Illicit tobacco is growing in Australia, both literally and figuratively. Tobacco products like cigarettes, cigars, and rolling tobacco that are sold without excise taxes being collected are estimated to cost the federal budget $6.9 billion in forgone revenue between 2025 and 2029, according to figures from the ABC. Not only is this trend costing the government money, but it is also a burden on a few ASX stocks.
The stocks of ASX companies that sell legal tobacco have suffered alongside the government as more of the tobacco market has turned black.
Grocers are a major supplier of legal tobacco products in Australia, which can make up a surprisingly large portion of overall sales. Take IGA operator Metcash Ltd (ASX: MTS). In its half-year results from December, Metcash reported $983.4 million in tobacco revenue. That was a good 18.88% of the company's revenue total of $5.21 billion.
But what is more interesting is that Metcash revealed that the $983.4 million it received in revenues from tobacco products over the six months to 31 December 2024 was down 16.5% from the $1.18 billion it bagged over the same six-month period in 2023.
Woolworths Group Ltd (ASX: WOW) and Coles Group Ltd (ASX: COL) weren't as forthcoming about their respective tobacco sales figures in their own half-yearly reports. However, both companies flagged a significant deterioration in tobacco sales over the same period.
Woolworths told investors that tobacco sales fell 25.7% over the half, while Coles noted "lower tobacco sales".
Supermarkets are the ASX stocks that have arguably borne the brunt of the shift to black market tobacco. However, other ASX stocks that sell tobacco, and thus have also suffered in all likelihood, include Ampol Ltd (ASX: ALD), Endeavour Group Ltd (ASX: EDV), and Viva Energy Group Ltd (ASX: VEA).
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Tobacco black market costs both governments and ASX stocks
You might first think that these falls in tobacco volumes might represent more Australians quitting smoking and tobacco use. However, the data indicates that, while some Australians may be quitting, many more are simply choosing to buy cheaper black market smokes.
Prominent economist Chris Richardson pointed out that the shortfall in the tax collected suggests a 55% drop in smoking over the past four years, which he points out has "almost certainly not happened".
Federal governments of both stripes have massively increased tobacco excise over the past decade. Back in 2010, a single cigarette attracted 26 cents of tax. But today, that same single smoke will attract a tax of over $1.40.
Richardson says that there is a "rapidly growing" chunk of smokers turning to the black market and buying their cigarettes tax-free in response to these steep tax increases.
That trend is costing the government and those ASX stocks listed above a lot of cash.
However, with the Federal election fast approaching, we could see a shift back from the black market.
Could the election light up Woolies, Coles, and Metcash?
Both major parties have committed to allocating additional resources to combat the illicit tobacco trade. Back in January, the Labour government under Prime Minister Anthony Albanese announced an additional $188.5 million in funding over four years. This money will be used to boost Border Force capabilities to find and seize illegal tobacco imports.
This was supplemented by another $156.7 million in additional funding announced in March.
This increased focus on illegal tobacco looks to be bipartisan.
The Liberal/National Opposition under Peter Dutton has also pledged additional resources to combat illicit tobacco. Earlier this month, the Opposition announced that a Dutton-led government will spend $750 million to combat the importation of illegal drugs, illicit tobacco, and vaping products at the border.
It remains to be seen how much these measures will benefit ASX stocks like Coles, Woolies, and Metcash, though. The black market is now well established, and dismantling it is likely to be a Herculean task. Even if all black market tobacco sales are halted tomorrow, it is hard to predict how many tobacco users would quit and how many would go back to buying legal products.
Let's see what the next earnings reports from Coles, Woolworths, and Metcash reveal about their tobacco sales in 2025 so far.
