Bloomberg News

Smugglers Prosper in Spain’s ‘Perfect Storm’ for Tobacco

February 14, 2012

(Updates with comment from tobacconist group president in 18th paragraph.)

Feb. 8 (Bloomberg) -- Spanish smokers, squeezed by higher taxes and a deepening recession, are increasingly relying on smugglers to feed their habit.

Illegal imports now account for 7 percent to 8 percent of Spanish cigarette sales, compared with almost nothing a year ago, according to the country’s tobacconists association. In southern provinces such as Cadiz, Seville and Malaga, the proportion is 20 percent.

“Smuggling and fake tobacco, which had been eradicated since 1993, came back strongly last year,” said Jaime Gil- Robles, corporate affairs director at Altadis, the Spanish unit of Imperial Tobacco Group Plc.

Smuggling, encouraged by a December 2010 increase in tobacco taxes and a ban on smoking in public places, has eroded both government coffers and company revenues. Spain, which has the European Union’s highest jobless rate, collected 14 percent less tobacco taxes in 2011 than a forecast of 9.05 billion euros ($12 billion), excluding value-added tax, according to Altadis.

“The fiscal policy was disastrous as it forced an average increase of 50 euro cents per packet,” Gil-Robles said. “Add the crisis and skyrocketing unemployment to that and you have the best scenario for smuggling and illicit tobacco.”

In a single week last month, Spanish tax authorities seized more than a million illegal packets of cigarettes worth about 4 million euros. In December, officials said they confiscated 561,500 packets of fake Marlboro brand cigarettes which were imported from China and entered the country through the port of Valencia in a container marked “synthetic fiber.”

‘Tremendously Worrisome’

The increase in smuggling is “tremendously worrisome for the whole industry,” said Mario Espejo, chairman of the Spanish tobacco association, which represents more than two-thirds of the country’s 14,000 tobacconists.

British American Tobacco Plc, Europe’s biggest cigarette maker, estimates that 6 percent to 12 percent of the 5.5 trillion cigarettes consumed worldwide each year are obtained through illicit means such as smuggling, its website shows.

In Spain, the number of packets sold last year declined 17 percent to 3.02 billion from 3.62 billion in 2010, according to the Tobacco Market Commission. Altadis this month requested a two-year freeze on tobacco tax to help the market recover.

In May, Altadis cut the price of Fortuna, Nobel and Ducados in Spain to maintain competitiveness after it sold 16 percent fewer cigarettes there in the first half of the fiscal year.

“Last year, there were three big shocks in Spain for the consumer: the tough economic environment, excise increases and the smoking in public spaces ban,” Alison Cooper, chief executive officer of Bristol, England-based Imperial Tobacco, said in an interview in Madrid. “That caused the perfect storm in terms of the Spanish market.”

Bleak 2012 Outlook

This year will again be “tough,” though declines may not be as steep, Cooper said.

Altadis has the biggest share of Spain’s cigarette market at 33.3 percent, according to the tobacco market commission. That compares with 30.7 percent for Philip Morris International Inc., 21 percent for Japan Tobacco Inc. and BAT’s 11.8 percent.

Philip Morris, the world’s largest publicly traded tobacco company, isn’t anticipating much improvement in Spain this year.

“The dynamics observed in the Spanish market in 2011, mainly the adverse economic circumstances and the high unemployment rate, are likely to continue in 2012,” the maker of Marlboro said in a statement to Bloomberg News.

The ban on smoking in public places, introduced at the beginning of last year, is another reason for the decline in tobacco sales, according to Alfredo Arahuetes, dean of the Economic Sciences and Business Administration School at Madrid’s Comillas Pontifical University.

Restaurant Sales Decline

“Lots of bars have seen their business damaged,” Arahuetes said by phone. “Prices here are also a bit lower than in other European countries so tourists come not only for the sun, beaches and parties, but also to take as much tobacco as they can.”

Smokers can avoid paying taxes on cigarettes by buying illegal tobacco from people who sell on the street to those who have stepped outside of bars and restaurants to light up, said Marcelino Gamez, president of ONAE, a lobby group that represents about 2,500 Spanish tobacconists.

Tobacco prices in Spain should be matched with other European countries, while being removed from the list of products measured to calculate the consumer price index, said Antonino Joya, a director at consumer rights group OCU.

Gibraltar, Andorra

The northwest region of Galicia, along with Gibraltar in the south and Andorra in the north, are the main locations for smuggling, the tobacco association’s Espejo said, adding that the Canary Islands, which benefit from lower taxes, have become another hot spot. A 4.25-euro packet of Marlboro cigarettes can be bought for about 2.25 euros on the black market, he said.

Alvaro Alonso, a manager at Los Angeles restaurant in Madrid, said revenue has dropped 15 percent to 20 percent since the smoking ban was introduced.

“The economic crisis and the smoking ban are a having huge negative impact on this type of business,” 33-year-old Alonso said. “We are just trying to survive.”

For the government, the need to tackle smuggling is just as pressing as it seeks to tackle the euro area’s third-largest budget deficit, said the tobacco association’s Espejo. About 80 percent of the cost of a packet of cigarettes is taxes, he said.

“As a country, we can’t afford the luxury of losing so much money in taxes as we fight to cut the budget deficit.”

--Editors: Paul Jarvis, Sara Marley.

To contact the reporter on this story: Manuel Baigorri in Madrid at mbaigorri@bloomberg.net

To contact the editor responsible for this story: Kenneth Wong at kwong11@bloomberg.net


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