The tobacco industry is full of fallacies regarding the illicit trade. The market for illicit cigarettes is a complex one that in many cases spans across national borders. Illicit trade is something that harms all reputable tobacco traders and this sadly includes some traders who are regularly and unfairly implicated.
Here are some known examples of how the illicit trade of tobacco thrives:
Counterfeit tobacco products
Counterfeit tobacco products are very popular for good reason, it’s manufactured in unregulated quantities and questionable qualities, dodging tax obligations and has access to a sizable market who find the counterfeit products trustworthy as they imitate well-known brands. One example of this is in Lesotho where counterfeit Gold Leaf Tobacco Corporation brands were manufactured and then smuggled into South Africa. These products were sold at a much lower price which appeals particularly to lower income communities.
Price averaging
When it comes to spaza shops and other informal trading outlets many vendors will buy legitimate tobacco products along with cheaper or even counterfeit tobacco products. Cigarettes are a powerful customer pulling product for retailers. Some cigarette brands are more desirable and understandably more expensive. With the widespread poverty in South Africa customers are drawn to good quality cigarettes at a low price. It for this reason that small businesses commonly use a technique called price averaging. In doing this they buy more expensive tobacco products along with much cheaper ones. They then inflate the prices of the cheaper cigarettes in order to bring down the prices of the more desirable brands. This way they don’t lose any money in deflating costs and benefit from the customers drawn by the more desirable brands selling at discounted prices. This practice fuels the illicit trade as it keeps the demand for cheaper products high.
Round tripping
The tax due on cigarette sales in south Africa do not apply to international sales deals. This means that persons from neighbouring countries can buy cigarettes from manufacturers in South Africa duty free. Unfortunately some of these purchased products are smuggled back into South Africa and sold at a lower price as the traders already paid a very low price for them. This is what we call round-tripping and it is a major contributor, if not the biggest, to the illicit market in South Africa. This drains funds from the government and ruins the reputation of the manufacturers. It is very difficult for the manufacturers to identify the problem buyers as these consignments often change hands a number of times before being round-tripped back into South African streets.
Our Stance
The South African Tobacco Organisation fully supports the fight against the illicit market in every way possible. We intend to work in harmony with law enforcement as well as various other governmental institutions in an attempt to develop the tobacco industry and eradicate illicit trade.