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Legal tobacco sales spiked during COVID-19 restrictions: Study

cigarette-1642232_1920-1024x783A new study is highlighting the extent of the illegal cigarette market in Canada and the cost to provincial treasuries in foregone tax revenue.

The new study, conducted for the Convenience Industry Council of Canada (CICC) by Ernst & Young LLP (EY), provides solid data and evidence regarding something many already suspected: A direct link between the closure of tobacco manufacturing operations and smoke shops on First Nations reserves, and an increase in legal tobacco sales at the c-store level.

“This study proves what we have been saying for a long time: the contraband problem is significant and governments must act now,” Anne Kothawala, president & CEO of CICC, said in a statement.

The report shows temporary closure and travel restrictions related to First Nations communities at the onset of the COVID-19 pandemic in mid-March was followed by a gradual, sustained uptick in legal cigarette sales across Canada.

Data collected from retailers shows that legal cigarette sales peaked in June 2020, representing a 24% increase over sales in this same period of time in 2019. According to the report, when on- reserve stores and cigarette factories re-opened in July, legal sales plummeted back down to pre- pandemic levels.

The increase in legal sales during the shutdown was most dramatic in Atlantic Canada. Legal cigarette sales in June 2020 were up 44.9% in New Brunswick, 47% in PEI and 44.3% in Newfoundland and Labrador, compared to June 2019. The study indicates that the closure of the Atlantic border was a one of the factors restricting the movement of illegal tobacco traffickers.

The temporary shift in the cigarette trade had noticeable impacts on provincial treasuries. According to the report, “In the month of June alone, the increased sales in the stores studied brought an additional $50 million in tax revenue to provinces ($32M) and the federal government ($18M). Ontario and Quebec saw revenues increase by $6.3M and $6.7M, respectively, while in New Brunswick the province took in an extra $5.1M in June.”

A number of alternative explanations and factors for an increase in legal sales – including seasonality of sales, price or tax decreases, cross border travel implications and an increased prevalence in smoking during this period were evaluated and eliminated by the authors of the study as a rationale for explaining these increases, according to the CICC.

“Gauging the size of the unlicensed cigarette market in Canada has historically been difficult. But major manufacturing and distribution shutdowns in response to COVID-19, demonstrated a significant change in sales,” Fred O’Riordan, EY Canada’s Tax Policy Leader and the lead author of the report, said in a statement. “As supplies of contraband dried up, smokers who typically purchased tobacco products illegally had instead to buy legal, duty-paid cigarettes. As a result, we were able to measure significant windfalls to provincial treasuries.”

“In turn, this study demonstrates that provinces stand to gain tens of millions of dollars a month —and hundreds of millions of dollars a year — by cracking down on the illegal distribution and sale of contraband tobacco,” added O’Riordan.

The CICC is calling on all orders of government to act on the report’s findings by:

  • Committing to no new tax increases for tobacco products until steps are taken to bring illegal tobacco under control, as the price differential between legal and illegal tobacco products is a major driver of the contraband market.
  • Empowering law enforcement with the resources and incentives to pursue illegal tobacco manufacturers, sellers and smugglers.
  • Working with Indigenous councils to apply a levy to non-Indigenous purchasers of tobacco products.
  • In Ontario, follow in Quebec’s footsteps by increasing enforcement and investing resources into the province’s Contraband Tobacco Enforcement Unit to tackle this growing challenge.

“As we emerge from this once-in-a-lifetime shock to our economy, governments must look at all options to pick up lost revenue,” said Kothawala. “Enhanced enforcement would cost a fraction of the total annual tax loss in Canada. Provincial treasuries will know the extent of it. In Ontario alone, per annum losses have been estimated to be $750 million. Left unchecked, contraband networks have economic consequences for both law-abiding retailers like convenience stores but also for governments, to say nothing of the major consequences on public health and safety.”

The study evaluates sales data from members of the CICC, the Canadian Tobacco Manufacturers Council and legal production and excise revenue data provided by the Canada Revenue Agency. Click here to read the full study.

 


Eyvind Dahl owns Dahl's Coin Laundry & Convenience in Renfrew, Ont.

The ups and downs of tobacco 

After a surge in sales during the COVID-19 lockdown, how do c-stores keep smokers coming back for more?

Eyvind Dahl owns Dahl's Coin Laundry & Convenience in Renfrew, Ont.

Eyvind Dahl owns Dahl’s Coin Laundry & Convenience in Renfrew, Ont.

As Canada locked down in the wake of the COVID-19 pandemic, Eyvind Dahl noticed something at his Renfrew, Ont. c-store went up: tobacco sales. 

Dahl, the owner of Dahl’s Coin Laundry & Convenience, attributes the increase in tobacco purchases to the closure of First Nations’ borders in the province, a protective measure to fight the coronavirus. “When they closed the reserves, our tobacco sales more than doubled,” says Dahl. 

He notes that sales of Imperial tobacco alone jumped from 50 to 100 cartons a week. Hand in hand with that increase in business came a surge in impulse purchases. “All my categories shot up,” says Dahl. “We were so busy it was crazy.”

 Surge then slide

Screen Shot 2020-10-27 at 10.40.46 AMDahl was not alone in seeing a surge in tobacco. According to a survey conducted by the Ontario Convenience Stores Association (OCSA), retailers throughout Ontario showed an increase in tobacco sales that ranged from 10% to more than 30%. The survey of the association’s 6,000 members also found that proximity to a reserve played little role in the booming business. Sales increased across the board, and almost half of the stores surveyed were more than 30 kilometres from the closest reserve. Dahl’s Coin Laundry & Convenience is an hour away from the nearest First Nations community. 

The boom has been temporary, however. “Now that the reserves are back open, sales are going down, down, down,” says Dahl. “It’s going back to normal, which shouldn’t be normal.”

The issue of contraband tobacco has been a significant one for retailers, particularly in Ontario. “The illegal cigarette market has been left unchecked for far too long,” says OCSA CEO Dave Bryans, who is based in Oakville. “This can’t go on. In Ontario, 30 to 60% of butts swept are contraband.”

The OCSA is calling on the provincial government to develop an integrated plan to address contraband concerns and other tobacco issues. “The survey demonstrates a need to work with the Ontario government to develop a tobacco strategy from pricing, formats, promotions and incentives to protect small businesses as well as government’s health policies,” says Bryans.

The Convenience Industry Council of Canada noted a similar surge amongst its members. During a recent interview with CSNC, president and CEO Anne Kothawala said CICC is engaging “Ernst & Young to put together a comprehensive study on contraband tobacco across the country. We need much stronger public policy to address this issue.”

 Competing with contraband

Until then c-stores are looking for ways to enhance tobacco sales. In the current environment, productivity is paramount, says Anthony Ruffolo, vice president, McCowan Design & Manufacturing Limited in Toronto. “Plain packaging has definitely made it more difficult to vend the product quickly. You need to be more efficient and organized.”

Products like McCowan’s secure undercounter tobacco cabinets can help. This may also free up the back wall for new opportunities, space often previously dedicated for tobacco products. “There is an ability to generate profits off the back wall. You may even be able to sell advertising,” says Ruffolo. 

Sara Clarkson, president of Storesupport Canada in Mississauga, points out that helping people work through the plain packaging maze will build customer loyalty. “There is still lots of confusion regarding cigarette brands with the start of plain packaging. Knowing what brands to recommend is key and ensuring stock is available of those brands for your regular customers is also of huge importance.”

Bryans recommends c-stores promote the least expensive products they have in inventory as a way of competing with First Nations’ retailers at a basic level. 

While that will attract some new customers and keep others coming back, there is no way c-stores can compete head on with contraband sales, notes Dahl. A carton of cigarettes from the reserve is $20. His cheapest brand is $120. “It’s a huge difference. I can sympathize with the customer.”

The focus on tobacco sales includes another harsh reality for c-stores: the category is declining.

Bryans notes that c-stores sell 99% of all legal cigarettes and sales are declining 1.5 to 2% a year. “That is a huge concern for the channel. The time has come for a task force to review the tobacco business in Canada.”

Filling the void

One solution is to look for options that can replace tobacco. Vaping seemed a promising category and the profit margin is greater than tobacco. The product is also very popular, but there are concerns about safety and increasing regulations that are undoubtedly affecting retailers.

Many would like to see c-stores be able to sell alcohol, and the industry has been lobbying the government and raising public awareness for the last seven years to encourage a move to an open retailing market. Doug Ford’s Progressive Conservative government has promised that market will soon be a reality in Ontario, but the wait continues.

Ruffolo also recommends retailers look for products and services that set them apart, such as foodservice or local products. “You need to draw in new customers. The more you know your customers, the more you will be able to retain them.”

It’s also critical to remind customers—through signage, conversation, and any other means—that c-stores offer what competitors, from larger stores to smoke shacks and vape shops, do not. That message resonates more clearly and convincingly in a COVID-19 world, notes Clarkson. “With access to grocery stores being more difficult with line-ups and extra time needed to shop, quick convenience is more important than ever. Ensuring staples are in stock and healthy snacks will promote a quick stop at the convenience store.” 

 

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OCSA invites retailers to participate in tobacco survey

The Ontario Convenience Stores Association is conducting a survey to gather information to share with the Ontario Government in an effort to find solutions to illegal cigarettes, while understanding the importance of the tobacco business for convenience stores.

Independent, chain and franchise operators are invited to participate in a survey and share their experiences and thoughts.

“If you are concerned about contraband and what it is doing to your revenue and traffic, then here is a great opportune to weigh in as a small business owner,” says OCSA president & CEO Dave Bryans. He will be sharing the information with the Tobacco Project Team, which is making a report to the Minister of Finance in August. “The government wants to hear from the convenience sector themselves, small business owners and how it effects them.”

Click here to complete the survey.


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Industry reacts to cross-Canada contraband cigarette bust

Cigarettes Generic Lg_100517Following a major crime bust last week, 16 people are facing charges and millions on contraband cigarettes are off the streets.

According to the OPP, a two-year investigation, dubbed Project Cairnes, took place across Ontario, British Columbia and Quebec, and targeted the illegal manufacture and distribution of contraband tobacco, as well as cannabis and other drugs.

Among the items seized, were 11.5 million contraband cigarettes, with an Ontario street value of $942,000, as well as 1,714 pounds of cannabis, with an estimated street value of $2.5 million.

“The depth and scope of this investigation reveals just how extensive the problem of contraband tobacco and its links to organized crime is in Canada,” Anne Kothawala, president of the Convenience Industry Council of Canada, said in a statement. “These groups are well-financed and organized, and their operations have major consequences on public health and safety as well as on small business convenience retailers.”

The tax loss associated with the cigarettes seized throughout the investigation is estimated at $3.3 million.

“Particularly at a moment when governments are looking to finance COVID-19 response and recovery efforts, decision-makers should support even greater actions to break up contraband networks that consistently evade taxes,” said Kothawala. “These are criminals who are flooding the legal market with cheap, unregulated cigarettes that have economic consequences for both law-abiding retailers like convenience stores as well as governments across the country.”

She further noted that these illegal products are more easily obtained by youth, as organized criminals are not concerned about access to tobacco by minors.

According to The Toronto Star, “The project began as an investigation into a tobacco plant on Six Nations of the Grand River First Nation, near Brantford. The OPP said that operation was controlled by a GTA-based criminal organization and that no benefit or investment was provided for Six Nations.”

The fight against contraband tobacco is ongoing. As the convenience store industry’s number one dollar sales category, stopping contraband and the illegal sale of cigarettes is an important issue.

The Ontario Convenience Stores Association is asking independent, chain or franchise operators to participate in a related survey.

“If you are concerned about contraband and what it is doing to your revenue and traffic, then here is a great opportune to weigh in as a small business owner,” says CEO Dave Bryans, adding he will be sharing the information with the Tobacco Project Team, which is making a report to the Minister of Finance in August. “The government wants to hear from the convenience sector themselves, small business owners and how it effects them.”

Click here to complete the survey.


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OCSA: Butt study results are in

The OCSA is hard at work ensuring the thousands of convenience store retailers in Ontario are heard. Here's what they're working on... Read more