of existing law instead.
George said: “While the tobacco bill might seem well intentioned, its authoritarian, unreasonable approach is not implementable. It also fails to address the biggest problems with tobacco use, which is illegal cigarettes.”
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