Examination of Witnesses(Questions 500-519)
MR GARETH
DAVIS, MR
BRUCE DAVIDSON
AND MR
JOHN DIBBLE
WEDNESDAY 19 JUNE 2002
500. I am just asking you where the triple whammy
is. Your profits have stayed virtually constant over five years,
three of which were before the time of the organised criminal
activity, so there has been no notable change in your profitability
as a result. In the meantime, what has happened, which you have
not alluded to, is that in the last year, 2001, you actually were
making as much profit from your overseas trade as you were making
from your UK trade. So the idea that you have not somehow been
benefiting in terms of your total profitability as a result of
illicit activities of people overseas does not bear examination,
does it?
(Mr Davis) I think it does.
501. Your profit has gone up massively, it has
just gone up indirectly.
(Mr Davis) I think I said in response to an earlier
and similar question, the fact is a significant amount of our
growth in operating profit from our international operations is
through acquisitions. These are companies we have bought, we have
made seven international acquisitions since 1997, so understandably
our international profit would rise.
502. But the triple whammy which you feared,
fortunately, has not fed through into your profit figures.
(Mr Davis) One could argue that it has in that it
would have been higher if that had not been the experience, and
we would have been more successful in certain other of our export
markets.
503. Did the market change so dramatically after
1997 in the UK that you would have expected to make enormously
more profits when they have been constant for the previous three
years?
(Mr Davis) No, I think—
504. No, of course, it does not. And the same
applies to the turnover.
(Mr Davis) All I pointed out earlier was that in terms
of 1997, that was when we saw really the start of cigarette smuggling
into the UK.
505. And when you would have suffered from the
whammy and it did not happen. The profits remained as they were
before.
(Mr Davis) Again, if I could please put it into the
context of when I made the point, the whammy is the fact that
the taxation in the UK or—
506. No, that is not what you were talking about.
You were talking about reduced profits. That is what you said,
a triple whammy.
(Mr Davis) The taxation in the UK has induced smuggling.
If that reduces sales of our bona fides duty-paid UK product,
then that obviously hits us because we make obviously a good margin
in the UK.
507. That was the second part.
(Mr Davis) The double part of the whammy is that we
are also investing in infrastructure and advertising and promotions
in many markets in the world, but in these particularly sensitive
markets we have invested in them and it has been a wasted investment
because the product has been hoovered up by smugglers and brought
back to the UK, and that is not in our interests because we are
not creating an international business that we want to.
508. But you did not suffer the down-turn in
turnover either. The turnover was £3.5 billion approximately
in 1997, it was virtually the same in 1998, it was the same in
1999 when the smuggling started, it was the same turnover, in
fact slightly higher, in year 2000, and was significantly higher,
it went up to £4 billion, in the year 2001. So the triple
whammy you talked about just failed to wham, did it not?
(Mr Davis) You have to bear in mind that a significant
part of the turnover is actually duty and, by definition, the
turnover would grow if the duty levy grows.
Mr Williams: I will finish there, I have
run out of time.
Mr Howarth
509. Could I declare an interest, I am probably
the only member of the Committee who is still a smoker. When we
were talking earlier about the high cost of a packet of cigarettes
in the UK as compared to other European countries, I think it
was Mr Dibble who said there were higher costs to retailers in
the UK compared to many of these other countries. Are you able
to give us any information about the wholesale cost to retailers
in this country compared to other countries as in the original
Appendix II of the paper you supplied?
(Mr Dibble) I have not got the details but clearly
there are higher costs to wholesalers as well, there are higher
insurance costs, wages in the UK tend to be much higher than other
parts of Europe, that is another cost, rent, property prices are
far higher than in Southern European states. So it is not just
retailers, I should have said the whole of the distribution chain
has to bear higher costs.
510. Nevertheless could you perhaps supply us
with the higher retail costs in the same way as you have provided
the wholesale prices?
(Mr Dibble) That is more macro-economics, I would
say, than particularly to our industry.
511. Is it? It is still information you have.
Presumably you know what you charge for selling X amount of cigarettes
to a wholesaler?
(Mr Dibble) Sorry, of course we can provide you with
a price to wholesalers in the UK as compared to the price to wholesalers
elsewhere in Europe.
512. That is all I wanted.
(Mr Dibble) Sorry, I misunderstood your question.
513. I think that would be helpful if we could
have that information. Another interesting point, and again I
think it was Mr Dibble but I may be wrong, apparently in a submission
to Treasury Ministers you argued, as I understood it, you gave
it some title which I have forgotten but you were basically arguing
for some tax harmonisation between the UK and the Republic of
Ireland.
(Mr Dibble) This was a discussion concerning how Customs
can be helped in eliminating smuggling. In fact there are only
two knobs to twiddle to eliminate smuggling. One is you increase
detection, which Customs are doing very successfully we are pleased
to say. The other is the price knob. If the price incentive is
so high, even if you take out half of the goods being smuggled,
smugglers can still make a profit. Therefore, our model looked
at what UK prices would have to be relative to various detection
rates to take the economic incentive out of smuggling, and the
model included where total UK consumption would go, both legal
and illegal, and what proportion of the market would be smuggled.
514. I notice in this submission you argue for
our costs going down to those of the Republic of Ireland. What
would be the effect of them bringing their level up to ours?
(Mr Dibble) I think the effect would be they would
have the very similar disorderly market which we are suffering.
515. The only way to do it is for us to come
down to their level, it could not possibly be the other way?
(Mr Dibble) We have just gone through on a European
basis a tobacco tax harmonisation with the Commission which lasted
two years. The outcome is very clear, that Member States throughout
the EU were not prepared to increase their taxation on cigarettes
above the target of 64 euros per thousand cigarettes, that is
84p. As Gareth said earlier, in the UK from a high tax base anyway
we put on 84p in the 3Ö years from November 1996 to March
2000.
516. When you decided on the interesting marketing
strategy of penetrating that huge world market of Afghanistan,
were you aware of the fact that something like 90% of the heroin
supply to this country and a fairly substantial proportion of
the cannabis supply to this country comes from Afghanistan?
(Mr Dibble) No.
517. You totally missed this phenomenon, the
fact there are established drug trafficking routes and considerable
infrastructure in Afghanistan to smuggle illegal substances right
across the world to markets in this country and elsewhere? It
was something which totally passed you by?
(Mr Davis) I have to say it was not a consideration
from our point of view.
518. So where did you assume all these cigarettes
you were exporting to Afghanistan were going to go?
(Mr Davidson) To Afghanistan.
519. Can you just remind me at its height how
many cigarettes you were exporting to Afghanistan?
(Mr Davidson) Some 300 million.
(Mr Dibble) Customs have provided the figure in their
document, 325 million.
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