Background: Metcash is the wholesale giant behind independent retailers like IGA, Foodland, Mitre 10 and Total Tools, supplying more than 10,000 stores across Australia. And despite going toe to toe with Woolies and Coles.

What happened: Metcash's core food business held strong with first-half food sales (excluding tobacco) rising 7.2% to $4.5 billion. But tobacco lit a $345 million hole in Metcash’s revenue in just six months. As a result, Mecash's overall profit was down 5.9%.

What else: The problem is that shoppers haven’t quit smoking, they’ve just switched from the legal stuff to the under-the-counter stuff, leaving Metcash and legitimate retailers missing out while the black market pockets the difference. Investors didn’t love that… shares dropped more than 9% on the news.

What's the key learning?

💡Illicit market substitution happens when consumers shift from regulated and taxed goods to cheaper underground alternatives. This price gap occurs especially in categories like tobacco where government taxes push up the price of the legal product.

💡A legal pack of cigarettes can now cost up to $50 while illegal smokes can be under $15. As a result, demand hasn’t vanished, it's just moved into the hands of criminal suppliers instead of legitimate businesses.

💡The impact goes far beyond Metcash. The government is estimated to be losing $3.3 billion a year in tax revenue. And investors have clearly realised tobacco can no longer be counted on as a stable profit driver.