Forewarned is forestalled Hand in hand with the arrival of duty paid marks comes the end of forestalling. This will prove a body blow for everyone involved in selling tobacco. Julian Hunt and John Wood explain why On the face of it, the introduction of duty paid marks on packs of tobacco and cigarettes should be good news for the trade. After all, it's designed to help Customs in its ongoing battle against smugglers. But alongside the introduction of this new mark, a massive change is taking place ­ with huge ramifications for retailers, wholesalers and manufacturers. And the change will inevitably force some smaller wholesalers out of business, lead to higher tobacco and cigarette prices, do nothing to prevent smuggling, and ensure independents continue to suffer. To understand why, you need first to grasp an important piece of recent history. For years, the trade has benefited from the practice of forestalling ­ where tobacco products are taken out of bond ahead of a Budget so the manufacturer or trader can avoid paying the new, higher rate of duty. So as well as trying to find new ways of stopping smuggling, the government last year decided it also wanted to put an end to forestalling. It was a matter of principle: the government believed the industry was cheating the Exchequer out of revenue (even though this "cheating" probably represents just 3% of duty losses, with smugglers accounting for the other 97%). Anyway, the government's initial idea was to introduce a Not to be sold after' date stamp on packs. Wholesalers felt such a mark would create chaos in the independent sector and lobbied Whitehall. They were successful and the government eventually dropped the plan in favour of a duty paid mark (see box) ­ so long as a way could be found to put an end to forestalling. The government's solution was to calculate how much each supplier took out from bond between November 1999 and October this year. This figure has been divided by 366 to give a daily average. Tobacco firms are now allowed to withdraw 140 days of stock from bond ­ which covers the period up to the Budget ­ plus an extra 28 days to ensure there is enough stock in the supply chain. It's complex. But everybody agrees it will put an end to forestalling. As Rothmans' public affairs manager Mike Belcher said: "Customs introduced compulsary guidelines restricting everybody's ability to buy tobacco between December and the Budget, based on last year's sales. They will only be able to buy normal supply. There is no stock profit to be made. "C&Cs operate on very tight margins and will have to look at this very carefully." You can say that again. The problem is that wholesalers have got used to making money out of forestalling. And this profit ­ plus whatever they made through the overnight lending of their cash flow ­ has allowed them to sell tobacco products virtually at cost or with a tiny margin. But now this vital revenue stream has come to an end, what are wholesalers to do? With as much one third of their business marginally costed, something clearly has to give. And that something will be pricing. Key Lekkerland's md David Rae said: "It is up to the manufacturers to take into account the problems this will cause and next time there is a price rise to give a realistic margin." But that seems unlikely. As Rothmans' Belcher pointed out: "Everyone's taking a hit." Manufacturers' profits are also affected by the changes, so wholesalers and retailers can't expect them to suddenly increase the margins they offer the sector (although one trader hoped they would become more responsible about their pricemarking). Christopher Adams, chairman of Palmer & Harvey McLane, the country's largest distributor of tobacco, agrees wholesalers ­ and cash and carries in particular ­ will have to make some additional margin to cover the loss of profit. And he estimates this loss of profit is equivalent to 2% margin. "There has been some price hardening in some quarters, but not across the board. Everyone is looking at everyone else's operations and jockeying for position." But he felt the upward movement in prices would be gradual: "In five years' time the wholesale prices will reflect the change in margin." Other operators feel the price changes will have to be made more quickly if smaller C&C operators are to adapt to the new trading environment. "Over the next year or so prices will go up, simply to allow wholesalers to survive," said one, who added: "The wholesale trade offers a service to manufacturers. But wholesalers don't understand what their role is and give their services for free." It may take time for smaller C&Cs to wake up to this, but when they do their margin structures will change. Those that don't or can't change will go out of business. By how much prices will go up in C&C depots and on PLOFs is a moot point. It could be as little as 2p to 5p on the current RSP of a pack. It could be much more. But any hike in the price of tobacco and cigarettes will be a nightmare for hard pressed independents, who are being squeezed both by supermarket price cuts and smuggling. P&H's Adams recognises the difficulties faced by many of his customers. "Tobacco accounts for anywhere between 30% and 60% of the average CTN's turnover. "Competition from smuggling has already had an impact on the viability of many stores, and anything detrimental to retailers' margins could put the future of many independents in jeopardy. This seems to run completely contrary to the government's rural regeneration efforts." If retailers are looking for some words of comfort, forget it. There are none. It's inevitable that prices are going to rise. And, as a result, independents will suffer. {{NEWS }}