Combating the rise of illegal tobacco trade in Australia

Smoking has long been a significant public health challenge in Australia, contributing to preventable deaths and placing a heavy burden on the healthcare system. While Australia has been a global leader in reducing smoking rates through stringent laws and public health campaigns, a new battlefront has emerged: the fight against the illegal tobacco trade.

This black market, fuelled by high cigarette prices, regulatory inconsistencies, and organised crime networks, has created profound social and economic impacts. Lower-income smokers are disproportionately affected, legitimate businesses face significant revenue losses, and organised crime has entrenched itself in the trade. Addressing this issue will require a coordinated approach, but progress remains slow, and downside risks remain for major retailers and fuel retailers affected by these trends.

Australia’s tobacco control and strict measures fuel the black market

Australia’s rigorous tobacco control measures, though effective in reducing smoking rates to around 10% of Australians they have inadvertently contributed to the growth of the illegal tobacco market. Several factors have driven this phenomenon:

1. Australia’s tobacco excise rates are among the highest in the world, making legal cigarettes prohibitively expensive. A single pack can cost upwards of $50 including $30 over excise driving smokers to seek cheaper alternatives. Illicit cigarettes, sold for $20–$25 per pack, offer significant savings, making them an attractive option. While high excise taxes aim to discourage smoking, they have inadvertently created a financial incentive for the black market.
2. Regulatory disparities: Tobacco retail regulations vary significantly between states. In some regions, unlicensed tobacconists operate with little oversight, providing a channel for illegal tobacco distribution. These inconsistencies allow organised crime networks to exploit gaps in enforcement, establishing a foothold in areas with minimal regulatory scrutiny.
3. Vaping restrictions: Australia’s restrictive policies on vaping further complicate the issue. While cigarettes remain widely available, nicotine vaping products are heavily regulated and require a prescription. This policy imbalance may unintentionally drive vapers back to smoking, sustaining demand for cheaper, unregulated tobacco products.
4. Lenient penalties and enforcement gaps: Penalties for importing or selling illegal tobacco are milder than those for other illicit substances, making tobacco smuggling a low-risk, high-reward enterprise for organised crime. Enforcement agencies, focused on higher-profile targets like narcotics, often deprioritise tobacco-related cases, allowing the black market to thrive.
5. Domestic cultivation and sophisticated distribution: While most illegal tobacco is imported, some is domestically cultivated, contributing to the black market’s supply. Criminal networks employ sophisticated logistics to ensure these products reach unregulated tobacconists and consumers efficiently.

The impact of illegal tobacco: revenue loss, crime and social strain

1. Government revenue losses: One of the most significant impacts of the illegal tobacco trade is the loss of government revenue. Excise taxes on tobacco products are a major source of funding for public health and other initiatives. In the fiscal year 2022–23, the Australian government collected $12.7 billion in tobacco excise duties. However, it's estimated that an additional $2.7 billion in excise revenue was lost due to the illicit tobacco market, which accounts for about 13% of total tobacco consumption in Australia. This not only undermines efforts to fund anti-smoking campaigns and healthcare programs but also exacerbates budgetary pressures.
2. Corporate revenue and profitability: The rise of illegal tobacco has had a substantial impact on the profitability of legitimate retailers. Major supermarket chains and fuel retailers have experienced significant revenue losses:
1. Supermarkets: Collectively, major retailers such as Woolworths (ASX: WOW) and Coles (ASX: COL) reported declines in tobacco revenue totaling approximately $1.5 billion annually. This equates to an estimated gross profit loss of $150 million.
2. Fuel Retailers: Companies like Ampol (ASX: ALD) and Viva Energy (ASX: VEA) have also been affected, with annual revenue losses of around $125 million from reduced tobacco sales equating to an estimated gross profit loss of around $25 million.
3. For smaller retailers, the impact is even more pronounced, as tobacco products often represent a larger proportion of their overall sales. These losses, combined with increased competition from unlicensed tobacconists, create significant financial pressures.
3. Criminal activity organised: Crime networks have capitalised on the profitability of the illegal tobacco trade. Sophisticated supply chains distribute counterfeit and smuggled products, often leading to turf wars and violence. Retailers and communities face heightened risks, including theft, arson, and intimidation from criminal groups seeking to dominate the market.
4. Socioeconomic consequences: Lower-income smokers are disproportionately affected by the illegal tobacco market. High prices for legal cigarettes drive them to purchase unregulated products, which can also lack quality control and pose additional health risks. The proliferation of illegal tobacco outlets undermines public health objectives and exacerbates existing social inequalities.

What is being done to tackle the illegal tobacco trade?

Efforts to address the illegal tobacco trade are multifaceted, focusing on legislative reforms, enhanced enforcement, and public awareness campaigns. However, progress remains slow due to the complexity of the issue and the entrenched position of organised crime networks.

1. Legislative reforms: Several states are introducing licensing regimes to regulate tobacco sales and curb unlicensed tobacconists. Fines and penalties for illegal sales have been significantly increased, with some states imposing penalties as high as $1.5 million. These measures aim to close regulatory loopholes and establish stricter oversight of the tobacco retail market.
2. Enhanced border enforcement: Authorities are intensifying efforts to intercept smuggled tobacco products at the border. This includes targeting shipments of both finished products and raw materials. However, enforcement remains inconsistent, and penalties for tobacco smuggling are still lower than those for other illicit goods.
3. Excise policies adjusting: excise taxes is a contentious but potentially effective solution. Lowering excise rates could reduce the profitability of illegal tobacco, but this approach weakens the price deterrent for smoking and reduces government revenue and also assists the major tobacco companies. Balancing these trade-offs is a significant challenge for policymakers.
4. Community awareness and harm reduction: Public education campaigns remain vital for reducing demand for tobacco products.
5. Targeting domestic cultivation: Efforts are also being made to identify and dismantle illegal tobacco farming operations. Increased surveillance and penalties for unauthorised cultivation aim to disrupt supply chains, but these initiatives require substantial resources and coordination.

Navigating tobacco risks and a pathway forward

From Tyndall’s perspective, these issues represent a social and structural risk for companies in our universe. While legislative and enforcement efforts are underway progress is slow, leaving companies vulnerable. Major retailers like Woolworths, Coles, and Metcash (ASX: MTS), which generate $6.5–$7 billion annually from tobacco sales, and fuel retailers like Ampol and Viva Energy, with $800–$900 million in annual exposure, face ongoing revenue pressures.

Through company interactions we would advocate for tighter, more consistent state-level regulation, including licensing and penalty frameworks, coordinated with federal support to strengthen border controls and curb illegal imports. While reducing excise taxes might provide a short-term lift for stocks as smokers return to legal products, this approach would not deliver sustainable portfolio value in our view given the negative societal and economic consequences, including higher smoking rates and poorer public health outcomes.

Ultimately, while early steps are being taken, reversing the influence of entrenched organised crime will be challenging. Until meaningful progress is achieved, Australia’s global leadership in tobacco control remains to be at risk, with significant financial and social challenges persisting for governments, companies, and investors alike.

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