Images of tobacco stores destroyed by fire have become increasingly common on Australia’s television screens in recent years as a criminal turf war rages.
The gang violence is not just damaging property and threatening the safety of the public, it has cost some of the nation’s biggest retailers billions of dollars in lost sales and the government $6.7 billion in lost excise.
The growing illicit tobacco market is estimated to be worth $2.5 billion to $4.5 billion a year, but if priced as legal cigarettes, it would sell for $7 billion to $9 billion, based on official estimates of the excise evaded.
Australia has the highest legal cigarette prices in the Australia-Pacific region, according to FTI Consulting’s Illicit Tobacco in Australia 2024 report, with illicit loose-leaf (unbranded) tobacco selling for 21.1% of the cost of a legal 25-cigarette packet.
The price of legal tobacco products in Australia increased by more than 11.5% in 2024, driven in part by ongoing increases in excise rates.
“As legal tobacco prices continue to rise in combination with ongoing cost-of-living pressures, more consumers are turning to illicit tobacco as a cheaper alternative,” FTI Consulting said.
Consumers have been buying more and more from stores illegally selling cheaper tobacco rather than the retailers of legal products like supermarkets.
The impact on the bottom lines of the largest supermarket operators, Coles (ASX: COL) and Woolworths (ASX: WOW), is harder to determine because smokers may have bought other items on their trips to the supermarket.
Sales in freefall
Coles said in its first quarter sales update that new tobacco legislation and growth in the illicit market led to a 57% decline in tobacco sales compared to the previous corresponding period (pcp).
The new laws contain stricter packaging and product requirements, new health warnings and bans or stricter controls on advertising, sponsorship and promotion of tobacco/related products.
In its equivalent announcement, Woolworths reported a 51% plunge in tobacco sales in Q1 FY26.
Wholesale distributor Metcash (ASX: MTS) has reported a 41% dive in tobacco sales since the 2021 financial year and urged governments and law enforcement agencies to crack down on organised crime.
“The foothold and the increasing strength of organised crime in this country is something I’m very alarmed about,” Metcash Chief Executive Doug Jones was quoted in an Australian Financial Review article as saying.
“It shouldn’t be viewed as a tobacco problem but as an organised crime and societal problem.”
Viva Energy Australia (ASX: VEA), which, like Ampol (ASX: ALD), sells cigarettes at its service stations, found tobacco sales were down 15% in the three months ended 30 September compared with the previous quarter.
Official response
Australian Border Force (ABF) seized 2.53 billion cigarette sticks and 435.46 tonnes of loose-leaf tobacco in 23,097 illicit tobacco detections in the 2025 financial year, preventing the evasion of $4.36 billion in duty, according to an ABF media release.
Since March 2023, a series of arsons, extortions and shootings involving tobacco stores, mainly in Victoria, have highlighted the serious and enduring threat from serious and organised crime networks involved in the illicit tobacco trade, the Australian Criminal Intelligence Commission (ACIC) said in its 2023/24 Annual Report.
The Australian Government responded in October by setting up the Illicit Tobacco National Disruption Group, led by ABF and including federal, state and territory police forces, the Australian Criminal Intelligence Commission, AUSTRAC and the Australian Tax Office, among other agencies and organisations.
Bottom line
Analysts said tobacco was a lower margin product than other products sold at supermarkets, which means their profit margins rise as tobacco sales fall.
“It’s good for the supermarkets that tobacco sales are becoming less significant, and it does increase their overall margins,” said one analyst.
“But what we don’t know is how many people are going there just to buy tobacco and incidentally buy something else as well. It’s probably a net positive.”
Morningstar Director of Equity Research Johanne Faul agreed that the impact on the retailers' profits and their valuations was not significant.
“It's a public issue. It's probably a funding issue for the government in terms of lost excise dollars but, for the supermarkets, it's not a big issue,” Faul told Azzet.
Tobacco has fallen from almost 10% of supermarket sales prior to the COVID-19 pandemic starting in 2020 to less than 2% now, with sales falling at double-digit rates year after year.
“What that means for the supermarkets in terms of top-line growth, it's a headwind,” Faul said.
Both supermarket giants have quoted sales figures including and excluding tobacco for a number of years because of the large difference in the growth rates.
“The underlying grocery business is much stronger than what the headlines suggest,” he said.
Marginal impact
Coles has indicated its margins would have been 30 basis points lower if tobacco sales had not fallen so much.
Coles reported an EBIT (earnings before interest and tax) margin of 5.3% for the first quarter of the 2026 financial year, or 5.5% on an underlying basis if major project implementation and some other costs were excluded.
“But if you think about the profitability of the sales, it doesn't impact the profit line that much,” Faul said.
“When you’re going from 2% of sales to 1% of sales in tobacco, a 50% decline in tobacco sales is big but on the bottom line you won't notice it.
“The question where do we go from here? Do illicit tobacco sales drop and does that mean it's going to increase in supermarkets?
“Are tobacco sales going to increase again? We don't forecast that so we’re agnostic in terms of what happens with tobacco sales. and, if anything, it doesn't add much to profit.”
Another analyst said tobacco would represent only 1% or 2% of sales now, but the illicit trade had slowed overall sales growth for the supermarkets.
Coles’ supermarket sales grew by 4.8% in the last quarter, and by 7.0% if tobacco was excluded, while Woolworths’ Australian food detail sales grew by 2.1% (3.8%) over the same period.
Coles said the price of its products rose by 1.6% in the September quarter, and 1.2% if tobacco was not included.
“From a price and volume perspective, prices have gone up more than the average but volumes have dropped by a lot more. Long story short, tobacco has definitely been a drag on sales,” the other analyst said.
He said tobacco served a similar role to milk and barbecue chickens as lower-margin products that attracted shoppers to supermarkets.
“The idea is that once you buy the milk or the BBQ bird, you pick up a few other things on the way out,” the analyst said.
“They would be on a higher margin which would increase the size or the margin profile of that basket overall.
“It’s good for the supermarkets that tobacco sales are becoming less significant and it does increase their overall margins.”
