Illegal cigarette sales during lockdown shake up South Africa's tobacco market

Illegal sales have benefited local producers and fueled a price spike. They may have changed the distribution of cigarette sales, a South African study points out.[1].

At the start of the 2020 COVID-19 lockdown, South African authorities suspended tobacco sales through the official network. However, the informal sector continued to sell tobacco during the five months of the ban, mainly to the benefit of local producers' brands. To establish this assessment of market developments, South African researchers used three waves of online surveys of smokers, during and after the lockdown, questioning their purchasing habits during the five months of the ban. They also put into perspective the developments in the South African tobacco market over the last decade.

Illegal trade booming since 2010

The South African tobacco market had evolved significantly before the lockdown. In 2000, British American Tobacco (BAT) was the largest player, with a market share of 90 billion. It was later joined by Philip Morris International (PMI) and Japan Tobacco International, with the three multinationals sharing a market share of 77 billion in 2019.

Since 2010, many local producers have also started selling cigarettes without paying excise taxes, distributing their products in the informal sector of street vendors and small grocery stores. They represented 22,% of market share in 2019, with price levels 73,% lower on average than those of international brands. Their entry into the market was simultaneously accompanied by a sudden increase in illegal tobacco sales, which rose from 10,% of the market in 2010 to 30,% in 2017. Tobacco multinationals have denounced the very low prices displayed by these producers and facilitated by the non-payment of taxes, despite the denials of these local producers.

Rapid increase in prices on the illegal market

Most smokers continued to smoke and buy through the parallel network, most often by switching from their usual brand to a local brand. The prices of these local brands quickly soared, to the point of showing an increase of 240 % in the second month of the sales ban.

Significant price differences were observed between the different provinces of the country: Gauteng province – the production area and economic centre of South Africa – and its surrounding areas were the least affected by these price variations, which more markedly affected the provinces that were furthest away, particularly the Western Cape.

Price gaps narrow after sales ban

The tobacco sales ban continued for almost three months after the lockdown and perpetuated this situation. The lifting of this ban on 17 August 2020 was accompanied by a readjustment of tobacco prices to return to a level comparable to that of early March 2020, with however an increase in the price of local brands and a narrowing of the gap with the prices of international brands (53% instead of 73 %). Local brands took advantage of this period to increase their market share, to the detriment of international brands.

Price differences between provinces also narrowed after the sales ban was lifted. Price differences between different types of packaging fluctuated: the price of single cigarettes, which had increased sharply (+45 %) during the sales ban, continued to increase (+61 %) after the ban; the price of cartons of cigarettes, which had moved closer to the price level of packs of 20 cigarettes, moved away from it again (from -3 % to -6 %) after the sales ban was lifted.

The authors of the study also noted a smoking cessation rate of 9% at the end of this period of ban on sales (7% according to the National Income Dynamics Study—Coronavirus Rapid Mobile Survey (NIDS-CRAM) studies, carried out nationally over a similar period). They deduce from this, based on the work of Becker and Murphy on addictive rationality[2], that the temporary nature of the tobacco ban was not a sufficient factor to trigger a smoking cessation process, despite the substantial increase in prices.

A proximity to political actors which would encourage trafficking

The researchers acknowledge that the online surveys did not allow them to gather the views of poorer smokers, who have less access to the Internet; they also admit that their sample was more female and made up of heavy smokers, and do not claim that it is representative of the South African population. However, their data are very close to those of the NIDS-CRAM studies, in terms of quit rates and the price of 20-cigarette packs.

The study only briefly mentions the smuggling cases in which tobacco multinationals have also been involved from South Africa. Nor does it mention the proximity between policy makers and tobacco producers, highlighted by the Tobacco Interference Index.[3]During the tobacco sales ban, the South African authorities had granted local producers the right to maintain their export activities, part of which was diverted to supply the South African parallel market.[4]The participation of a local producer, Gold Leaf Tobacco Corporation (GLTC), in contraband activities during this period of confinement had notably been highlighted.[5].

In 2015, the recent commissioner of the South African Revenue Service (SARS), based on disinformation orchestrated by BAT, had abolished the special illicit market inspection teams, which were restored in 2018 by his successor in the form of a unit dedicated to the illicit economy. South Africa has since struggled to establish an effective traceability system.[6].

Keywords: South Africa, lockdown, market, smuggling ©Tobacco Free Generation

M.F.

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[1] van der Zee K, Filby S, van Walbeek C, When Cigarette Sales Suddenly Become Illegal: Evidence From an Online Survey of South African Smokers During COVID-19 Lockdown, Nicotine & Tobacco Research, 2022;, ntac067, https://doi.org/10.1093/ntr/ntac067 [2] Becker GS, Murphy KM. A theory of rational addiction. J Polit Econ 1988;96(4):675–700. [3] In South Africa, the tobacco lobby is gaining ground, Generation Without Tobacco, published September 29, 2021, consulted May 6, 2022. [4] The 20-week tobacco sales ban of 2020 greatly disrupted the cigarette market - UCT study, University of Cape Town, Communication and Marketing Department, published 3 May 2022, accessed 5 May 2022. [5] South Africa: Cigarette maker accused of smuggling during pandemic, Generation Without Tobacco, published September 17, 2020, consulted May 6, 2022. [6] Tracking and tracing of tobacco products: the South African tax administration up against the wall, Generation Without Tobacco, published October 16, 2020, consulted May 6, 2022. National Committee Against Smoking |