Tobacco Vending Machine Association
SUBMISSIONS TO THE DEPARTMENT OF HEALTH
REGARDING THE TOBACCO PRODUCTS CONTROL AMENDMENT BILL, 1998
BY THE TOBACCO VENDING MACHINE ASSOCIATION

14 AUGUST 1998

Introduction
These submissions regarding the Tobacco Products Control Amendment Bill, 1998 ("the Bill") are made by the Tobacco Vending Machine Association ("the Association").

The Association was formed to represent the interests of the owners of the approximately 3000 cigarette vending machines in South Africa, 2154 of which are operated by members of the Association.

The members of the Association are A.L.Z. International C.C., Coin O Matic C.C., Peninsula Vending C.C. and Vendomatic (Pty) Ltd (which operate nationally), Fresh Brew Vending, Rob & Associates and Top Vending C.C. (which operate in Gauteng and Port Elizabeth) and Ocean Vending C.C. (which operates in Durban).

The cigarette vending machine industry in South Africa
The cigarette vending machine industry in South Africa is comparatively small. As explained, there are approximately 3000 cigarette vending machines in the country. By comparison there are approximately 80 000 cigarette vending machines in Australia, 800 000 in Germany, 150 000 in the United Kingdom and 100 000 in the United States of America.

Unlike countries such as Australia, Germany, the United Kingdom and the United States of America, the majority of cigarette vending machines in South Africa (and approximately 90% of the machines operated by members of the Association) are located on premises which are licensed to sell liquor for on-consumption purposes. However, of these only 450 (20.9%) of the total are located in premises such as bars to which entry is restricted to persons over the age of 18 (and therefore inaccessible to persons under the age of 16). By far the majority – 1490 (69.2%) of the total – are located on licensed premises such as restaurants, restaurant-bars and bars (e.g. O’Hagans) which are accessible to persons under 18 (but where they cannot purchase liquor). In spite of this, most of the venues in question are not frequented by unaccompanied minors under the age of 18.

In Germany, by contrast, cigarette vending machines are placed in the open (e.g. on busy streets) and in the United States they are often located in "waffle parlours" and other places where children tend to congregate.

In addition, the price of a packet of cigarettes purchased from a cigarette vending machine in South Africa is substantially higher (between R1,50 and R2,00) than the price charged by cafés and street sellers. In most foreign countries, by contrast, vending machines’ prices are only marginally more expensive than those of normal retail outlets.

Purchases by children in South Africa
In our experience, one of the results of the limited availability of cigarette vending machines and the relatively high price of cigarettes bought from vending machines in South Africa is that children do not as a rule buy, or attempt to buy, cigarettes from vending machines here. Moreover, warnings stating that under age persons may not purchase cigarettes are displayed on all the machines supplied by the Association’s members, and the managers of the premises where vending machines are located are regularly reminded that they must ensure that persons under the age of 16 do not buy cigarettes from them.

The Association would point out that although there are no published findings on the incidence of cigarette purchases from vending machines by children in South Africa, as the Minister of Health herself has stated research has shown that the incidence of purchases of cigarettes by children decreases markedly as the price increases.

In view of the profound differences described above, the studies of cigarette purchases from vending machines by children in countries such as the United States, which reportedly were used by the Department of Health when drafting the Bill, cannot provide a sound basis for a change in the legislative framework in South Africa.

Financial matters
The average cost of a cigarette vending machine is approximately R13 000. Most members of the association lease their cigarette vending machines from finance houses or have bought them subject to instalment sale agreements.

The revenue of the members of the Association derives mainly from profits on the sale of cigarettes and from a distribution contract with tobacco manufacturers.

Most cigarette vending machines sell on average 400 packets of cigarettes per month. This translates into a turnover in excess of R120 million until December 2005 (the date when the distribution contract will expire) for all of the machines operated by the Association’s members. As vending machines have a life span of approximately 20 years, most will remain economically active until at least 2010 (and so yield another R87 million in sales revenue).

All of the Association’s members have a distribution contract, valid for a further 7,5 years, which entitles the tobacco manufacturers to display their product on the front panel and to supply 70% of the brands sold. The value of the contract for the remaining period is in excess of R75 million for all of the machines operated by the Association’s members. The payment for the display on the front panel varies, depending on type of venue where the vending machine is situated and its location at the venue.

Two of the Association’s members – ALZ International CC ("ALZ") and Peninsula Vending CC ("Peninsula"), respectively – manufacture and import cigarette vending machines. ALZ’s manufacturing business has a factory valued at R1,5 million, a workforce of 10 and an annual production turnover of R1.5 million. Peninsula Vending CC has an annual turnover on imports of R2,5 million.

As a result, for reasons which will be explained, if the Bill is passed the members of the Association will lose turnover and distribution revenue in excess of R285 million. Moreover, at least 200 jobs will be lost.

The problems for the Association presented by the Bill
All of the members of the Association have been in the cigarette vending industry for between five and seven years. As is apparent, during that time they have invested millions of rands on the understanding that the nature of their business was entirely legal and that the distribution agreement with the tobacco manufacturers will continue in place until the scheduled expiry date.

The Association wholeheartedly supports the Government in its efforts to curb cigarette sales to children, and will seek to implement any reasonable measures aimed at reaching this goal.

The Association is, however, extremely concerned by the amendments to sections 3 and 5 of the Tobacco Products Control Act, 1993 ("the Act"), contained in clauses 3 and 7 of the Bill. If enacted, these amendments will put paid to approximately 79,1% of the business of the members of the Association, resulting in losses in the order or R150 million.

If the display on the front panel of the vending machine is prohibited, one of the effects of the proposed amendment to section 3 of the Act, the tobacco manufacturers will in all probability cancel their contracts, resulting in losses greater than R75 million for the members of the Association.

If the proposed amendment to section 5 of the Act is enacted, cigarette vending machines will be prohibited on all premises other than those which are inaccessible to persons under the age of 16 years, i.e. practically everywhere other than "old-style" licensed bars. Viewed on its own this amendment will result in losses of up to R150 million for the members of the Association.

"B"
In short, if sections 3 and 5 of the Act are amended in this way the businesses of the members of the Association will be devastated. As explained, this will lead to scores of job losses.

The Association has been advised that there is a reasonable prospect of a court declaring unconstitutional any such amendments to sections 3 and 5 of the Act on the grounds that they constitute an unjustifiable expropriation without compensation of its members’ property or an unjustifiable infringement of their freedom of trade or, as regards the restrictions on displays, possibly an unjustifiable infringement of their (and the manufacturers’) freedom of speech.

The Bill is noteworthy for the absence of any provision reimbursing vending machine operators for the fair market value of their businesses, including the cost of redundant machines and other plant and equipment, and compensation for lost profits, unexpired contracts, lost goodwill and severance payments to retrenched employees.

The amendments proposed by the Association
The Association believes, however, that the Government’s aims can be achieved by less drastic means.

The Association proposes that sections 3 and 5 of the Act be amended to allow, respectively:

the front panel of a cigarette vending machine to include facsimiles of the packages of the brands of cigarettes on sale by the machine, the aim of which is to facilitate the selection and purchase of cigarettes from the machine, and a display panel comprising a facsimile of the package of one of the brands of cigarettes on sale by the machine, with the prescribed health warning prominently displayed; and

sales of cigarettes from vending machines from premises which are licensed for the sale of liquor for on-consumption and other premises where sales to persons under the age of 16 years are unlikely or can be prevented by the person in charge.

If adopted, these amendments would entail the following insertions and deletions from sections 3 and 5 of the Act:

Insertions underlined.
[Deletions bold in square brackets].
"3. Advertising, sponsorship, promotion and required information in respect of packages of tobacco products
(1) ….
….

A retailer of tobacco may post in accordance with the regulations signs at the point of sale that indicate the availability of tobacco products and their price: Provided that the front panel of a cigarette vending machine may include –

facsimiles of the packages of the brands of cigarettes on sale by the machine, the aim of which is to facilitate the selection and purchase of cigarettes from the machine, and

a display panel comprising a facsimile of the package of one of the brands of cigarettes on sale by the machine, with the prescribed health warning prominently displayed.

(4) ….

"5. Restrictions on use of vending-machines
(1) The [Director-General may in writing empower any officer to enter any premises where he has reasonable grounds to suspect that a vending-machine for the sale of tobacco products is kept, to determine whether the provisions of section 4 (1) are being contravened] sale of tobacco products from vending machines shall be restricted to-

(a) premises which are licensed for the sale of liquor for on-consumption; and

(b) other premises,

where sales from such machines to persons under the age of 16 years are unlikely or can be prevented by the person in control of such premises.

(2) [If the officer, after the conclusion of such investigation as he may consider necessary, is of the opinion that section 4 (1) is being contravened by means of a vending-machine referred to in subsection (1), he shall notify the Director-General accordingly] It shall be the responsibility of any person in control of premises in which any vending machine is kept to take precautionary measures to prevent the vending-machine being used by persons under the age of 16 years.

(3) The Director-General may in writing direct the owner of the vending-machine in question or the person in control thereof-

(a) to take such precautionary measures as are specified in the direction to prevent the vending-machine being used by persons under the age of 16 years; or

(b) to remove the vending-machine from the premises within the period specified in the direction.

[(4) The powers and duties of an officer may within the area of jurisdiction of a local authority be exercised or performed by an officer of such local authority authorized thereto by such local authority.]"