Squeezing the cigarette smugglers is easier said than done
THEY have been repeatedly hit with excise-driven price hikes, bans in public places, graphic health warnings and other measures to stamp out smoking. Yet, last year Malaysians smoked almost 23 billion cigarettes, making tobacco still an industry where companies continue to post significant profits and good returns on investment for its shareholders. A case in point is British American Tobacco (BAT), still the biggest of the Big Three, with more than 60 per cent of market share, which declared a dividend of 276 sen per share for last year on the back of RM4,127 million in revenue and RM720 million in profit after tax at the company's shareholders meeting on Tuesday. BAT's financial performance demonstrates that despite the regulatory pressures against cigarettes and the lower sales volume, it has been able to maintain profits, keep share prices high and make a good dividend payout.
However, as nine billion of the cigarettes, or more than one in every three cigarette smoked, were not made by the company, or by the two other major international tobacco companies in Malaysia, but smuggled into the country by crime syndicates, BAT is understandably concerned about the loss of customers to the contraband, and has called on the government to squeeze the smugglers harder. To be sure, there is a need to take decisive action to tighten the borders, checkpoints and sale at the counter as the smuggling deprives the Treasury of RM2 billion in revenue and the lower-priced contraband cigarettes undermine the public health objective of raising tobacco taxes. But given the size of the black market, which according to the Goldman Sachs Global Tobacco Report in 2009 is the biggest in the world, and the length of our coasts and borders, this will be easier said than done.
As it is, the Royal Malaysian Customs has stepped up stringent inspections of shipments at the ports, and the Maritime Enforcement Agency is intercepting boats smuggling kretek cigarettes. Both Customs and the Health Ministry have also raided retailers selling contraband cigarettes under the counter. Though these actions have helped to check the influx, at 36.1 per cent of the tobacco trade, the black market is still extensive. Like it or not, as smoking is a habit that is easy to make but hard to break, this means that demand is relatively inelastic. And this also means that when prices are high, poorer smokers will look for the cheaper smuggled varieties at the expense of the premium and the value-for-money brands of the big tobacco companies.