Like millions of Spaniards, Alicia García has been forced to make sacrifices because of the country’s debt crisis. The 32-year-old beautician used to smoke up to a pack a day, but now she’s down to just five cigarettes. “Smoking has just become way too expensive,” says García, as she stands on a street in downtown Madrid puffing away. “I’ve got to think twice before lighting up.”
Squeezed by a deepening recession and higher excise taxes, Spain’s 10 million-plus smokers have become ripe targets for cigarette smugglers. Illegal imports now account for 7 percent to 8 percent of overall cigarette sales, compared with nearly zero a year ago, according to the country’s tobacconists’ association. The number of cigarette packs sold in Spain fell 17 percent last year, according to the Tobacco Market Commission, which tracks only legitimate commerce. “Smuggling and fake tobacco, which had been eradicated since 1993, came back strongly last year,” says Jaime Gil-Robles, corporate affairs director at Altadis, the local unit of Imperial Tobacco Group (IMT:LN), which has one-third of the €11.3 billion ($14.8 billion) Spanish market. In a single week last month, Spanish tax authorities seized more than 1 million illegal packs of cigarettes worth about €4 million.
The problem is not confined to Spain. French authorities seized 462 tons of counterfeit and contraband tobacco products last year—a 33 percent increase from 2010. Much of that cargo was bound for the U.K. and Ireland, which have the highest tobacco excise taxes in the European Union. In Dublin, a pack of Marlboros costs €9.10, compared with €6.20 in Paris.
“I’ve been working in this area for four years and the problem is only growing, growing, growing,” says Ross Marié, who heads the anti-illicit trade unit at British American Tobacco (BATS:LN), maker of Lucky Strikes and Dunhills. Morgan Rees, director of regulatory communications at Philip Morris International (MO), which owns the Marlboro brand, estimates that illegal sales account for about 10 percent of the market in Europe.
While contraband imports from China have leveled off, those from Russia and other parts of Eastern Europe are on the rise, says Austin Rowan, head of the tobacco and counterfeit goods unit at the European Anti-Fraud Office (OLAF) in Brussels. “The deep economic crisis in certain markets such as Lithuania, Latvia, Romania, and Spain has fueled the problem,” he says.
Spain’s 22.9 percent unemployment rate is the highest in the EU. Factor in a ban on smoking in public places, starting at the beginning of last year, along with a tax increase of 50 euro cents per pack, and you have the makings of “a perfect storm,” says Imperial Tobacco Chief Executive Officer Alison Cooper. The crowds of Spaniards puffing away outside of bars and restaurants are a ready market for street peddlers of contraband cigarettes, says Marcelino Gamez, president of ONAE, a lobbying group that represents about 2,500 tobacconists. A €4.25 pack of Marlboros can be bought for about €2.25 on the black market.
It’s not just cigarette makers that are losing out. The illicit tobacco trade costs European governments about $10 billion a year in lost revenue, according to OLAF. In Spain, Altadis has appealed for a two-year freeze on tobacco tax increases, while Imperial’s Cooper is holding out hope that the government will relax the smoking ban.
Such concessions would rankle health advocates such as Armando Peruga, program manager of the Tobacco Free Initiative at the World Health Organization. Peruga notes that Spain, along with Italy and Ireland, has successfully used tax increases to curb smoking rates. “Tobacco companies want to frighten the government with the scarecrow of losing money from tobacco taxes due to the increases,” he says. “That’s a fallacy. When smoking is banned in public spaces, the only power firms have is low prices, which they lose if the government increases taxes.”