Illicit Cigarette Trade Creates Woes for Retailers

WASHINGTON, D.C. -- This March, The Tax Foundation released a report highlighting the illicit cigarette trade in the United States. Shortly after, New York Gov. Andrew Cuomo announced a new Cigarette Strike Force -- composed of state, local and federal agencies -- to crack down on illegal tobacco trafficking and sales in the Empire State.

A few months later, Winston-Salem, N.C.-based Reynolds American Inc. (RAI) launched a special website called the "New Tobacco Road" to draw attention to cigarette smuggling and the issue's seriousness for the tobacco industry and all its players, including convenience store retailers and wholesalers.

While the black market trade of cigarettes is not a problem of the 21st century -- it has been around for decades, in fact -- the situation is getting more serious.

"This isn't a new problem. It has been around since the late '70s when there were studies and research done about this issue. But we have seen it become a more serious issue as organized criminal enterprises look at illicit cigarette trade as part of their portfolio," explained Bryan Hatchell, director of communications at RAI. "It is becoming the currency of organized crime."

The "New Tobacco Road" refers to Interstate 95 along the Eastern Seaboard and the website is specifically meant to point out this issue. Along the I-95 corridor, criminals are taking advantage of the opportunity to make huge profits from the illicit sale of tobacco products, Hatchell said.

RAI is not the only tobacco company taking aim at this problem. Combating the illicit trade also has been a major part of Richmond, Va.-based The Altria Group Inc.'s corporate responsibility platform for several years.

The Brand & Trade Channel Integrity Department within Altria's law department works toward an end. Its efforts include communicating to trade members that distribute Altria's products at wholesale and retail; maintaining a system to monitor compliance and address violations of the terms of trade programs; supporting law enforcement and regulatory agencies at all levels; and investigating those involved in importing and selling illicit cigarettes.

"Those are some big-bucket things we do as a company to protect our business and the legitimate cigarette distribution system," said Brian May, senior manager of communications at Altria, the parent company of Philip Morris USA.

The illegal cigarette trade has moved beyond the average person traveling south to buy cartons of cigarettes at cheaper prices.

"More and more, we are finding organized crime, ethnic street gangs and even terrorists getting into the game because it's the new currency for the criminal. It's more profitable than narcotics," said Rich Marianos, a retired assistant director with the federal Bureau of Alcohol, Tobacco, Firearms and Explosives. "It's a $5.5-billion loss to this country a year in tax avoidance, tax evasion and just plain old stealing from the American taxpayer."

Marianos, who now works with RAI on the New Tobacco Road, said he feels bad for the convenience stores and other retailers who are being hurt by the illicit trade.

"These convenience stores [and] gas stations play by the rules, pay their taxes and buy all their products legally, and the black market comes in and undercuts the nonsense out of them and hurts their overall profit," he said. "This is their livelihood. They are part of the community. They are staples where you can get milk late at night or whatever you need. These illegal traffickers are putting them right out of business."

The black market for cigarettes is not just an East Coast problem, either. It is happening on the Southwest border, on the New York-Canadian border, and in Los Angeles across the Mexican border. It's also happening in the Miami area where counterfeit cigarettes are coming off ships.

However, when you look at the illegal sales of legitimate cigarettes, I-95 is one of the best examples, according to Marianos. "You have places like the Carolinas, Georgia [and] Virginia where they can purchase a ton and use that artery right up to New York State or Massachusetts," he pointed out.

As Marianos noted, the pervasiveness of the illicit trade is making it difficult for c-stores and other tobacco retailers to compete. RAI's Hatchell agrees.

"It is incredibly hard for legitimate retailers to compete in an environment where illicit cigarettes are being sold. They cannot competitively compete with those prices," Hatchell said. "It is up to retailers to contact their local legislators and law enforcement and let them know this is an important issue that is hurting their business, hurting their ability to maintain their jobs and for the safety of their employees."

For more on the black market and its impact on c-stores, look in the September issue of Convenience Store News.