Gawith Hoggarth boss lifts lid on tobacco industry challenges

Published by Scott Challinor on October 11th 2021, 1:01pm

Chris Gawith is a director at Gawith Hoggarth, a Cumbria-based business that has a rich history of making high-quality tobacco products by hand, dating as far back as the 18th Century. Like many businesses within the industry, the company that is now the UK’s last surviving smoking tobacco manufacturer has been forced to navigate various challenges over the years, arising from the implications of the revised EU Tobacco Products Directive [TPD] and more recently, from Brexit.

Sitting down on The Leaders Council Podcast with host Joshua Jackson, Gawith [pictured] spoke at length about the nature of the challenges the industry had been left facing and how his business has sought to adapt to a changing trading environment.

The EU’s revised Tobacco Products Directive came about as an effort to crack down on the trade of illicit tobacco products. A study by ‘Big Four’ firm KPMG uncovered that trade of counterfeit and smuggled cigarettes accounted for 8.7 percent of overall consumption within the EU, Norway and Switzerland in 2018, corresponding to roughly 44.7 billion individual cigarettes around the world.

As part of the changes to the TPD, a new serialisation system was made compulsory in order to track and trace the movements of tobacco products on the EU market. The first phase of the new directive came into force on May 20, 2019.

Discussing the consequences of this change, Gawith said: “As a country, we’ve inherited a lot of European directives into UK law and some of this legislation is hard to meet for small companies like ourselves. Combatting illicit trading of tobacco is a positive thing, we don’t know what’s in these products and they cause a lot of lost money for the Treasury and defraud industry operators. But, as a system, serialisation has shaken the whole industry right across Europe.

“The reason is that the system requires every packet of cigarettes or rolled tobacco product to have a unique serial number on it. These serial numbers need to be bought off the government in whichever country it is being sold in, and then be marked on all the individual packets of cigarettes and other products. This enables the product to be traced all through the supply chain so you can identify where it was bought from, find out the machine it was made on and who made it.

“It is a reinforced way of finding out whether duty has been paid on the product and it makes identifying illicit goods far easier. It is also hard for an illicit trader to buy serial numbers off any government because only licensed manufacturers are allowed to. But while HMRC and the government have done well in applying the system, the cost to us as a business to comply with it is enormous. It has added a further £350,000 of operating costs and that sort of cost will certainly contribute to the collapse of many small tobacco businesses across Europe in 2024, upon full implementation of the revised directive. We manufacture pipe and hand-rolled tobacco products, and serialisation adds 25 per cent more time to the manufacturing process compared to the way it was before the rule came in, so we are also having to contend with that.”

Gawith also highlighted that despite the significant cost of serialisation compliance for smaller businesses, support from HMRC and other bodies has not been forthcoming.

“We have essentially had no support. We do sit down regularly with HMRC, and the big four tobacco companies and you get that nod of sympathy from across the table but nothing else. Of course, it is expensive even for the multinationals to comply with the rules, but the cost measured against their profits is a drop in the ocean compared to what businesses like ours pay out.

“Big tobacco also has the luxury of being fully automated, so they can split open a production line and add a new module that can take care of serial number marking and pack aggregation for them and manufacturing time and output doesn’t suffer. Meanwhile, it is much more time consuming for companies like us that do all our work by hand.”

Since the start of 2021, the full enactment of Brexit has also forced Gawith Hoggarth and the wider industry to adjust its operations to work around new Rules of Origin [ROO] and associated tariffs.

Gawith explained: “As part of the UK-EU trade deal, ROO are applied so there is a preferential tariff between the UK and EU on tobacco products and these are difficult to get around. It determines that within your product, to name an example, it must contain ten per cent wholly opaque material if you are going to export it. This is difficult to stick to and if you don’t abide by that preferential tariff, you’re then looking at a 74.9 per cent import tariff, so it prices lot of our European customers out and then they have their tobacco duties worked out and applied on top of that.

“We haven’t been able to really send any product to the EU market as a result, which was a good market for us. It wasn’t entirely keeping all the lights on for us as a business, but it was a good chunk of our export market which we are relying on more and more, because the UK market is on the decline and the rate of people smoking has been decreasing every year. We have people in Europe queuing up to place orders, but we have not sent anything to the EU since November last year. We’ve also had four new distributors come forward that we’d like to talk to, and we can’t send anything.”

As well as having to contend with issues around Rules of Origin, Gawith Hoggarth have also had to navigate the challenges around procuring tobacco leaf; a product which is not grown in the UK. Having managed to find a good supply of the product from a trader in Poland, there was then the logistical headache of trying to get it to Cumbria.

“We have had to source some slightly different products because of Brexit. We have no choice but to import some products because there isn’t any tobacco leaf grown in the UK. European leaf is also quite tough to get hold of. Europe does not really grow enough of it to supply the whole European smoking market either and it sells a lot of its leaf outside the EU.

“Fortunately, we managed to source some good tobacco leaf from Poland that wasn’t too expensive and which we were lucky to find. So, we are bringing product in from Europe cheaply where possible to one day hopefully sell it back once we have processed the tobacco into our own products. For us, paperwork is not the big problem and clearing customs is not the problem. The problem is physically finding companies and vehicles willing to ship tobacco around. That is not just companies in the UK, it is just as difficult convincing any company in the EU to come and collect the leaf and bring it to us because they deem the risk too high.

“For instance, we had an incident with a shipment of our Polish tobacco leaf where we’d bought and paid for it as necessary, and it sat in Antwerp for a few months while we waited for a trucking company to bring it to us in the UK. We eventually found a French forwarding agent that employed a Romanian trucking firm to collect it from Antwerp and bring it to Britain. However, the forwarding firm did not realise that they had to submit paperwork at the UK border and the truck was then seized by police since they had no customs clearance.”

Addressing how to rectify the issue, Gawith believes it will simply take time for operators on both sides to become accustomed to the complexities of the new rules following Brexit.

“The big part of the transport issue that seems to be going on between the UK and EU is that, on the European side especially, they don’t understand Brexit and its implications. There is such a lack of understanding as to what needs to be done to come into the UK with certain products. So, it is hard getting people to come here with tobacco products for us to finish off and distribute to our customers. If they want to come to the Lake District with two or three pallets of tobacco leaf and deliver it to us, the chances of them being stopped are higher than if they were just carrying other products, for instance cake. Businesses do not want to run the risk of getting stopped at borders because they lose out on valuable driving time when they are already running tight logistic operations.

“However, I don’t think it is an unsolvable or never-ending issue to come from Brexit. I think when things are more understood and we have better adapted, and you can then find decent EU partners to work with, I think things will get easier. Costs associated with tariffs, serialisation and more might not go down but whatever happens with cost, it is redundant anyway when you can’t move the product around at all.”

With Brexit proving to be such a hindrance to trade of tobacco produce with the continent, Gawith revealed that the business had been left with little alternative but to look for other markets to do business with. This has proven a successful exercise, with the company finding clients in the US, China and Russia among others.

“As much as we want to sell to Europe because it is on the doorstep and as much as it would be nice to have more trading freedom, we just can’t with the regulations there right now. So, Brexit in a way has given us a springboard to look elsewhere and we have found a lot of business doing so. I dare say it has played out like the government wanted, we have looked outside of Europe and found more business to try and drive the Global Britain agenda forward. Especially a company like us which has a long line of Best of British pedigree in our sector going back through history.”

Yet, as promising as these developments have been, the company has had to remain wary of its limitations as a successful yet fundamentally small business that continues to manufacture its products by hand.

“Our big problem here is production capacity,” Gawith candidly admitted.

“It never used to be too much of a problem, but we have always been a small business and since we began saying ‘yes’ to more overseas enquiries, we have been fairly inundated with product requests. Most months we are figuring out how we are going to produce orders and we are having to turn down and tone down some orders from non-EU countries to cope.

“The United States is a fantastic country to work with, for instance, and we’ve got great partners there including some new ones, and things are going well. We try and supply them with as much as we can, but the reality is that one 20-foot container can take us the best part of three months to put together and every single one will sell in just eight days just because of the quality and how we do it. You cannot automate twist and rope tobacco processes like ours. You must iron the leads out and hand feed and slice them onto the end of the rope leaf by leaf. It is time consuming and requires operator skill, and not many people are out there doing it.

“Going the other way, China has been a big customer too. We had initial order quantities of almost 20 tonnes going there, so again, you cannot really meet all their demands because orders can be excessive. But it is an interesting market, and we hope it can sustain itself as a market for some time for us given some of the political challenges around it. Over in neighbouring Japan and South Korea, the companies we sell to are coming along nicely as well. There is a more regular pattern and steady way of trading with them now, and once you get to know someone and what their market requires in terms of regulation it becomes easier all-round. We have also found projects in Russia, which if done correctly could potentially be a huge market for us too. Doing it all by hand means we are having to even knock back some of these orders, since it would take four months just working on one order in the case of some of them!

“The positive thing is with the downtime we have from not being able to send anything to the EU, we aren’t left quiet because we’ve got global customers who’ll keep buying the product that keep us busy.”

Reflecting on the fact that export has become a far greater part of the business in more recent years, Gawith said that it had proven to be a positive learning curve for himself and his colleagues, and that the next natural step would be to continue to drive that part of the business and keep supplying the markets that continue to crave the quality and tradition of Best of British in the post-Brexit world.

“We have been exporting for a long time but not on this scale. So, our team has been learning much about customs worldwide, how to get things all over the world, because it is a big part of our future. We will never abandon the UK market for as long as we can operate, but there is so much world out there and plenty more markets for us to pursue.

“With the more traditional products gaining momentum in China and the US, and increasing interest from around the globe, it feels like the sky is the limit for the potential of our business. The company has taken little marketing and commercial effort in the past, but now we are looking at developing our brand and identity to capitalise on these new markets. Our main aim is that we want more people to become part of the journey. We want them to be part of our heritage and, in particular, to get involved on social media, because it has worked out nicely for customers as a means of directly interacting with us as company owners.”

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Authored By

Scott Challinor
Business Editor
October 11th 2021, 1:01pm

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