South Africa – where much of this book plays out – has its own tobacco-related rags-to-riches story (which ultimately ends up circling back to Lausanne decades later). In the 1940s a small tobacco farmer, Anton Rupert, noted that even the depression did not seem to decrease people’s consumption of tobacco and liquor, and started manufacturing cigarettes in his garage with an initial investment of £10,5 which he eventually built into the tobacco and industrial conglomerate Rembrandt Group. He has been credited with innovations ranging from king-size filter cigarettes, foil-wrapped packs and menthol filters, and the international hit brand Peter Stuyvesant.
In 1988, Rupert’s Rembrandt group founded the Swiss luxury goods company Richemont, effectively turning his earlier £10 investment into a company with annual net sales of $10 billion. In 1995, Rembrandt and Richemont consolidated their tobacco interests into Rothmans International (at the time controlling 93% of the legal tobacco market in South Africa). Their market share was ultimately ceded to BAT, handing over what was a virtual monopoly,6 and setting BAT up for dominance in the local market for decades to come.
Today, BAT is estimated to control around 74% of the local licit market, followed by JTI with 9% and PMI with 8%. This dominance, combined with the high excise tax on cigarettes, makes BAT one of the largest contributors to the fiscus.7
Whether it’s South Africa or America or mostly anywhere, the story almost always plays out the same way: a man makes some cigarettes; he finds a faster and cheaper way to make more cigarettes; he expands into other products; he gets bought up by a larger company; that big company merges with another conglomerate.
Oligopolies that started in somebody’s garage.
In recent years, a confluence of events has started putting pressure on what was previously a seemingly invincible industry. And industries under pressure bring out the big guns and the dirty tricks.
The first reason why big tobacco has been forced into a defensive posture has to do with simple market dynamics: smaller, local, low-cost manufacturers who are making inroads into its market share.
The second dynamic is a general increase in the awareness of big tobacco’s chequered past, resulting in more efforts around the world to regulate its business practices more effectively (especially in places like Western Europe).
The third is an obligation imposed under an Illicit Trade Protocol in the World Health Organization’s Framework Convention on Tobacco Control8 to introduce a track-and-trace system for cigarettes, so that cigarettes end up where they are supposed to, and packs that do make their way to the black market can be traced back to their manufacturer.
A fourth problem facing the industry is that governments are increasingly being pressured to introduce higher tax rates, as an incentive for people to stop smoking. Quite understandably, this is the last thing the tobacco industry needs.
Make no mistake: Impressive bottom lines notwithstanding, big tobacco is under pressure.
Which perhaps in part explains why it feels the need to take out the competition that is mercilessly chipping away at their market share. While the focus of this book is on big tobacco, it helps to understand the upcoming crop of independent manufacturers who are giving the big boys a run for their money.
2. The competition: ‘Cheap and nasty’
‘The magician must expect the exposure of his tricks sooner or later, and see what it has required long months of study and time to perfect dissolved in an hour. The very best illusions of the best magicians of a few years ago are now the common property of travelling showmen at country fairs.’
– French magician Alexander Herrmann
In the simplest terms, there are three circles in the tobacco manufacturing industry: multinational big tobacco companies with their globally-known big brand names; smaller, independent manufacturers who typically make cheaper – but still legal – cigarettes (sometimes called ‘cheapies’ or value brands); and the guys who manufacture specifically for the contraband market, making counterfeits (addendum 3) or what are called ‘illicit whites’ or ‘cheap whites’ (addendum 4).
In an interview Johann van Loggerenberg, the tax sleuth and author of books like Rogue, Death and Taxes, and Tobacco Wars, describes them as bank robbers, bag snatchers and muggers respectively.1
The big guys, the little guys, the purely criminal guys, they all have three things in common: they all try in some way to minimise their tax liabilities; their products all – to a lesser or greater degree – seem to find their way on to the black market; and they all, in the end, will likely kill half of their customers.2
Increasingly, big tobacco is under material pressure from smaller, local low-cost manufacturers who are making inroads into its market share.3 For instance, South Africa’s Carnilinx sells its value brand for R17 (just over $1 at the time of writing) a pack. BAT’s most popular Peter Stuyvesant packs sell for around R44 (roughly $3).4 How can a Carnilinx pack sell for so much more cheaply than one from BAT does? They could be evading taxes, but not necessarily so: on average, it costs less than R1,50 to make a pack of cigarettes, and these smaller, low-cost companies do not have to send royalty payments, management fees and IT charges to an offshore parent company like BAT has to. And because what you’re allowed to put into cigarettes is reasonably well regulated, their product is at least in some way comparable to what big tobacco makes. For cash-strapped consumers it’s an obvious choice.
As Yusuf Kajee of Amalgamated Tobacco South Africa puts it: ‘It’s like people having a choice between Prada and Gucci [meaning the big tobacco companies] and then Mr Price [a value clothing and homewares brand in South Africa]. That’s all we are doing – offering a lower-priced cigarette to the ordinary man on the street.’5
In 2002, when the illicit cigarette trade was just beginning to pick up pace, BAT’s market share in South Africa stood at between 86% and 95%; it now sits at around 74%.6 Here’s why: In 1999, 27% of South Africans smoked. Big tobacco held more than 80% of that market, equating to some 4,6 million smokers buying their brands. By 2015, in large part because of targeted anti-smoking campaigns, only 11% of South Africans were smoking. Where big tobacco previously had a potential pool of 4,6 million smokers to target, they were now down to a pool of 2,7 million smokers7 – many of whom were now more price conscious. So, in the space of six years, big tobacco in South Africa had effectively lost 1,9 million smokers – close to half their market.
With fewer potential smokers to sell their products to, the entrance of competitors who sell what are essentially the same products more cheaply would be the last thing big tobacco needs.
What big tobacco instead appears to have done, is to effectively suggest that there are only two classes of tobacco manufacturers: big multinational corporations, and criminals. It’s a tactic that works well – by attempting to paint all of its competitors as inherently criminal, big tobacco plays to our collective sympathies and fears. In South Africa, big tobacco has claimed that the local market is being flooded with illicit cigarettes and seemingly lays the blame squarely at the feet of smaller, local low-cost manufacturers like Gold Leaf Tobacco and Carnilinx, portraying them as the veritable axis of evil.
Painting them as entirely criminal is not borne out by the facts. So, for instance, media reports suggest that in 2018 South Africa earned around R17 billion (more than $1 billion) from excise duties and VAT on tobacco products. R4 billion of that is reported to have come from local independent manufacturers of cheapie brands.8 If these reports are correct, it would suggest that almost a quarter of the tobacco tax being collected comes from value-brand manufacturers. Labelling them as intrinsically criminal just doesn’t add up: they seem to be paying at least some taxes, although they have also been implicated in allegations of unlawful behaviour.
Indeed, illicit cigarette sales are on the increase in South Africa as they are in many parts of the world, and they do put our tax offices under greater pressure.