Indonesia: Mixed Outlook for Cigarette Industry

Source from:  The Jakarta Post  01/28/2014

With this year's legislative and presidential elections and live broadcasts of the FIFA World Cup, groups of cigarette-smoking men discussing the polls at political party headquarters or cheering on their favorite soccer nations in cafes are likely to be common sights.

Big soccer matches and elections have been able to boost cigarette sales in a country that still relates smoking, sport and politics to masculinity.

While analysts and cigarette manufacturing associations agree that 2014 can be a big year for cigarette sales, they are also cynical that the tobacco industry can sustain long-term growth due to the government's encumbering regulations and difficulties in opening up new markets.

Hasan Aoni Aziz, secretary-general of the Indonesian Cigarette Manufacturers Association (Gappri), said his association predicted the industry might grow by 5 percent this year — a significant increase compared to last year's growth of 2 percent, with a total annual production of 346 billion cigarettes.

"We've included the elections and the World Cup factor in this year's estimated growth," Hasan said.

However, he added that while cigarette manufacturers might enjoy instant skyrocketing sales in 2014, a series of regulations effective from this year may put the brakes on the industry's growth and could start to heavily hit the sector in following years.

The government decided not to raise cigarette excise tax in 2014 and in exchange, introduced a new regulation imposing a 10 percent tax from excise known as "regional cigarette tax".

"Starting next year [2015], when the government will increase excise tax again, the cigarette industry's tax costs will jump by about 18-20 percent. Taxes will stand above 50 percent of cigarette prices and 300 percent above inflation," said Hasan.

He pointed out that in the last five years, the cigarette industry had seen its excise tax rise by 16 percent on average. Only 800 cigarette factories with total of 5,000 workers still operated last year, compared to 3,225 factories with 41,875 workers operating in 2009.

The obligation for companies to put graphic health warnings (GHWs) on their product packaging, to be effective in June, will also create difficulties for companies to raise awareness of their cigarette brand and to introduce new products, as GHWs will cover 40 percent of cigarette wrapping.

Last but not least, he said, was the government plan to give consent to the Framework Convention on Tobacco Control (FCTC) — which was designed to globally curb the tobacco trade and the negative impact of smoking — as it would further pressure the growth of the industry.

"In the future, the growth of the cigarette industry can only rely on our country's demographic bonus — increasing the adult population with more potential novice smokers — and stronger purchasing power," he said.

According to PT Investa Saran Mandiri analyst Kiswoyo Adi Joe, the new smokers that cigarette companies are seeking will not be easy to find in the coming decades as the industry relies heavily on existing, addicted consumers.

While he agreed that the elections and World Cup may help boost cigarette sales this year, he said it would be an arduous task for the tobacco industry to achieve more than 5 percent annual growth.

Instead, he predicted the industry would stagnate in one or two decades with heavy campaigns against smoking, tax regulation and bylaws that forbade smoking in public — all of which would lead the next generation shy away from smoking.

"Cigarettes are different from other consumer products. No parents teach their children which cigarette brand to smoke, like how they tell their kids what brand of shampoo is good for their hair," he said.

"The next generation may even see their parents helpless in hospital beds due to too much smoking, so the cigarette industry has nowhere to run. It can't expand its business overseas, where anti-smoking regulations are applied more strictly than in Indonesia. It can't lead businesses there to expand to a country like ours."

In 2012, the World Tobacco website claimed 30 percent of the country's 248 million population smoked, making it the fifth-largest cigarette market in the world.

Despite generating higher income up to the third quarter of last year, however, most of the cigarette manufacturers saw declining profit margins due to higher operational costs and inflation.

Excise tax alone made up 70 percent of Gudang Garam's cost of goods sold this year, up from 68 percent in 2012. The cigarette producer's cost of sales went up by 11 percent year-on-year to Rp 32 trillion by the third quarter of the year. Enditem