Newsmaker: Smoke coming out of his ears

Brian Finch: CEO of British American Tobacco (South Africa) Illegal trade in cigarettes - and government inaction - frustrates tobacco boss, writes Chris Barron

Newly appointed British American Tobacco (South Africa) CEO Brian Finch works in the most glorious setting. The close-up view of the Jonkershoek mountains from his office in Stellenbosch beats the bird's-eye view he had of the Thames, St Paul's cathedral and the House of Commons during his last posting in London, he says.

But his broad smile hides the fact that this 47-year-old product of Zimbabwe's "excellent" education system, before Mugabe wrecked it, and the first black person to lead the company in South Africa, is a worried man.

He is worried because he takes control of BAT at a time when its future is threatened by a massive influx of contraband cigarettes through porous borders and inadequately policed ports.

"It's our biggest challenge."

Company research suggests that one out of every five cigarettes smoked in South Africa is illicit. "That's a hell of a lot," he says.

It has been "an issue" in South Africa for years, but in spite of the company's efforts to engage the government and police, BAT estimates there are twice as many contraband cigarettes in the country than a year ago.

Largely as a result, demand for BAT products is declining. Domestic losses are being offset by increasing its exports to West Africa and the Middle East but at some point soon there will be retrenchments unless the situation is arrested, he says.

"It's having a huge impact on our productivity."

BAT in South Africa has the fourth-biggest tobacco products manufacturing plant in the world, but this means consumption has to be sustained at a high level to keep the operation economical.

"If we fail to get the right traction with government on the enforcement side we will have to retrench," he says.

Apart from the money BAT is losing, the fact that almost 52% of the price of a (legal) cigarette goes to the government in taxes gives an idea of the billions the national fiscus is losing through this massive failure of law enforcement.

"Our tax bill last year was over R10-billion. This year we won't get close to that."

The government's response to its declining revenue from legal producers like BAT (which has close to 90% of the local market) has been to increase its tax on cigarettes. But this is a very short-term and ultimately self-defeating "solution", says Finch. The only winners are the importers and distributors of illicit cigarettes, which are not taxed, because the more expensive the legal product becomes, the greater the demand for cheaper alternatives.

"We can't compete on price. If 52% of your price is tax that's a hell of an incentive to offer to any trader to sell your stuff and sell it quick. And in recessionary environment there are consumers out there looking for the cheapest option."

With the high tax on cigarettes, "the opportunity to anyone wanting to indulge in illicit gains is huge", he says.

As are the costs to the industry and society.

"It's a challenge for us in terms of our factory ouput and employment, but those kinds of margins bring other evils. It facilitates crime in a way that government doesn't want to see at all."

Before London, Finch was marketing director for the Southern African region for a couple of years so, while he has only been CEO since May this year, he speaks with the frustration of an old hand.

"There's a whole lot of education we're having to do with our stakeholders and with government", he says. "It's tough, it's not an easy exercise."

Is anyone listening?

"I like to believe we're having good engagement with government", he says.

But the results speak for themselves.

"One out of five. And we've seen it double from this time last year."

Meanwhile the talking continues.

"The issue now," says Finch, "is to see some action in the marketplace against the perpetrators, including some of the trade partaking in this exercise.

"If you can't stop it at source you've got to disrupt the supply chain, and that's not our job, we can't police the marketplace."

There is also a health component to counterfeit trade which Finch believes the government should be paying more attention to.

"Nobody's sure they (the contraband cigarettes) meet the stringent quality controls we apply to our products," he says.

"The Department of Health could do a lot too."

Finch says local consumption is down 10% on this time last year, "no doubt as a direct result of illicit product".

He downplays the effect of legislation and the growing anti-smoking, pro-health culture.

"People are smoking less and we accept that, that's the industry we are in. But the population is growing."

The ban on advertising has forced BAT to be "a lot more targeted and focused around our brand message" which in retrospect was "absolutely the right thing because now we have to go out and speak to smokers.

"We're putting a hell of a lot more money into research than we did before."

Finch himself has never smoked.

"It's just something I never did."

How does he feel about the fact that his job is to encourage people to do something which is bad for them?

"My job is not to encourage people to do anything they don't want to do," he says firmly.

"Do I sleep well at night? The answer is yes. Why? Because these are people who have consciously decided that smoking is something they want to do notwithstanding the risks it comes with."

Does BAT in South Africa have a future?

"I think we do. But if the business becomes totally illicit, if 90% of product in the market is contraband, then of course there's no future for a company like ours."