Fita Challenges BATSA Illicit Tobacco Research in SA

• The Fair-Trade Independent Tobacco Association (Fita) is challenging research funded by British American Tobacco SA (BATSA) that links smaller manufacturers to a rise in South Africa's illicit cigarette trade.
• An Ipsos survey, funded by BATSA, reported finding cigarettes sold below the minimum collectable tax of R27.12 in nearly 75% of retail outlets visited.
• Fita argues that the survey's methodology incorrectly equates the presence of below-tax products in stores with the overall volume of illicit cigarettes and can misattribute illicit sales to legitimate brands.
• BATSA attributes its Heidelberg factory closure and reduced capacity to illicit trade, alongside weak law enforcement and the 2020 tobacco sales ban.
• Past criticisms, including from a UCT researcher in 2022, have also highlighted methodological issues in BATSA's illicit trade claims.

Fita maintains that such retail price surveys cannot definitively establish whether a manufacturer failed to pay excise, pinpoint a pricing anomaly within the supply chain, or identify a counterfeit product.

The Fair-Trade Independent Tobacco Association (Fita) has publicly questioned research financed by British American Tobacco SA (BATSA), which suggests that smaller manufacturers are responsible for a significant increase in illicit cigarette sales across South Africa. This challenge comes in response to an Ipsos survey, funded by BATSA, which reportedly identified cigarettes sold below the minimum collectable tax in nearly 75% of retail outlets visited, a substantial rise from 27% in a similar 2022 survey. The minimum collectable tax benchmark stands at R27.12 per pack, yet some products were found retailing for as little as R7.

Fita acknowledges that illicit trade represents a serious issue, causing revenue loss for the fiscus, disadvantaging compliant businesses, and necessitating robust, impartial enforcement throughout the entire supply chain. However, the association firmly rejects the presentation of industry-funded research as conclusive evidence that three-quarters of all cigarettes consumed in South Africa are illicit, or that independent manufacturers should be specifically named based on statistics that do not support the accompanying narrative.

Fita's critique extends to the methodology of the Ipsos survey, which involved 4,704 purchases. The association contends that the survey merely indicates where below-tax cigarette packs can be found, rather than accurately quantifying the total volume of illicit cigarettes sold. For instance, a retail establishment might stock a single brand priced below the tax threshold while selling significantly larger quantities of tax-compliant products, a distinction the survey did not measure.

Furthermore, Fita has criticized the practice of identifying specific manufacturers whose brands were purchased below the tax threshold. The organization argues that a retail price survey cannot definitively establish whether a manufacturer failed to pay excise, pinpoint a pricing anomaly within the supply chain, or identify a counterfeit product. A significant concern raised is that brands are attributed based on packaging, meaning a counterfeit item could be mistakenly recorded against the legitimate brand owner, distorting the true picture of illicit activity.

These criticisms from Fita are not new, reflecting ongoing debates within the sector. In 2022, University of Cape Town researcher Nicole Vellios highlighted a similar issue, tracing BATSA's claim that “almost 70% of all cigarettes consumed in South Africa belong to illicit brands” back to a survey finding below-tax packs in “almost 70% of outlets in Gauteng.” Vellios noted that the national figure was 34% of stores and deemed it misleading to suggest that 70% of the Gauteng market was illicit based on these findings.

BATSA, for its part, announced in January that it would close its Heidelberg factory, which was operating at only 35% capacity, largely attributing this to the impact of illicit tobacco sales. The company also cited weak law enforcement, the 2020 tobacco sales ban, and above-inflation excise increases as contributing factors to the deteriorating market conditions. Johnny Moloto, area head of corporate and regulatory affairs for BAT Sub-Saharan Africa, stated that Fita’s latest comments do little to advance a serious discussion about South Africa’s illicit cigarette crisis, affirming that BATSA stands by its published independent research and remains committed to efforts aimed at addressing the illicit market that undermines legitimate businesses, employment, and state revenue.

The South African tobacco market has faced significant challenges, particularly since the five-month ban on tobacco sales implemented by then-Minister Nkosazana Dlamini-Zuma during the Covid-19 pandemic in 2020. This ban, purportedly aimed at reducing pressure on hospitals, severely impacted the market shares of major manufacturers like Philip Morris and BATSA, leading to a dramatic shift towards illicit brands and an influx of cigarettes paying no excise duty across borders.

Local manufacturers were also accused of tax dodging, contributing to estimated annual tax losses of R30 billion. The tobacco market has yet to recover to its pre-Covid levels, indicating the lasting effects of these disruptions. The ongoing dispute over research methodologies underscores the complexity of accurately assessing and combating the illicit tobacco trade in the country.

Compliance officers in the South African tobacco sector should scrutinize research methodologies used to assess illicit trade, particularly when such research is industry-funded, to understand potential biases and ensure accurate reporting. Legal counsel should be prepared to challenge or defend claims of illicit trade based on the interpretation of market data and the attribution of products to specific manufacturers, especially concerning issues like counterfeiting or supply chain anomalies.

Source: Original reporting via industry news