Analysts estimate the explosion of illegal imports costs the industry tens of millions, while the Government is losing up to pounds 600m a year in lost tax revenues.
Gallaher believes that bootleggers importing cheap cigarettes from Continental Europe now account for 3 per cent of the whole UK market, estimated to be worth more than pounds 10bn a year. The group claims that the explosion in illegal importation of tobacco is the main reason behind a 4 per cent fall in the cigarette market in 1997.
The handrolling tobacco market has also been damaged by illegal imports which now account for three quarters of UK consumption. Bootleggers are importing tons of tobacco mainly from Belgium and Luxembourg
Peter Wilson, chairman and chief executive of Gallaher, yesterday surprisingly backed the principle of a voluntary ban of smoking at work or in public places. "I think it is a matter of common sense. If people can come together and make a decision then that it the right solution."
However, Gallaher joined BAT in denouncing Government research published earlier this week that passive smoking harms health and can kill. "I am saddened. This should be judged on science not emotion. They have not established there is any increase in risk from passive smoking," said Mr Wilson.
Gallaher, along with its main UK rival, Imperial Tobacco, faces the threat of litigation from lung cancer victims in the UK. The legal action comes in the wake of the US tobacco industry's decision to arrange a settlement with claimants in response to a stream of compensation claims.
However, Gallaher said yesterday that the group had no intention of compensating victims and would continue to fight them tooth and nail in the courts. "We have in place meritorious defences and continue to have faith in the British justice system. We will not be settling any cases," Mr Wilson said. Gallaher admitted that the proposed European wide ban on advertising and sponsorship would have a big impact on its business. However the group is confident it can circumvent the ban and maintain sales by increasing promotions in shops that sell cigarettes.
The Government is expected to announce another rise in tobacco duty next week, equivalent to around 20p for a packet of 20.
If the duty is imposed in the next few months then Gallaher admits it could prove a significant drain on profits. However it is hoping Gordon Brown, the Chancellor, will not choose to impose the new duty until December.
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