Up in smoke: Evolving trends in tobacco consumption

The black-market trade in illicit tobacco and nicotine vape products continues to drive significant challenges in the industry, as manufacturers and retailers navigate through a changing regulatory environment while competing with illegal rivals.

According to the Australian Association of Convenience Stores (AACS) 2023 Mid-Year State of Industry Report, tobacco sales dropped 13.7 per cent to 28.7 per cent share of channel sales in the first half of the year and, even more concerning, experienced a 19.8 per cent decline in the quarter ending June.

Theo Foukkare, CEO of AACS, said all segments within tobacco have experienced a decline, even in the competitive value and sub value segments, with every state and territory, except Tasmania, experiencing double-digit declines in sales.

“Tobacco remains a real concern, with the federal government implementing a Tobacco Excise increase of plus five per cent as well as a CPI increase which was passed on 1 September,” Foukkare said.

“Now is certainly the time for retailers to look at how they can engage shoppers more through stronger value propositions and focus on shopper retention through this tough selling period.”

Despite the decline in sales, the P&C channel remains a mainstay for tobacco manufacturers wanting to maintain a strong foothold in Australia.

Chris Peczalski, Channel Sales Manager at Imperial Brands, says P&C provides a broad national footprint as well as an operational efficiency that benefits consumers who enjoy tobacco and vaping products.

“The point of difference the P&C channel offers is that it ensures our product is always available to the consumer, no matter the time of day or the location,” says Peczalski.

“The channel provides an incredibly broad national footprint of outlets and stores that cater to the needs of the local community, from on-the-go, impulse focused food and beverages stores to regional and highway stations that are more automotive and fuel focused. Having a presence in P&C means our product is available 24/7 across regional and metro areas.”

Peczalski says the operational efficiency of convenience stores and the high-level service they offer consumers is a key opportunity.

“It’s a quick in-and-out type of engagement and that service level efficiency is a really big opportunity,” says Peczalski.

Changing regulatory environment

John Trezise, Head of External Affairs at British American Tobacco (BAT), says the industry is entering into a new regulatory environment where a number of unresolved issues will continue to pose challenges for suppliers, manufacturers and retailers.

“BAT recognises the need for government regulation and follows a very strict set of criteria and measures to ensure we remain compliant within one of the most heavily regulated industries in the world,” says Trezise.

“However, the argument remains that enforcing stricter regulations around a legitimate and legal industry enables the capacity of the illegal players to find loopholes resulting in the growth of an illicit black market, which is what we are seeing play out today.

“According to FTI Consulting, one in four tobacco products is illegal in Australia. While it’s starting to become more apparent to people, I find it quite baffling at times that we don’t have outrage beyond the industry. The state of illicit tobacco in Australia is a national embarrassment.”

James Bigwood, Head of Corporate and Legal Affairs, Australasia at Imperial Brands, expressed similar concerns.

“Unimpeded access to illicit tobacco and illegal vape products is driving a number of negative outcomes,” says Bigwood.

“The illicit nicotine market represents a significant challenge. Legitimate Australian retailers are struggling as consumers continue to seek more affordable illegal products supplied by the criminal organisations operating in this space.

“There is also a lot of regulatory uncertainty in the market for both tobacco and vapes. The government has made different announcements for both products but retailers are still facing uncertainty as to where those announcements will land.

“Without tangible actions to reduce the illicit trade, new regulatory measures will lead to a predictable increase in the consumption of illegal product to the detriment of legitimate manufacturers, retailers, the Government and the wider Australian community.

“For example, the government has published details of regulations that will come into play in 2025 around tobacco products and packaging. Our concern is that the illicit pipeline is well stocked with the kind of products that will soon be prohibited. Further restrictions on the availability and accessibility to tobacco products, will only increase consumer demand for illegal products.”

Pradeep Kumar, Managing Director at Tabsol, says the issue is the fact that regulatory changes only apply to legal retailers and importers.

“The government is proposing changes that responsible retailers and manufacturers will follow but will also drive demand for products like cheaper non-compliant packs in the black market,” Kumar says.

“Over the past 12 months, the illicit trade has become more accepted in the marketplace by consumers who don’t really understand what the difference is anymore. Brand loyalty and product quality has given away to price and availability. People want the cheapest option, whether it is legal or not, and as we enter into a period where the government is accelerating the rate of excise on cigarettes and roll your own tobacco, the prices of these products are increasing at an accelerated rate, which then creates further opportunities for the illicit trade.”

New Zealand feels the squeeze

It’s a similar state of affairs over the ditch, with government regulations creating more challenges than solutions for retailers in New Zealand selling tobacco and vaping products.

Dave Hooker, Executive Director of New Zealand Association of Convenience Stores (NZACS), says the first set of changes that came into effect last year saw more than 5000 general retailers lose a large segment of vaping sales to about 1000 specialist retailers.

A specialist retailer can sell different flavoured vapes, along with tobacco and menthol products, while a general retailer, usually a service station, supermarket, or liquor store, is restricted to selling tobacco and menthol products only.

Hooker warns that further changes for vaping products are in the pipeline.

“Under the Smokefree Environments and Regulated Products Act (SERPA), retailers will soon have to notify the government that they sell vaping products, single use vapes will be phased out, the names of vape flavour names will be changed, manufacturers will be required to put childproof devices on the vaping products, and nicotine levels will be lowered,” Hooker says.

“However, the general public’s reaction to these changes is that the government hasn’t gone far enough to addressing the country’s youth vaping epidemic.”

The story isn’t much better for retailers selling tobacco products either, according to Hooker.

“At the moment, there is around 6500 general retailers that have licences to sell tobacco, and that number will be limited to about 600 early next year under what the government is calling a ‘retail reduction’,” Hooker says.

“The challenge facing retailers is knowing how to apply for the new tobacco licence to be one of the successful 600 because there is currently no information out there as to how to apply for the licence.

“As a retailer, if you aren’t successful in acquiring a licence, you need to find a way to fill the gaping hole the tobacco sales will leave. On the flip side, if you do get a licence, you will then see a massive increase in sales and the challenge becomes managing that steep increase.

“The other challenge that is really flying under the radar at the moment, is the fact that in nine months from the time the new license regime comes in, the government wants to introduce a low nicotine product, which is 90% lower than the lightest cigarette on the market. There is only one company in the world that currently makes the product and they haven’t been successful because nobody likes a product; it’s not strong enough.”

Hooker says changes in regulations and the limits being placed on retailers will inevitably lead to businesses closing and a booming black market.

“A recent survey by Imperial Tobacco found that 50 per cent of dairies in New Zealand would have to close if they didn’t have a tobacco licence.”

Calls for retailers to lead the way

Bigwood says a responsible, retailer-led, regulated model for nicotine vaping products is needed in Australia.

“Imperial Brands has consistently supported the need for responsible regulation when it comes to nicotine vaping products, so adult smokers have access to high quality products, while at the same time, underage use is prevented.

“We believe a regulated, retailer model with youth access prevention and strong standards is needed. The retail model has been shown to have worked in other countries where products are sold, with strict restrictions in terms of youth access and strong penalties.

“A growing number of countries provide adult consumers with access to vaping products and in turn they’ve experienced a corresponding decline in smoking rates. The policymakers in these countries have taken a harm reduction approach to tobacco control whilst ensuring products are marketed responsibly and the regulations in place demand high product standards,” says Bigwood.

Trezise agrees, saying the only plausible pathway forward for vaping products is to have responsible retailers.

“The government needs to give retailers the opportunity to prove they are responsible to sell these products at a retail level. Regulated retailers will transfer demand for vaping products back to a legitimate market. That’s not to say the black market will disappear – it will still exist, but a regulated market will go a long way in shrinking the illicit trade. Consumers don’t want to break the law. They want to do the right thing and purchase a product legitimately.”

National illicit tobacco strategy

Trezise and Bigwood say the first step in the right direction is establishing a national illicit tobacco strategy.

“Establishing a national illicit tobacco strategy was one of the recommendations from a 2020 extensive investigation into the use and consequences of illicit tobacco in Australia,” says Trezise. “A joint effort across all levels of law enforcement to strengthen the legal tobacco and vaping industry is a really critical first step to tackle this problem on a national scale.”

Bigwood says a more coordinated approach from state and federal government and a national illicit nicotine strategy would help address the ongoing concern of illicit products.

“While there have been positive developments at an individual state and territory level, there is an urgent need for more action to be taken at the federal level. Significant efforts have been made to address the problem at the border, although the continued proliferation of illicit products suggests much more remains to be done.

“Without a clear national strategy encompassing strong anti-illicit trade enforcement measures, we will unfortunately see the illegal trade continue to grow.”

This article was written by Lizzie Hunter for the October/November issue of C&I Retailing magazine.

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