Examination of Witnesses(Questions 340-359)
MR GARETH
DAVIS, MR
BRUCE DAVIDSON
AND MR
JOHN DIBBLE
WEDNESDAY 19 JUNE 2002
Mr Gibb
340. Just following on from Mr Gardiner's last
point, if you are taking action when you do spot the tracing of
these sticks, why do you represent 50% of the illicit market in
this country?
(Mr Davis) As I say, this is a figure that Customs
say and we have no argument with that number. We know a significant
amount of our brands, Regal and Superkings, have figured very
prominently in seizures and that is not a point of issue with
us. The point is, as I say, we have taken action where those brands
have come back prominently to cease supply to those distributors.
It is an absolute trickle.
341. Can I ask you about these other figures.
You said you questioned Customs' figure of 43% of the illicit
market and you say they have included Philip Morris and that brings
it up to 50% and therefore your licit and illicit markets are
consistent with the rest of the industry. Do you export Philip
Morris cigarettes as well?
(Mr Davis) No.
342. Is it correct to include the extra 7%?
Surely that is incorrect? If you are not dealing with the exports
of Philip Morris you should only be looking at 43%, should you
not?
(Mr Dibble) We make profit in the United Kingdom on
over 50% of brands on the market because we distribute and sell
Philip Morris Marlboro in the UK. Customs' figures are attributing
Marlboro and the Embassy Number One to us in the smuggled figures.
Unfortunately they are not our brands outside of the EU and Marlboro
outside of the UK so that is how the 50/50 arises.
343. Thank you very much. Can I ask how much
Regal King Size cigarettes retail for in some of these countries
like Latvia? How much is the retail price in sterling in those
countries?
(Mr Dibble) It is about 50 pence.
344. So what can you do to stop somebody going
up to a kiosk in Latvia or Russia, buying the whole stock and
bringing it back on a container ship? Is there anything you can
do about that?
(Mr Dibble) Very little I would suggest.
345. Is that something you have raised with
Customs that there is nothing you can do about this because people
can go to kiosks and buy them.
(Mr Dibble) What we can do is when we exchange information
with Customs on where smuggled cigarettes are coming from in the
world and they say they are coming through Latvia what we can
do is assist Customs by ceasing supplies in total to Latvia and
in that way no one can buy them for 50 pence and bring them back.
That is the action we take.
346. Then smugglers would move to jurisdictions
where they are 75 pence.
(Mr Dibble) Exactly.
347. And then you would cease—
(Mr Dibble) We would cease supplying there.
348. Then they would go to where they retail
at £1.54 and the smugglers would bring it back from there.
(Mr Dibble) This is Gareth's double whammy. Our export
drive and our export business is being sucked back because of
high UK taxation and as a British company we are unable to export
successfully.
349. Can I ask Mr Wells to respond to that point.
Can this vicious circle continue, they cease trading with countries
which have no tax and are therefore selling them at 50 pence,
then the smugglers move on to the next jurisdiction; what is your
response to that?
(Mr Wells) I think the issue, as far as we are concerned,
is the wholesale supply of large volumes of cigarettes to organised
criminal groups rather than the sort of situation which you describe
of cigarettes being bought at a kiosk. If I were to give you one
example from Latvia, for example. We made a seizure in Northern
Ireland recently, last November, of around 40 million Regal cigarettes
which had come from Riga in Latvia. It is unlikely those would
have been bought at kiosks, they would probably have been purchased
in large quantities from wholesale outlets. That is the sort of
area in which we have particular concern. We quite recognise in
the case of Imperial and all other manufacturers that there are
limits to what they can do. We do not suggest it is possible for
any manufacturer to prevent any of its supply coming back to the
UK, but there are things that can be done to control the wholesale
supply of product in such a way that it falls into the hands of
organised criminals.
350. Are you claiming that the tobacco companies
know when they supply it to a wholesaler in Latvia that a huge
quantity of those come back to Britain?
(Mr Wells) I think that there are certain circumstances
in which it may be that the quantities that were going to particular
countries may have been greater than the market in those countries
apparently could sustain.
351. Aside from that point, how else would Imperial
Tobacco know that a distributor further down the chain from their
initial customer was going to sell large quantities to criminal
gangs? Why do you expect Imperial Tobacco to know?
(Mr Wells) In the sorts of circumstances in which
product falls into the hands of organised criminals in large quantities,
then there may be circumstances in which questions would be asked
as to why distributors have supplied quantities in particular
volumes. Indeed, as Mr Davis has said, about 30 distributors of
Imperial have had their supplies discontinued for precisely this
sort of reason over the last two years. So there are circumstances
in which the lack of control that some distributors apply to the
sales of the end product are such that both we and manufacturers
would agree that those sales should discontinue.
352. Do you have any of these customers at the
moment?
(Mr Davis) The situation of the sensitive territories
where there has been a track record built up over time—and
it is a relatively short time because cigarette smuggling really
started in 1997—is that there are time lags and we are tending
to find that stock of two years old comes back consolidated with
stock of other manufacturers. It is consolidated sometimes with
counterfeit product. It is quite a complex situation. In terms
of the particularly sensitive markets, then I think it is fair
to say that the 30 traders we have ceased dealing with pretty
much cover those sensitive areas.
353. Where is the other 50% of the illicit market
you have? Where does that come from?
(Mr Davis) With respect, again, a lot of this data
as to where the 50% emanates from is pretty much historical, going
back well into 2000 and 2001. As I say, the seizures of our products
in this calendar year to date are 40% down on this time last year.
I would expect that to continue falling because, as I say, we
are not supplying the vast majority of these countries now.
354. So what would you estimate is your share
of the illicit market?
(Mr Davis) It is very difficult for me to estimate
that as things stand at the moment. I am prepared obviously to
accept the Customs figures that were put forward.
355. That is 50%.
(Mr Davis) No. That was for 2000-01. I would have
to say it will be substantially lower than that, but it is a very
imprecise science by the nature of the smuggling market. It is
imprecise, it is difficult to verify.
356. Policy makers need to base it on something.
Is it de minimis?
(Mr Davis) It is becoming de minimis and over
time it will become very de minimis because we are not
supplying them any more.
357. The problem is solved, is it?
(Mr Davis) It is well on the way to being solved in
the sense we would not, again, disagree with Customs' estimate
that 21% of consumption in the UK 2000-01 was illicit product.
The indication we have at the moment is that that number is falling
very substantially.
358. No one is going to these countries and
buying either in kiosks or in larger shops large quantities of
75 pence packets and bringing them back to the UK and selling
them from white vans then?
(Mr Davis) I do not know. They may be bringing other
products back, other brands which United Kingdom smokers might
find attractive, but, as I say, we are not supplying the vast
majority of those areas any more, so it is a very difficult one
for me to answer. What I would say is that if all UK tobacco companies
stopped exporting tomorrow it would not stop smuggled product
coming into the UK.
359. There is smuggled product. That is what
I am trying to get at. You say on the one hand there is no smuggled
product and on the other hand there are vast quantities of smuggled
product. I want to know what it is.
(Mr Davis) Clearly from what I said it had got to
about 21%. I believe that number and I believe that Customs also
feel that that number is coming down very significantly. It is
in both our interests (Customs and ourselves) to co-operate as
fully as possible otherwise it is only the smuggler that wins.
Our aim must be to get it down to zero.
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