Select Committee on Public Accounts Minutes of Evidence

Examination of Witnesses(Questions 320-339)



  320. The tax on that is £3.51 which is 79%. In Spain it is £1.54 per packet and the tax on that is £1.09 and therefore the tax percentages are very similar, it seems to me. If you were selling at your base price in Britain the same as you were selling it in Spain you might not make so much profit but that is the main reason why tax and the overall price therefore seems to be so much higher in this country. It seems to me it all comes down to what base price you are selling at and therefore to blame the tax rates for your problems when the problem lies with your base price is grossly unfair and it is just an excuse.
  (Mr Davis) You have misunderstood the whole situation Sir. If we could explain it again.
  (Mr Dibble) If you would be good enough to look at our Appendix II, we clearly set out for the Committee the retail price comparisons within the EU. This is for the same brand, Regal. We have listed the absolute price difference of the pack of cigarettes in each country. We have listed the absolute total taxation on those cigarettes in each country. As you can see, we have included our tax exclusive price. Our tax exclusive price in the United Kingdom is some 44 pence higher than it is in Spain. If we added 44 pence to the price of the pack in Spain you would have a figure of £1.98, still substantially lower than the £4.40 in the UK.

  321. But the rate at which the Government will levy the tax is similar in each country. That is the point. The overall rate works out at over 70% in both cases but the Government is not doing you any more damage in percentage terms in this country than in Spain.
  (Mr Davis) With respect, sir, your point is not relevant.

  Chairman: Thank you, Mr Rendel. Mr Barry Gardiner?

Mr Gardiner

  322. Mr Davis, the reason that you are here today is because members of this Committee believe that you are complicit in a smuggling operation that costs this country £2.8 billion a year. Do you or your company know the maximum penalty for tobacco smuggling in this country?
  (Mr Davis) To be straightforward with you, sir, no, I do not know the maximum penalty.

  323. It is seven years. Mr Davis, in your opening statement you said your company's stated strategy has been to grow internationally through an export-led approach and you reinterated that in your reply. Yet the export data that you supplied to this Committee I would have thought—these are the ones I am talking about—must have made pretty appalling reading to any of your shareholders. It is a catalogue of incompetence, is it not? They see-saw around from £72 million to £338 million the next year back down to zero the next year, from £8 million, to £24 million, down to £36 million the next year, from £397 million up to £869 million, plummeting to £99 million in the next year. There is no stability there, is there? A market strategy such as you have talked about, such as you have put in your annual report implies that you identify who your customers are and that you invest in marketing to them. Where have you launched these marketing campaigns, these advertising campaigns to increase your sales abroad? How much have you spent in those export markets. What rises in those markets were (a) predicted by you and (b) achieved?
  (Mr Davis) I think there are a number of questions inherent in what you say there. The first point to make is that, yes, our initial approach was very much export-led and our strategy is to grow our international business organically and by acquisition. In the early days it was very much skewed to export led. We have made several international acquisitions since 1996. That is demonstrated by the number of people we now employ.

  324. What I am talking about is your export market. I am not talking about your acquisition of Reemtsma, which is the single largest brand, West, that is smuggled into Germany. That in itself may make an interesting topic for the Committee at a later stage. That is not what I am asking about. I am asking about your own exports from the United Kingdom.
  (Mr Davis) Our exports from the UK are all produced in our Nottingham facility.

  325. Answer the question please.
  (Mr Davis) I am coming to it.

  326. You are taking a long time about it.
  (Mr Davis) I think it is helpful that you understand the background.

  327. I know the background; I want you to answer the question.
  (Mr Davis) We obviously export our cigarettes which are manufactured there to a number of markets.

  Mr Gardiner: I have asked you specific questions. If you cannot answer them in Committee please provide written responses. I want to know, Chairman, how much has been spent, in which market, what were the sales predicted and what were the sales achieved. I presume that you can provide a written response to this Committee on those points.


  328. Can you provide a written answer on those points?
  (Mr Davis) We can certainly provide written answers which will be in confidence to the Committee. Please let me have one kick at the ball. I can only say to the point you make that the sales have see-sawed, yes they have, and they have see-sawed because we have stopped them; we have discontinued trading relationships with 30.[2]

Mr Gardiner

  329. You talked about an export-led marketing strategy; you did not talk about export-led marketing chaos! Let's pass on to the next question. Customs say that you put 12.2 billion to export. They also say that eight billion ends up back in the UK. That implies that you do not know where two-thirds of your exports are going. Is that correct?
  (Mr Davis) No, it is not correct.

  330. Can you explain to me how you know who the end users are of the eight billion that end up back in the United Kingdom?
  (Mr Davis) I think I have to say, first of all, that these are not precise estimates. The numbers are based on Customs' seizures and the eight billion is an extrapolated figure and is an estimate. We find that a difficult number to reconcile because—

  331. Mr Davis, I will give you a couple of billion, it is still a hell of a lot of cigarettes you are not tracking in your marketing strategy.
  (Mr Davis) Because in terms of the sensitive countries where stock has come back from, we have sent three billion. It is a difficult figure for us to reconcile. That is all I am saying, Mr Gardiner. If we look at those sensitive markets, the discontinued relationships and cessation of trade, it is virtually zero.

  332. Would you be happy then to say to your shareholders—and they will be watching this and they will know—that you do not know where let's not even call it two-thirds let's call it half of your export market is going? Is this a marketing strategy and you do not know where half of it is going to end up? How can you possibly advertise in those markets? How can you possibly expand those markets? Your shareholders must be tearing their hair out. It is incompetent, is it not?
  (Mr Davis) We are a late starter in terms of international growth because of our previous history and one cannot claim to be successful in every market that one enters. We have been successful in some markets but not in others but in these particular cases where there has been seen to be constant flow-back we have acted and discontinued the relationship. I do not see what else we could do.

  333. You keep on saying that you have discontinued. I am talking about what you did. You are now telling me, "We think we may have got it wrong and we stopped doing it." That implies that your export-led marketing strategy has now gone down the pan because people like Customs and Excise have got on your back. That is another question. Mr Davis, when you supply a legitimate wholesaler, company A, who operate as a wholesaler for Regal and Superkings into Belgium, that wholesaler would get pretty upset if you also supplied another wholesaler, company B, who undercut them in that market. Can you explain to the Committee the way you take steps to protect company A, because you do, do you not?
  (Mr Davis) Could you go through that again, I am not quite sure I understand your point.

  334. Yes. I asked when you sell to a wholesaler abroad and you know that that wholesaler may be the wholesaler providing a particular market like, let's say, Belgium, you take steps, do you not, to protect that wholesaler that you have supplied from being undercut or in competition from another wholesaler who might seek to go in the Belgian market with Regal and Superkings. What are those steps?
  (Mr Davis) In our case, with particular export markets we have a solus supply type situation with what would be a distributor rather than a wholesaler.

  335. Of course you do, Mr Davis, but you know very well what I am getting at. What I am getting at is you put trackers on the packs that you sell elsewhere to make sure nobody can sell outside the market they are supposed to, do you not?
  (Mr Davis) We put codes on our packs.

  336. Exactly, so you are quite capable of tracking the cigarettes that reach that market and you are therefore able to protect company A against company B. Mr Davidson is providing you with a prompt so you had better read it before you answer.
  (Mr Davis) Mr Davidson is pointing out that we have solus or exclusive distributors for certain markets. In other markets we may have more than one distributor who may have different brands. I do not see this—

  337. Mr Davis, you have already conceded that you have put codes on your cigarettes so that you can track them through the market. I want to cut the crap because I have only got two minutes left and I do not want to waste them. What you do then is if one of the wholesalers you supply starts competing in an area that you have already franchised out somewhere else you will stop supplying company B, will you not? You impose obligations on company B when you sell it to them not to on-sell in such a way that it ends up undercutting company A. Is that not correct?
  (Mr Davis) Broadly, yes.

  338. That means that you should have absolutely no problem in doing exactly the same thing with all the eight billion sticks that are coming back into the UK. Why do you not do it?
  (Mr Davis) I think I would have to argue that we have. I do not want to repeat the point about distributors again, but we have.

  339. Mr Davis, finally you said that it is no benefit to you to have the smuggling going on. Can I just put it to you that there are several reasons why you profit from the illegal trade. One, it sells the product to overseas wholesalers and you make your profit at the start of the distribution chain that feeds back on to the black market. Two, it keeps cheap cigarettes on the UK market and keeps smokers smoking that would otherwise have quit. Three, it also exercises downward pressure on the Chancellor because the fact there is an illegal market undercuts his ground and it takes away the revenue that he would otherwise be putting into things like the National Health Service to clean up the mess that you create. I do not see that you can really say you do not benefit in any way. It also helps with your competition with Gallahers. Is that not true?
  (Mr Davis) I do not think any of the points you make there are accurate or true at all. It does us no good at all.

  Mr Gardiner: Unfortunately my time is up for the moment, maybe I will try and get five minutes at the end.

2   `Commercial in Confidence' note not printed. Back

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