South Africa may have finally lifted its highly controversial tobacco ban – but it has left the country in an utter mess, backfiring spectacularly.
By Thomas Schmid
When South Africa’s authorities introduced a total ban on tobacco products on March 24 as part of the Covid-19 lockdown, it hit industry and consumers alike totally out of the blue. The reasoning behind the ban reportedly was that exhaled tobacco smoke might carry the SARS-CoV-2 virus and, thus, propagate or even accelerate the spread of Covid-19. Of course, there was not one credible study that conclusively proved that there existed any higher risk of contracting Covid-19 through smoke than there was from people breathing out normally.
The only aspect that somewhat could’ve justified the ban was that tobacco smokers typically remove their protective face masks when lighting up or using their device, given that prohibiting smoking in public and close proximity to other people would have completely sufficed. But, completely banning all sales of tobacco products seemed just as irrational as, for instance, suspending sales of asthma inhalers or inflatable party balloons. The ban also bestowed South Africa with the doubtful honor of being the only country worldwide to have resorted to such a heavy-handed approach.
And, what initially was promised to be only a temporary prohibition was extended again and again. Not that it mattered. Consumers still found their supplies without much difficulty. Instead of dedicated tobacconists or supermarkets, cigarettes in South Africa are mostly sold by informal street vendors and small “mom-and-pop” groceries and few among these adhered to the sales ban. As stocks of legal cigarettes eventually depleted, illicit tobacco products filled the void, further compounding a problem that already had existed pre-Covid.
In its fifth issue last year (vol. 23 no. 5), Tobacco Asia had carried a comprehensive featured article that explored how an unprecedented deterioration of state institutions and agencies in the country, including the South African Revenue Service (ironically abbreviated as SARS), not only had led to massive tax dodging but also to the domestic market being swamped with illicit product. The (since-defunct) Tobacco Institute of Southern Africa (TISA) had told Tobacco Asia at the time that the total cigarette market in 2018 was estimated at 30 billion sticks. Yet, legitimate manufacturers had only contributed about 18bn sticks to that figure, the balance of 12bn sticks being “illegal or duty-not-paid.”
A pack of cigarettes bought from an informal vendor routinely retailed for an average price of only ZAR10 (US$0.66), often enough even less. However, the minimum applicable excise tax rate per pack in 2018 in fact stood at ZAR17.85 (US$1.18), making it quite clear that cigarettes sold at below the actual tax rate ought to be illicit. Furthermore, a TISA-commissioned study conducted in 2018 had revealed a staggering increase in illicit cigarettes in the informal market from 33.4% of total sales in June 2018 to 42% in October.
According to TISA chairman François van der Merwe, it was one particular – but unnamed – company that was largely to blame for that situation, as its products allegedly “represented 73% of the national market for illegal cigarettes.” By the time our article was published, South Africa’s hitherto bestselling brand, British American Tobacco South Africa’s (BATSA)Peter Stuyvesant, had supposedly been outstripped by the unnamed company’s products. Incredibly, this de-facto made South Africa the first and only country in the world where an illicit cigarette brand had become the national top seller.
Then SARS-CoV-2 started rearing its ugly face, the ensuing sales ban commencing on March 26, 2020. While it didn’t succeed at curbing the spread of Covid-19 in any meaningful way, it certainly excelled at exacerbating the already untenable illegal tobacco situation. Consumers jockeyed for illicit cigarettes as legal products either were taken off shelves or their remaining stocks – sold under the table, ban or not - quickly melted away. A study by the University of Cape Town’s Research Unit on the Economics of Excisable Products found that of 23,000 smokers polled, an astonishing 93% said they were still able to purchase cigarettes despite the tobacco ban.
When the ban was finally lifted on August 17, the damage it left behind was mindboggling. For instance, BATSA claimed in a recent press release that its pre-lockdown market share of 48% had eroded to just 8.7% by the end of June. “The minuscule amount of people who have reported being able to buy BATSA brands almost certainly obtained them out of pre-lockdown shipped retail stock,” BATSA said in the statement, describing the ban as “bizarre and irregular”. Additionally, BATSA alleged South Africa had lost US$36m in taxes during every single day the ban lasted.
But BATSA was not the only party irked. Local and international media widely reported that the Fair Trade Independent Tobacco Association (FITA), which represents 80% of South African cigarette manufacturers, on May 4 had filed a law suit against the country’s Minister of Cooperative Governance and Traditional Affairs. FITA charged that there was no rational connection between the cigarette ban and the aim of preventing the spread of Covid-19. Although the Pretoria High Court dismissed the suit on June 26, ruling that the minister had acted reasonably with a view to save lives, FITA has already filed an appeal with the Supreme Court.
Another fallout of the ban was a steep price rise particularly for premium brands, which according to a report by local business news website, businessinsider.co.za, apparently was unilaterally driven by retailers trying to get back on their feet financially. The website had compared pre-lockdown with post-ban retail prices in Cape Town (see table). The findings were that prices for premium brands had skyrocketed by as much as 35% -- although prices of mid-range brands either stayed about the same or were even slightly cheaper than before Covid-19.
On top of that, a more official price increase also has been applied in the meantime. Business Insider cited a letter reportedly sent by BATSA to retailers, informing them that as of August 24 the company would be raising prices of its brands by between 4% and 10% to recoup some of the revenue lost after nearly five months of tobacco ban.”This [price increase] will have a negligible impact on the losses suffered during the prohibition on legal sales but it will, we believe, allow us to continue supporting or partners in the legitimate value chain,” the BATSA letter, dated August 17, stated. Manufacturers and distributors of illicit, untaxed cigarettes probably must have rejoiced once again after hearing all of this.