The illicit industry taking over South Africa 

The illegal cigarette market is outpacing the legal market, and its use of aggressive pricing strategies has cost the government billions over the last few years. 

This is according to research from Ipsos, which was commissioned by British American Tobacco South Africa (BATSA), and is the latest iteration in a series of mystery shopper surveys started in 2021. 

As part of the study, Ipsos researchers visited a sample of more than 4,500 stores representative of the total retail universe in South Africa to purchase the cheapest available pack or carton of cigarettes.

The research revealed that 59% of stores sampled sell illicit cigarettes, with the cheapest price point at R5 per pack of 20, intensifying the ongoing price war among illicit manufacturers.

“The illicit cigarette market comprised 5% of the market in 2009, peaked at 60% in 2021, and decreased to 58% in 2022,” a study from the University of Cape Town (UCT) said.

According to the Ipsos study, new manufacturers are entering the market, which is fuelling intense competition at the bottom end of the market.

“The entrance of new players raises some serious concerns about the Government’s commitment to address illicit trade,” said Johnny Moloto, Area Head of Corporate & Regulatory Affairs for BAT Sub-Saharan Africa. 

“Nothing justifies licensing new manufacturers in a sector already ravaged by high levels of non-compliance without conducting proper due diligence.” 

He said the Ipsos study highlights the challenge facing the new government in tackling illicit trade and cross-border illicit financial flows, which are wreaking havoc on our economy and tax revenues.

“To right the ship, authorities urgently need to prioritise the fight against illicit tobacco and secure convictions against the ring leaders,” Moloto said.

“BATSA also calls for an immediate forensic audit of all tobacco factories in the country, including our own,” he said.

Tax implications 

The UCT study showed that in 2022 alone, the government lost R15 billion in excise taxes and R3 billion in value-added tax (VAT) from these illicit sales.

From 2002 to 2020, the government lost a staggering R110 billion in revenue. 

Had the South African Revenue Service (SARS) collected its fair due in 2022, it would have added another 1% in total government revenue to the actual 0.6% received.

“BATSA estimates that the government will continue to lose an estimated R24 billion in excise tax revenue to the illegal cigarette trade every year,” Moloto said.

In the past few years, retail outlets have fluctuated in their availability of cigarette packs selling below the Minimum Collectable Tax (MCT).

It dropped from 44% in March 2021 to 27% in October 2022 before surging to 59% in 2024. 

An illicit pack of 20 cigarettes sells for anything from R15 to more than R50. The excise on the pack is R21.77, meaning that anything selling for less than about R32 is probably illegal, the UCT study explained.

BAT also calculated the MCT on cigarettes as the following:

• Excise: R21.78 for 20 cigarettes (1 pack)
• VAT on excise: R3.27 for 20 cigarettes (1 pack)
• MCT (excise + VAT): R25.05

The Ipsos research showed a concerningly high level of cigarette packs available below R25.05 in the wholesale and informal trade, at 83% and 72%, respectively.

“These findings show the futility of punitive regulation aimed at the legal industry, while illicit cigarettes are widely available at rock-bottom prices, concentrated in channels used by low-income earners such as corner shops, spazas and tabletop hawkers,” Moloto said.

“The result is a market descending into freefall, as law enforcement struggles to contain the escalating illicit economy.”

Recent estimates by tobacco majors such as BAT and Philip Morris estimate that the illegal cigarette market has a 60% market share, with some suggesting the black market is as high as 70%, according to UCT’s study. 

This means that legal cigarette sales on which taxes were paid only accounted for about 14.3 billion sticks in 2022, compared to 19.4 billion illicit sticks.

Aggressive pricing strategies in the market were a key part of the reason for these rates.

The research revealed that Gold Leaf Tobacco Company (GLTC), which operates out of Johannesburg and Harare, has doubled down on an aggressive pricing strategy. In May 2024, 79% of its brands were available for less than MCT, compared to 28% in March 2021.

A GLTC brand named ‘Chief’ – a recent addition to its portfolio – is the most widely available cigarette brand selling below R25.05.

Companies like Carnilinx, Afroberg and Best Tobacco are all competing with GLTC at the lower end of the market, as new manufacturers like Bozza add to the pressure, BAT explained.

“Notably, a core group of manufacturers have consistently supplied large quantities of cigarettes at prices well below MCT over the entire three-year period since 2021,” Moloto said.

“This makes it patently clear that these manufacturers are not using a loss-leader discount strategy, as it would be commercially impossible to stay in business if all taxes were paid.”

“Their bargain-basement prices for such a sustained period, in our view, point to the possibility that they likely do not pay all taxes due.”

Given the magnitude of the problem, BAT called on the National Treasury to capacitate SARS with additional funding for forensic tax investigations, and on SARS to step up visible enforcement efforts against tax evaders like those in the illicit tobacco trade.

“Further, we believe the Hawks should prioritise investigating and prosecuting complex crimes such as these and that the NPA must do everything in its power to secure convictions to signal the new government’s clear intent to step up the fight against crime and corruption,” Moloto said.

“An urgent task for the new Government of National Unity is to stabilise the fiscus and bring rising debt under control, and take decisive steps to reverse the exponential growth of the illicit tobacco trade that has taken place since the 2020 Tobacco Sales Ban.”

He explained that one of the most effective solutions to the illicit tobacco trade is for the Finance Minister to introduce a Minimum Retail Price, which would make it illegal to sell cigarettes for less than a stated amount.

“This would provide a valuable tool for law enforcement agencies as they seek to enforce and prosecute, and would empower them to tackle illicit trade head-on.”