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Smoking hot: Damning research slates SA’s illegal tobacco ...


Smoking hot: Damning research slates SA’s illegal tobacco industry

... but the findings on the sale of cheap cigarettes have come under fire from those fingered for wrongdoing

Senior reporter

South Africa’s cigarette cold war has become smoking hot after the release of a damning report into the country's multi-billion rand illicit tobacco trade industry.
Independent tobacco manufacturers and their parent body – the Fair Trade Independent Tobacco Association – have come out guns blazing, labeling the report and its findings, which were released on Thursday, as scandalous.
The report was compiled by the Ipsos research think tank on behalf of the Tobacco Industry of South Africa (Tisa). The researchers did not interview those they accuse of tax evasion, claiming that the research was market-related and only looked into what cigarettes were being sold, where and their cost. The research looked into the sale of cheap cigarettes in spaza shops, general dealerships, corner cafes and hawkers.
The report revealed that two of the association's members – Gold Leaf Tobacco and Amalgamated Tobacco Manufacturers – account for nearly 80% of the illicit cigarette trade, which the authors claim robs the taxman of an estimated R7-billion a year. The authors said GLT’s RG brand, the second most popular cigarette in South Africa, was illicit, based on its price of R10.50 per pack.
Released on Thursday at the Johannesburg Stock Exchange, the report describes illicit cigarettes as those priced below the minimum tax payable – R17.85 per pack or below R1 a loose cigarette.
For years South Africa’s independent cigarette manufacturers have butted heads with international tobacco giants such as British American Tobacco and Japan Tobacco International, who have been accused of being involved in industrial espionage and anti-competitive behaviour to run local tobacco manufacturers out of business.
In turn, local South Africa’s cigarette manufacturers are accused of making billions from undeclared revenue.
The association’s chairperson, Sinen Nguni, and GLF’s lawyers, Raees Saint, slammed the report.“Tisa says they are targeting illicit cigarette manufacturers, but this is nothing more than a guise to stamp out competition,” said Nguni.
He said he first engaged the Competition Commission in 2016 over Tisa members’ anti-competitive practices.
“In May we again engaged with the commission over other anti-competitive practices and will be formulating submissions to them. We will be done with this by month end. What pushed us to approach the commission is that we received complaints from our members that they were struggling to get into the formal market because retailers were being pressured by Tisa members not to stock local South African products (see letter from Gold Leaf Tobacco to Fita at the bottom of this story).
“The situation around illicit cigarette manufacturing is bad, but they are targeting the wrong people. Our members are also hit by the illicit trade, but a lot harder.
“There are factories in our neighbouring countries that are producing knock-offs or our members’ brands and smuggling them into the country, where they sell them for far less than what our members actually sell their cigarettes for,” he alleged.
Nguni rubbished the report and its allegations that their members were stealing R7-billion from SARS.
“Where is the empirical science that shows this? It is simply a number that Tisa has come up with. It’s nothing more than another attempt to criminalise our members even further and keep them out of the formal retail industry.”
He said the monopoly of the formal retail sector by tobacco multi-nationals had forced their members into the informal sector.
“That does not make them criminals.”
Tisa, he said, was nothing more “than a Trojan horse for multinationals”.
“If our members entered the formal retail sector their cigarettes would still sell for cheaper than the global brands. The illicit industry problems can be solved by stamping out of anti-competitive behaviour.”
Saint asked how Tisa could claim his client was illicitly manufacturing cigarettes when the researchers never visited their factories.
“SARS has auditors there. Did the researchers speak to SARS?”
Amalgamated Tobacco Manufacturers owner Yusaf Kajee criticised the report, which he said was baseless. He said they had recently had an audit done which showed no nefarious activities.“From the beginning to the end the report is flawed. On one page the researchers say I’m one of the top three illicit cigarette producers and the next they say I’m barely on the radar. In their list of illicit producers they have a category for other, but don’t say who these others are.”
He said those who drove the report were dishonest and that their dishonesty and greed had cost people their jobs, especially those who were hounded out of SARS by trying to enforce the law and regulate the tobacco industry.
“To keep our prices down we cross-subsidise businesses which sell our products, which include energy drinks, peanut butter, matches. This allows people to sell our products for cheaper.
“Does that mean we are not paying taxes? That our products are illicit? It’s clear from the report certain agendas are being driven. It’s about politics and profits and ensuring local manufacturers are kept out of the formal retail market.”
He said multinationals, which didn’t have manufacturing plants in South Africa, should engage local manufacturers and involve them.
“Why can't these big companies empower us and say: ‘Come produce for us’? That way you eliminate the competition.”
SARS said in an e-mail that itcould not provide figures on the losses to the economy from tax evasion by cigarette manufacturing companies  “because it is largely non-detectable, being a criminal activity”.
“The tobacco and cigarette trade is one of SARS’s priority areas,” the tax service said.
The organisation said they were working with other government departments and international counterparts and were conducting investigations and audits into alleged perpetrators.
“We use specific tools to identify non-compliant taxpayers and traders. Inspections on imported goods are done and we have criminal investigation teams to assist us. There are also other enforcement measures which we are implementing.”
SARS was, however, unable to say when it last did a raid on a cigarette factory.
“They take place continuously as part of our business-as-usual operations. We cannot talk about individual cases, due to legal privacy constraints.”NOW READ:
"Anti competitiveness by BAT" - A letter from Gold Leaf Tobacco to FITA
Please find some of the issues that we are facing in terms of anti-competitive behaviour from BAT and JTI.
Hi Senin (sic)
Please find some of the issues that we are facing in terms of anti-competitive behaviour from BAT and JTI.
Issued faced are:

BAT instructs their reps to remove all our point of sale material from corporate stores and these reps tell kiosk staff and managers that due to BAT having cigarette stands/units in their outlets, they are entitled to remove these items that don’t belong to them.
BAT also does not allow ‘communication items’ like posters and counter mats in the accounts where they have paid for shelf space and hot spot for their visibility.
BAT is the cigarette manufacturer that conducts category management on behalf of larger grocer chains. Due to this, they always place our products at the bottom where it is out of sight regardless of the rate of sale of our products. They do not allocate facings according to rate of sale but rather according to their brands getting the most visible spot on the shelf.
If we would like to list a new variant, we are told that we have to remove one of our slower lines and not the BAT brands that are not selling at all like Texan, Gunston, etc. The retailers should view the category as a whole and not have preference over manufacturers. Our faster moving lines should be give prime spots over the much slower moving BAT brands but they don’t as BAT often tells them that they have paid for the space. When BAT launches a nee products without history of rate of sales, they do not ask them to replace with a new product. They using their size and power in the market to disadvantage other cigarette suppliers.
JTI does not allow any other supplier to place price labels on the shelf and only allows their pricing labels. This is unfair as they already have the advantage of the hotspot for displaying their products and they have now removed any chance that we have to highlight our good pricing in the trade.

These are trends that occur most frequently in the trade and is a general approach from BAT and JTI.
Kind Regards
Rohan Sukuram
Global Head of Sales and Marketing - Corporate
Gold Leaf Tobacco Corporation (Pty) Ltd
Note: This letter was supplied to Times Select by Fita. It is published unedited...

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