The troubled tobacco shop concessions

We haven’t talked about the tobacconist shops lately, although there is quite a bit to be said about them. First and foremost, that as the result of the newly restricted availability and the price hikes black market sales of cigarettes have soared in the last couple of months. Fewer and fewer people are buying cigarettes at the designated stores. The fallout? The loss of 23 billion forints in excise taxes for the treasury. Also, the new owners of these shops, although they turn a 10 percent profit on every pack of cigarettes, are not doing well. One needs to sell an awful lot of cigarettes to make a really good living.  And “only an idiot would buy cigarettes in the tobacconist shop,” reads a headline in today’s Origo

The troubles started early, with a spate of tobacconist shop robberies. Petty criminals all over the country, hearing about the fabulous profits that could be made by the owners of these shops, found them irresistible. And since the store fronts must be darkened and the doors kept closed at all times, the robbers could be assured of an easy target.

After a few weeks the black marketeers were in full swing, divvying up territories among themselves. They sell inexpensive cigarettes from Ukraine and Serbia for 500 forints a pack, as opposed to 900 forints in the stores, as well as western brands such as Kent, Marlboro, and Lucky Strike. The supply is plentiful. And it’s a terrific deal for both seller and buyer. The Ukrainian seller turns a 100% profit on each pack of cigarettes and the Hungarian buyer gets the pack for almost half the official price.

A man on Kálmán Széll tér (formerly Moszkva tér) explained how the distribution system works. A “very reliable man” brings him the merchandise from Ukraine. This reliable guy has his “reliable customers,” among them the fellow the Origo reporter talked with. The man admitted that what he does is illegal but, as he said, “the laws are wrong.” The black marketeers divide up the square among themselves, and they “defend their turf as jealously as the prostitutes.” Tobacconist shops nearby are hard hit. There are days when for hours they don’t have a single customer. A fair number of shops have already closed.

Making tobacco a state monopoly was most likely the brainchild of the Hungarian-owned Continental Tobacco Company. The owner of the company is a good friend of János Lázár, who was heavily involved in drafting the law. The Continental Tobacco Company also made sure that its employees and board members received a fair number of concessions through front men (Strohmann/stróman). Of the 4,300 tobacconist shops they got about 500 concessions.

One of the main beneficiaries was András Kulcsár, a top manager at Continental. He got 84 concessions. Now, after a few months, he has already had to close 25. The reason? Most likely a lack of business expertise, bad location, and low sales. The law, by the way, states that stores that close must be reopened within 60 days.

The cronies have all the dough / Photo Index

The cronies have all the dough / Photo Index

Today we learned that one of the tobacconist shops that belonged to Tomi Palcsó, a singer discovered on “Megasztár,” has been closed for days. The singer, who is a Fidesz favorite and who often performs at Fidesz events, received five concessions, officially the maximum number. It looks as if business in Csepel didn’t exactly thrive. Mind you, DK demonstrations in front of the Csepel stores over the last couple of weeks probably didn’t help. (László Varju, one of the top DK leaders, has been called into the police station for organizing demonstrations.) Although Palcsó’s store was already defunct, about a dozen DK activists protested in front of it today with signs like “The cronies have all the dough.”

Meanwhile, on popular initiative the National Election Committee gave its blessing to holding a referendum on two questions concerning the tobacconist shops, and the Kúria (formerly the Supreme Court) approved it. If the activists manage to get 200,000 signatures within 45 days the referendum can be held. There will be two questions on the ballot: Do you agree that instead of a 10 percent guaranteed profit, it should be rolled back to the original profit margin of 3.33%? And do you agree that only tobacco products should be sold in the tobacconist shops?

Apparently the Fidesz leadership is furious. As one Fidesz politician told the reporter for Index“that will not happen again.” At this moment it is not clear whether the government/Fidesz (it really no longer matters what we call it) intends to block such a referendum altogether or whether they only want to prevent its being held before the elections. In either case, I wouldn’t like to be in the shoes of one of the members of the Committee who in the last minute changed his mind on the question of the profit margin and thus made passage of the motion possible.

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Ron
Guest

I noticed the statement about the HUF 23 billion before. It is not entirely correct. Using the article as reference.

July Excise taxes was HUF 28 billion (ly 34 billion) loss HUF 6 billion. But since the original shops were also selling the impact was not that big.

August Excise taxes was HUF 24 billion (LY 36 billion) loss HUF 12 Billion
Excise taxes together HUF 18 billion, plus HUF 5 billion in less VAT is HUF 23 billion.

Extrapolating to the end of the year (assuming August is the first full month, and take only half of the VAT amount) 4 months times HUF 14.5 billion. Lost excise and VAT revenue is HUF 77 billion in 2013.

This will have a major impact of the bottom line, and I expect new cost cutting coming the next few months. Please do not forget the budgeting 2014 is just starting.

Paul
Guest

Fascinating that, after all this ‘government’ has done, it’s a ‘minor’ issue like smoking that trips them up. How did the normally smooth running Fidesz strategy department get this so wrong – did they somehow miss that bit in their history lessons about prohibition never working?

A little personal insight that might throw some light on this – the one thing I’ve noticed that all our Fidesz-supporting friends and family have in common is that none of them smoke – not one.

Could it be that the reason they’ve cocked this up so badly is that Orbán’s advisors don’t smoke and so don’t understand people who do? To the Fideszniks it’s just a disgusting habit of the lower orders, and a convenient source of revenue. If they smoked themselves they’d have known that this was a bad idea from day one.

Trafikos
Guest

Ron — not only that, but the government created a gigantic black market, although the trend that tobacco became a black market item has to do with price too (as the EU expects a relatively high price compared to available source in Ukraine/Serbia). But it’s the distribution shock with the new Tobacco Shops which was the tipping point.

The taxpayers are now subsidizing an unknown group of people who deal with tobbacco.

It’s such a big market, it might even be bigger than illegal drugs.

Expect the mafia to strengthen all over Hungary and new local strongmen to emerge.

And I think the government does not want to act because of political reasons, as it is a huge business for border regions (close to Serbia and Ukraine).

Also these mafia will have to pay to police/border guards people and ultimately to Fidesz party coffers to be able to continue to operate.

Ron
Guest

The thing is that they set up these shops to protect the minors, reduce smoking, and in general to improve the living conditions in Hungary.

What they created, a large portion of the NAV (Hungarian Tax, Duty and Excise Office) is to seek and possible destroy the black market (which is impossible), make smoking exciting (minors cannot buy in shop, so per definition need to find their fags on the black market, which is very exciting), no guarantee about quality, so tobacco may be of poor quality, so has an impact on health (more than normal).

Guest

A few weeks ago I found a story on the internet about Continental Tobacco installing a tobacco expansion plant in its Satoraljaujhely factory. As it often happens I cannot find it again.

Tobacco expansion is performed with liquid carbon dioxide which makes the tobacco puff up to double volume. Consequently it takes half as much tobacco to fill a cigarette. Surely the cigarettes will be much cheaper when the plant is turned on.

Ron
Guest

Jean P: This Company and its subsidiaries obtained at least HUF 400 million from the Szechenyi Plan. Thius is next to more or less the monopoly they received from Fidesz.

http://continentaltobacco.com/hu/continental-eu
http://tiszaviragszeged.hu/palyazat go the the Company Tobacco website and then to Taban Trafik Zrt.

Ron
Guest

I love the Continental Tobacco core Ideology (apparently they have one).

http://continentaltobacco.com/en/our-core-ideology

Being the best in whatever we do
Respecting human values and relations
Being creative and innovative
Acting in an entrepreneurial spirit
Acting responsibly

Marcel Dé (@MarcelD10)
Guest

The increase in trafficking (and in sales of cut tobacco) is directly linked to the price hike; in the capital at least, the state concessions have nothing to do with it. Since there are far less illegal point of sales than legal ones, the ‘reduced availability’ you mention is obviously not a factor.

In an ideal world, a substantial part of the taxes should be spent on fighting trafficking; as usual I suspect this isn’t the case (notwithstanding the difficulty created by the decrease in excises). The state-licensed tobacconists will get more and more angry at the Government, and I fully agree with you here, feeling they have been cheated.

Its a trap, and they can hardly expect to seriously sell anything else than tobacco since they can’t advertise behind their opaque doors. Except maybe other products under state monopoly… we’ll see.

Now, if I remember well MSzP announced it would roll back the concessions – meaning the owners’ discontent will not turn in their favor. Has Jobbik said anything about it?

Jonathan
Guest
Marcel, you are way to optimistic. Continental has very good connection to all parties. Apart from Fidesz, all parties tend to be very understanding towards lobbies. For example Jobbik is a huge fan of not only Paks II (the biggest bonanza ever) but also of the Bős-Nagymaros Danube dam (even three dams not just one at Nagymaros, well those would be great bonanzas too). Whether it’s the Russians or the construction/cement business, Jobbik is open to them. MSZP detto. Forget the idea that the tobacco shops will lose their exclusivity. Does MSZP want to favor the multinational bloodsuckers again to let Tesco and Spar sell tobacco again? C’mon, MSZP is afraid of looking too foreign friendly and not caring about Hungarian entrepreneurs. They will not do anything what you hope for, perhaps issue some licenses to other mom and pop shops who lost their licenses, but the system will stay. They will not dare to fundamentally change any Fidesz policy, they will be so afraid from Fidesz’s power. Any other hope is naivity. Fidesz decides to do something and then it executes its plans against all lobbies. This has good and as well as bad consequences of course. I support… Read more »
Guest

A bit OT:

“poor romas got the welfare and within two days most of it was gone into the machines”

I remember that!

When about 15 years ago my neighbour organised the planting of grass seed and bushes in my new garden he got a few Roma from the village to do the work. They got a litre of his wine and a bottle of soda a day (more when it was really hot) and 1000 Forints – but those were not given to them!

Every evening their wives would come to collect the money – and some German chocolate …

Later I sometimes was a bit surprised when families which I didn’t recognise at all greeted , me in the village until I realised that some of these people had worked for me – of course it’s better that way, i e to have a good reputation amongst the locals …

Marcel Dé (@MarcelD10)
Guest

@Jonathan:perhaps. Your remarks make sense of course, yet if I look at my own neighborhood, before last summer there were 4 points of sale within a 50m radius from my door: two small élelmiszerek, a mini-Spar and a small Cba. Now there’s… none.

I don’t think the Spar and Cba really cared, but the two 24/7 shops certainly did, and it shows (both already reduced their personnel). That’s several families not happy about it at all. And 100m from my door, there’s a new state-licensed tobacconist hidden in a building’s inner yard on a low-traffic street, who doesn’t seem to be very happy about it either.

I understand that what I see in Erzsébetváros may not apply elsewhere, yet… if not rolling back the law entirely, at least redistributing the licenses would make sense electorally (and business-wise). Maintaining the ‘opaque door’ and protection of minors policies would be enough to keep the supermarkets away, except perhaps for the hypermarkets who could afford a special, separate booth on their premises.

On the other hand my guess is Fidesz, to appease the current discontent of its own clientele, will instead give them new exclusive licenses on other products or services.

Guest

Our interspar managed to build a separate shop with an entrance far away from the main entrance …

On the other hand they closed down the old shop that also sold newspapers, magazines and books of all kind.

PS: I just read on bbj.hu that the book market in Hungary is down at least 20 % (in volume) compared to 10 years ago and magazines and newspapers aren’t doing too well so maybe that was inevitable.

Still, the mafia-type way that Fidesz handled the whole affair is something to remember – and I’m telling everybody in Germany that asks me how democracy is doing in Hungary.
You should see people’s expressions when they hear what’s really going on in Hungary!

Kugler
Guest
Wolfi, I think part of it is demography. The older generations leave and the younger read much less, plus you have a net decrease in population, plus the enormous emigration. If you add those together you have a big decline, especially as part of the book business is school books, books for classes and in ten years the school age population decreased very significantly. Plus the continuing and ever deepening recession. Also, it depends in comparision what the basis is, 2004 might have been the top book sales year in the post-1990 era. But the Fidesz government does everything to wind up the book bsuiness. After all: book publishers are mostly Budapest-based and not necessarily loyal right wingers. So why subsidize your opposition? You need projects in rural areas. It is more interesting why people like János Gyurgyák (a loyal Kövér fan, by the way) whose Osiris publishing company is in terminal decline does not shout louder? The newspaper business is a different story. It’s a vicious circle: those who are open to read are the first to welcome internet and change habits. Still, very sad tendencies. I am not sure the decline can be stopped. Also an interesting point:… Read more »
petofi
Guest

Well, we’re leaving Hungary for a long sabbatical. I’ve just had one too many “Christian Hungary” thrown at me. Worse still, is the silence of the populace: do they not know that this term reduces all else to 2nd class citizenry? Perhaps not legally, but
certainly ’emotionally’…(Well, who cares about another jew, anyway?)

But truth be told, Hungary is a mightily sick country. The inner sense of right has disappeared: the ‘hos Magyarsag’ is all.
Hungarian innovation is stillborn; great effort is a bygone thing; competitiveness in nonexistent. Everything is ‘who you know’ and ‘who you can cheat’. This is a society rotting.

But so far, the patina of ‘Hungarian Greatness’ has not worn off. When it does,
the people may awake to the folly of present ways. I wish them enlightenment.

Guest

Petofi, good luck to you and your family!

I hope you’ll stay here on Eva’s blog.

tappanch
Guest

latest Ipsos poll:

Fidesz 27%
Jobbik 6%
democratic opposition 21%

no answer 46%

Ron
Guest

Kugler: I believe you are wrong about the books business and how much people are reading. But right about changing habits.

Personally, I believe people continue to read, but in a different way. Less death trees, and more electronically, such as downloads, electric books. And furthermore, less reading complete works, but more parts of it over a longer period of time.

For example, when I read a book it may take two or three weeks before finishing it.

Member

tappanch :
latest Ipsos poll:
Fidesz 27%
Jobbik 6%
democratic opposition 21%
no answer 46%

This unfortunately means little. Among committed voters, Fidesz is crushing the MSZP by 50% to 25%, and E14’s support has gone down to 5%. In fact, all “democratic” parties have lost support among committed voters in the past three months, while Fidesz has moved upwards.

Mutt
Guest

Eva S. Balogh :
Re Együtt’s support. This morning I read that according the the latest Ipsos among all voters E14 went down from 4% to 3, while first time this year DK went up from 1% to2. So, at least according Ipsos the difference between the two parties is really minuscule.

I sense the same with my friends. The educated ones started to like the DK, but in a “f@#$% it, they seem to be the best” way.

The same people have no particular problem with E14 but they miss substance, that is concrete opinions on issues. C’mon Gordo! We need more to hold on to!

Mutt
Guest

BREAKING

The court rejected the registration request of the Hungarian Dobletailed Dog Party (MKKP). They said the party is promising things that can’t be realized.

The party promises, free beer to everyone, eternal life, world peace, distribution of money, and voting rights to animals.

Well compare these with, one million jobs, falling crime rate, lower debt …

Kirsten
Guest

Mutt: “The educated ones started to like the DK, but in a “f@#$% it, they seem to be the best” way.”

And to get involved themselves, has that already been thought about…?

spectator
Guest

Eva S. Balogh :
Re Együtt’s support. This morning I read that according the the latest Ipsos among all voters E14 went down from 4% to 3, while first time this year DK went up from 1% to2. So, at least according Ipsos the difference between the two parties is really minuscule.

Hey, DK increased its popularity with a 100%, while E14 down with 30%, while MSZP made a step back.

Seems pretty much to me, that the slicing up those territories happened a bit prematurely.

I wonder, how will those nice guys – Bajnai and Mesterházy – explain, say on three months time, if the trend keeps on like this?
Just curious, you see.

Kirsten
Guest

me: And to get involved themselves, has that already been thought about…?

Now that I read it, perhaps I should add that this was meant as a real question, no reproach. I really would like to know whether this is being thought about. In my (very few) attempts to make people who are critical of the current situation interested in (at least) having a look at an opposition movement, there is some slight interest first but quickly the general scepticism of politics prevails.

Paul
Guest

“It’s such a big market, it might even be bigger than illegal drugs. ”

It will be MUCH bigger than illegal drugs. Far fewer people take illegal drugs that most people realise (because the media makes such a fuss about it) – for the hard/problem drugs, the figure is ‘only’ in the tens of thousands in Hungary. Whereas millions of people smoke.

Paul
Guest

Eva S. Balogh :

Kirsten :
In my (very few) attempts to make people who are critical of the current situation interested in (at least) having a look at an opposition movement, there is some slight interest first but quickly the general scepticism of politics prevails.

Yes, in general this is the case. But the DK supporters are very committed.

I don’t doubt that for a moment, but do they have the money and the people to mount a full national election campaign? With the new rules, this is now even more difficult and expensive.

I suspect even putting up candidates in the minimum number of constituencies to get on the party list is really going to stretch their resources.

spectator
Guest
Ron : The thing is that they set up these shops to protect the minors, reduce smoking, and in general to improve the living conditions in Hungary. Honestly, did anybody bought this crap? I asked already once, since I’ve never smoked, if somebody ever started smoking purely by the tempting(sic!) sight of packets of cigarettes on a display somewhere? I have never heard of such event, even if it may have happened, I hardly think, that the statistical significance could justify the frosted glass windows, or even the punishment of the shopkeeper in case if a minor entering the shop. Anyway, isn’t it true, that there is a sign outside, informing the public, that they must be over the age of 18 to enter? If it so, then why isn’t the person punishable, who ignored the restriction, why somebody else, who actually has no legal right to verify the age of the person before he/she actually inside the shop, but then is already too late, according to the law. Law? If someone will enforce a healthy lifestyle instead of – say – educate the populace and promote alternatives, then make sure, that the underage person won’t be served to those… Read more »
robert fairhurst
Guest

On a back of the envelope calculation based on a stat on WHO webpage that said the average cigarette consumption per adult is 3,265 in Hungary, (2nd in the world) it would mean that approx 1.4bn packs are sold per year, meaning 275,000 per shop, meaning a daily profit per shop of 76,000 HUF. Surely, even the shops who are poorly positioned are still raking it in.