Smoking in South Africa will never be the same again – taxes, laws and more

Market disruptors such as e-cigarettes have reshaped how the government regulates and taxes smoking in South Africa.

From 1 June 2023, nicotine-substitute solutions, including vaping products, will be taxed at a flat excise duty rate of R2.90/ml – illustrating a keen move by the government to extend the tax net over developing and new methods of smoking in the country.

However, the biggest player in the Tobacco space, British American Tobacco (BAT), as well as the Vapour Products Association of South Africa, have warned that the new tax will likely end up pushing prices up by as much as 138%, forcing consumers to the illicit market.

Currently, vaping products are not covered by the Tobacco Products Control Act or the Medicines Act; however, legislation is now in the pipeline to address regulatory holes concerning the practice.

Parliament is currently considering the Tobacco Products and Electronic Delivery Systems Control Bill, which was introduced at the end of 2022 after extensive consultation.

Broadly speaking, the bill aims to further regulate smoking and the smoking industry, including e-cigarettes.

Through the bill, when it becomes an act, the minister of health will be given authority to designate certain public places and outdoor areas as no-smoking zones and to regulate the packaging and advertising of tobacco products.

The bill also includes a provision to ban the display of all tobacco products, as well as e-cigarettes, vapes, and heat-not-burn products, in retail settings, including speciality tobacco stores.

Equity analysts Siphesihle Zwane and Varshan Maharaj from Allan Gray said that similar to government regulation, the tobacco industry never paid much attention to new nicotine consumption methods.

“The industry never invested aggressively in new ways to consume nicotine,” Allan Gray said.

“This changed when JUUL, a vapour brand, began to grow significantly in the United States by introducing innovative products with flavours and marketing that turned their brand name into a verb. This uptick in ‘JUULing’ forced incumbents to increase their investment in next-generation products (NGPs), a major shift from the stable nature of the industry.”

New methods, including vapour, tobacco-heating, and modern oral products, all look to pose less harm to consumers, which will invariably take its toll on the traditional tobacco market.

According to Allan Gray, most large market regulators saw that the vaping industry’s regulatory advantage would not stay forever, and the proof is now in the slew of developments in the e-cigarette space.

Big Tobacco is now encouraging smokers to quit or, if they cannot do so, switch to next-generation products via various consumer education initiatives, such as stores in malls, said the equity analysts.

“These products are all relatively new, and the current science regarding harm reduction has been positive, showing as high as a 90%-plus reduced risk of exposure to harmful substances. However, we do continue to monitor the science as population studies are conducted to better understand the longer-term impacts,” said Allan Gray.

Major disruptions to the smoking industry have increased the risks associated with tobacco investments that used to be a stable industry for decades.

Risks associated with regulatory changes have not had a noticeably large impact on tobacco industry earnings yet, but they have caused the sector to trade on a lower multiple of earnings, said Allan Gray.

The potential decline in tobacco sales is a concern for industry heavyweights such as British American Tobacco, as smoking rates have decreased while the population has grown.

However, if long-term combustible volumes do not decrease significantly and real price increases are achieved, companies like BAT could see growth in revenue and margins.

Allan Gray added that profit-per-stick might improve as more consumers shift towards Next Generation Products (NGPs). Despite the decline in smoking prevalence, the number of smokers has remained stable at between 1 billion and 1.1 billion since 1990.

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