Just came across this, it's a few months old but it hints at some good developments (standardizing things would be helpful for us as consumers.)
All eyes are on hookah
02 Sep 2008. It may be a fad for young adults in Europe and North America, but there is no denying that smoking shisha or water pipe has grown in popularity, elevating its status from niche product for the Middle East and India to a global phenomenon.
It seems that as human beings, we know we have “made it” when people ask for our autograph and perfect strangers call out our names when we are out in public; alas, if you are a tobacco product, you know that you are successful when everyone attempts to regulate you and change the tax structure. Yes, it seems when government officials learn about the popularity of a product, suddenly it becomes important to check the tax policy and these days its seems that several governments are contemplating the way they tax other tobacco products, or OTP as they are commonly called, and where shisha molasses are often categorised along with all of the various smokeless products available on the market.
In the US, several states are reconsidering their ad valorem tax on OTP and moving toward a weight-based tax instead. Since 2005 eight states have gone to a weight-based tax, bringing the overall total to 13, with Utah having just switched in July.
“There’s no conspiracy going on here; it has to do more with looking at companies who offer various segments of a product and wondering why a premium product is taxed more heavily than a cheaper brand,” notes Steve Stanek, managing editor of Budget and Tax News.
In the ad valorem world – where excise taxes are based on product price –, he explains that as cheaper brands gain greater market share, they drive down the prices people are willing to pay for the product. Because ad valorem tax is built into the final sales price, the final cost differential becomes even greater in states which have sales tax. It ends up distorting consumer behaviour and if you are a consumer of either OTP or cigarettes, you should want a per-unit price.
“It is simply a matter of fairness; when it comes to wine you pay the same tax no matter whether it is a USD 100 bottle or a USD 5 one, so why should it be any different for tobacco products?” argues Stanek.
“As you can imagine, depending on the cigarette manufacturer and how many premium brands they produce, some companies welcome the change to weight-based and others do not,” he adds. He says that ad valorem tends to distort the market because it increases the cost differentials between premium products and lower-quality brands.
“I think the fact that states are considering these kinds of changes for the OTP segment is a sign that these products have really gained in market share as consumers look for alternatives to cigarettes for whatever reason,” suggests Stanek.
“There used to be a time when smokeless products did not have a lot of brands, so it really was not much of a concern in terms of taxation and revenues and I imagine it was the same for people who offered hookah molasses. Now it is really trendy and you are beginning to see more brands and price bands.”
Meanwhile in the state of Ohio, a debate has been waging to raise its OTP tax, which it has not done since the tax was created in 1993. Health advocates in Ohio want to raise the OTP tax in Ohio, which has one of the lowest OTP tax rates in the country. They argue that the OTP tax of 17 per cent of the wholesale price is less than half of that for cigarettes, which is USD 1.25 per pack.
The health lobby insists that having cheap OTP products leads to more tobacco use and though considered less deadly than cigarettes, they are worried that a market full of cheap OTP markets will be a gateway to a lifelong tobacco addiction.
Across the Atlantic in the UK, consumers believe they are getting an unfair deal as the UK is one of the few, if not the only, countries in Europe which slaps a full tobacco tax, or GBP 60 per kg, on a 250 gram pack of shisha molasses, even though only 0.05 per cent of its contents are actually tobacco. This translates to GBP 15 per pack and thus most molasses bound for the UK are imported to continental Europe before being distributed to the UK. In addition, a new law in the UK will require providing all of the ingredients as well as a lab report on the contents.
Setting shisha standards
According to Ismail Hebesha from Egypt-based Nakhla Tobacco’s export department, the UK is not the only government which does not completely understand the shisha product.
“We want our products to be represented 100-per cent legally in the country – there is no argument about that; but our products are not like other tobacco products with a high tobacco content, it is more like 20 to 30 per cent and the rest are additives, yet they tax us unfairly as if we were a full tobacco product like cigars.”
For that reason, Hebesha says that Nakhla has spent a great deal of time lobbying for the inclusion of shisha or water pipe tobacco to be included in the World Tariff Organisation’s official handbook and he is happy to report that it has recently been accepted. In addition to the taxation struggles, Hebesha says that producers of molasses are popping up like daisies all over the world and their product needs to have international standards recognised.
“Over the last ten years we have worked very hard to get the word out about the pleasures of shisha and now we have the problem that because of the growing popularity, some companies have begun manufacturing products which do not follow the standards that companies like Nakhla, and some of the other traditional brands, have worked so hard to establish, so our agenda now is to work on getting the shisha tobacco product standards in the World Tariff Organisation and to have a specific tariff code ensuring that every company adheres to these legal standards and consumers have access to quality products and not inferior imitations.”
When Nakhla is not busy promoting and protecting the essence of the industry, it focuses on the more mundane aspects of the business, such as searching for new markets, and Hebesha says that they are “very interested in the Far East”. He also says that they are currently working on packaging innovations and making the packing easier for end users to handle. Some innovation is happening in the way water pipes look but otherwise he says that as long as consumers enjoy the experience with the traditional apparatus – and they apparently do and in growing numbers –, there is little reason to tinker with the construction of the pipes.
“Smoking shisha is not just a process, but an entire culture which you share with friends and business associates. We have conducted marketing research with a German company and what we found is that people are excited about the traditional shisha cafés and prefer them over the modern ones,” explains Hebesha.
This point alone must be frustrating to hookah lovers the world over, as from Vancouver, Canada, to Mumbai, where water pipe smoking all began, governments are striking down the argument that it is a cultural aspect and are including it along with the rest of tobacco products as a banned habit in public places. Happily, as recently as 24 July 2008, Mumbai’s High Court reached a decision which would allow the city’s hookah parlours to continue their business for the time being.
And while on the subject of India, Sopariwala is enjoying much success with its herbal molasses under the Soex brand name, which, according to Asif Fazlani, managing director, contains no tobacco but in no way compromises the smoking experience. As with their traditional molasses, Sopariwala offers consumers over 40 flavours. Fazlani says the manufacturing of the herbal product is more technical and refined than the traditional product. The only downside to this popular product is, of course, the tax issue. Over the last year, the Mumbai-based company has experienced the greatest interest in its products from the Far East and Europe.
Further to the south in the United Arab Emirates, Al Ajamy is preparing its entry to the European market, having already made a mark in the US, South Africa, Russia and traditional Middle Eastern markets.
“Smoking shisha is spreading so quickly that we are surprised to find ourselves exporting our product to places we would not have thought about, such as the Ivory Coast, Angola and the Congo,” says Ali Al Ajami Saleh, procurement and export manager at the three-year-old company.
In the first two quarters of 2008, they had a 36 per cent share of the UAE market behind leader Al Fakher, which also happens to be the world’s number two behind world leader, Nakhla. He explains that the company’s current focus is its European launch, which is planned for September 2008 in Germany. Saleh says that Germany will be the first country for two reasons: demand is very high in the country, and thanks to a diligent agent based in Hanover, it was concluded that some of the molasses ingredients would have to be modified in order to meet the regulations for import. They have also received initial orders from a Swiss company, and thus are excited about the potential in Europe. According to Saleh, business is going so well that in the last 18 months the company has grown tenfold with 48 employees operating nine production lines.