KPMGUK is a leading advisor in tne field of illicit tobacco consumption measurement

562 Pages·2012·24.28 MB·English

• •
2015 Full Year Report
15April 2016
KPMG LLP Tel [phone]
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London E14 5GL
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15April 2016
Important notice
This presentation of keyfindings (the 'Report') hasbeen prepared by KPMG LLP inthe UK('KPMG
UK')for British American Tobacco Australia Limited, Philip Morris Limited and Imperial Tobacco
Australia Limited, described together inthis Important Notice and inthis Report asthe 'Beneficiaries',
onthe basis set out ina private contract dated 26 May 2015 agreed separately with the Beneficiaries.
Nothing inthis Report constitutes legaladvice. Information sources, the scope of our work, and scope
andsource limitations, are set out inthe Appendices to this Report. The scope of our review of the
contraband, counterfeit and unbranded segments of the tobacco market within Australia was fixed by
agreement with the Beneficiaries and is set out inthe Appendices.
We have satisfied ourselves, so far as possible, that the information presented inthis Report is
consistent with our information sources but we have not sought to establish the reliability of the
information sources by reference to other evidence.
This Report hasnot been designed to benefit anyone except the Beneficiaries. Inpreparing this
Report we have not taken into account the interests, needs or circumstances of anyone apart from
the Beneficiaries, even though we have been aware that others might readthis Report.
This Report is not suitable to be relied on byany party wishing to acquire rights or assert any clairna.
against KPMG LLP(other than the Beneficiaries) for any purpose or in any context.
At the request of the Beneficiaries and asamatter of practical convenience we haveagreed to
publish this Report on the KPMG UKwebsite, inorder to facilitate demonstration bythe Beneficiaries
that astudy into the matters reported has been performed by KPMG UKfor the Beneficiaries.
Publication of this Report does not in any way or on any basis affect or addto or extend KPMG UK's
duties and responsibilities to the Beneficiaries or give rise to any duty or responsibility being accepted
orassumed byor imposed on KPMG UKto any party except the Beneficiaries. Tothe fullest extent
permitted by law, KPMG UKdoes not assume any responsibility andwill not accept any liability in
respect of this Report to anyone except the Beneficiaries.
Inparticular, andwithout limiting the general statement above, since we have prepared this Report
for the Beneficiaries alone, this Report has not been prepared for the benefit of any other
manufacturer of tobacco products norfor any other person or organisation who might have an interest
inthe matters discussed inthis Report, including for example those who work inor monitor the
tobacco or public health sectors orthose who provide goods or services to those who operate in
those sectors.
KPMG LLP,aUKlimited liability partnership andamember firmof Registered inEngland NoOC301540
theKPMG network ofindependent member firms affiliated with Registered office: 15Canada Square, London, E145GL
KPMG International Cooperative ("KPMG International"), aSwiss
entity.
Glossary
ABF Australian Border Force (the new front-line operational agency of the DIBP)
ABS Australian Bureauof Statistics
ACT Australian CapitalTerritory
AIHW Australian Institute of Health andWelfare
AIT Anti-Illicit Trade
ATO Australian Taxation Office
AWOTE Average Weekly Ordinary Time Earnings
AUSTRAC Australian Transaction Reports andAnalysis Centre
BATA British American Tobacco Australia
bn Billion
CAGR Compound Annual Growth Rate
CATI Computer Aided Telephone Interview
CAWI Computer Aided Web Interview
Contraband Genuine manufactured cigarettes that aresoldwithout the payment of applicable excise taxes inthe
market of consumption. Contraband cigarettes tend to havebeen bought inalow-tax country and
brought intothe country of consumption illegallyoracquired without taxes (forexport purposes) and
illegally re-soldinthe market of consumption. This includes genuine products which arebrought intoa
country inamounts exceeding the personal allowance; inAustralia this limit is50sticks or50grams of
RYOper person.
Counterfeit Manufactured cigarettes which areillegally manufactured andcarrythe trademark and/or branding of a
legally manufactured brand without the consent ofthe trademark owner. Counterfeit cigarettes are
also known asfake cigarettes. Forthe purposes of this analysis, data relating to counterfeit isnot
included within the definition of contraband.
CPI Consumer PriceIndex
OIBP The Department of Immigration and Border Protection (the department intowhich the Australian
Customs and Border Protection Service was integrated in2015 atwhich time the ABFwas created)
EOS Shipment dataisprovided byeach manufacturer to independent research agencies who process and
combine it intoasingle set of datato reflect ex-factory shipments for allthree manufacturers.
EPS Empty PackSurvey
FCTC Framework Convention on Tobacco Control
9 Gram
GOP Gross Domestic Product
H1 Firsthalfofthe year i.e.the period from JanuarytoJune
H2 Second halfof the year i.e.the period from Julyto December
Illicit whites Manufactured cigarettes that areusually manufactured legally inone country/market but which the
evidence suggests have been smuggled across borders during their transit to Australia, where they
have limited orno legal distribution andaresoldwithout the payment oftax.
Inflows Totalvolume of cigarettes coming into Australia
ITA Imperial Tobacco Australia
.\ -: - -~I.•-"0( \. -. ,;:)1.1":' ,-,!' 2
'.'
Glossary (cont.]
kg Kilogram
KPI KeyPerformance Indicator
LOC Legal Domestic Consumption
LOS Legal Domestic Sales
LTM LastTwelve Months
LTM H1 LastTwelve Months to the end ofJune (e.g. 1July 2014 to 30June 2015)
LTM H2 LastTwelve Months to the end of December (e.g. 1January2014 to 31 December 2014)
m Million
MSI MSlntelligence
NO(L) Non-Domestic Legalisthe legitimate tobacco purchased induty free orabroadwithin personal
allowance limits.
Non-domestic Cigarettes which arenot Australian (i.e.healthwarnings missing or not inEnglish, brandsnot sold in
cigarettes Australia, packswith identifying marksfrom other markets such astax stamps).
OECO Organisation for Economic Cooperation and Development
POI Personal Disposable Income
PML Philip Morris Limited
iJl.I Percentage point
Project SUN Astudy ofthe illicit cigarette market inthe European Union by KPMG
Outflows Legitimate tobacco purchased inAustralia andtaken abroad
RMR RoyMorgan Research
RSP RetailSellinq Price
RYO RollYourOwn
TISG Tobacco Industry Stakeholder Group. Formerly known asthe Tobacco Industry Forum (TIF)
TRN Tobacco RetailerNotification
Tonnes Thousand kilograms
WHO World Health Organisation
Unbranded Illegalloose leaftobacco upon which noduty hasbeen paidandwhich carries no labellingorhealth
tobacco warnings. It issold andconsumed either inRYOform (calledChop Chop)or inserted into empty
cigarette tubes. Commonly sold inboth bagsorboxes.
Unspecified Unspecified market variant refers to cigarette packswhich do not bear specific market labellingor
Duty Freelabelling.
YoY YearonYear
3
Contents
Page
1.Executive summary and key findings 5
2.Australian tobacco market 8
3. Macroeconomic environment 13
4. Market landscape and developments 16
5.Size of the illicit tobacco market 27
6.Drivers of results 36
7. Conclusion 46
Appendices 48
4

Executive summary and key findings
Illicit tobacco declined from 14.3% to 14.0%, this was
characterised by a change in mix towards contraband
cigarettes
1.1Key messages
Consumption of illicit tobacco products by category and asapercentage of overall consumption,
2007 - 201S(1)(2)(3)(4)(a)(bl
16%
14%
6
12%<f2.
co .;::;
10% (/)0E.
C'Cl
8 ~
8%
(.)c
6% .2 8
0_
:++~"".+8C'C"l
4% =
-'+0
2%
0%
2007 2009 2010 2011 2012 2013 LTM H1 2014 LTM H1 2015
2014 2015
• • •
\
Counterfeit Contraband Unbranded -t- Illicittobacco - %oftotal consumption \ Bridgebetween studies
Illicit tobacco consumption continued to decline
Thetotal volume of tobacco consumption inAustralia inthe fullyear 2015was approximately 17.4million kg.This
represents anannualised 0.9% decrease inthe total volume compared tothe twelve months to June 2015, asarise in
loose tobacco was offset byafallinmanufactured cigarettes.
14.0% of total consumption (or2.4 million kg)of this was estimated to beillicit, representing adecline of 0.3
percentage points from the twelve months to June 2015. Thisdecline isprincipally due to adecline inthe consumption
of unbranded tobacco.
Ifthis 2.4 million kgoftobacco hadbeen consumed legally itwould haverepresented anestimated excise valueof
AUD 1.49 billion.v'
Contraband volumes have increased over the past six months
Whilst contraband volumes haveincreased over the past sixmonths they remain lower than levels experienced in2014.
Whilst we cannot evaluate the contraband volume atspecific locations, growth inthe non-domestic incidence was
identified infourteen of the sixteen populations centres sampled inthe Empty PackSurvey (EPS).
Flows of ChinaandSouth Korea(including Duty Free)labelled packscontinue to account for the majority of
non-domestic flows.
Counterfeit remains avery small shareof illicit tobacco consumption (0.03m kgor 1.4% of total illicit consumption).
Unbranded (or'Chop Chop') consumption decreased 18.5% (from 1.6million kg)inthe six months to December 2015
although itstill accounts for the majority (54%) oftotal illicit consumption.
Notes: (a) KPMGhavenothadtheopportunity tovalidateresultsfor Sources: (11 PWC,IllegalTobacco:counting thecostofAustretie's black
2007-2011. market.2007,2009.
(bl Valuesbelow 0.1havebeenremoved forclaritypurposes. (21 Deloitte, IllicitTradeof TobaccoinAustralia,2010,2011,2012.
(cl Calculated attheaverageexciseratefor2015. (31 Industrydata;seespecific reportsections forfurther detail.
(41 KPMGAnalysis.
r:; 6
Executive summary and key findings
KPMG UK is a leading advisor in tne field of illicit tobacco
consumption measurement
1.2The purpose of this report
BritishAmerican TobaccoAustralia, Imperial Tobacco
Australia Limited andPhilip Morris Limited have
commissioned KPMGUKto estimate the sizeofthe
consumption of illicittobacco inAustralia. Reports are
produced bi-annually.The purpose ofthis report is:
1. To provide an overview of the nature and dynamics of
the legal and illicit tobacco markets in Australia, and
2. To provide an independent estimate of the size of the
illicit tobacco market in Australia.
Thisfullyear2015 report measuring the consumption of illicit
tobacco inAustralia isthe second oftwo reports published
focusing on2015. Itreports onevents occurring during the
twelve month period from January2015 to December 2015.
This2015 report isproduced usingamethodology consistent
with previous KPMG'Illicit Tobacco inAustralia' reports.
1.3KPMG UK's anti-illicit tobacco measurement
experience
KPMGUKhassignificant experience inthe measurement of
illicittobacco consumption acrossanumber of markets as
well asAustralia. Ourwork hascovered markets inEurope,
LatinandNorth America, Asiaandthe Middle East.
Ourwork was pioneered inEuropewhere we havepublished
anannualreport on illicitcigarette consumption since 2006.
In2013 itwas conducted onapan-industry basisfor the first
time, beingjointly commissioned byBritish American
Tobacco Pic,Imperial Tobacco Limited, JT International SA
andPhilipMorris International Management ('Project SUN').
The study included all28 EuropeanUnion Member States
(with previous reports covering allmember states atthat
point intime). Project SUNwas conducted for the second
time in2014, the first occasion onwhich the study also
included the non-EU markets of Norway andSwitzerland.
..;""-III 7
i" ~ I .'" .1-

Australian tobacco market
u
Tnelegal and illicit markets are made of manufactured
cigarettes and loose tobacco
2.1 Tobacco consumption in Australia
Tobacco consumption refers to total volume ofconsumption for alltypes oftobacco asmapped out infigure 2.1.Thissection
dealswith the tobacco market and related products:
Figure 2.1:Australia tobacco market map
Tobacco market
Illicit
Manufactured ciqarettes Unbranded tobacco
Contraband Counterfeit IllicitWhites Chop Chop Pre-filledtubes
Legal tobacco products Counterfeit
There aretwo maintypes of legaltobacco products These aremanufactured cigarettes that are illegally
considered inthis report (cigarsandpipetobacco havebeen manufactured andsold byaparty other than the trademark
excluded for the purposes ofthis study): owner. Once manufactured, they aresmuggled intoAustralia
most commonly viaports inlargefreight containers and
Manufactured cigarettes - Made for the legaltobacco
other channels including airmail.
market andsold inpackets.
According to the Tobacco Industry Stakeholder Group
Loose tobacco - Legalloose leaftobacco sold inpouches
(TISG)!a)they do not adhere to industry production standards
andused inRoll-Your-Own (RYO)cigarettes, which are
andmaypose additional serious health risks. They arealso
consumed using rolling papers ortubes.
known asfake clqarettes'".
As shown inSection 5.1,additional legalconsumption is
possible inthe form of non-domestic legalproduct. This is
Illicit Whites
tobacco purchased abroad byconsumers andimported
legally intoAustralia, either within personal allowance limits Illicitwhites aremanufactured cigarettes that areusually
orbypayingduty onthe amount overthis allowance. manufactured legally inone country/market but which the
evidence suggests have been smuggled across borders
during their transit to Australia, where they have limited orno
Illicit tobacco consumption
legaldistribution andaresoldwithout the payment oftax.
Illicittobacco ismainly brought into the country illegallyfrom
overseas markets without the payment ofcustoms duties.
Unbranded tobacco
Thistobacco issold to consumers atlower pricesthan
Australian cigarettes, avoiding Australian customs Unbranded tobacco issold asfinely cut loose leaftobacco in
obligations, orisbrought intothe country inamounts 250g or halfkilogram amounts.
exceeding the allowable personal limit. This product carries no labelling or health warnings andis
consumed inRYOform orinserted into empty cigarette
Contraband tubes which areavailablefrom legitimate tobacco retailers,
often sold inthe original cigarette tube boxes. The product is
These cigarettes aremanufactured legallyoutside of
then sold inpre-filled tubes or loose inbags (calledChop
Australia but arenon-compliant with Australian regulations
Chopl.F'
andaresmuggled into the Australian market. Thisalso
includes cigarettes which arepurchased legallyoutside TheAustralian Crime Commission andTISGbelieve that
Australia but exceed the personal import allowance andhave most unbranded tobacco isimported rather than grown in
noduty paid. Australia but there havebeen seizures of locallygrown
tobacco, discussed on page34. It isbelieved to be
Contraband cigarettes arelegitimately manufactured bythe
distributed byretailers inthe same way ascounterfeit and
trademark owner but imported illegally (bythird parties or
contraband products'!'.
consumers) to avoidAustralian government regulations,
quarantine inspections andlocalproduct controls'".
Notes: lal Formerlyknown asTobaccoIndustry ForumITIFI,recentlychanged 121 TobaccoIndustryStakeholder GroupITISGI.
astheresultofchangesbytheAustralianTaxationOffice
IATOIforums.
Sources: III LegalandConstitutional Affairs Legislation Committee,
23February2015.
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