British American Tobacco (BAT) is closing its only manufacturing plant in South Africa in a move that will shed thousands of jobs, with the group overwhelmed by the proliferation of illegal cigarettes.
The decision by the London- and Johannesburg-listed company will see the group not manufacturing cigarettes locally for the first time in more than 50 years, resorting to imports to serve the South African market.
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On Wednesday, the company, which produces popular brands such as Peter Stuyvesant, Pall Mall and Dunhill, informed the political leadership of the Lesedi Municipality, where its Heidelberg manufacturing facility is located, that it will close the plant by the end of this year, blaming this on illegal cigarettes, which it said now account for 75% of the market.
Head of corporate & regulatory affairs at BAT sub-Saharan Africa, Johnny Moloto, confirmed the closure in a statement after Business Day had first reported this development.
Business Day reported earlier that BAT said in a letter to the mayor of the municipality, Nelson Nkosi: “Our Heidelberg manufacturing facility is currently operating at just 35% of total capacity, making it operationally unsustainable…. The company’s decision to close the facility is final.”
“That said, BAT is not exiting the South African market. It will retain its secondary listing on the JSE and will continue serving customers through a supply importation model,” the letter continued.
The BAT Heidelberg factory accounts for both domestic consumption and export into the wider Southern African region. The group employs at least 1,500 people in South Africa.
The decision to shut the plant comes shortly after the company decided to pull the plug on its Mozambican operation. Business Day reported at the time the move put pressure on authorities in South Africa to rein in the infiltration of illegal cigarettes, which have cost the group 40% of sales volumes in the past five years.
The volume decline began in 2020 due to the explosion in the availability of illicit cigarettes in the market after then co-operative governance and traditional affairs minister, Nkosazana Dlamini-Zuma, banned the sales of cigarettes in the early part of the Covid-19 pandemic.
The volume loss has resulted in job losses at the company, with it having reduced its overall workforce by more than 30% since 2020 as a result.
The UK-headquartered group’s presence in South Africa goes back to 1904 with the establishment of the United Tobacco Company. In 1999 the group merged with Rothmans International, in which the Rupert family had a stake, giving birth to BAT South Africa.
The Rupert family, led by its patriarch and South Africa’s richest person, Johann Rupert, ended its 80-year association with the tobacco industry a year ago, selling its more than 43-million shares for £1.221bn (R26.8bn) in cash. The Rupert dynasty’s association with the tobacco industry dates back to the 1940s, when Anton Rupert founded the Voorbrand Tobacco Company, later known as Rembrandt. By the mid-20th century, Rembrandt had cemented its place as a top player in the industry, listing on the JSE in 1956 and branching out into banking, mining and financial services.
BATSA has engaged with government and law enforcement authorities over the past decade, consistently raising concerns about the growth of illicit trade and advocating for effective enforcement
— Johnny Moloto, head of corporate & regulatory affairs at BAT sub-Saharan Africa
Last year BAT called on South African authorities to place customs officials at cigarette factories as part of measures to clamp down on the proliferation of illegal cigarettes, which it said is costing the fiscus R100m a day in lost revenue, amounting to R28bn a year.
A study by Ipsos, commissioned and paid for by BAT, found the availability of illegal cigarettes in SA has become endemic, with nearly eight in 10 SA retailers selling illicit cigarettes — triple the number reported three years ago. The study, which surveyed more than 4,000 outlets countrywide, found about 69% of retailers were selling cigarettes at less than R20 per pack and nearly 80% were selling below the R26.22 minimum collectible tax.
BAT’s 2023 results were negatively affected by an impairment of goodwill regarding South Africa of £291m due to the continued “negative effect of illicit trade”.
The group also called for the “urgent” introduction of a minimum retail price of R37 per pack, saying it should be illegal to sell a box of 20 cigarettes below the threshold, which it said is “economically viable”.
In the letter announcing the closure of the plant, BAT acknowledged the “recent” moves by the South African Revenue Service (Sars) to clamp down on illegal cigarettes.
“The difficult reality for BAT South Africa is that our facility’s sustainability has been in decline for several years, with no clear evidence of a trend change in the illicit market. I can attest that if there is a substantial, sustained trend change in illicit trajectory, BAT will reinvest again in local manufacturing.”
Moloto said the imminent closure of the plant highlights a broader challenge facing many other industries and all legitimate manufacturers in South Africa.
“BATSA has engaged with government and law enforcement authorities over the past decade, consistently raising concern about the growth of illicit trade and advocating for effective enforcement,” Moloto said.
“The company points to several policy decisions that have worsened the situation: the unconstitutional 2020 tobacco sales ban, from which the legitimate market has never recovered, and above-inflation excise increases that have widened the price gap between legal and illegal products.”
“Adding to this is proposed new tobacco legislation currently before Parliament, which, if passed, will worsen South Africa’s illicit trade issues. In a presentation to the portfolio committee on health last year, Sars stated they believed the proposed legislation would worsen the illicit tobacco trade.”
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