RPT-INTERVIEW-Japan Tobacco: Difficult to Raise Cigarette Prices

Source from:  07 Jul 2008 Reuters By Elaine Lies and Ritsuko Shimizu 07/08/2008

Most Japanese smokers would quit if the price of cigarettes were to triple, as could happen under a proposed tax scheme, the chief executive of Japan Tobacco <2914.T> told Reuters in an interview on Monday. Japan Tobacco, the world's third-largest cigarette maker and half-owned by the government, is facing the threat of potential tax hikes, which could more than triple cigarette prices to 1,000 yen ($9.34) a pack. Chief Executive Hiroshi Kimura also said other price hikes would be difficult given the current business climate. The company has already seen costs rise even as it grapples with a declining domestic market, where the population is shrinking and consumers are becoming more health-conscious, resulting in a market that has contracted for nine straight years. "Given the fact that demand is on a decreasing trend, the impact of this would be incalculable," Kimura said. "If prices reached 1,000 yen, 80 to 90 percent of smokers would quit and the rest would probably cut back." Japan Tobacco makes Mild Seven cigarettes and owns the Camel, Winston and Salem brands outside the United States. A pack of Mild Seven currently costs 300 yen ($2.80), while other brands such as Marlboro set consumers back around 320 yen -- a far cry from the 5.66 pounds ($11.19) a pack costs in Britain. Rising costs in everything from tobacco to transport and the material used for packages have put the company under additional pressure, but Kimura said that hiking prices -- which the company had previously said was one option -- would be tough. While declining to comment directly on whether a decision on a price hike would be made in the current business year that ends March 2009, he said: "It would be extremely difficult." "CAN'T STOP THINGS FALLING" The company sees domestic demand falling by 5.2 percent compared to the previous year, of which 1 percent will be due to the influence of newly introduced age-identifying smart cards now required to buy cigarettes from vending machines. Kimura said he expects this negative influence to fade as more smokers acquire the cards, which were introduced on July 1 to prevent underage smokers from buying cigarettes. "Overall, we can't stop things falling. The question is just how much it falls," he said. Japan Tobacco last year acquired Britain's Gallaher Group for about $15 billion to vastly increase its international sales. The company's overseas tobacco business more than doubled its operating profit to 205.3 billion yen in the past year, while profit from its domestic operations slipped 9 percent to 222 billion yen as the market shrank for a ninth straight year. Kimura said his company hoped to expand into Asia to take advantage of its huge population, with expansion into India, Indonesia and China being considered, but did not give details. For the fourth quarter ended March 31, Japan Tobacco's operating profit was 63.8 billion yen, up from 58.5 billion yen a year earlier. For the full year, profit jumped 30 percent to 430.5 billion yen. But Japan Tobacco forecast a 28 percent fall in operating profit this year due to an accounting change, its first drop in eight years. The company said profits would fall this business year as it begins to amortise goodwill -- the excess paid for a company above the value of its assets, which includes intangible assets such as brand names -- related to the Gallaher acquisition. Japan Tobacco shares shed 1.8 percent on Monday, sliding to 434,000 yen. The stock has fallen 35 percent this year, partly due to fallout from a food scare earlier this year involving pesticide-contaminated dumplings the group, which also operates a food business, imported from China. Enditem