Philippines: Cigarette Price War Seen

Source from:  Malaya Business Insight  12/20/2013

The country's new tax system roiled the pricing of locally made cigarettes. This has lead to the resurgence of a once largely unknown brand, loss of market share for the leader and now a price war among competitors.

To compete, cigarette manufacturers are introducing lower priced brands and downgrading classification of their products from high to low-price categories.

British American Tobacco, maker of Lucky Strike, said that it will also ask for a downgrade in the classification of its brand to low price if and when Philip Morris Fortune Tobacco Corp. (PMFTC) will be allowed to reclassify its Marlboro brand.

Earlier, BAT was able to downgrade Lucky Strike's classification from premium to high enabling it to pay a lower tax.

This time, BAT to pre-empt a negative response, since a two-time downgrade may be hard to push,  it has introduced another brand at remarkably cheaper price.

A visit to 7-Eleven stores, showed that Pall Mall, a BAT brand sells for P25 per pack, even cheaper than Mighty which is sold at P26 per pack. It is also P18 cheaper than Lucky Strike.

The costliest cigarette is Marlboro which retails at P69 per pack, followed by Philip Morris, P57; Winston, P50; Lucky Strike, P43; Fortune, P41; Mighty, P26 and Pall Mall, P25.

James Lafferty, BAT Philippines general manager, said: ""we think that this move (Marlboro reclassification from high tier to low tier) will have a negative impact on government revenues. But if reclassification is granted, we would have no choice but to follow suit on Lucky Strike," Lafferty said.

"We would be at an extreme disadvantage if we have to pay P27 excise tax next year while Marlboro, the most popular premium brand in the market, pays only P17 per pack," he added.

In a letter addressed to BIR Assistant Commissioner Alfredo Misajon, head of the Large Taxpayers Service, PMFTC president Paul Riley said that the company's production volume fell to 68 billion sticks this year from 92 billion in 2012.

"By next year our volume will be 48 billion sticks. This is why we need to do something to reverse the current trend," Riley said.

"What is more worrying, we expect the down trading to continue, with the Marlboro volume further decreasing to 7.9 billion sticks in 2014," he added.

PMFTC said that the drop in its production and sales was a result of the switching of brands by smokers to lower priced cigarettes.

Riley said that the continued viability of one of the company's factories and the jobs of more than 1,000 employees are at stake.

"To prevent this dire development, the company is willing to significantly cut its margins by introducing new Marlboro products with Net Retail Selling Prices of below P11.50 per pack," Riley said.

Under the new excise tax law, the rate will progressively increase to P30 per pack for all brands of cigarettes, including imports.

"The company is hoping to get an additional volume of 8.9 billion sticks in 2014 which, in turn, can help the BIR collect more revenues from cigarettes," he added.

Riley said that the PMFTC would still maintain its original Marlboro products in the high category.

Riley pointed out the company will not produce their flagship brand, Philip Morris, in the low price category.

"It is critical for our company that we secure the approval of the BIR for our request to register Marlboro Original, Marlboro Gold Lights, Marlboro Menthol, and Marlboro Black Menthol in the low price category," Riley said.

PMFTC manufactures and sells other low price brands like Champion, Fortune, and Jackpot, brands that were previously owned by Fortune Tobacco Corp. before it merged with Philip Morris Philippines to form PMFTC. Enditem