Sales of tobacco on fire after price hike announced

Faced with an 80 percent hike in tobacco prices, many smokers rushed to convenience stores to buy up cigarettes, prompting the government to take action against hoarding.

Cigarette sales at the nation’s three major convenience store chains increased more than 30 percent on Wednesday after a series of news reports confirmed the same day that the government planned to announce a tobacco price hike on Thursday.

The hike, which will go into effect next January, will see the cost of a pack of cigarettes rise from 2,500 won ($2.40) to 4,500 won.

As a result, tobacco sales at GS25, one of the nation’s three biggest convenience store chains, jumped by 32.9 percent on Wednesday compared to a week ago.

At 7-Eleven, consumption increased by 31.2 percent on the eve of the announcement and surged further to 49.4 percent on Thursday.

The country’s largest convenience store chain, CU, also saw a 33.6 percent increase in cigarette purchases on Wednesday.

Tobacco accounts for around 35 percent of the total sales of convenience store chains.

In response to the growing cases of hoarding, the Ministry of Strategy and Finance said yesterday it will impose fines of up to 50 million won against retailers who buy cigarettes in bulk as of noon yesterday.

It appears that the measure will only have a limited impact because consumers are not being targeted. The penalty is aimed at tobacco manufactures, importers and retailers who squirrel cigarettes away in excessive quantities.

Tobacco manufacturers and distributors will be punished if they supply more than 104 percent of their average allocations in the January-August period.

Retailers will face fines under the same conditions.

“The decision is intended to prevent market disruption amid people’s concern for the upcoming hike,” the ministry said in a press release.

Those who violate the rule could face a prison sentence of up to two years or a maximum fine of 50 million won.

The penalty will be temporarily enforced until the price hike is put into place next year.

In a nation where the percentage of male smokers is one of the highest among Organization for Economic Cooperation and Development (OECD) member countries, many people will feel the pinch.

The smoking rate for Korean males currently stands at about 44 percent, which is much higher than the OECD’s average of 25 percent.

And stockpiling was not the only repercussion from the announcement.

While shares in all three major convenience store operators buoyed yesterday, shares of KT&G, a manufacturer of tobacco products, ended 2.88 percent lower after an early drop, falling to 7 percent.

Financial analysts point to the fact that the price hike will not translate into a sales upsurge for the tobacco manufacturer as the price rise is because of a tax increase.

“The increase is so drastic that it will eventually bring down the total sales of KT&G,” said Park Ae-ran, an analyst at IBK Securities.

“Also, the benefits of the hike will go into government coffers following the tax increase.”

In contrast, the shares of BGF Retail, CU’s owner, and GS Retail, which operates GS25, increased more than 1 percent.

“Cigarette sales account for approximately 35 percent of convenience stores’ entire sales,” said Park Jong-dae, a researcher at Hana Daetoo Securities.

“So the cigarette sales increase will help boost convenience store sales by 5 percent to 22 percent. I think they will enjoy a rally for the time being.”

BY PARK EUN-JEE [ejpark@joongang.co.kr]