IGA supplier Metcash said on Monday tobacco sales for the six months to October 31 plunged 35.1 per cent to $637.8 million, compared to the same period a year ago.
Already weak sales fell further from July 1, when a new law came into effect requiring warning labels on individual cigarettes and banning flavourings such as menthol or mint.
"Since the beginning of July, we've seen a significant step-down in tobacco, even from a declining market for that, as more and more sales pushed into the illegal market," Metcash chief executive Doug Jones told analysts.
The drop in sales was slightly more significant than Metcash expected, and impacted more goods than just tobacco.
"On top of that, you lose the associated product sales, the products that would have been in the same transaction," Mr Jones said.
Other retailers - including Woolworths, Coles and petrol chain Viva Energy - have also reported a big drop in cigarette sales in recent months, with Woolworths in October citing a 51 per cent drop in quarterly tobacco revenue.
Mr Jones noted a recent ramp-up at the state level in both legislation and enforcement aimed at curbing the activities of emboldened illegal operators.
"It's certainly too early to claim any sort of victory, but it's pleasing to see, at last, some concerted efforts by state authorities," he said.
Still, tobacco sales were down 40.7 per cent in the first four weeks of the second half.
The group's overall sales excluding tobacco were up 2.9 per cent - or down 1.1 per cent when including tobacco sales.
Metcash, which also distributes to Mitre 10, Total Tools, the Bottle-O, Cellarbrations and other independent brands, is trying to help its independent retail network transition away from tobacco sales.
Overall, Metcash announced a small rise of 0.3 per cent in first half net profit to $142.2 million from a year ago, off the back of a positive result in its food segment.
Its underlying earnings before interest, tax, depreciation and amortisation rose by two per cent to $367.2 million, while sales revenue grew 0.1 per cent to $8.48 billion.
Food sales excluding tobacco were up 7.2 per cent to $4.5 billion, which Metcash said was underpinned by its independent retailers' differentiated and localised offerings.
Including tobacco, total food sales were 0.8 per cent lower at $5.2 billion.
Metcash's liquor business grew sales 1.4 per cent to $2.6 billion, reflecting market share gains in Australian packaged liquor and more wholesale sales to on-premise customers.
However, it said the overall liquor market remained challenging.
Sales in Metcash's hardware and tools division rose 2.5 per cent to $1.9 billion, amid strong demand for building supplies and timber in Queensland, Western Australia and South Australia.
Metcash will pay its shareholders an interim dividend of 8.5 cents per share, fully franked - the same payout as a year ago.
Metcash shares were in a trading halt for most of Monday after closing at $3.70 on Friday as the stock exchange dealt with an issue affecting the release of market-sensitive news.
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