LIM, Mr Chiang, General Manager, Alliance of Australian Retailers

MACDONALD, Mr Alan, Vice-President, Australian Newsagents' Federation; and Member Representative, Alliance of Australian Retailers

MICHAEL, Mr Heath Adam, Director of Policy, Government and Corporate Affairs, Australian Retailers Association

ROGUT, Mr Jeff, Chief Executive Officer, Australasian Association of Convenience Stores Ltd

CHAIR: Welcome. Do you have any additional comments about the capacity in which you appear?

Mr Macdonald : I am owner-operator of Mackas Griffith Newsagency.

Mr Michael : I am filling in for my CEO, Russell Zimmerman, today.

CHAIR: Thank you, gentlemen. We welcome you here today. I invite you each to make a brief opening statement, and the committee will ask questions.

Mr Rogut : Thank you, Mr Chair, and, gentlemen, good morning. By way of background, our association was established in 1990. I have been the CEO for the past five years. Let me firstly thank the committee for the invitation to appear and provide some insights into the issue of illicit tobacco. It is an important one for our industry. I represent retailers as a retail association. However, we do have a number of suppliers that are members of ours as well, and our tobacco suppliers are members of our association. I also say up front that we do not pretend to be health experts; neither do we pretend to be experts in policing. Our perspective is purely from the retail and the front line.

In this short opening, I would like to quote verbatim from one such retailer based in a regional city of New South Wales who recently responded when asked about illicit tobacco and then give a short quote from another in Victoria. This should convey the message that illicit tobacco availability is not just an issue for major cities, where the media has covered these quite extensively.

Let me start with a quote: 'Where do I start with illicit tobacco? From a business point of view, illicit tobacco is far cheaper and drives customers out of our stores and into pop-up gift stores. I lose profit—and the federal government. It is also not confined to the tobacco sales in my store. It is also the extra items that are not being purchased, such as drinks, food et cetera.

'Up here in the country, there seems to be no channel with which to report illicit tobacco outlets. There seems to be no clear direction as to the government agency who should be leading the charge against illicit tobacco. Local council and the Department of Health New South Wales are the outlets that police tobacco sales and infringement for packaging, which most illicit outlets do not in fact comply with. I am yet to be aware of an illicit outlet being raided by either of these departments. State police seem to have no jurisdiction either. The Federal Police and the Australian Border Force are the two agencies that do seem to be making all the confiscations of illicit tobacco, but only at the large end of the scale. I have never seen them in this region.

'One illicit tobacco store that is here hands out samples of illicit cigarettes to people in the car park of a major supermarket. They just walk up to anyone they think is a tobacco smoker, explain the price and hand over some samples and a business card. They have no regard to who this person is. It is not being done through subterfuge or cloak and dagger; it is quite open. I had an outlet early last year selling from a little shopfront for about six months. It was less than a block from the local police station. One of the people who was approached was in the Coles car park and was in fact my tobacco representative.

'There need to be some laws introduced around possession of illicit tobacco as well. I believe that, if the average consumer of tobacco were to be charged and receive a large fine, it may stop a lot of purchases. It may seem extreme, but, unlike illicit drugs, there is an option to come to my store, buy the product legally and pay the tax.

'An indication follows of what an illegal chop-chop operation has done to my business, and it is also worth noting I have taken a two per cent margin cut just to protect my diminishing sales: November 2013 to November 2015, a 21 per cent reduction in unit sales; December for the same period, 2013 to 2015, a 22 per cent reduction; and 2014 to 2016, a 26 per cent reduction, purely attributed to the increase in excise but, most importantly, the illicit tobacco in the area of the store.'

From Victoria, here is a short quote:

Chop chop has increased in my area as a result as well. Once again I admit price has something to do with it, but also a large part is played by plain packaging. It all looks the same, the chop chop people don't have to do much to make it look better … a white box is all they need, in fact.

That is the end of the quotes.

From the industry point of view, tobacco represents approximately 38 per cent of the store sales across our industry, and approximately 27 per cent of the stores' margin. It is a very important legal category that our retailers responsibly sell. We believe that the recent excessive price hikes through excise increases and restriction initiatives by government such as plain packaging have stimulated the growth of robberies in stores targeting tobacco, importantly, as well as the growth of illicit and cheap tobacco. Despite what any of the health lobbyists claim, it has done very little to improve the health of Australians.

How easy is it to buy illicit tobacco? Last week, my wife and I visited our local market. This is in suburban Melbourne. It is a large, established market and trades three days a week. In fact, you pay an entrance fee to go into this market. There are a number stallholders selling e-cigarettes without any warning signs at all, and they are sold amongst all the food, clothing and other things traditionally found in a suburban market. There are absolutely no health warning signs at all. There was one particular stallholder that only sold e-cigarettes. Young people walking with their parents were seeing this, stopping and looking at the product.

I approached one stallholder and sought to buy an e-cigarette. I said, 'How much is it?' and the lady said it was $15. This is it. I did bring some samples, which I am very happy to leave for the committee. It is a pack that has very little in the way of instructions. You do not really know what it is you are buying. That was $15. I looked at a similar product online; it retails from between $60 to over $100. It is a very attractive price. How it is getting in at that sort of low price is anybody's guess. I then acted ignorant and said, 'Do you have tobacco?' and she said, 'What do you mean?' I mentioned some brands, and she said, 'No, I don't have those brands, but I do have'—and she very slyly pulled out a packet of Marlboro Red from under the counter. It was not in plain packaging; actually red and white Marlboro. I said, 'What is the price of that?' and she said it was $90. When you look at the full retail of that, the equivalent is about $275. It is very attractive. I said, 'Do you have anything cheaper?' and she said, 'Yes. I can sell you a box of a hundred cigarettes for $30.' I said, 'Yep, you've got a deal.'

There I am, buying illegal tobacco, heading off to Canberra—I am feeling really good about this. Here it is, and again, I am happy to leave this for you. It is not in plain packaging. It is not in a box that has anything to do with tobacco. It is actually filter tubes, and when you open it up, there are a hundred cigarettes of very dubious quality in this particular pack. The person that was running the market was going around quite serenely picking up the fees that people pay with absolutely no concern. My wife, who was with me at the time, really thought we would end up in jail by that evening. We are not in the habit of breaking the law, but it was so easy and, with so many people milling around there, it really said to me that this is a hot spot for those sorts of products.

I have some very brief suggestions to address this issue. Firstly, I suggest a national hotline to report illicit tobacco sales. That needs to be well promoted, and certainly within our network I am sure we would get support to display such a hotline. Reading what is happening in Canada, where they have a significant illicit tobacco problem as well, they do fine people for possession. Fines range from $100 to in excess of $500.

It is not necessarily our preferred option, because I think there are laws and regulations available to authorities if they were indeed enforced—and that is my third point: really doing more at the coalface, and I am not a policeperson, and actually trapping these people and fining them not only for the illicit product but also for the packaging. There are significant fines available to people who choose to enforce them. More importantly is to actually publicise that, as Border Force and the other agencies do in the media, to say this is a serious issue and we are treating it seriously. Gentleman, that is the end of my opening statement. I would be very happy to address questions as we go through. If I do not have the answers, I am very happy to come back to you.

Mr Lim : On behalf of the members of the Alliance of Australian Retailers, I thank you for your invitation to participate in your inquiry into illicit tobacco. My name is Chiang Lim. I am the AAR's general manager. Since 2011, the AAR has represented up to 3,000 small businesses across Australia and its member retailers. They include newsagents, corner stores, small supermarkets, mixed businesses and other independent retailers.

I also brought along Mr Alan Macdonald, who is one of our member retailers and national vice-chairman of the Australian Newsagents' Federation and owns and runs Macka's Griffith Newsagency right here in Canberra.

In addition to our written submission, I would like to share the initial findings of our national survey which we recently closed last Friday. About 25 per cent of respondents said that illicit tobacco sales have increased in their neighbourhoods since the introduction of plain packaging and three successive tobacco excise tax increases since 2012. About 18 per cent do know who is selling the illicit tobacco. While 79 per cent would and have reported it to the authorities, about 30 per cent of those, who have not reported it, fear for their staff and their own safety.

Whether they are newsagents, corner stores, small supermarkets, mixed businesses and other independent retailers, these small business retailers are universally owned by families who have mortgaged their homes and tipped their life savings into the businesses. They rely on customers who buy not just tobacco products but other items in their shopping baskets. Since the introduction of plain packaging and cumulatively high excise taxes, these retailers now operate in a current environment where customers more than ever are actively seeking the cheapest available tobacco products, legal or otherwise, knowingly or unknowingly. With the loss of such customers to those who sell illicit tobacco, our small business retailers lose the sales of those many other items in those customers' shopping baskets. They are putting at risk overall revenue, their profitability, their ability to employ staff, pay themselves, the future value of their businesses and not to mention their home mortgages that cover their businesses.

We thank you for the opportunity for us to offer you more of our perspective of what illicit tobacco is doing to our small business retailers and their families, and look forward to your questions.

Mr Michael : I represent the Australian Retailers Association. We are membership based. We only have retailers as members. We are a Fair Work registered organisation, and it is a requirement that we are only able to have retailers as members. We represent some of Australia's largest grocery, convenience stores, petrol sales, tobacconists; the list goes on down to mum-and-dad level retailers.

For our members who deal with the tobacco product, the most reported issues that are coming into us are around the illegal trade in tobacco and how it is affecting their individual businesses; the commoditisation of tobacco product in terms of how that is creating the illegal trade; the risk to staff and livelihoods; and costs related to illegal tobacco.

When we talk about illegal tobacco, we identify everything from loose product tobacco to branded tobacco from overseas and the plain packaged product available in Australia which is being generated through thefts. I noticed only today, there was a tobacconist that was caught in Devonport—I think it was a retailer or a tobacconist —selling illegal product. Our official position is that our retailers do not support illegal activity by other retailers. It creates a market distortion. Our retailers will happily report against those undertaking illegal trade, whether that is someone selling an illegal Chanel handbag or illegal cigarette products.

We do believe there is a requirement for greater policing, particularly at border level. We are getting reports in about sales that are happening in supermarket car parks. And it is not just tobacco being sold. We also know from seizures that there are other substances being sold along with the tobacco products. We also have members reporting in, and have a number of cases where they are reporting in, that they and their sales staff are being offered at-counter illegal and illicit product, whether that is from the Australian market or other markets. Once again, it is an issue where we need some more solid reporting mechanisms.

We have been working with the New South Wales government in particular; Fair Trading are quite active on policing and they do tell us that they will act on reports. I have been working with the Victorian government around those issues as well where I believe they need to play a more active role when it comes to consumer affairs enforcement. But we are happy to discuss all sorts of options with the federal government when it comes to policing activities and give whatever evidence you might require from us. I hand over to the others.

CHAIR: I might start. The retailing of the illicit product—I would imagine, as your evidence has been here today—there are people actually operating a tobacconist store that also has the illegal product, and yet there are people who are not operating a tobacconist store that are selling it basically under the counter, and saying, 'We also sell this'. Do you have any rough estimate, or would you like to maybe comment, on how you see the differential? How do you see this illegal product being sold to it? How much would you say it is through otherwise legitimate stores and otherwise backyard market operators?

Mr Rogut : I might hazard an answer to that. We represent about 6,000 organised convenience stores. They are largely the larger brands—7-Eleven, Caltex, BP—and many of the other independent convenience stores with fuel. Generally they are very well monitored from a merchandise point of view. They also get visits very regularly from the tobacco representatives. So we are pretty confident—it is hard to give a 100 per cent guarantee—that in that sort of network it is minimal. From our intelligence—and because it is illicit tobacco it is really hard to judge—it is mainly happening through standalone type stores that are doing it and certainly the markets.

CHAIR: Are those standalone stores selling other legitimate or legal tobacco products?

Mr Rogut : Yes, they are, to my knowledge and from some of the reports we have had. It is a mix. But they tend to be isolated independent stores, not necessarily aligned with any particular brand or group.

Mr Michael : I would comment further that, for legitimate retail down the road, we are happy to pass on their reports to the authorities if they are aware of those instances occurring. How can you compete with someone undertaking illegal activity and undercutting you?

CHAIR: What is your—

Senator LEYONHJELM: Do you have any experience on that?

Mr Lim : We represent the much smaller end of the spectrum, and from what we understand—from what our main retailers tell us through the survey we did—virtually all of the illicit tobacco that is being sold, if it has actually been identified, are not from newsagents or corner stores; they are actually from other channels that do not even sell tobacco in the first place. The feedback we got was that there seems to be this great understanding out there that, because of the high profitability and the very easy way of getting away with it, other stores try and cash in on this opportunity. So it is a real problem for our small business retailers who do the right thing by and large and see the others get away with it. In actual fact, one of the common threads of the feedback was also that, even when they dob them in, nothing seems to be done.

CHAIR: For a typical convenience store or small business retailer, what is your mark-up on a packet of cigarettes?

Mr Rogut : Mark-up in the convenience channel is slightly higher than the supermarkets, because obviously we trade 24 hours and we have higher costs.

CHAIR: So when you say it is a 'higher margin', you mean you are selling at higher retail price?

Mr Rogut : It is a slightly higher retail price. The actual margin is probably between 18 per cent and 21 per cent.

Senator LEYONHJELM: That is gross margin.

Mr Rogut : Gross margin. So, on average, it is around about 20 per cent. That 20 per cent represents 27 per cent of the total margin for that store. It is a very important—

CHAIR: And that would be significantly lower than the majority of other products sold at the store?

Mr Rogut : Yes, beverages, products like that, would be in the high 40s or 50 per cent potentially.

Mr MacDonald : I sell at 17 per cent.

CHAIR: Why do you think it is that tobacco has such a low retail margin on it compared to other products?

Mr Michael : It is high compared to lotteries.

CHAIR: Okay. What about your competition with the major supermarkets? You said that the supermarkets sell at a lower price.

Mr Rogut : They do.

CHAIR: So that must put a lot of competitive pressure on the small businesses retailers?

Mr Rogut : Absolutely.

CHAIR: And is that lower price because they are able to buy at a lower price from the distributers and wholesalers?

Mr Rogut : I am not sure whether they actually buy—trading terms are reasonably confidential between all the groups; it is hard to actually get to that. I would suggest it is more their competitive position and wanting to take share, as they have openly said many times, from the smaller retailers. So, whether it is beverages, whether it is confectionery, if they sell it for less than our people buy it for, I think it is just another category they believe they can be a destination for, and get customers to buy, other products.

CHAIR: What sort of differential in price are you talking about?

Mr Rogut : Because it is so competitive, it would be 10 per cent of 15; it is not a huge differential. In some cases—

CHAIR: But when your margin is only 17 per cent—

Mr Rogut : Correct.

CHAIR: At 10 per cent there is quite a substantial difference.

Mr Rogut : It is substantial from a retailer's point of view.

Mr MacDonald : You get massive variation during the year too. In our shopping centre there is me and an independent supermarket retailer. He is part of a chain, and so on 1 March, on Tuesday morning, their system put the price up across their channel or across the whole chain. Whereas I do not put my price up until I purchase my next lot of stock. So that gives me a small window of maybe up to two weeks where I can be significantly cheaper than them and try and grab some market share back. When I put it up, I am still cheaper than what they are and I can still make a dollar out of it. I cannot make it cheap enough without significant kickback from the manufacturer to stop people walking down to Manuka to Coles.

CHAIR: A rebate back from the suppliers?

Mr MacDonald : Yes. They will have something on promotion for a month and they will give me a rebate on sales, and then I can at least make them stop and think whether they will walk to Coles or buy at a competitive enough price for them.

CHAIR: So that rebate enables you to match what the big supermarkets—

Mr MacDonald : I cannot match but I can get close enough to avoid a walk.

CHAIR: Is your buy-price lower than the supermarket's price?

Mr MacDonald : In most cases.

CHAIR: Are there any cases where you would have found it cheaper to go to the larger supermarket to purchase their stock to resell?

Mr MacDonald : Not that I have found with cigarettes. I now only buy directly from one of the manufacturers. The other two manufacturers I buy from a tobacconist who can sell it to me cheaper because of the size of the rebate he gets on quantity.

CHAIR: Explain to me about the distribution channels from the manufacturer to you. Is there a wholesaler in the middle? Do the manufacturers have their own representatives that come and sell to you? How does it work?

Mr MacDonald : I purchase online and then it is delivered by a freight company directly to me. But the freight company employee only delivers cigarettes. So it might be Toll that brings it to me but he specifically brings cigarettes.

CHAIR: And your online order goes directly to—

Mr MacDonald : To the manufacturer

CHAIR: British American Tobacco?

Mr MacDonald : Imperial, I do directly to them; and then the other two, British American and Philip Morris, I do online directly to the tobacconist.

CHAIR: Is the tobacconist a wholesaler or is he another retailer?

Mr MacDonald : A free-choice tobacconist with a wholesale licence. I purchase through him and go and pick it up. That cuts out the delivery costs. He has rebates from Imperial Tobacco, so it is cheaper for me to buy my Imperial Tobacco directly from him rather than from the manufacturer. On some occasions, I get a weekly price list and make a decision about who I am going to buy from based on that.

We are living in a world where cigarette smokers have moved from being very brand loyal to now very price sensitive. Someone could have smoked Winfield or Benson & Hedges all their life, but they are not smoking them now. That brand's market share is rapidly dropping down to the lower end of the scale. As a retailer, my concern is that, as prices increase, there is nowhere left for them to drop to other than the car park. They are now my bottom line. Over the last three years, they have worked their way down my shelves, and they are on the bottom shelf now.

Mr Michael : I support Alan's comments. That is exactly the report, no matter what size retailer. It is the price point that is driving the illegal trade. The customer does not care anymore. I had cause to run a survey in Tasmania recently. There are some proposals there with fat taxes, sugar taxes and raising the cigarette smoking age to 25. A third of smokers surveyed said they would happily buy the product illegally; they volunteered that. Another third said they would buy interstate, and the rest of them said they would look at things like vapour products. That is actually a line that retailers would like to stock, because if you go to other jurisdictions you see that retailers have an alternative to offer customers. I think we have all seen vapours being used in social environments. All of those, if they contain nicotine, are illegal in Australia; they are bought offshore.

CHAIR: I will come back to that, but I will give Senator Leyonhjelm a shot.

Senator LEYONHJELM: I want to ask a little bit more about this commoditisation question. First of all, Mr Macdonald, you are in Manuka, are you?

Mr Macdonald : Griffith.

Senator LEYONHJELM: Okay. I have an extremely important question: do you sell Cohibas or Montecristos?

Mr Macdonald : No.

Senator LEYONHJELM: Damn! Is this issue of commoditisation and driving down price the case for everyone? Is it just the youngsters? I think Mr Michael said people are not asking for their Benson & Hedges and Marlboros anymore; they are just going down to the bottom. I am not a smoker. Don't they discriminate on their menthols and non-menthols, their strongs and weaks and that kind of stuff anymore?

Mr Macdonald : Yes, they do—on the strength of the cigarette. But they do not walk in and ask for a packet of Dunhill now. I am not talking about 100 per cent; I am talking about probably 80 per cent. When I purchased the news agency 10 years ago, it would have been 80 per cent who came in and asked for their specific brand of cigarette. It was a bit like working in a bar, where I needed to know what they smoked. As they walked in the door, I would turn around, get it down and sit it on the counter ready for them. They were upset if it was not there. Now they come in and say, 'What is your cheapest?' That is the question they ask. It does not matter what age group they are, who they are or how loyal they have been. I have a customer who had been smoking a packet of Winfield Grey 20s a day. After the September price rise last year, he moved down a tier. I cannot think of the brand he went to, but it was the next tier down. He is now coming in and saying: 'What've you got on promotion? What's your cheapest?' He mows lawns. He does people's gardens and works very hard six days a week with a good income, but that is where he is at now. Where does he go next price-wise?

Senator LEYONHJELM: The question is: what is cheapest?

Mr Macdonald : For me at the moment, it is JPS because—

Senator LEYONHJELM: But they are asking you, 'What is the cheapest?'

Mr Macdonald : That is all they ask, and it is based on the rebate that I can get from—

Mr Rogut : In terms of our network, when I talk to many of our operators, the most common refrain is: what are your cheapest smokes? Brand has become secondary to price because of the huge increases.

Senator LEYONHJELM: Could you estimate what percentage of your customers are no longer asking specifically for their brand?

Mr Macdonald : I would say 75 to 80 per cent.

Senator LEYONHJELM: You still have about 20 to 25 per cent who are brand loyal, and the rest are not brand loyal anymore?

Mr MacDonald : The ones who are asking specifically, out of that 20 to 25 per cent, have probably moved down a category over the last 18 months. They are still asking for a specific brand, but it is not the Dunhills or the Benson & Hedges.

Senator LEYONHJELM: Mr Lim, I think you said that has occurred since plain packaging, or is it since the price rises?

Mr Lim : Since both.

Senator LEYONHJELM: Can you attribute that to either of them in particular?

Mr Lim : No, I think it has been a cumulative effect. Without specific branding any more, with prices keeping going up because of the excise taxes—so far there have been three; there is one more to go—and with the particular economic climate at the moment, customers are basically feeling that they want to economise on their choice of products.

Senator LEYONHJELM: I appreciate it is a bit hard to tell which is which—and you say both—but could any of you speculate? Let us suppose the prices had gone up with the excise increases, but we had not had plain packaging. Do you think the consequences would have been the same or different?

Mr Michael : I will speculate. Price has been a significant factor for some time. The price hikes did not help, but to take away branding at the same time as significant price rises is going to destroy brand loyalty.

Mr Rogut : I have to concur on that. When you talk to a few customers and say, 'Why are you chopping on price?' the question is that the cachet or image attached to pulling out a gold, silver or red pack is not there any longer. They all look the same, so unless they were absolutely wedded to a particular brand it really is the economy of 100 for $30 rather than 20 for $27.50.

Mr Michael : I might add that we tried to measure this. It was a little bit difficult, but we were getting a lot of reports in about staff confusion and training issues for service staff—particularly for junior staff who have never seen branded packets of cigarettes. I would identify location issues at point of sale as significant within the store, and it is causing delays. Customers will say, 'Just give me the cheapest one.' We did try measuring that; it was quite difficult to do.

Mr MacDonald : In my opinion, plain packaging has had zero effect on the consumer but a massive effect on the retailer, and has opened a door for illegal product, because there is less duplication. Staff-wise, stocking shelves, getting the right packet in the right spot and selling the right packet to the customer is extremely difficult. Initially we had people hand back packets and say, 'No, I don't like the one with the baby on it,' and ask for the next one in the line. There were people taking the middle out and throwing the packet away. For a while we tried to make a bit of money out of it by selling stickers that went over the packet. I still have a great pile of them, because that lasted for about a month. Now it is irrelevant to the consumer; it does not change their habit. It just makes our life extremely difficult. Price is the significant factor from a consumer point of view, and plain packaging has assisted the illegal trade enormously.

Senator LEYONHJELM: You have provided some suggestions and thoughts on enforcement, or the lack of enforcement. You referred to retailers—and we have heard about this from previous witnesses—who sell illicit tobacco, chop-chop and all the branded stuff. And I think Mr Rogut also referred to the car park sales. You could probably envisage a situation where law enforcement addressed the retailer who was selling it. The threat would be that it would close down their entire business, and that might be a disincentive. Whether that is the right approach or not is another matter, but you can envisage that occurring. In enforcement terms, how would you address the car park, back-of-the-boot types of sales that you are referring to?

Mr Rogut : In a couple of ways. I think the fine for selling product that is not in plain packaging is around $220,000. As a start, if that were enforced that would send a very, very strong message. I will give you an analogy. Petrol theft—people driving off without paying—costs our industry about $60 million a year. We have incredible difficulty getting the police to get involved in that. They see that really as a civic matter; they do not see it even as a crime, so trying to find the person who is buying the product will probably have even less of a result. And I think we are seeing that with illegal drugs and that generally. Attacking the source—the seller, where it is coming from—in my way of thinking would be far more effective.

Senator LEYONHJELM: Do you think a similar approach that is taken to selling drugs in car parks—and plenty of that occurs, notwithstanding the fact that it is illegal and that you can actually go to gaol for quite long periods of time if you are caught doing it—would work in the case of selling tobacco?

Mr Rogut : It is a good question. It would assist, and certainly if it were publicised it would assist. Like anything that is illegal and illicit, people will always find a way around it. I do not think we will stamp it out totally, but we will certainly bring awareness to it. So, rather than there being a major market where hundreds of people, thousands of people, are walking around and buying this without impunity, then with impunity it will certainly send a message. We do not have that at the moment.

Mr Michael : If there were a consumer fine involved, the consumer might think twice about, 'Do I risk it, or do I go and buy from the legitimate merchant?'

Mr MacDonald : With the example of the market in Melbourne: walking through those markets, I do not think you would be able to go up to any of those stores and buy ecstasy or ice or heroin, so you are dealing on a different level. People who are lower down the criminal scale, I suppose, are prepared to take the risk with tobacco, but they are not going to take the risk on the drugs.

Mr Michael : Where we have found a blended issue is that it is not just the tobacco. With some of my high-end brand retailers who have their branded product being sold at those markets as well and tobacco is being sold alongside them, we have discovered that the product is coming in in joint shipments, whether it is illicit tobacco or illicit handbags, sunglasses, you name it.

Senator LEYONHJELM: Mr Michael, you also referred to risks to staff, but you did not elaborate on that. Could you tell us what you meant there?

Mr Michael : Interestingly, my workplace health and safety committee had a meeting around unsociable and violent behaviour in the workplace on Monday, and we were looking at a number of issues around violent acts towards staff and how to deal with them. The one standout through that whole process was the convenience and grocery segment, which faces these activities on a daily basis. One of our very large convenience chains was reporting to us that certainly within every few days there will be an act committed within store, and nearly always that act is around trying to gain access to tobacco product—the high-value product within store—or even something illegal such as attempts to use skimmed credit cards. We have identified a whole range of illegal activities right down from the delivery side to the break-ins to insurance costs that go with the costs that are related to staff, even if they are taking a few days off or they have had to go into workers' compensation because of those activities committed against them. And it is not just the staff for the franchisers, it is also for the store owners. I believe that Alan has some personal examples of attempted thefts within his stores. I do not think there is anyone stocking tobacco who has not had their product targeted at some point, and that goes for the big chains, too. Usually it is the transactional side with them.

Mr HAYES: What are your members telling you about being approached by people who are trying to market illegal cigarettes?

Mr Michael : It happens.

Mr HAYES: How often does it happen? I am trying to gain an appreciation of the extent to which it happens. We know it happens.

Mr Michael : We get regular reports of it. I personally had my own convenience store a number of years ago, and I have been offered the product illegally in the past. I do not have any statistics on how regularly it happens, but we get reports of it. I do not know whether my other retail colleagues have instances they can talk to.

Mr Rogut : In support of what Heath is suggesting, because it is illicit, a lot of the franchisees and a lot of the operators are very loathe to talk about it for fear of dobbing someone in or retribution. Anecdotally, we hear it very, very regularly. It is not necessarily this sort of product. It is counterfeit product that reportedly looks the same as legal product. Certainly there are regular reports of that happening but to quantify would be really difficult. I am happy to look at some way of putting out a survey to our senior people to gauge what it is, but I would really be in the dark to give you an actual number.

Mr HAYES: One of the major tobacco companies approached me and could show me with precision, within a kilometre of my electorate office, where the distribution point for illicit tobacco was. They were retailers and presumably eligible to be a member of your associations. That information must be coming through from fellow retailers. Would that not be the case?

Mr Michael : Our position is that if it is reported and if we hear about it we will take action and make sure that the retailer is dealt with, whether through head office or through the correct authorities.

Mr HAYES: I understand that. So what is the action that is taken?

Mr Michael : In our case, either the head office or the tobacco companies deal with the issue.

Mr HAYES: So if there is an understanding that a retailer has been complicit in selling illegal product, are the police and law-enforcement agencies engaged?

Mr Michael : I believe they would be in some instances.

Mr HAYES: Is it policy? Would you definitely notify the police?

Mr Michael : I do not, but I would certainly be expecting that the tobacco companies and the head offices would be doing that.

Mr Rogut : Certainly within a franchise group, it would be a breach of their franchise in terms of their illegal involvement. But I cannot say, in the last few years, that we have had any reports directly from any of the manufacturers suggesting that one of our members has been involved. Talking about our members, we get reports of them being approached with people trying to sell it.

Mr HAYES: I think we get the significance of someone selling out of the boot of a car in a car park—we understand that part of it. It does seem the evidence is that the vast majority of illegal cigarettes are being retailed through worst stores.

Mr Lim : I have only been in my role for the last three or four months, and we have only just started to encourage members, who have not already done so, to report. Most do. The difficulty for them is that even when they do, there does not seem to be any updates or success in prosecution, let alone convictions. It is interesting that we have heard that in Victoria they have introduced a law into the state parliament specifically for smuggled tobacco products. We are slowly seeing whether other jurisdictions across the entire country have the same or similar laws, but that does not seem to be the case. If we have a situation whereby one state parliament has already started to strengthen their state laws, in terms of prosecution of pop-up stores and so forth, then that could help to explain the current low-level of prosecutions and therefore convictions. The retailers in our recent survey seemed to suggest that, so far, cumulatively, in the last three or four years, because there have been very few convictions, there is a loss of faith as to whether anybody can help them. I am dealing with one right now that happens to be in Sydney. A newsagent there is in the heart of Chinatown. His customers are asking for such products and his customers are suggesting a particular vicinity. I am trying to get closer to where exactly it is. He is too, from his customers, and assisting the local authorities to fine and prosecute whoever is selling it. It is not easy when we do not seem to get the kind of assistance that we so desperately need.

Mr HAYES: Do you think the community has been de-sensitised to the notion of illegal cigarettes?

Mr Rogut : To a large degree. When it comes to tobacco, as many people say, there are no votes in it and it is supported. Those who smoke are certainly passionate about it and will try to do the right thing. But, increasingly, as prices have gone up and these products have become available, a number of them have been tempted and have bought. The rest of the community, I think, are less concerned with illegal tobacco as they are with ice, methamphetamines and some of the hard drugs.

Mr HAYES: Would it follow then that the law enforcement agencies might similarly take that view when prioritising their activities?

Mr Rogut : Locally, I would. Certainly from a Border Force point of view, I think the action they have taken has been terrific. On a local level, the local cop on the beat, I think it would be way down on their list of priorities, quite frankly.

Mr Michael : It is interesting that there is active policing around the smoking age and very few retailers will risk selling to under-age. I cannot think of any of the significant brands that have been caught doing it in years and years. There is active policing there. Why aren't the state authorities looking at the issue of illegal product like they are when it comes to selling to under-18s? Surely it is not that much more difficult.

Mr Lim : So far this year, there has been some positive steps. For example, the Department of Immigration and Border Protection have convened an industry advisory group on illicit tobacco and it includes the industry and us as retailers. How do we get better intelligence? How do we get better prosecutions, and convictions for that matter? It is like the broken windows issues. What we are hearing is that law enforcement are starting to understand that if they can deal with issues at this point other criminal activities may not actually evolve. We are delighted and hopeful that that action has started this year. I think the gentlemen here are potentially contributing to that step. But as retailers, we would like to see more prosecutions and more convictions.

Mr HAYES: But the difficulty at the moment is that this trade has been allowed to gain a foothold in the market and is, to some extent, now establishing its own pace.

Mr Lim : I hope we are not signalling an abandonment of it either.

CHAIR: Mr Macdonald, you said the introduction of plain packaging had zero impact on the consumer. Do you think that it is the same for consumers across all ages? Do you think it may have had some effect on younger smokers?

Mr Macdonald : We are getting just as many young smokers come in as we always did. I have two schools behind me and they are in asking for cigarettes from year 10, probably. Checking age is big for us and big for my staff, and once they are old enough they are purchasing the same as they always have.

CHAIR: For years we have been told that the advertising of cigarettes encouraged young people to be attracted to a specific brand. Are you saying that you are finding that that is not the case?

Mr Macdonald : Yes.

CHAIR: If there was a significant hike in the excise on cigarettes and they went from the current $20 to, say, $30 or $40 for a packet, what do you think would happen?

Mr Macdonald : Sales of legal product would drop significantly. I do not think smoking levels would necessarily drop by the same proportion.

CHAIR: Do you think people would be forced into the—

Mr Macdonald : Well, it is so easy to get it from a market. I daresay that the market in Melbourne is not a unique place to do it. There would be plenty of markets around Australia where the same scenario would happen. I have had a gentleman turn up selling legitimate products to me, like e-cigarettes and things that are all branded and all fine, and it would be very easy for him to be pushing illegitimate products, to the right person.

Mr Lim : On that point, if you actually increase excise tax again one of the unintended consequences is also that these products, legal products, become much more attractive and therefore more break-ins will also occur. As a result, insurance costs to these small business retailers will go up—more break-ins and more costs. It is getting to the point where they have to ask themselves if it is actually worth it. Governments have to understand what the unintended consequences are downstream of increasing prices.

Mr Macdonald : I had three attempted break-ins in January. I do not think they were coming to grab the paper at three of the morning! There would be one product and one product only.

Mr Michael : Given that the subject of e-cigarettes came up again, we as retailers would like to see a less-harmful product legitimately available for customers. It is asked for regularly. We know the major chains are interested in stocking it. We would like to see that process hurried up. At the moment they are all being bought offshore.

CHAIR: Thank you for your evidence today and for the work you do with the many small businesses around the nation that keep this country running.