Philippines Cigarettes Lost a Future

Source from:  Malaya Business Insight  07/19/2013

The cigarette market is slowly but steadily being eaten away by smuggled cigarettes and  the fake  that can be produced in the backyard…'

There is something weird happening in the cigarette market.  Philippine-made cigarettes are slowly losing their share of demand.  Presumably, Lucky Strike of British American Tobacco is taking over for two reasons.

First and foremost is lower price.  Hard pack Lucky Strike is retailed at about P45 per pack.  The hard pack Marlboro brand is retailed at between P60 and P70. 

The second reason is Lucky Strike tastes better than local brands.  For me, at least.  Maybe it's because I have always liked  the smuggled "blue seal" of any brand.

I and  many smokers have the best of both worlds.  We smoke our favorite Lucky Strike brand and we pay less.

The wonder of wonders is why BAT is holding supply of Lucky Strike in the face of rising demand.  In fact, it has not expanded its outlets beyond the 7-Eleven chain.  Since this is so, the market for locally made cigarettes is not eaten away by Lucky Strike.  Demand is lost to the illicit kind.

Now the question:  Why is BAT making its Lucky Strike brand scarce in the face of rising demand?  I cannot find an answer except guess that the foreign company may be trying to limit losses selling Lucky Strike at a price at least 35 or so percent less than Philippine cigarettes in the high category.

I say this because I have personally verified from friends in Kuala Lumpur that the same brand is sold for about P140 per pack.  In other words one pack in Malaysia is good for three packs of the same brand in the Philippines.  

James Lafferty, general manager of BAT in the Philippines, will never be able to make good his promise  his company will double sales this year as a result of what he calls a level playing field where the excise tax on Philippine-made cigarettes was raised from less than P5 to P25 per pack.  On the other hand, the rate on Lucky Strike and other brands imported by BAT was reduced from P28.30 to P25, placing it in the same "high" category as Philippine cigarettes. 

We dare guess that BAT will recover whatever losses it may incur.   The recovery will happen when the excise tax is made unitary at P30 per pack in the last year of the law.

BAT may continue selling at P45 and make a gross margin of P15 per pack.  That is fair and square.  The foreign cigarette importer starts seeing the best when the excise rate is made unitary for all brands.

It will dominate the market because the low-end brands like Mighty and others   produced  by Anglo American which are now retailed at less than P15 and taxed at P12 per pack, not including the value added tax, will be wiped out.  It cannot survive a P30-per pack tax.

The merged Philip Morris Fortune Tobacco will similarly suffer but it can afford to take big losses in the last year of the law. We do not know whether or not the present rates will be retained under a new law to be passed in 2017.

This is what I have been trying to get lawmakers and regulators to understand.  Why is there a law that kills small manufacturers who produce cigarettes for the poor smoker and at the same time favors a foreign competitor?

It must be said however, that the smoking habit among the poor smokers will not  be minimized as a function of prohibitive prices that will automatically result from the unitary rate of P30 per pack for all brands.

The P30 tax alone is already beyond the reach of the poor smokers.  

Neither would it  mean that British American Tobacco will fill the gap in the low end cigarettes.  The price of P45 per pack after paying a tax of P30 is not  a fortune to the  smokers of means.  It is a fortune to the poor man.  Since the law makes smuggling attractive, the low-end smoker will continue with the habit and maybe smoke more, encouraged by low prices of smuggled brands.

This, and nothing else, is the reason I  have maintained that the excessive excise rates on cigarettes will neither produce the expected revenues nor discourage smoking.

The cigarette market is slowly but steadily being eaten away by smuggled cigarettes and    the fake  that can be produced in the backyard that does not pay a tax either.

In other words, the volume of cigarettes, including the brands imported by British American Tobacco, will definitely shrink.  What will be lost in volume can never be covered by higher tax rates.

In fact, it is the high rates that will encourage illicit trade and production of imitation or fake cigarettes using brands of the legitimate producers.  The arithmetic sounds stupid.

The BIR has not announced the amounts it collected in cigarette tax since the new law took effect January 1 this year.  What it told the public is the total tax collected from sin products – tobacco and alcohol.

Since the cigarette tax is subject to harsh criticism but the rate on alcohol specially fermented liquor was effectively reduced, the BIR might find it necessary to disclose the revenue collected from each category, not from both.

The estimated P30 billion from tobacco does not look attainable.  If there is a trend that it is, the BIR should tell us so we can say higher prices and smuggling do not adversely affect the collection target.

Cigarette smoking has been documented as life threatening.  The habit is evil.  So is excessive drinking of alcohol.  In the present situation, the bigger evil is the excessive rate on cigarettes.  Bigger evil because, as tirelessly explained,  the high rates will not minimize the smoking habit.  The habit will be fed with illicit tobacco.

What gain does the government make from any or all of these except give a foreign competitor of cigarettes a big chance to dominate the market of  "high" category.  Yet, as said above, BAT is withholding supply. Enditem