Project C&C source Project Stella - STOP ILLEGAL · ProjectT Sitletella Report Important notice &...

ProjectStellaReport

Title Importantnotice&navigation

Howtousethisreport

Backgroundtoanalysis

Aboutthisreport ExecutiveSummary

Focusonkeymarkets

C&Csourcecountries

Focusoncounterfeit

FocusonIllicitWhites

Appendices

ProjectStellaAstudyoftheillicitcigarettemarketintheEU

ProjectStellaReport


Howtousethisreport



Focusonkeymarkets

C&Csourcecountries

Focusoncounterfeit


Appendices

ImportantNoticeandnavigation

Navigatingthisreport

Thispresentationofkeyfindings(the'Report')hasbeenpreparedbyKPMGLLP,theUKmemberfirm(“KPMG”)forthePhilipMorrisProductsSA,describedinthisImportantNoticeandinthisReportas‘theBeneficiary’,onthebasissetoutinaprivatecontractdated07March,2019agreedseparatelybyKPMGLLPwiththeBeneficiary(the‘Contract’).

Informationsources,thescopeofourwork,andscopeandsourcelimitationsaresetoutintheintroduction,footnotesandappendicescontainedwithinthisReport.Thescopeofourwork,informationsourcesused,andanyscopeandsourcelimitationswerefixedbyagreementwiththebeneficiary.Wehavesatisfiedourselves,wherepossible,thattheinformationpresentedinthisReportisconsistentwithourinformationsources,butwehavenotsoughttoestablishthereliabilityoftheinformationsourcesbyreferencetootherevidence.

ThisReporthasnotbeendesignedtobenefitanyspecificorganisationotherthanthebeneficiary.InpreparingthisReportwehavenottakenintoaccounttheinterests,needs,orcircumstancesofanyspecificorganisation,otherthanthebeneficiary.ThisReportisnotsuitabletobereliedonbyanypartywishingtoacquirerightsorassertanyclaimsagainstKPMGLLPforanypurposeorinanycontext.Assuch,anypersonorentity(otherthanthebeneficiary)whoreadsthisReportandchoosestorelyonit(oranypartofit)willdosoatitsownrisk.Tothefullestextentpermittedbylaw,KPMGLLPdoesnotassumeanyresponsibilityandwillnotacceptanyliabilityinrespectofthisReport.

Inparticular,andwithoutlimitingthegeneralstatementabove,althoughinlightofthefactthatwehavepreparedthisReportforthebeneficiary,thisReporthasnotbeenpreparedforthebenefitofanyothermanufactureroftobaccoproductsnorforanypersonorentitywhomighthaveaninterestinthemattersdiscussedinthisReport,includingforexamplethosewhoworkinormonitorthetobaccoorpublichealthsectorsorthosewhoprovidegoodsorservicestothosewhooperateinthosesectors.

Navigationaroundthisreportisinteractiveandthereadercanvieweachscreenbyclickingonthecontentsboxesabove.

ThekeytrendscanbefoundintheExecutiveSummarytab

MethodologyandcountryreportcanbedownloadedasPDFsusingthelinksintheAppendicestab

Alternatively,viewerscananalysecountry-specificresultsbyclickinghere.

Aglossaryoftermscanbefoundbyclickinghere

ImportantNotice

©2019KPMGLLP,aUKlimitedliabilitypartnershipandamemberfirmoftheKPMGnetworkofindependentmemberfirmsaffiliatedwithKPMGInternationalCooperative(“KPMGInternational”),aSwissentity.Allrightsreserved.TheKPMGnameandlogoareregisteredtrademarksortrademarksofKPMGInternational.

ProjectStellaReport


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Focusonkeymarkets

C&Csourcecountries

Focusoncounterfeit


Appendices

Howtousethisreport

Howtodownloadareport Howtofilterinformation Howtoviewadditionalinformation

Additionaltooltipdetails

Hoveryourcursoroveracolouredareaonachartormaptogetadditionaldetailsabouttheselection

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1.Executivesummary2.Focusonkeymarkets3.Focusoncounterfeit4.FocusonIllicitWhites

Wherevertheseoptionsareavailable,wehaveincludedinstructionsinitalicisedtextforguidance

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Documentscanalsobedownloadedusingthelinksintheappendicestabofthisreport

AccessCountryReports:Clickhere

ProjectStellaReport


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Focusonkeymarkets

C&Csourcecountries

Focusoncounterfeit


Appendices

Note:(a)OtherC&Cispredominantlycontraband,butalsoincludescounterfeitformanufacturerswhodonotparticipateintheEPSsurveys.However,thisvolumeisexpectedtobesmallSource:KPMGEUflowsmodel2018

LDS Outflows

461.3 -34.2

LDC ND(L) Counterfeit IllicitWhites OtherC&C

427.1

34.813.0

25.2

5.5

Counterfeit&Contraband(C&C):43.6

TotalConsumption

505.6

KPMG’sapproachtocategorisinglegalandillicitcigaretteconsumption AccessCountryReports:Clickhere

EstimateoftotalcigaretteconsumptionintheEU,2018(bncigarettes)

HoveroverthebarstoviewdescriptionsofeachcomponentThechartoppositeillustratesKPMG’scoreapproachtoestimatingthesizeandscaleofillicitcigaretteconsumption,knownasCounterfeit&Contraband(C&C)

KPMG’sapproach,usingEmptyPackSurveys(frommarketresearchagenciescommissionedbythetobaccoindustry)andLegalDomesticSales(providedbymanufacturersandthirdpartyresearchagencies)allowsittosplittotalcigaretteconsumptionintoitsconstituentparts

LegalDomesticSales,availableineverycountry,underpintheinitialvolumeestimate,whilstEmptyPackSurveysenableKPMGtodeterminetheadditional‘non-domestic’componentofconsumption,whichcanbefurtheranalyseddependingonthesourceandbrandofeachpack

KPMG’sflowsmodelensuresthatinflowsandoutflowsaroundtheEUareallequal,sothattheoverallconsumptionineachcountrycanbeestimated

Hoverovereachcomponentofcigaretteconsumptionforfurtherdefinitions

ForadetailedmethodologyanddatasourcespleasegotoKPMG’smethodologybooklet

ProjectStellaReport


Howtousethisreport



Focusonkeymarkets

C&Csourcecountries

Focusoncounterfeit


Appendices

ExpertPanel:Hoverovertoviewbiographies

MeenaSayal

KarlLallerstedt

MichaelEllis

JillBattley

ClaudeJeanrenaud

ProjectStellaisanannualstudyestimatingthescaleanddevelopmentoftheillicitcigarettemarketintheEU.ThisreportwascommissionedbyPhilipMorrisProductsSAfordatacovering2018.KPMGLLPwaspreviouslycommissionedbyRUSI(RoyalUnitedServicesInstitute)toundertakeProjectSUNin2017.Thestudycoversall28EuropeanUnionmemberstates,withanEUmarketoverview.TherearealsoindividualcountryreportsforNorwayandSwitzerlandinthecountrydashboard.Moreinformationontheagreedscopeofworkcanbeseenintheappendicestothisreport.

ThemethodologyusedtoestimatethesizeoftheillicitcigarettemarketinconnectionwiththeProjectSUNreportshascontinuedtobeappliedconsistentlyintheProjectStellareport,withtheunderlyingdata-sourcesremainingthesame.Themethodologyisunderpinnedbyacombinationofharddata,suchaslegalsalesofcigaretteswithintheEUandtraveldata,publiclyavailabledata-points,suchassmokingprevalenceandaveragepricesofcigarettes,andtheEmptyPackSurveys,undertakenbyindependentmarketresearchagencies.KPMG’sapproachistoreviewalldata-pointstoproducetherelevantestimates.Anoverallmethodologybookletisprovidedwithintheappendices,alongwitha‘keyassumptions’boxineachcountryreport.

TheinclusionofanExpertPanelFor2018,KPMGareappointinganExpertPanelaspartoftheapproachtoreviewingandrefiningtheresultsoftheStellareport.ThepanellistswereapproachedbyKPMG,basedontheirdiversityofexperienceinstudyingandfightingillicittrade(hoveroverthenamesoppositefortheirbios),comingfromarangeofbackgrounds,includingindustry,lawenforcement,academiaandtobaccocontrol.ThepanelreviewedKPMG’sapproachtoassessingthedifferentdata-sourcesandhavemadeaseriesofrecommendationstoKPMGinordertoensurearobustandindependentapproach.Duringtheproject,KPMGprovidedthepanelwithunderlyingdataandwherenecessary,thereasoningandrationalebehinditsassumptions.Thepanel’srolewastoassesstheintegrityofdatasourcesandtoprovidechallengetoanyassumptionsthatKPMGmadethroughoutthestudy,ensuringthatthesewereaccuratelyandtransparentlyreflectedinthemethodology.

Havingspenttimeundertakingthisbackgroundexercise,thepanelwillusetheirknowledgeandinsightstoplayasignificantroleininputtingintothesecondstudy,wheretheywillplayaroleindrivingthekeyissuestohighlightandadviseKPMGonavenuesforadditionalresearch.

Thisreportreferstointerviewswithlawenforcement,whichtookplaceaspartoftheresearchprocessforthefirsttimeinthestudy(andlistedinthemethodology).HistoricreferencestopreviousversionsofthestudyarealsomadewithinKPMG’sProjectSIAreport(availablehere)whichdocumentsseizuresoftobaccoproductsthroughoutEurope.

HavingconcludedthisreportasecondstudywillbelaunchedinSeptember.Thisstudywillgointomoredetailsaroundsomeofthekeyissueshighlightedinthefirstreport,afteradditionalanalysisandresearchbyKPMG.

Aboutthisreport


ProjectStellaReport


Howtousethisreport



Focusonkeymarkets

C&Csourcecountries

Focusoncounterfeit


Appendices

Note:(a)IncludesIllicitWhites;ThisisanextractfromProjectStellafor2018,astudyoftheillicitcigarettemarketintheEuropeanUnion,NorwayandSwitzerland.FormoreinformationincludingCountryReportsandMethodology,pleaserefertotheappendices.KPMG’sapproachtoconsumptionisexplainedinthe‘BackgroundtoAnalysis’pageSource:KPMGEUflowsmodel2018

taxrevenuelostfromC&CoftotalconsumptionwasC&C

Customiseviewbyselectingametricandyearfromthelist.Hoveroveracountrytoview5-yeartrend

counterfeitandcontrabandcigarettesconsumed(a)

MapoptionsC&Cconsumption

SelectYear2018

€10bn8.6%-1.1bnon2017 0.0%ptson

2017 369mon2017

©2019Mapbox©OpenStreetMap

C&Cconsumption,2018(bncigarettes)43.6bn

Executivesummary

KeyTrends

Illicitcigaretteconsumption(C&C)remainedstableat8.6%oftotalconsumption,estimatedat43.6bnsticksacrosstheEU

Hadthesecigarettesbeenlegallypurchasedinthecountriesinwhichtheywereidentified,anadditional€10billionoftaxeswouldhavebeenraisedacrosstheEU

Volumereductionsofthelargestcountry-specificflowswerereplacedbycounterfeitandIllicitWhiteswithnocountry-specificlabelling

Challenges

Thenumberofcounterfeitcigarettesgrewby33%to5.5billion,thehighestlevelsincethestudybeganin2006

IllicitWhiteswithnocountry-specificlabellinggrewby15%to9.5bn,thelargestcomponentofC&Cinthestudy

Thesetwocategories(withnoidentifiablesourcecountry)accountedfor34%ofC&C.FromourinterviewswithlocallawenforcementweunderstandthatfactoryraidsandseizuressuggestthatmanyofthesecigarettesweremanufacturedillegallywithintheEU

IllicitflowsfromthethreelargestsourcecountriesofUkraine,BelarusandAlgeriadeclinedby15%intotal

Lawenforcementintervieweesconfirmedthatthedeclinecoincidedwithincreasedinvestmentinenforcement,especiallyatbordercheck-pointsattheEasternEUborder

However,intervieweesalsonotedthatcross-bordersmugglingappearedtobebeingreplacedwithintra-EUillicitmanufacturing,demonstratingtheflexibilityofillicitcigarettetradingnetworks

Improvements


Lessthan1bn

Between1bnand2.5bn

Between2.5bnand5bn

Over5bn

ProjectStellaReport


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Focusonkeymarkets

C&Csourcecountries

Focusoncounterfeit


Appendices

Source:KPMGEUflowsmodel2014-2018;KPMGanalysisofUNWTOdata;*Discussionswithlocallawenforcementandcustoms

C&Cconsumptiondeclinedin11countriesintheEU


MapoptionsChangeinC&Cconsumptionvsprioryear

Choosetypeofmapandyearfromthedropdownlistsbelowtocustomiseview

Selectyear2018

Whilsttheshareofillicitconsumption(C&C%)remainedstableacrosstheEU,successfulvolumereductionsinsomecountrieswereoffsetbygrowthinGreeceandtheUK

ThechallengesfacedinGreeceandtheUKareparticularlypronouncedastheyalsoexperiencedsomeofthehighestsharesofillicitconsumption(C&C%)withintheEU,alongsideIrelandandLatvia

Decliningillicitvolumes(C&C)inPoland,Germany,EstoniaandFinlandillustrateeffortsatbordercheckpointstoreduceflowsacrosstheEasternEU*

IllicitvolumesgrewinTheCzechRepublic,Greece,ItalyandtheUK,howeverFranceremainedthelargestC&CmarketbyvolumeintheEU

Whilsttotalconsumptioncontinueditslong-termdecline,forthefirsttimesince2014totalnon-domesticvolumes(illicit(C&C)pluslegal(ND(L))volumes)increasedacrosstheEU,drivenbyanincreaseinlegalvolumes,especiallyinFranceandItaly

Theincreaseinlegal(ND(L))volumesindicatesconsumers’willingnesstotraveltopurchaselower-pricedcigarettes,especiallyinotherEUcountries

ThistrendisillustratedinFrancewhereconsumerslivingclosertothebordercountriesofSpain,BelgiumandLuxembourghavetakenadvantageofthegrowingpricedifferencebetweencountriestoincreasinglypurchasecigarettesabroad

2014 2015 2016 2017 2018

427.1440.1451.4458.0459.6

43.644.748.353.056.6 34.831.832.132.129.7545.9 543.2 531.8 516.6 505.6

EUConsumptiontrend,2014-2018(bncigarettes)

ND(L) C&C LDC

ChangeinC&Cconsumptionvsprioryear,2018(ppt)


Increasedby1ppt+

Stable

Decreasedby1ppt+

ProjectStellaReport


Howtousethisreport



Focusonkeymarkets

C&Csourcecountries

Focusoncounterfeit


Appendices

Notes:(a)OtherC&Cispredominantlycontraband,butalsoincludescounterfeitformanufacturerswhodonotparticipateintheEPSsurveys.However,thisvolumeisexpectedtobesmall;(b)SeizureinformationsuggeststhatcounterfeitvolumesmayalsocomefromwithintheEUSource:KPMGEUflowsmodel2014-2018;*Discussionswithlocallawenforcementandcustoms

IllicitconsumptiontrendCounterfeitwastheonlyC&Ccategorytoshowyearonyearvolumegrowthin2018,withIllicitWhitesand‘OtherC&C’volumes(predominatelycontraband)declining

However,theamountofIllicitWhiteswithnocountryspecificlabellingincreasedby1.2billioncigarettes

Togetherthesecategoriesofillicitconsumptionaregrowing,howeverbothhavenoidentifiablesourcecountryandmayhaveoriginatedfromwithintheEU

Illicitconsumptionsources

Illicitcigarettetradersappeartohaveshiftedtheireffortstoalternativesourcesofcheapcigarettes,especiallycounterfeitandIllicitWhiteswithnocountryspecificlabelling,whichincreasedtheircombinedshareofC&Cfrom28%to34%

ThemajorityofflowsfromBelarusarealsoillicitwhitesasthebrandssoldinBelarushavenolegaldistributionwithintheEU

Asinprioryears,illicitcigarettescomingfromoutsidetheEUremainedthelargestsourceofC&CconsumptionintheEU,buttherewasevidenceofproductionofbothcounterfeitandIllicitWhiteswithnocountry-specificlabellingwithintheEU*.Ukraine,BelarusandAlgeriaremainedthelargestcountryspecificsources,butalldeclinedaslawenforcementeffortstorestrictflowscontinued

TheEU-labelledvolumeshareofC&Chasremainedstablesince2015,mainlyaccountedforbyflowsfromPolandandRomaniatothehighestpricedcountriessuchastheUKandIreland

C&Cvolumescontinuedtheirdecreasingtrend,butcounterfeitvolumesincreased

C&Ctrendbytype,2014-2018(bncigarettes) SourcesofC&C,2014-2018(bncigarettes)

2014 2015 2016 2017 2018

21.2

19.816.4

14.213.0

31.828.5 28.1 26.4 25.2

3.7

4.7

3.8

4.15.5

56.6

53.0

48.3

44.7 43.6

-4.6%

-8.5%

33.0%

Y-o-YGrowth,2018(%)

2014 2015 2016 2017 2018

9.58.310.510.811.4

6.06.56.26.5

8.34.24.8

5.83.20.53.64.3

4.86.27.7 1.82.2

3.23.12.9

1.51.1

0.91.10.9 11.613.3

13.117.4

21.35.5

4.1

3.8

4.7

3.756.6

53.0

48.3

44.7 43.6

Counterfeit

Othernon-EU

Moldova

Algeria

Belarus

Ukraine

EU

IW:nocountrylabel

Counterfeit

IllicitWhites

OtherC&C


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Focusonkeymarkets

C&Csourcecountries

Focusoncounterfeit


Appendices

Source:KPMGEUflowsmodel2014-2018

Counterfeitconsumptionhasincreasedin15EUcountries

Counterfeitvolumesincreasedby1.4bnin2018tothehighestlevelrecordedsincemeasurementbeganin2013

ThecountrieswiththelargestcounterfeitvolumeswereGreece(1.5bn),UK(0.9bn)andPoland(0.8bn)

EuropeanlawenforcementintervieweeshaveindicatedthattheincreasedEUvolumesmaybedrivenbyillegalfactorieslocatedwithintheEU,inparticularinGreece,butalsotheUK,Poland,SpainandtheNetherlands,whereseizuresandfactoryraidshavetakenplace

Counterfeitvolumes,2014-2018(bncigarettes)

2014 2015 2016 2017 2018

3.7

4.7

3.84.1

5.5

Counterfeitvolume,2018(bncigarettes)


Counterfeitvolume

Choosetypeofmapandyearfromthedropdownlistsbelowtocustomiseview

Year 2018


ProjectStellaReport


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Focusonkeymarkets

C&Csourcecountries

Focusoncounterfeit


Appendices

IllicitWhitebrandsconsumptionintheEUaccountedforapproximately30%ofC&C

Source:KPMGEUflowsmodel2014-2018;*Discussionswithlocallawenforcementandcustoms

IllicitWhitescontinuetobeamajorsourceofC&CvolumesintheEU,withthelargestbrandsatanEUlevelbeingMarble,NZ,andRegina

MarblereplacedFestasthelargestIllicitWhitesbrandbetween2014and2018.Fest,mainlywithBelarusianlabellingwasidentifiedinmultiplecountriesclosetotheEasternEUborder,whilstMarblewaspredominantlyidentifiedinRomaniawhereitisthelargestillicitflow

AsinprioryearsthebrandscollectedviatheEmptyPackSurveysindicatethatsomeoftheseIllicitWhiteshadBelarusianlabelling,however,manyhavenohealthwarningsorhaveDutyFreelabellinginordertoevadedetection.ThesearecategorisedasIllicitWhiteswithnocountryspecificlabelling

WhilstIllicitWhiteshaveoftenbeenthoughttooriginateinBelarus,RussiaandUkraine,lawenforcementinterviewsalsohighlightedabeliefthatinsomecountriesintheEU,suchasPolandandGreece,theremayalsobeanincreaseindomesticIllicitWhiteproduction

Inaddition,seizuresmadeofplasticbagsfullofcigaretteswithnoidentifiablebrand,indicatedatrendtowardsIllicitWhiteandcounterfeitproductionratherthanthesmugglingofgenuinebrands*

VolumeofIllicitWhitesbycountry,2018(bncigarettes)

©2019Mapbox©OpenStreetMap2014 2015 2016 2017 2018

21.219.8

16.414.2

13.0

Top5IllicitWhiteBrands,2018(bncigarettes)

Year2018HoveroveracountrytoviewthelargestIllicitWhitebrandsinthat

country.SelectayeartoupdateviewHoveroverabartoseethekeyIllicitWhitebrandsforthatyear


Lessthan0.3bn

Between0.3bnand0.6bn

Over0.6bn

ProjectStellaReport


Howtousethisreport



Focusonkeymarkets

C&Csourcecountries

Focusoncounterfeit


Appendices

Appendices

1.ExecutiveSummaryReport

2.Methodology

3.2017Results

4.Glossary

DownloadableContent

Clickontitlesbelowtodownloadcontent

5.CountryReports

Austria

Belgium

Bulgaria

Croatia

Cyprus

CzechRepublic

Denmark

Estonia

Finland

France

Germany

Greece

Hungary

Ireland

Italy

Latvia

Lithuania

Luxembourg

Malta

Netherlands

Norway

Poland

Portugal

Romania

Slovakia

Slovenia

Spain

Sweden

Switzerland

UK

Project C&C source Project Stella - STOP ILLEGAL · ProjectT Sitletella Report Important notice &...

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