OPINION: High prices, low margins: a challenge for tobacco sales

It is a Catch 22 situation. The margin on a pack of premium cigarettes sold at recommended retail price is overwhelmed by the sheer size of the government’s tax take to the point where some retailers say they cannot borrow money cheaply enough to cover the cost of their stockholding.

Using a pack of Lambert and Butler as an example, Amal Pramanik, general manager of Imperial Tobacco UK, told wholesalers last week that 81 per cent of its £7.19 selling price was taken in excise duties and VAT, leaving just £1.42 to be shared out by the manufacturer and retailers. On value brands, the government was taking as much as 88 per cent of the selling price.

Well aware that retailers are criticising his company for the low margins, Mr Pramanick says that retailers should look at their margin against the net sales price after stripping out government duty. On L&B this works out at 37p, which has increased by 33 per cent over the past five years. It is a tiny 5.1 per cent margin on the price retailers are guided to sell at. But a more respectable 26 per cent on the net selling price.

The government’s plans for plain packaging was an even bigger threat, Mr Pramanik told the trade. On the one hand, this would boost the illicit trade, which already accounts for a third of cigarette sales in the UK. On the other, the trends to down trade to value brands would be compounded, meaning margins would shrink further.

Asked about the impact on working capital and cashflow for retailers, Mr Pramanik said that Imperial was working out how it could help the trade. Wholesalers get, he said, very good credit terms but the retail sector struggled. Trials were taking place to find ways to help retailers overcome the cash flow problem.

Ideas around personal guarantees could be the way forward. Any ideas welcome. Let me know.

PS, If you can sell cigarettes at a 10 per cent premium to the market, you can get your L&B margin up to around 14 per cent by adding 70p to the selling price. Your shoppers may notice!