Cut-price smokes ‘here to stay’
Small manufacturers say big companies rip customers off
THE cigarette industry in South Africa is increasingly becoming a dog-eat-dog business as smaller manufacturers fight tobacco giants on price for market share.
Small local manufacturers have been entering the market with cigarettes selling at super-low prices of about R7 to R16 a pack. The newcomers have been welcomed by many in a country with high levels of poverty and unemployment.
Big tobacco companies, however, make the point that man- ufacturers have to pay excise and VAT of R12.45 on every pack of cigarettes, in line with the law.
“If you take into account manufacturing and distribution costs, it means that anyone selling a packet for less than R15.50 cannot be playing on a level playing field,” said British American Tobacco director Kingsley Weaton on a recent trip to South Africa.
This suggests that many of the independent local manufacturers duck taxes.
But that is not true, according to Belinda Walter, chairwoman of the fair-trade independent tobacco association. It represents six local manufacturers, one in Zimbabwe and another in Botswana, that sell brands such Yes, F1 and Forum.
Adriano Mazotti, head of local manufacturing company Branded World, explained that it was nearly impossible for the “smaller guys” to get a foot in the door, especially because tobacco companies had not been allowed to advertise since 1995. “To promote our brands, we often pay the necessary taxes and then sell our product for cheaper, essentially taking a cut in trying to promote our brand,” said Mazotti.
Business Times was shown an audit letter issued by SARS stating that it found one invoice for “promotional stock” showing that cigarettes were sold for R70 a carton, whereas the average carton in supermarkets sold for more than double that, often up to R300.
“However, the excise duties on these stocks have been paid in full,” the letter from SARS said.
Cigarettes were first subsidised in South Africa by Gallagher Tobacco about 10 years ago, when it launched its lowprice brand, LD.
Back then it was established that selling cigarettes at a lower price than excise duties and VAT was legal as long as the manufacturer ensured that all taxes were paid. The LD campaign was highly successful, and it is probably still the largest low-price brand.
Walter said her association and its members were often “victimised” by big companies, which insinuated their “value brands” were illegal because of their lower prices.
“These big companies have engaged in many years of sponsored propaganda, and their representatives and others often instruct retailers to take down our product. This is why this organisation was established: to protect small manufacturers from being individually victimised.”
However, British American Tobacco senior legal counsel Luche Joubert said it would be naive to think that everything was above board if one considered the large and increasing volumes of cigarettes being sold below R12.45.
“For anyone to subsidise such large quantities of cigarettes would just be madness,” said Joubert. But, according to the association, it costs only about R1.20 to make a pack of 20.
“If you add excise and VAT to that, and considering that they still charge R25 to R30 for a box, it is clear that these big companies had been ripping off their customers for years,” said Mazotti.
“They have been working on massive profit margins for decades and they are scared that their profit margins are coming under threat.”
Walter said independent smaller manufacturers did not need to make a 100% profit or pay huge royalties and dividends abroad, unlike the big listed companies.
“The R15 pack of 20s is here — whether the major manufacturers like it or not.”