By Gavin Gibbon
Smoking appears to be holding its own despite increased health warnings and taxation and excise, as well as the advent of e-cigarettes
Health campaigners who thought smoking was on the verge of taking its last drag may be forced to think again.
The industry has long been vilified and targeted by anti-smoking campaigns, social pressure and legal measures enforced around the world. And yet any idea of a smoke-free future appears to be stubbed out by analysts from Research and Markets who say revenues from the worldwide tobacco industry will reach $10.12bn by 2026, representing a 4.6 percent compound annual growth rate over 2017’s $664m.
Latest figures from Euromonitor showed 5.42 trillion tobacco cigarettes are consumed annually across the globe. In the UAE however, people appear to be paying attention to the warnings. The number of individuals who kicked the habit in the country doubled in the space of two years, according to the Ministry of Health and Prevention (MoHAP) who revealed earlier this year that the amount of people stopping using tobacco products rose 122 percent from 2016 to 2018.
According to the World Trade Organisation (WTO), the most effective method to encourage cigarette smokers to quit is by hiking up the price of cigarettes. And so the UAE government will be hoping, where the health warnings may have failed to hit home, hitting smokers in the pocket may have greater success.
Since 2017, the range of categories covered by what is dubbed “sin tax” have been energy drinks and tobacco (with a 100 percent mark-up), and carbonated drinks (50 percent mark-up).
“We’re losing a lot of consumers to non-governed tobacco available for AED2 or AED3, that is not health-regulated”
In a joint report, industry experts Lovrenc Kessler (partner) and Gawel Adamek (director), from Simon – Kucher & Partners, tell Arabian Business: “Due to the addictive nature of tobacco products, consumers are less price sensitive than customers of most other fast moving consumer goods (FMCG) like foodstuffs, cleaning products and toiletries. Still, the excise tax resulted in a very significant price increase. And even though this mark-up was added on to pretty low prices (before the tax’s introduction, tobacco products were relatively cheap compared to other FMCG categories in the UAE), smokers still reacted.
“The first measure – a decrease in individual consumption – only saved them money in the short term. Soon, most customers returned to their former habits. However, a small fraction of smokers actually quit smoking; this corresponded to people having a lower income level.”
From January 2020, an additional tax of 100 percent will be applied to electronic smoking devices and the liquids used in them.
However, rather than sound the death knell for smoking, leading figures in the industry fear it will force smokers to opt for cheaper alternatives.
“The biggest illicit trade challenge in the GCC are so-called ‘illicit whites’ cigarettes”
In an interview with Arabian Business, Abdulla Al Gurg, Group CEO of the Easa Saleh Al Gurg Group (ESAG), says that the UAE’s introduction of 100 percent excise tax in October 2017 has “taken a toll” on cigarette sales, although he does not give specific figures for how it has impacted Al Gurg Tobacco.
“But, if you compare a pack of cigarettes here to a pack of cigarettes in Europe, it’s still five times the price there,” he adds. “When you compare, a person who is aware and educated [will] see that it shouldn’t be that way [inexpensive in the UAE].”
An ESAG company, Al Gurg Tobacco has been the exclusive UAE agent for the British American Tobacco Company and its subsidiaries for more than 50 years, and claims to be the largest company of its kind in the UAE. Among the brands that it distributes are Dunhill, Kent, Benson & Hedges and Lucky Strike.
Many smokers, Al Gurg says, have turned to unregulated, cheaper cigarettes available at “the old prices” still for sale across the UAE, even if they are now illegal.
“We’re losing a lot of consumers to non-governed tobacco available for AED2 or AED3, that is not health-regulated,” he adds. “I have voiced that over and over to the health authorities. That is the key ‘cancer’ in the whole thing.”
Additionally, Al Gurg says that he expects that the government will unveil new regulations to combat the trade in unregulated cigarettes soon. “They are preparing to address the issue,” he says.
On August 1, the sale and possession of cigarettes which do not bear Digital Tax Stamps officially became illegal.
Two types of stamps have been approved, including ‘Red’, which is placed on tobacco products’ packaging at local markets and duty-free arrival lounges; and ‘Green’, which is marked on tobacco products sold at duty-free departure lounges.
The Federal Tax Authority has also urged consumers to check for Digital Tax Stamps on tobacco products and to inform authorities of any violations.
Graham Gibbons, general manager and vice president for the Middle East for Japan Tobacco International, says the problem of illicit tobacco trade is wider than simply counterfeit cigarettes.
“One concern I have is the sale of vaping devices was legalised to try and stop the unregulated devices, we worry that a price increase could push consumers to source products elsewhere or push them back to cheaper, more harmful habits, like cigarettes”
He says: “The biggest illicit trade challenge in the GCC are so-called ‘illicit whites’ cigarettes. These are usually manufactured in numerous free zones throughout the world with no taxes paid and specifically for smuggling.
“High taxation on tobacco products and resulting price hikes create incentives for bringing illegal cheap tobacco products into the domestic market. Whilst considered by some as a victimless crime, illegal tobacco actually strips national government of tax money, hampers legitimate business and serves as a revenue source for organised criminal networks.”
There is also the potential of clear packaging being introduced in the coming years, although again, Al Gurg fears this could fall prey to deception.
He says: “There is clear packaging which is coming up. That might impact sales. There are many discussions about the clear packaging and we just need to be concerned about how that would impact illicit trade. There are direct correlations between every regulation being imposed on the tobacco industry and the illicit trade business and that’s where we need to be much more aware.”
If anyone is in any doubt about the continued strength of feeling against the smoking industry and smoke products in general, then the recent case of tobacco giant Philip Morris International (PMI) and its association with sponsorship of the Swiss pavilion at Dubai’s Expo 2020 event, serves as a timely reminder.
The world’s biggest cigarette maker and owner of the Marlboro brand came under fire from the World Health Organisation (WHO) and Swiss School of Public Health, which published an open letter calling the tobacco industry deceitful and misleading, and urging Federal Councillor Ignazio Cassis – a former medical doctor – to reject the sponsorship money.
After continued criticism, the decision was taken in Switzerland to scrap the sponsorship deal – believed to be potentially 1.8 million Swiss francs ($1.8m) – which was part of the Swiss government and Parliament’s objective to cover 50 percent of its Expo 2020 presence via private sponsoring in a bid to save public money.
PMI has invested more than $6bn in developing, evaluating and producing reduced-risk alternatives to smoking for existing smokers who don’t want to quit altogether. One of its measurable targets and projects is for at least 40 million PMI cigarette smokers to switch to PMI’s smoke-free products by 2025.
And it is a market that is booming, particularly given recent government legislation in Dubai from the Emirates Authority for Standardisation and Metrology (ESMA) which introduced new regulations to legalise the sale of e-cigarettes and vaping devices, opening up a market where the consumption rate of tobacco is high – 25-30 percent among men – but where there is rising awareness of health hazards associated with smoking and a growing demand for alternatives to traditional cigarettes.
Earlier this month, British American Tobacco announced that it was cutting 2,300 jobs globally by January as bosses move to concentrate on driving revenues in e-cigarettes.
More than 64 million people will switch to vaping devices instead of smoking traditional cigarettes over the next three years according to expert forecasts, while the MEA e-cigarettes market, valued at $267.9m in 2018, will register CAGR of 9.74 percent between 2019 and 2024.
Jake Nixon, sales director at Quartz Business Media, the organisers of The World Vape Show, which is being held in Dubai next year, tells Arabian Business: “I think the potential is massive. You only have to see how it’s gone for the rest of the world. The UK market has grown a huge amount in the past five or six years, so much so that the Public Health England and the NHS are encouraging people to move on to e-cigarette products.”
However, despite being a relatively new kid on the block and the protestations on health benefits compared to smoking, vaping has not escaped the attentions of the UAE government, which has included it in its ‘sin tax’.
And potential growth may be hindered by a decision from the UAE Cabinet last month to expand the list of excise taxable products to include electronic smoking devices. Starting from January 1, 2020, a tax of 100 percent will be levied on electronic smoking devices, whether or not they contain nicotine or tobacco, as well as the liquids used in electronic smoking devices.
The move was made to reduce consumption of unhealthy goods. “The decision aims at reducing the consumption of harmful products that put the health of people and environment at risk,” a government statement said.
But Nixon fears it may end up having the complete opposite effect.
He tells Arabian Business: “We’ve seen the UAE government increase taxes on multiple items in recent years. One concern I have is the sale of vaping devices was legalised to try and stop the unregulated devices, we worry that a price increase could push consumers to source products elsewhere or push them back to cheaper, more harmful habits, like cigarettes.
“The tax rule comes into force next year so we’re not exactly sure how it will play out, but it’s something we will keep an eye on,” he says.
Producers will also be keeping an eye on America, where US President Donald Trump’s administration has said it would soon ban flavoured e-cigarette products to stem a rising tide of users following a spike in vaping-linked deaths.
While e-cigarettes do not contain the estimated 7,000 chemical constituents present in traditional cigarettes, a number of substances have been identified as potentially harmful and the vapour could contain traces of metal, according to a 2018 study prepared for the US Congress.
“These concerns are why a major international event of this nature (World Vape Show) is so important. It’s a new industry for the region and these are important issues that need exploring.”
As well as the traditional cigarette smokers, e-cigarettes are also looking to tempt regular shisha smokers across, although this isn’t proving to be easy, particularly in this part of the world, with the Middle East and Africa region holding the largest share in the global market and its revenue of global market exceeding 69 percent in 2017.
The worldwide market for hookah (shisha) tobacco is expected to grow at a CAGR of roughly 18 percent over the next five years, reaching $1.98bn in 2024, from $730m in 2019, according to a Global Info Research study.
Headquartered in the UAE, Al Fakher is the largest international manufacturer and global market leader of waterpipe tobacco products, employing over 1,000 people in its production and distribution network. The company exports its products to over 100 countries around the world.
Ronan Barry, group head of Corporate and Regulatory Affairs says: “Although declines in oil production amongst the major producers and increased political tension across the Gulf add uncertainty to the economic outlook, we believe this will be somewhat offset by growth in the non-oil sectors. We are also confident in the potential of new products and innovation – including electronically heated and tobacco-free products – to grow our business.”
Euromonitor senior analyst James George says the tobacco industry is at a crossroads.
“The future of the industry is one that depends on the performance of two drivers. One of the long-term shifting attitudes of consumers with regards to health consciousness and the second being the ability of the industry to recover from short term negative financial impact,” he says.
“Similar tax implementation elsewhere has shown that post a significant volume drop, there is an eventual return to normality once the price shock has subsided for habitual consumers. However, a change in preference of brand choice based on price point and taste profile of cheaper alternatives does occur.”
This may be the case in some instances, but Group CEO Al Gurg is confident in his customer base.
He says: “It’s all based on the first cigarette you tasted. It correlates with youth and your younger days so there’s a lot of sentiment behind smoking. I see that there is a degree of loyalty as the taste of a product that you’ve already been part of for a long while, your palate is used to that product. It’s much more sentimental and emotional because you buy a pack of something that you’re used to.”For all the latest Retail news from the UAE and Gulf countries, follow us on Twitter and Linkedin, like us on Facebook and subscribe to our YouTube page, which is updated daily.