Local companies keep flourishing, come what may

Sep 07 - 13, 1996

Increased taxes only mean increased profits for local cigarette industry

The local tobacco industry is worried about its very survival, now that legally imported foreign cigarettes have entered the market. The locals claim that the high rates of taxes imposed by the government will make it difficult for them to compete with the foreign varieties.

It is said that once the mrket is open for foreign brands, the whole market will soon be flooded with foreign varieties making it difficult for the local brands to survive due to what they call 'differences between the tax structure' of the two.

It was reported recently that cigarettes and tobacco generated the highest amount of excise duty in the country during the last financial year. The central excise duty collected during 1995-96 on these two products amounted to 11.5 billion rupees as compared to 10 billion during the 1994-95 financial year.

According to sources in the market this steady increase in various taxes has been there since 1993 when the government increased the excise duty on cigarettes which promptly caused the increase in the end-user prices.

Furthermore it is argued that the country's balance of trade would be further aggravated with legitimate cigarette imports which will soon shoot up sharply causing a drain on the country's foreign reserves.

Presently, tobacco leaf is the largest agricultural produce from the Northern area bringing in more than Rs 700 million for the growers in the region and according to sources more than 200,000 families are directly or indirectly dependent on the cultivation of this crop. If the foreign brands are allowed to flood the market, they said, some of the local manufacturers with foreign principals too, such as Philip Morris and BAT will soon close down their local factories and convert from major local manufacturers to importers.

On the other hand, analysts are of the opinion that imported foreign cigarettes will have little or no impact on the local industry because both are separate segments and have no influence on one another.

Local problem

The local industry, analysts said, is faced with local problems and has nothing to do with whether the market is open to foreign brands or not. Taxes on this industry have been increasing since 1993 but that did not make the major players in the local market such as Premier Tobacco Company, Lakson Tobacco Company and Pakistan Tobacco Company look back in their production.

According to figures available, Lakson Tobacco Company in 1990 announced an annual profit after tax which ammounted to 15 million rupees which went down to 14 million in 1991 and then increased in 1992 to Rs 25 million, a total amount of 48 million rupees was declared in 1993 as profit after tax which increased to 65 million rupees in 1994. Likewise, the half-yearly report of the company issued in December 1995 indicated that the company had an annual sales turnover of Rs 52.3 million higher than the previous year.

Pakistan Tobacco Company, which is regarded as the market leader announced a total turnover of 8060 million in 1991 which went up to 8663 million in 1992, in 1993 the figure went down slightly to 8642 million rupees which picked up again the following year to 8788 million rupees in 1994 and 10151 million rupees in 1995.

Sources in the market indicated that though John Player Gold Leaf which was the company's major brand in the country, was up against its smuggled foreign variety yet its sales increased by about 26.1% at the end of the year and so did those of the other brands of the company such as the popular 'Wills Kings' and Embassy.

Figures from the two major players in the market indicate that the industry is doing well irrespective of certain local and international problems such as the increase in the cost of wrapping material in the international market.

During the last crop season, there were reports of a surplus crop and the tobacco board had to intervene to save the farmers. All the manufacturers were required to share a prorata absorption of the surplus which in turn raised their inventory levels but this problem did not create any impact on the players.

Marketing Problems

Under-pricing and excessive sales promotion programmes are said to be some of the major problems of the industry. While the domestic industry indulges in what is known as under-pricing by selling their brands cheaper than those of their rivals in the same category, the manufacturers are said to be involved in excessive advertisements and other promotion programmes. The industry is known to be the largest spender on publicity worldwide.

Local Vs Foreign

The foreign cigarettes have been here since the days of the drug-lords when cigarettes were brought in from Dubai. The trade reached its zenith during the Afghan Transit Trade and the introduction of SRO 663. But things did not get any better by amending the SRO and suspending the ATT because those using the ATT facilities soon found the same facility by Iran and therefore even now all the consumer items that are offloaded in Bandar Abbas in Iran soon find their way to Karachi through Quetta.

There are no authentic figures available as to the share of the foreign brands out of the 50 billion sticks being burnt in Pakistan annually, but analysts put the estimate at less than ten per cent of the total market.

According to Omar Jilani, the country manager of R.J. Reynolds, an international cigarette manufacturer that just started marketing five of its international brands in Pakistan, both the foreign and the local brands are two separate segments of market and therefore the legally imported brands are here to compete against the smuggled foreign brands.

Pakistan Tobacco Company too, has just started importing another brand, Benson & Hedges. Analysts in the market are of the view that these two importers are here to share out of the ten per cent which the parrallel market holds at present.

It is reported that soon the 555, Malboro and Dunhill brands will soon come in through the main door to pitch themselves against the same brands that come in from the backdoor.

There are enough opportunities for both the sectors in the industry if the local segment could bring themselves at par with international brands and develop a standard market while the locals should rather team up with the legally imported ones to face the parallel market which is not only a problem for both but also for the government as well as the society at large.