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Tobacco firms in Kenya puff up profits despite tough laws

FINANCIAL STANDARD
By Lee Mwiti | Jun 7th 2016 | 5 min read
By Lee Mwiti | June 7th 2016
FINANCIAL STANDARD

Peter Mwangi precariously dangles a cigarette on his coal-dark lips as he serves customers behind his large aluminum box inside one of Nairobi City’s smoking houses. The leisurely way he puffs, while meticulously balancing it so that it doesn’t fall, is almost artistic.

Now and then, he dips his equally dark wiry fingers inside the box and picks different packs of cigarettes and quickly tears them to hand eager customers their favourite sticks. You can feel their relaxation once they light them and take the first puff. The smoking room is dark, with old strands of soot dangling from all corners of the roof. It is like a deserted chimney.

“I have been selling cigarettes since 2013. At times, my stock runs out by midday and I have to go for more. People from nearby offices flock in especially during lunch hour and puff endlessly,” Mr Mwangi says as he continues to serve the many hands stretched at him.

All sorts of smokers, from handcart pullers to suit-wearing corporate types who have trekked from opulent offices along Kenyatta Avenue to queue at Mwangi’s place for the prized stick. Now Mwangi has even fashioned his box to act like a small canteen where he sells bananas, sweets and sodas. And he proudly hangs the Sh2,500 Nairobi City County licence that proves he is a legitimate businessman, with a very loyal clientele. Indeed, business is good.

And it is good too for tobacco processing firms despite a raft of regulations and sin taxes meant to curtail smoking.

Alleged Bribes

In Kenya, there are two leading cigarette makers– Mastermind Tobacco Kenya and British American Tobacco (BAT). And despite commanding a huge customer base, both have been fighting the government on tough regulations and taxes that are meant to check their expansion. The fight has extended to public health groups that keep heaping pressure on the State.

Yet, both have survived the tides of law and taxes to post profits and scale heights in the corporate world, as companies in other sectors reel under pressure of low revenues. In the last financial year for example, BAT had a good run bragging a 17 per cent increase in profit before tax to Sh7.1 billion. Its earnings per share increased by 18 per cent and its shareholders will be taking home a total dividend payout of Sh49.50 per share making them some of the highest earners in the year under review.

BAT controls 70 per cent of the tobacco industry in Kenya. Mastermind on the other hand, controls the remaining 30 per cent and though not listed on the Nairobi Securities Exchange, has had a healthy balance sheet that has seen it expand rapidly to neighbouring markets of Uganda and South Sudan.

BAT has a strong foothold in the high-end market for expensive brands such as Dunhill and Embassy, while Mastermind mainly serves the lower-end clientele where brands such as Supermatch are common. A Dunhill Stick goes for Sh10 while Supermarch goes for Sh4.

Both companies have also been pitted in a fierce war against each other, as one wants to out-muscle the other out of the lucrative market. The rivalry has cost them millions in legal fees and alleged bribes to authorities as each lobbies against the other.

But perhaps the biggest challenge they recently faced, one that probably could lead to their downfall, were the newly upheld provisions of the country’s 2014 Tobacco Control Regulations by the High Court. The court order has been described as a resounding victory for Kenya’s public health.

Top on the companies’ grievances is that the restriction they had bitterly fought - to have smokers allowed to puff publicly - was rejected. They had argued that smokers have rights too, just like non-smokers, and the idea of restricting them on where they can smoke and where not to puff, was unconstitutional. They wanted smoke houses such as the one Mwangi operates in abolished, and smokers allowed to puff freely.

They had also asked the High Court to quash a 2 per cent tax imposed on cigarattes, which they had deemed unacceptable. The court turned them down.

BAT Chief Executive Officer Keith Gretton in an interview with Business Beat said: “Apart from the High Court’s ruling on regulations being unconstitutional. Of which we intend to appeal, the 30 per cent of space that a health warning should take on a cigarette pack is all right as long as the regulators don’t add more. Customers don’t have to be told what they already know through huge, scary warnings.”

Mr Gretton blames the health regulations that were introduced between 2009 and 2010 as the reason the industry is not performing even better. “It takes time for smokers to adjust to new regulations, and this brings instability in the market. The kind of instability that can be very negative on operations,” Gretton says.

But despite both companies battling health regulations that are hell-bent on crippling their profits, they are at the same time swimming in an industry that has been riddled with corruption allegations which have given it too much negative publicity.

BAT was the first to be accused of being an errant player, after being accused of bribing top honchos at the Kenya Revenue Authority (KRA) to have a look at Mastermind’s files. Allegedly, BAT wanted to steal some trade secrets from Mastermind.

Mastermind on its part, has been engaged in a bitter copyright case with Ugandan company Leaf Tobacco Limited over the Supermatch brand. Mastermind has been accused of rough play as it seeks to take over the Ugandan market.

sin tax

But it is BAT that has suffered the most when it comes to bribery allegations, some spilling even into the international stage. British newspaper The Guardian was the first to call out BAT’s alleged corrupt tendencies.

The daily accused BAT of bribing top politicians and government wheeler-dealers so as to turn a blind eye to smoking regulations recommended by the World Health Organization (WHO). It is alleged that such bribes had kept Kenya from ratifying WHO’s health recommendations, becoming one of only two countries in Africa not to do so.

However, corruption allegations aside, the issue of taxation stings the industry even deeper. Gretton cautions the government against taxing cigarettes or encouraging the so called ‘sin tax’ for the simple reason that criminals take advantage of such taxes to engage in illicit trade.

“The sin tax will encourage illegal trade. Counterfeits will sprout from everywhere and racketeers will take advantage of the high taxes to make more money and drive legitimate products from business,” Gretton cautions.

The MD adds that while the Treasury has every right to increase taxes on cigarettes as per the current levels of inflation, the Cabinet Secretary Henry Rotich is invited to leave out taxes on cigarettes at least for 2016. Gretton claims that 16.3 per cent of cigarette revenue went into government coffers last year. Punishing the industry with severe taxation would hurt this revenue stream.

“The new tax regime was introduced only last December. It would be unfair to up it again this year,” says Gretton. Indeed, despite all the problems the tobacco industry is facing, swimming from one shark-infested ocean to another, the companies seem happy posting profits year in, year out, as they continue to expand. [email protected]

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