‘Something very peculiar is going on in cigarette market’: UCT Prof Corné van Walbeek

Professor Corné van Walbeek, director of the research unit of the economics of excisable products at the University of Cape Town, has been talking to smokers about South Africa's lockdown ban on cigarette sales. He says there's been a huge increase in the intensity of sharing of cigarettes – even though the government's ostensible reason for the ban was to prevent this. He also predicts that when the sales ban is lifted, the market is going to be in complete chaos. – Editor.Professor Van Walbeek… Last time we spoke, you had brought out your first report – that was soon after lockdown – to see how South African smokers had reacted. We're quite a few months into the process now. In the first report, I recall you saying that it might have been well-intended, but it actually didn't work that well. The second set of research is now telling us that it really has amplified those errors. .Absolutely, that is exactly what we found. In our first report, we indicated that the prices on average had increased by 90% relative to pre-lockdown. At the moment the prices on average have increased by 250%, that's the average for the country but in some provinces, it's substantially more. Specifically, in the Western Cape, it's over 400% more than pre-lockdown. In some other parts of the country – the northern provinces and Gauteng – it's between a 150% and 200% more than what it was pre lockdown. .Are they quitting because of this? .___STEADY_PAYWALL___.We asked that question in more detail in this particular report. We asked specifically why did you quit, and the main reason why more than 50% of people attempted to quit was because of the price. About 14% of people quit because they were unable to find cigarettes, and only 11% of people indicated that they attempted to quit because of the ban on smoking, in other words, being a good citizen. Then there were some other minor reasons, like health concerns and so on but more than 50% has to do with the price of cigarettes. .That's a jolt. If only 11% of people are law-abiding enough to say we believe the law is a good law, that tells us 89% think it's a dumb law. .That's not me saying saying that, that's what our results are suggesting. That many people are simply not taking the regulation of the ban seriously. .Did you ever smoke? .No. At one level, I wish I had. Not because of anything else but I want to experience what smokers experience when they smoke, and also what smokers experience when they quit smoking. I think the experience of most people – and I've chatted to hundreds of people about smoking – is quite variable. Some people can quit relatively easily and others find it incredibly hard. Just to give a little bit more perspective on this, we also find that the quitters tend to be relatively light smokers. Again, that is something that you would expect. We found that on average for our sample – and I want to emphasise the fact that we are not making a general comment about smokers in South Africa overall, we're talking about our sample of about 23,000 respondents – what we found from them is that most of them that have quit have been light smokers, smoking less than eight cigarettes a day. Those that were unable to quit or didn't even try quitting, smoked an average of something like 16 cigarettes per day..Read also: Cigarette wars: Did government shoot itself in the foot with tobacco ban?.Now, I ask the question because I used to smoke as a young man for about a dozen years and I quit hundreds of times. If the price had gone up like that, I would have quit. Certainly, I would have told you in the survey I would have quit, but it would have lasted maybe two days, maybe three days. Only when I went to Smokenders was I able to finally quit. In other words, on a proper programme that enabled it and that went over six weeks. Certainly you still got cigarettes in Smokenders, you tapered off nicotine. It's not surprising that people would say, yes, they have tried to quit because of the price, because I think that would be a natural reaction. The question is how many stayed quit? .We asked that question and 71% of smokers indicated that they would want to stay quit, after the lockdown is over. By implication, 29% either were unsure or indicated that they would go back to smoking once prices have stabilised. .If you take the full sample of 100 smokers, how many of them have quit? How many of them are continuing to smoke during the lockdown? .If we look just at our sample and again emphasising that this is a sample, this is not nationally representative. About nine out of 100 smokers have successfully quit during the lockdown. Of those nine, approximately seven intend to remain quit, and two or two and a half of them are likely to restart smoking after the ban is over. I have to emphasise that we were oversampling whites and we found that whites are very, very poor quitters and African smokers were significantly better quitters during the lockdown and we sadly under-sampled black smokers. .Even so, 90% of people are still smoking. The question has to be there, where are they getting it? .Absolutely. We look into that and we ask the question, why did you buy your cigarettes? Primarily that bought them from what we would call informal outlets, outlets that did not exist before the lockdown, through WhatsApp groups, many more people buy through spaza shops, home groups, etc. From the formal retailers that previously had more than 50% of the sales going through, their share has reduced to 0.3%, basically completely vanished during this particular period. 93% of our respondents indicated that they had actually purchased cigarettes during the lockdown. So it's a very, very common thing. .They're criminals now because they're breaking the law? .Yes, they would be classified as criminals. .One of the strange, one of the motivating factors for the cigarette ban was that people would share cigarettes and that would be a quick way or an easy way of spreading the Covid-19 virus. That's the motivation or at least the official one… has that been achieved by banning cigarette sales, people are not sharing these cigarettes which they are legally now purchasing? .We specifically asked that in this round of the survey, we didn't do it in the first round. We asked people, did you share cigarettes, not from a box, but the same cigarette. Did you share that with other people? We asked them, did you do that before the lockdown and also, did you do it in the last four weeks? 82% of our respondents indicated that they had not ever shared cigarettes with other people before the lockdown. However, during the lockdown, that percentage has decreased to 74%. By implication, 26% of smokers have shared to some extent. .We ask ourselves the question if we can replay time and we start again in March, what could the government have done differently? Our view as economists is, increase the excise tax..What we found really interesting is that the intensity of sharing has increased quite significantly. Before the lockdown, less than 2% of people indicated that they shared more than half of their cigarettes with other people. During the lockdown, something like nearly 10% of people indicate that they are doing that. That's a huge increase in terms of the intensity of sharing of cigarettes during this time period. There's a good economic rationale for it. The cigarettes are so expensive you don't want to throw any of it away, you'd rather give it to someone else for them have their fix. The economic rationale and the understanding behind it is completely understandable. .Again, using a little bit of a personal example, as a schoolboy, we could hardly afford the cigarettes that we bought, but we used to do what it's called bouncing a cigarette. You would have a few drags and pass it on to somebody else because of the economic circumstances you were in. It doesn't surprise me that you found that your research showed that its had the exact contrary impact of the official desire to stop people from sharing cigarettes. If they are more expensive, you're going to perhaps get your kick in a different way. .Absolutely. The economics behind what we are seeing, everything makes economic sense. If the price goes up, people are going to consume less. We see that smokers have cut back on their consumption. According to our sample, the average consumption pre-lockdown was something like 16%. The average consumption amongst the continuing smokers during lockdown is something like 13 cigarettes per day. There is approximately a 20% decrease in daily consumption, even by continuing smokers as smokers are finding it becoming increasingly expensive. .If you then crunched the numbers, it looks like tobacco consumption is inelastic. In other words, not a huge difference in demand if the price has gone up because these price increases have been dramatic. Does that not suggest that if you were to make it legal again, you could jack up the excise duties?.That's exactly the point that we are making in our report. We ask ourselves the question if we can replay time and we start again in March, what could the government have done differently? Some people would say there should be possibly more information, the government should speak more nicely with smokers and not be so aggressive about the smoking ban. Our view as economists is, increase the excise tax. At the moment, the excise tax is officially R17.40 per pack of cigarettes. If we had increased that to as much as R50 a pack of cigarettes, the price of cigarettes would be R60, R70 to R80 a pack of cigarettes. They would still be available. Many people would cut back their consumption simply because it's too expensive. At the same time, the government is not losing a billion rand a month as they are losing at the moment. That is very much our argument that that would have been a better strategy in retrospect..What we are saying going forward is if the sales ban is going to get lifted and at some point in time it will be lifted, the market is going to be in complete chaos. The reason why it's chaos is that the multinationals that pre-lockdown had a market share of well over 75% and the local manufacturers that a market share of the remainder of about 20, 25%. That is completely reversed. The multinationals have a market share in the illicit market of less than 20%, the local manufacturers primarily have got the remainder. Many of them are attached to the Fair Trade Independent Tobacco Association (FITA)..Read also: Tax Justice SA: Cigarette ban costs fiscus R35m daily, exposes millions to Covid-19.There's going to be probably a very, very big price war where the multinationals are wanting to get the market share back, where the new companies are wanting to hold onto their market share and the way to fight that is by decreasing the prices. That's going to be seriously bad for public health – as prices go down, we know that people are going to smoke more. If prices go up, people smoke less. Yes, it's not very elastic, but at the same time, you do have those negative responses between an increase in the price and consumption. Our view is very much that when the government does lift the ban on the sale of cigarettes, we would argue strongly that the Treasury then significantly increases the excise tax. I'm not going to say to exactly how much, but a number that rings true is more or less a doubling of the excise tax. It would claw back some of the losses that they've incurred or the lack of revenue that they've incurred over the past number of months. At the same time, it will act as a disincentive for smokers to want to start smoking again. .The big proviso on this is, of course, illicit trade. Illicit trade has become much more entrenched over this time period. It's a tragedy. It was already pretty high before we had the lockdown, with something like 25 to 30%. At the moment, it's 100%. After the sales ban is lifted and we go back, there will still be these distribution channels that have been very much part of the fabric of this industry. Sars has got its work cut out where they really have to then focus on how can they cut back on the illicit trade which has become so deeply entrenched in the tobacco industry. .Dumb question. When Pravin Gordhan was fighting state capture, he said to us, join the dots. I'm asking you to join the dots for me. How is it that independents have suddenly got a 75% share in what is a 100% illicit market? .To be honest, I don't know. FITA… I find it interesting that they were the first tobacco organisation to take the minister to court. I think that this probably a fight within FITA, that FITA wants to present itself as an honourable, clean type of organisation. It's representing companies and wants them to be clean and so on, but I don't think that they actually have control over their members to cut back on illicit trade. .The fact that we are seeing all these brands that have been working on the fringes over the last number of years suddenly come to the fore and suddenly becoming the major brands is very, very peculiar. Does Sars have the capacity to be able to look at the situation and to be able to actually control the manufacturing that takes place? Of course, since the beginning of May, tobacco companies were allowed to produce. That is a particularly crazy idea that you're allowed to produce in principle for the export market. We know from history that the tobacco industry has got a reputation of making those so-called exports disappear into the local market. .Clearly something is not well, and the thing that is not well is that we've got this contradictory policy. On the one hand, we don't allow the sales of cigarettes. We starving the market, the prices are going sky-high. On the other hand, we are allowing production to take place so-called for the export market, and it doesn't take a brilliant person to work out that this is going to cause a tension that the tobacco companies will find and able to resist. They want to get into the market because their competitors are getting into the market and it's time to make lots of hay.

‘Something very peculiar is going on in cigarette market’: UCT Prof Corné van Walbeek

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