Much ado about sin tax reform

MANILA, Philippines - As a business leader, there is nothing more humbling than to stand on a soapbox, passionately defend a position, and then find out later on you are wrong. Nobody is perfect. I can think of the multiple times in the past where I was sure of a given outcome, and then only later was proven to be way off. It’s all part of the learning process  of self-improvement.

History is full of cases of the business community, in the throes of overt self-interest, professing “doom and gloom” if a given law passes. “The end of the world is coming!” And then the world finds out that, frankly, nothing negative really happened at all.

There is no better example of this than the recent “Sin Tax” reform, which put in a sensible excise regime and created a level playing field for alcohol and tobacco.

From an objective vantage point, looking at the governmental, societal, economic and benchmark data, there was nothing more obvious to do than to revise excise as was done. Yes, it may indeed hurt some quarters in some small way, but for the overall health of the economy, it was irrefutably the right thing to do. But of course, as is par for these things, those who may be hurt raise the proverbial Armageddon arguments. “This is the end of the local tobacco industry.” “This is the end of the tobacco farmers.” “This is the start of massive smuggling.” And on and on.

We are now entering month four of the new excise law. It is still, of course, far too early to be conclusive. But the data is clear, and we can say so far none of the fears are coming true.

What are the facts?

Anecdotal evidence from the farmer advocates indicates that all is “business as usual,” and there is plenty of business. To quote, “Local tobacco is doing well. And nobody is buying any less.” This is, of course, not surprising since well over half of the local crop is exported, meaning is has nothing to do with local excise rates! This is why the statement, “This is the end to all the farmers” never had any credence to any knowledgeable individual. There has been no discernible impact on the farmers.

The Nielsen data is in now for January and February, the first two months of the start of the new excise law. After a very strong December that was +15 percent (due to massive industry loading before excise reform  and, of course, that would impact January and February!), January and February did decline by averagely -9 percent. Now at this point it is hard to discern how much of this is due to December loading, and how much is real market decline due to higher excise rates. My estimate? We probably won’t see much more than a -5-7 percent decline in the market sizes. A far cry from the “death” and “-40 percent market decline” estimates that were randomly tossed around.

So far, there has been no discernible uptick in the amount of smuggled cigarettes being sold.  Again, not entirely surprising. Filipino prices for cigarettes are among the lowest globally even after excise reform! Smuggling directly correlates to local pricing levels: the higher they go, the more smuggling becomes attractive.  It’s difficult to show a massive increase in smuggling when local prices still remain at benchmark low levels.

Finally, one of the big “fears” of excise reform was the “death of the local Filipino companies” and a victory for multinationals and imported brands. So what is the result so far? Well, first of all, if we take the latest February share, compared to December (the last month before reform started), the three multinationals in the market have lost 10 share points combined! And guess who gained +10 share points? You got it! The local Filipino companies!   And, the one “imported brand” that some have obsessively raved about “flooding the market”? It has hit a share level in February of 0.3 percent! Talk about overreaction!

My dear friend Erik Weihenmayer is the only blind man to successfully climb Mt. Everest. A few years ago he and I climbed Mt. Kilimanjaro, the tallest peak in Africa, and I was one of his guides. One night at 4,000 meters we were chatting and he said something I will never forget: “Jim, sometimes the things we most dread end up being the best things that ever happened to us. When I was going blind, all I ever worried about was ending up completely sightless. And then the day came when I saw nothing. And that changed my life. I became better. Stronger.  I made a better career than I could have ever imagined. I visited the world. Met amazing people. I have to say Jim, that going blind was the best thing that ever happened to me.”

Imagine that. Joy over being blind!

Many foresaw doom and gloom with excise reform. The jury is still out as we are early in the game. But into month four, it is looking brilliant and the administration has hit the proverbial “home run” and kudos to the DOF and BIR. And, like Erik, perhaps even the unthinkable is true  the best thing that ever happened to the local tobacco industry was the recent excise reform.