The Illicit Tobacco Trade

Is the Illicit Tobacco Trade a new problem?

The main type of illicit trade 20 years ago was large-scale cigarette smuggling: containers of cigarettes were exported, legally and duty unpaid, to countries where the brand was not normally sold, where they then disappeared into the contraband market. The issue today is two fold, with some Tobacco products being legally imported into the UK from cheaper (often EU based) countries and sold by unlicensed vendors and others selling counterfeit Tobacco products carrying the names of big brands but with varying ingredients and levels of quality. It is believed that packaging changes bought about by EUTPD has made counterfeiting simpler. As well as Tobacco, illicit products are an issue for a variety of industries.

"The illicit trade is now linked to serious crime and products ranging from cancer treatments, children’s toys and baby milk formula are all now being counterfeited”.– The convenience store magazine

Since the introduction of EUTPD, prices have increased dramatically, fueled not only by taxation but also by retailer pricing. This makes the sale of Illicit Tobacco even more attractive to fraudulent traders.

"An investment of £1,000 in distributing illicit tobacco provides a return of at least £40,000 making illicit tobacco twice as profitable as drug smuggling”. – Police Scotland and HMRC

What are the reasons for the fall in sales?

As highlighted in our previous research, overall sales quantities are down and retailers are feeling the pain. Higher margins are currently mitigating this issue. One of the reasons for the fall in sales is the rise of illicit, as well as other issues within the industry such as:

• Societal Trends
• Pack Sizes
• Availability
• Increasing Prices

What do communities face?

A TRDP retailer has recognised this change within his community:

"I have noticed that in the last six months there has been an increase in the number of younger persons openly smoking on the streets and they’re not getting them from our shop”.

According to UK Trading Standards, retailers are prohibited from supplying tobacco to any person under the age of 18 years or they could face a fine of up to £2,500. Those selling Illicit Tobacco are not subject to the UK Trading Standards and do not feel the need to sell to people over the age of 18.

With the illicit trade becoming bigger over time, young users know they can get their supply from other source. For example, it is easy to purchase tobacco from social media platforms such as Facebook with 1,800,000 users between the ages of 13-17 in the UK alone. Once distributors have there contact base, they do not need to look elsewhere for custom.

In what way has this change impacted your business?

• "We have reported people to the Trading Standards."
• "People have a limited choice but still choose to buy and smoke. If the government still carry’s on with more taxes then small businesses will eventually vanish and it will be a shame as small stores are part of British history."
• "We have limited support from HMRC."
• "What can we do, you stop one person another one takes over. Before you know it the trade is spiralling out of control."
• "We are trying to promote Local Loyalty and Home Delivery"
• "We are focusing on other areas of our store to encourage growth"
• "I cannot do a lot. Media sites such as Facebook that support Buy, Swap and Sell pages need to be monitored by Trading standards and the police. When I have made comments opposing to people selling ill-gotten gains I get verbally abused by them. It’s a no win situation."
• "We have tried as much as we can but cannot seem to get our customer base back on a regular basis."
• "We cannnot promote tobacco products so we are limited in boosting the tobacco category."
• "I have invited along the local department to our next trade meeting."
• "Talking to customers about the impact it has on small businesses."
• "We are choosing to invest in E-Cigarettes and other alternatives and hope customers remain loyal."

What is the Tobacco Industry doing about it?

The industry is aware of the problem and are actively combating the smuggling of both genuine and counterfeit tobacco products into the UK as well as seeking to deter all aspects of the illicit trade in tobacco products.

This can be summarised as a five step approach:

• Intelligence
• Insight
• Technology
• Collaborative Working
• Mobilising Support

To Read more about how The Tobacco Manufacturers Association are tackling the Illicit Tobacco Trade click Here.

"Legitimate retailers, often small or family businesses, are damaged as smugglers, and criminals steal their trade, while rules for retailers to prevent sales to children are undermined by illegal sales away from the eyes of the authorities.” – British American Tobacco.

Is every business feeling the threat?

In a recent TRDP survey, we asked retailers if this change had had an impact on their businesses. We found that 20% of retailers felt the majority of their tobacco sales remained the same as last year, but trends suggest that they will feel the effects soon if they haven’t already.

How could you tackle this change?

The illicit Tobacco trade will, unfortunately, be an ongoing problem. Trading Standards are attempting to clamp down on the Illicit Tobacco trade. Re-focusing your business on high margin substitute products such as e-cigarettes, and higher margin categories such as confectionery, snacks and soft drinks, will help build to profitability of your store. Many retailers have found alternative uses for their gantries and have stocked them with high ticket alcohol to compensate for the lack of tobacco sales. Focus on making your shop stand out and boost those profitable categories.

Most Profitable Categories Hot Food Soft Drinks Frozen Chiller Snacks Groceries Confectionery

Average Margin 52% 35% 32% 32% 30% 29% 28%