The king size problem for tobacco retailers that just won't go away The government has put tobacco manufacturers in the dock, but as arguments rage over advertising, retailers are fighting their own war of attrition Tobacco is an industry under siege. Bootlegging, high taxation and government pressure for a comprehensive advertising ban have stubbed out any hope of significantly growing sales in the UK. But as smoke clouds gather on the horizon, the major players remain resolutely optimistic. Gallaher defiantly talks of tobacco being an "essential part of the UK retail mix", pointing to an upturn in sales of roll your own and cigars ­ while at the same time acquiring a £260m stake in the unregulated Russian market which will no doubt help offset the long-term decline in its UK sales. Meanwhile, fellow tobacco giant Imperial is busy working on increased trading opportunities through independents ­ but admits that this year's 15% jump in pretax profit to £210m was largely due to a strong performance overseas. Notwithstanding that consumption of cigarettes in the UK has increased for the first time in 10 years by 800,000 to 10.8 million, no one's bothering to deny conditions in the £12bn UK tobacco market are tough and likely to get tougher. "It's a difficult operating environment," admits spokesman for Gallaher Mark Phillips. "But the UK and Ireland remain our bread and butter business and we still have the largest market share." As if fiscal policy, Tony Blair and White Van Man weren't enough for the industry to contend with, European health ministers are now threatening to increase health warnings on cigarette packets and ban the use of the term "mild". The Commons health select committee, meanwhile, has called for new regulations which would, in effect, bring an end to tobacco branding in the UK and stop shopkeepers found selling tobacco to under 16s from stocking it again. Both moves are resisted by the Association of Convenience Stores, which represents the industry's most valuable trading channel ­ convenience stores account for around two thirds of all cigarette and tobacco sold. "While we support the government's public health initiatives, tobacco is a legal product and we want the commercial freedom to be able to promote it and create price awareness," says James Lowman of the ACS. Ironically, an advertising ban could be good news for independent retailers, he says. "Manufacturers would have fewer places to differentiate their brands: one is trade press and the other is the tobacco gantry, where presumably the value of fixtures would go up." Branding therefore remains crucially important. "We want attractive, well branded fixtures," agrees Lowman. "Gantries represent a large capital investment on behalf of the manufacturers and we would like to retain that." As far as combating underage sales go, retailers have already given their support to the CitizenCard scheme which could be used across all controlled categories, including alcohol. "It is impossible for a retailer to ascertain the age of a consumer, and even the health committee has acknowledged that a proof of age scheme is needed. But there is no point in the alcohol industry having one card and tobacco another," says Lowman. "We are hopeful that the Citizen Card will provide the answers but we need more help from government by way of explicit support and backing for the card. We also need to change the culture of underage purchases and move towards the American model where the culture is to expect to be asked for id." For retailers, the high profile battle being fought in the European courts over advertising is largely a sideshow. In the high street, the more urgent problem is smuggling. The Tobacco Association estimates that as much as 75% of hand rolling tobacco and nearly a quarter of all cigarettes consumed in the UK are illegally trafficked, representing lost sales of £42,500 a year for the average store. Phillips puts the blame squarely at the government's door. He says the policy of successive Chancellors has resulted in an own goal for the Treasury."The differential needs to be addressed, and if our tax doesn't go down, there's no reason why the rest of the EU should not come up." Smuggling might be a convenient stick with which manufacturers can beat the Treasury around Budget time, but it is retailers who are in the front line when it comes to erosion of sales and profitability. According to a recent report by Bournemouth University, illegal trafficking in tobacco has led to the closure of some community stores. "Smuggling impacts on us in two ways," says Lowman. "First, it directly replaces sales through legitimate channels, and secondly, it erodes brand recognition which keeps the market at a reasonably high value and delivers some margin to retailers." ACS members are being encouraged to share intelligence with Customs and Excise, but they are frustrated at the speed at which the problem is being tackled. "Customs and Excise have had a lot of extra money invested in them and greater powers ­ it's a case of making that work," says Lowman. Manufacturers, wholesalers and retailers, meanwhile, are cheering a victory in the campaign against compulsory date marking of cigarette and tobacco packs. The measure, designed as an anti smuggling device, would also have seen an end to forestalling, whereby the trade stockpiles cigarettes and tobacco in suspended duty, ready to sell them at higher prices post Budget. The date scheme has now been nailed in favour of a "duty paid" label and a quota system for distributing tobacco. Although, in theory, the date marking scheme remains an option if the industry fails to regulate itself effectively, manufacturers, wholesalers and retailers agree that date marking would have been a nightmare to administrate, leading to as much as 16p extra on a packet of 20 cigarettes with the add on costs hitting smaller stores hardest. "Our one concern is that the most powerful retailers will still be able to access more product at Budget time which may leave others short," says Lowman. "Profit on forestalling for larger operators is important and I'm sure they will seek to maintain it." {{Z SUPPLEMENTS }}