Select Committee on Public Accounts Minutes of Evidence

Examination of Witnesses(Questions 400-419)



  400. Can I take it that in your original answer about the price differential you think it would be worth trying £1.02 off to bring us in line with the Republic to see what happens?
  (Mr Dibble) That would certainly bring us in line with the Republic who have much less of a smuggling problem than we have.

  401. Would you be tempted to help with that by reducing your tax exclusive price?
  (Mr Davis) At the end of the day, given the differential wholesale retail margins, the margin to us is not appreciably different in most Western countries.

  402. One other question. You recently agreed to buy Reemtsma, the German cigarette manufacturer, who manufacture the West brand. In 2000 the World Customs Organisation reported that the West brand was Europe's most frequently smuggled cigarettes. What are you doing to turn that situation around?
  (Mr Davis) I think Bruce, who was involved in the due diligence team who looked at Reemtsma, is best qualified to answer that.
  (Mr Davidson) One of the things we were very impressed with with the Reemtsma company was they had large security measures already in place so that quote I think perhaps refers to a historic problem that the brand had. Germany is Western Europe's biggest cigarette market, West has some 10% market share, it is a substantial brand, so again slightly the same dynamic as in the UK, the popular brands could be targeted, and I think West's particular problem historically was from Eastern Europe. We were more than convinced that is a problem in the past and they have managed to do something about it.

  Mr Jones: Thank you.

  Chairman: Thank you very much, Mr Jones. Mr Gerry Steinberg.

Mr Steinberg

  403. Thank you, Chairman. I have got to be quite honest, I am a little confused because you appear to be very co-operative this afternoon, Mr Davis, doing everything you can to minimise smuggling and help Her Majesty's Government, which is so laudable and we are delighted to hear what you have to say. Did you watch the BBC2's The Money Programme? You have someone called Mr Sadler who works for you, do you not?
  (Mr Davis) Yes.

  404. Did you watch that programme?
  (Mr Davis) I did not watch it live but I have seen subsequent recordings.

  405. If Mr Sadler was sitting there would he be saying the same thing as you, do you think?
  (Mr Davis) I am convinced he would.

  406. That is interesting. I watched it at the weekend and I took notes of what he was saying on that programme. He basically said "We know quite well what is happening but we still supply known smugglers on the basis that if we don't, others will". He basically said that. He also went on to say "We want our brands being sold, therefore the smuggled market gives us a legitimate sort of appearance so we can sell our brands and we want a slice of the action regardless". Those are not his exact words but that is basically what he said on the programme.
  (Mr Davis) I think they were far from his exact words.

  407. That is exactly what he said.
  (Mr Davis) I take the point you are making. I shall not be pedantic on the wording. I think what he was trying to get across was in countries where there are legitimate channels and where British consumers are going, countries like Spain where there are a considerable number of holiday makers, a considerable number of British full-time residents or part-time residents, if there is a demand for our products there we want them there, we want them to be well merchandised, we have invested in sales infrastructure to make sure the brands are there and, if possible, we want them better merchandised than our competitors so we get a share of that business.

  408. Mr Sadler was not saying that. Mr Sadler was basically saying "We know there are smuggled markets, therefore we have basically got to be part of that. We want our brands to be sold and one way of getting them sold and recognised is by them being there". Take the North-East, for example, that is where you sell most of your Regal cigarettes and that is where most of them are smuggled. He was basically saying "It is there so we have got to participate in it". You appear to be saying something totally different. Is Mr Sadler still working for you?
  (Mr Davis) Yes, he is. If that is your interpretation, Mr Steinberg, I can only say—

  409. I recommend that everybody who is in this room this afternoon should have a look at that programme because that is clearly what he did say in The Money Programme.
  (Mr Davis) This was some time ago.

  410. It does not really matter when it was, does it? If that was the attitude of Mr Sadler—
  (Mr Davis) I presume we are talking about the same one and we are talking about the same thing.

  411. I hope so. Are you saying that your company policy has changed?
  (Mr Davis) No, I do not think our company policy has changed. I think what has happened over time is we have seen with tracking data, with stock coming back into the UK, this is something that has evolved over what is quite a small period of time really, since 1999. As a result we have discontinued supplying to these people.

  412. If there was no smuggled market, how would that affect your profits? Tell us what your profits are from UK sales and what your profits are from exports?
  (Mr Davis) If there was no smuggled market our profits would increase, absolutely.

  413. I am just a layman and I did not do very well at sums at school but I find that quite a staggering statement. What you are saying is if there is no smuggled market then your profits would go up.
  (Mr Davis) On the basis that we believe the UK duty paid sales price would compensate for it we would make more money.

  414. What are your profits in the UK?
  (Mr Davis) On our last full year I think it was about £350 million.

  415. Perhaps you can send us a note on it.
  (Mr Davis) I have got it here actually. In total it was £604 million in our last full year, of which £325 million was UK and £279 million overseas. That is export and the earnings of our overseas subsidiaries.

  416. From what you are saying this afternoon you appear to be saying you will co-operate as much as you can. This afternoon will you give us a clear, unequivocal commitment from your company to work to minimise the presence of brands in the smuggled market?
  (Mr Davis) Indeed.

  417. You will?
  (Mr Davis) Yes.

  418. Fine. We will hold you to that, of course. If you turn to your own document, the Imperial Tobacco Limited Briefing Paper, which you sent to us, on page six you say "Imperial Tobacco has never deliberately supplied overseas markets with the intention that smugglers will obtain its cigarettes and divert them to the UK illegally." That takes a lot of believing when you look, for example, at the countries you are exporting to, does it not?
  (Mr Davis) No, I do not think it does.

  419. Explain why it does not.
  (Mr Davis) The tobacco industry and the count of cigarettes is characterised by big numbers, it is millions and it is billions of sticks, as it were. The volumes we are talking about, while they obviously seem very big numbers, only represent single digit shares of the markets that were in question. When trying to go into those markets it is not an unreasonable assumption to try to plan to take a small single digit share of a market where there is an appetite for international brands.

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