Illegal tobacco market booming

The amount of illegal loose tobacco and cigarettes consumed in Australia represents 14.3 per cent of total tobacco consumption, according to the latest Illicit Tobacco Trade in Australia report by KPMG LLP in the UK.

The Illicit Tobacco Trade in Australia report, prepared by KPMG LLP for British Imperial Tobacco Australia (BATA), Imperial Tobacco Australia and Philip Morris Limited, shows there has been a marginal decline in illegal tobacco of 0.2 percentage points, down from the record level of 14.5 per cent of total tobacco consumption reported six months ago.

The report found that the total volume of tobacco consumed in Australia in the 12 months to June 2015 was 17.5 million kilos, which is the same for the full year report in 2014. The report also showed that 2.5 million kilos consumed were illegal, adding if this portion of illegal tobacco was consumed in the legitimate market it would represent $1.42 billion excise revenue for the government. Loose tobacco is estimated to make up 65 per cent of all illegal tobacco consumed in Australia.

Despite the slight decrease in consumption of illegal tobacco, the first decline since 2012, BATA Spokesperson Scott McIntyre said illegal tobacco remains a nationwide concern that hurts legitimate retailers and deprives the government of billions of dollars in revenue.

“While we commend the government on the new ABF strike team, the industry believes the substantial growth in illegal tobacco is directly linked to the Federal Government’s annual 12.5 per cent excise increases which occur on 1 September,” McIntyre said.

“These large excise increases and other excessive regulations fuel the black market and make it more lucrative for organised criminals to smuggle illegal tobacco into Australia,” McIntyre said.

Nikitas Theophilopoulos, MD, Philip Morris Limited (Australia & New Zealand), told C&I Week, “I am sure the excessive tobacco tax increases will be identified as one of the key reasons behind the problem”.

“Illegal tobacco is sold by rogue traders in suburbs and towns all across Australia. It is staggering that approximately 2.5 million kilograms of illegal cigarettes and loose leaf tobacco (or chop chop) was sold on the black market last financial year, the equivalent of around 3 billion cigarettes,” Theophilopoulos said.

Speaking about the consequences that retailers face if they choose to traffic illegal tobacco products McIntyre said, “Make no mistake illegal cigarettes come in branded packs, many without health warnings and are often covered in a foreign language. They are obviously not plain packaging compliant and hence those retailers selling it can be fined up to $360,000″.

In response to the report, Jeff Rogut, Chairman of the Australian Association of Convenience Stores (AACS), told C&I Week, “The majority of illegal tobacco is going through markets and smaller neighbourhood stores in some areas, not the organised convenience store channel. The tobacco companies and the AFP are already onto these players in most cases. The majority of convenience stores, especially AACS members, are too aware of the financial costs of fines and risks to their reputation to on-sell illegal tobacco.”

Data from investigations conducted by Philip Morris Limited, British American Tobacco Australia and Imperial Tobacco Australia in the 2014 provide some insight into the hot spots for illegal tobacco trade. The report identifies suburbs where there is at least one retailer selling illegal tobacco. In total the reported highlighted  90 suburbs across the eastern states. In NSW, Cabramatta, Campsie and Fairfield recorded the highest amount of traders, with more than 10 in each suburb known to be selling illegal tobacco.

Price comparisons 
According to the report, while the average price of a pack of legal cigarettes in Australia is around $22 due to the Federal Government’s excise system, in a lot of Asian countries similar packs are sold legally for one to two dollars.

Australian prices are more than 58 per cent higher than the third most expensive market in the region, with this large price differential between Australia and other relatively nearby markets creating smuggling incentives for those involved in the illicit market. In some cases the price difference between illegal and legal tobacco products was as high as $17.40 (for chop chop loose leaf tobacco) in June 2015. 

“It becomes even more lucrative for organised crime gangs to smuggle illegal counterfeit or contraband cigarettes which can be purchased for as low as 20 cents a pack in some Asian countries,” McIntyre said.

“Especially when the average illegal pack of cigarettes are sold for around $10 to $13 in Australia. That’s a huge profit margin for the crime groups who smuggle them in.

“The Australian Crime Commission (ACC) said in their most recent organised crime report that smuggling illegal tobacco is seen as a low risk, high profit activity.

“We’re hopeful the new ABF strike team can change this and greatly increase the risk of those criminals getting caught.”


Fighting back 
“Hopefully the ABF strike team can help stamp out the illegal tobacco problem as it comes across the border. However more resources need to be deployed at the retail level for enforcement,” McIntyre said.

“We are committed to working cooperatively with Australia’s law enforcement authorities in their fight against the illicit tobacco trade and welcome the recent seizures. The recent establishment of the ABF strike team to take a holistic view of the illicit tobacco problem is a positive first step. Philip Morris will continue to share technical expertise on this matter and work cooperatively with law enforcement authorities to stamp out this criminal activity.”

Recognising that small and independent stores face strong competition from big supermarkets when it comes to tobacco pricing, Rogut said “taking advantage of big supermarket prices and bulk purchasing has been an issue across all categories for at least 20 years. Big supermarkets have become another distributor. It’s a foolish strategy and provides a false picture to suppliers of what is going through our channel. By working with suppliers directly, stores can provide them with knowledge about what is selling and what they need to supply and pricing deals that need to be done.

“Suppliers do want to support all retailers, whereas supermarkets are only interested in undercutting smaller convenience stores. By purchasing specials from supermarkets, convenience stores are perpetuating the system that allows the big supermarkets to continue growing their volumes and benefits and then undercutting smaller businesses in the long term.”

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