Cigarette Price War

Source from:  The Star (my) 11/13/2008

PETALING JAYA: A price war among major tobacco companies is heating up with players slashing their prices in selected cigarette segments since early this month. This is despite a stern warning by the Health Ministry last Monday to big players British American Tobacco (M) Bhd (BAT), JT International Bhd (JTI) and Philip Morris International (PMI) not to reduce their prices below the new minimum price of RM6 for a 20-stick (20s) pack, effective by year end. Plagued by declining sales, high duty import and smuggled cigarettes, the companies are hard pressed to sustain their respective market share which has contracted sharply. Under Budget 2009's higher excise duties, players had raised prices between 60 sen and 80 sen for all segments. An industry source said: "There is an on-going price war in the value-for-money and extremely low-priced (ELPs) segments, triggered by an initiative to gain market share but at the expense of significant (profit) margin erosion." The three major segments are premium, value-for-money and ELPs. BAT, JTI and PMI dominate the local market with a combined 91% share. Premium cigarettes are priced from RM9 for 20s while in the value-for-money segment, the 20s are priced at RM7.50 to RM8. There are also ELPs and "illegal" cigarettes sold at RM2.50 to RM3.50. Industry players claimed BAT initiated the price-cutting on Nov 3 when it lowered – by over 20% – the price of Pall Mall 25s from RM8.20 to RM6.50 and Pall Mall 20s from RM7.50 to RM5.80. CIMB Research in a report said BAT's move to slash the prices of Pall Mall came as a surprise, particularly after the minimum pricing policy. "The price cut suggests that the company is not content to watch from the sidelines and is going all out to win more customers. "JTI seems unperturbed by the price move, as it has left the price of its Winston (same value competitor) brand unchanged," it said, adding however that it was early days still. It believed that the price cut would last until year-end at most, in line with the minimum pricing requirement, effective by year end. A source close to BAT told StarBiz: "The company had to react as a direct response to recent competitor movements to protect its market position and ensure the business can be sustained." AKJ Manufacturers Sdn Bhd, one of the four local cigarette players, expects its sales in the next one month to be hit by the big boys' move to cut prices. "We will be badly affected although the ongoing price war among the big boys is likely to be short term; until year-end," a company spokesman said. AKJ produces mainly ultra value-for-money cigarette brands like Saat and John as well as premium brand SPA. Analysts expect AKJ, Hyeap Seng Sdn Bhd, Modern Tobacco Co Sdn Bhd and Tai Chong Tobacco Co Sdn Bhd to likely see sales dropping by 10% to 15% till year-end. An analyst with a bank-backed research unit said: "If the Health Ministry sticks to its RM6 for 20s pack, ELP players will have no choice but to adopt the new price." Given such attractive pricing, he believed local consumers "will switch to more established brands rather than smoke the lesser-known ELP brands." Enditem