Smugglers Prosper in Spain’s ‘Perfect Storm’ for Tobacco

Spanish smokers, squeezed by higher taxes and a deepening recession, are increasingly relying on smugglers to feed their habit.

Illegal imports now account for 7 percent to 8 percent of Spanish cigarette sales, compared with almost nothing a year ago, according to the country’s tobacconists association. In southern provinces such as Cadiz, Seville and Malaga, the proportion is 20 percent.

“Smuggling and fake tobacco, which had been eradicated since 1993, came back strongly last year,” said Jaime Gil- Robles, corporate affairs director at Altadis, the Spanish unit of Imperial Tobacco Group Plc.

Smuggling, encouraged by a December 2010 increase in tobacco taxes and a ban on smoking in public places, has eroded both government coffers and company revenues. Spain, which has the European Union’s highest jobless rate, collected 14 percent less tobacco taxes in 2011 than a forecast of 9.05 billion euros ($12 billion), excluding value-added tax, according to Altadis.

“The fiscal policy was disastrous as it forced an average increase of 50 euro cents per packet,” Gil-Robles said. “Add the crisis and skyrocketing unemployment to that and you have the best scenario for smuggling and illicit tobacco.”

In a single week last month, Spanish tax authorities seized more than a million illegal packets of cigarettes worth about 4 million euros. In December, officials said they confiscated 561,500 packets of fake Marlboro brand cigarettes which were imported from China and entered the country through the port of Valencia in a container marked “synthetic fiber.”

‘Tremendously Worrisome’

The increase in smuggling is “tremendously worrisome for the whole industry,” said Mario Espejo, chairman of the Spanish tobacco association, which represents more than two-thirds of the country’s 14,000 tobacconists.

British American Tobacco Plc, Europe’s biggest cigarette maker, estimates that 6 percent to 12 percent of the 5.5 trillion cigarettes consumed worldwide each year are obtained through illicit means such as smuggling, its website shows.

In Spain, the number of packets sold last year declined 17 percent to 3.02 billion from 3.62 billion in 2010, according to the Tobacco Market Commission. Altadis this month requested a two-year freeze on tobacco tax to help the market recover.

In May, Altadis cut the price of Fortuna, Nobel and Ducados in Spain to maintain competitiveness after it sold 16 percent fewer cigarettes there in the first half of the fiscal year.

“Last year, there were three big shocks in Spain for the consumer: the tough economic environment, excise increases and the smoking in public spaces ban,” Alison Cooper, chief executive officer of Bristol, England-based Imperial Tobacco, said in an interview in Madrid. “That caused the perfect storm in terms of the Spanish market.”