Philip Morris CEO says EU tobacco directive will 'boost illicit trade'

The EU's proposed Tobacco Products Directive (TPD) contains a number of elements which could have the effect of driving illicit trade, according to Philip Morris chief executive Louis Camilleri.

Preliminary proposals that the TPD would mandate the introduction of plain packaging - which the tobacco industry resisted staunchly on the grounds that it could make it easier for counterfeiters to inveigle products into the supply chain - have been removed.

However, the directive "does contain a number of proposals that we believe have no credible scientific basis and would be counterproductive," said Camilleri on the company's fourth quarter results call earlier this week.

A ban on menthol and slimmer cigarettes and the introduction of 75 per cent graphic health warnings will "inevitably lead to both an increase in illicit trade and a reduction in government revenues with no benefit to public health," he added.

Menthol and slim cigarettes account for around 10 per cent of European consumption - a market equivalent in size to France or Spain - and the fear is that banning these from sale will drive consumers to illegal products.

Like its peers in the Big Four tobacco companies Philip Morris loses considerable revenue to illicit trade, including counterfeited brands which are estimated to account for as much as 11 per cent of the global tobacco market, and the problem appears to have been exacerbated by the global economic downturn.

Camilleri said internal assessment suggested illicit products accounted for 11.1 per cent of the market in 2012, up from 10.4 per cent a year earlier, and there needs to be closer collaboration between industry, governments and enforcement agencies such as Interpol on the introduction of measures such as track-and-trace that can be used to tackle illicit trade.

Those comments were echoed by Daniel Hubert, head of supply chain tracking and verification at British American Tobacco (BAT), who told the IP Protect Expo in London, UK, earlier this week that the counterfeit trade in cigarettes is worth an estimated $5bn-$10bn in lost sales.

In fact, illicit trade is so big at around 600 billion cigarettes a year that it has claimed fourth place in the tobacco sector in terms of market share, behind Japan Tobacco International (JTI) and ahead of Imperial Tobacco, according to Hubert.

Digital protection

The four main tobacco companies formed the Digital Coding and Tracking Association (DCTA) to help advance track-and-trace, product authentication and digital tax verification technologies, and have put their weight behind a system known as Codentify which uses layers of technology to secure the supply chain.

The system is incorporated into cigarette packaging and provides a number of functions, including tracking the forward movement of products through transnational supply chains and tracing potential points of diversion.

Paper tax stamps are failing to tackle illicit trade and protect government revenues as they are copied too easily, Hubert told the meeting, adding that bundling digital tax stamps with track-and-trace and authentication is the way forward.

Digital tax stamps have already been introduced in countries such as Brazil and Turkey, and according to market estimates appear to have boosted tax revenue whilst reducing illicit trade, although it is hard to gauge the effects directly against a backdrop of declining cigarette consumption.
 
Hubert told the meeting that the DCTA is keen to open up discussions with other industry players, especially pharma and alcohol, to draw on each other's expertise in the fight against illicit products.