My name is Michel Gadbois. I'm the senior vice-president for the Canadian Convenience Stores Association. At the same time, I'm the president of the Quebec convenience stores association.
I will be doing my presentation in French simply because I'll be more precise and it will be swifter, but at the same time I'm very comfortable dealing with the questions in French or English.
Thank you.
On behalf of the Canadian Convenience Stores Association, or CCSA, I want to begin by thanking you for giving convenience store owners an opportunity to weigh in on the issue of contraband tobacco. In the next ten minutes, I will be addressing the following four issues: who we are and how contraband tobacco affects us; the responsibilities of both convenience stores and the government as regards the sale of tobacco; the repercussions of the current crisis; and, possible solutions.
First of all, who are we? The Canadian Convenience Stores Association represents 33,000 owners and managers of convenience stores across Canada, in the four main regions of the country: the Maritimes, Quebec, Ontario, the Prairies and Western Canada. We have four divisions for the country as a whole.
Who is a typical convenience store owner? It could be a mother or a father, often a newcomer to Canada. It would also be someone who is dynamic and hardworking, who may devote more than 60 hours a week to the business. It is someone with close ties to his or her community and the desire to serve that community. It is someone who employs young people, who often acquire their very first work experience at a convenience store.
The economic impact of convenience stores in Canada is considerable in every way. For example, we employ some 220,000 people in Canada. We pay out $3 billion in annual salaries and, of course, we collect $9.2 billion in taxes for the government every year—in other words, three times more than the salaries we pay—and that figure does not include gas. That amount does not, in fact, include gas taxes; only taxes on tobacco. Of course, in Quebec and other provinces as well, convenience stores also sell alcohol.
Convenience stores are among the rare businesses to still be managed within the family. In our opinion, it is very important that there continue to be room in Canada for this type of family business.
How does contraband affect convenience stores? First of all, retailers are in a very good position to have observed the astonishing increase in contraband occurring in Ontario and Quebec. They see this, first of all, through price changes; secondly, through lower sales; and, thirdly, through increased sales to minors.
For example, with respect to pricing, the price of a carton of contraband cigarettes has dropped from $18 or $20, two years ago, to $5 or $6 today, compared to $70 or $75 on the legal market. That clearly shows that supply is continuing to increase and that the product is more and more available and accessible.
As regards lower sales at our end, according to an internal study of convenience stores in Quebec, for the last two years, individual convenience stores have lost some $2 million in revenues since contraband products began to appear. Of course, contraband was not always as prevalent a problem as it has become; it started slowly.
In 2007, based on an illegal market representing 30 per cent of the overall market, on average, in Ontario and Quebec, foregone sales amounted to $2 billion. I repeat: $2 billion! With respect to increased sales to minors, we have provided you with a copy of a study carried out in the youth segment to identify cigarette butts in schoolyards. In English, the name of the study is catchier than it is in French: it is the “Butt Study”; in French, because the word for butt is “mégot”, the title isn't funny. However, the results published in the fall of 2007 show that some 11,000 cigarette butts from 105 schools in Ontario and Quebec were analyzed. Incidentally, methods were used to determine whether the butts were from legal or illegal products. The result was that 24 per cent of the butts in Ontario, and 35 per cent of them in Quebec, were contraband tobacco products.
That rate is similar to the one for the illegal market during the same period. It's huge. What that means is that the market is extremely prevalent in the youth segment, which represents a highly vulnerable client group. The figures show that the median—not the average—is around, or possibly higher than, 50 per cent. According to the figures presented in the study, in some schools, it is as high as 75 per cent, especially in lower income neighbourhoods.
I would now like to address the question of what the responsibility of convenience stores is in this regard. Owners have three major responsibilities when it comes to tobacco: to collect and remit taxes to the government; to enforce specific regulations regarding the sale of tobacco, particularly with respect to product displays; and, to prevent the sale of prohibited products to minors, whether it be tobacco, alcohol or lottery games.
Because the highest taxed products are sold in our stores—alcohol, tobacco, gas and products that are almost exclusively made up of taxes, such as lottery games—convenience stores remit some $9 billion in taxes every year, as I mentioned earlier, not including gas.
In terms of product displays, what is happening now is ironic: even as the uncontrolled, illegal tobacco market is expanding with disastrous consequences, a number of provincial governments have recently introduced new regulations which will require convenience stores to rethink all their product displays, at their own expense, in order to hide products sold legally in their stores.
Despite the current context of illegal competition, the CCSA has undertaken to help its members comply by suggesting quick and effective solutions. Yet most convenience stores are going through a period where they are losing their income, and it is costing them between $2,000 and $5,000 to hide these products. That harkens back to the days of the Commission des liqueurs du Québec. Some of us are old enough to remember that time. Alcohol was hidden behind the counter, and handed over in brown paper bags. That hasn't changed, and I think people react badly to that kind of regulation.
In terms of sales to minors, we have deployed, all across the country, an innovative program for checking customers' ages called: “We Expect ID”. This is a rigourous program whereby customers are asked for ID—a driver's permit, in Ontario. On-line training and certification is provided to retailers. There is also a mystery buyer program that allows us to see whether our members are in compliance or not.
Now let us look at the government's responsibilities with respect to contraband. The government has important responsibilities in this regard. The first and most obvious one is to ensure that people are complying with the law; the second is that the market is fair; and, the third is reducing smoking, particularly among young people.
In terms of law enforcement, a group specialized in smuggling control has been set up. Without prejudging its effectiveness, we can certainly say that its impact on this scourge will, at best, be extremely marginal and, at worst, be absolutely negligible, given the volume of traffic involved and the very low fines mentioned earlier.
In terms of market equity, the very high price differential between the legal product and contraband tobacco remains the primary cause of increased contraband. It is important to remember that 75 per cent of the cost of a carton sold is taxes—nothing but taxes.
Between 1999 and 2002, the Canadian and Quebec governments increased taxes on a carton of cigarettes by almost $20 over a period of only three years. It was at the end of that period that contraband really took off, exceeding at the time—and even now, five years later—the highest levels noted in Quebec in 1994, during the period when contraband was at its peak.
As regards the prevention of smoking in young people, current contraband is gradually wiping out all the prevention efforts undertaken over the years, because tobacco has never been more accessible or affordable for young people than it is now.
What are the consequences of the current crisis? Well, history is repeating itself. In the early 1990s, after contraband reached the critical threshold of 30 to 40 per cent of the overall market, it proceeded to rise dramatically over a two-year period, reaching levels of 60 and 70 per cent. That is perfectly normal, and it would happen in any industry: once your distribution network is in place, the market is there and there is no competition, growth is exponential. Now it has reached a critical threshold. If current trends continue and contraband reaches levels such as 50, 60 or even 70 per cent, we can expect the following consequences.
First of all, criminal groups will engage a power struggle to control this huge and lucrative market, and because they'll be fighting over the same territory and customers, violence will increase in Canada and in street gangs. Young people will be smoking more and more, governments will see their tax revenues fall dramatically, and citizens will become increasingly cynical, in terms of their attitudes towards their government and its inability to enforce the law.
Our message is simple: we must all take our responsibilities when it comes to fighting contraband.
Convenience store owners have taken their responsibilities by launching an extensive campaign to mobilize people across the country, a campaign which includes the following: an anti-contraband advertising campaign in convenience stores across the country that will be launched in early June; the creation of a national coalition to fight contraband, that will bring together all groups and organizations concerned about contraband tobacco at the national, provincial and regional levels; on May 26, we will begin a tour of seven major cities in Quebec; and finally, we will be getting convenience store owners on board to carry out a campaign all across the country aimed at federal and provincial elected officials, and even senators.
In closing, I would like to emphasize, once again, the role of government and its responsibilities. There is not only one solution; there are many. There is an obvious need to review tobacco taxes as a whole, including the very interesting areas mentioned earlier. I am going to say something now which may hurt: it may be necessary to lower taxes temporarily in order to bring back the market or, at least, return us to a situation where we can prevent the exponential growth we are seeing today. Something must be done, and that is one of the temporary measures that could be taken.
As well, there is a need to start a constructive dialogue with the Aboriginal nations, to tighten up enforcement measures and increase police resources at the federal and provincial levels, particularly on the U.S. side. That is the most significant source of the problem we are currently experiencing. We must make the public aware of the dangers of contraband tobacco, which is something we will be starting to do in a comprehensive manner all across the country.
In closing, leadership and political will on the part of the government are the key to success when it comes to eliminating contraband. We believe that retailers, social groups and governments can work together to rid us, a second time—and for the last time, we hope—of the national scourge which contraband tobacco has become.
Thank you.
