Tobacco Giant Fights Philippine Market Share Decline

Source from:  Bloomberg  02/12/2014

The Philippine cigarette venture of billionaire Lucio Tan with Philip Morris International Inc. (PM) lost 13 percent of the market last year after the country raised taxes and rivals undercut its prices.

The market share of PMFTC Inc., Tan's venture with Philip Morris, fell to 72 percent at the end of December from about 85 percent in 2012, before the Philippines raised taxes on cigarettes in January last year, according to President Paul Riley. It lost out to rivals such as Mighty Corp., a 65-year-old Philippine company, as price competition intensified.

"If we need to compete in the marketplace to defend our market share, then we will," Riley said yesterday in an interview in Manila. "We're not just going to sit by and let our market share disappear."

Earnings are threatened at LT Group Inc. (LTG), billionaire Tan's holding company, as it gets 40 percent of its profit from the tobacco venture. As PMFTC's market share fell, LT Group's shares fell 32 percent in the past nine months from a record 27 pesos on May 6. The Philippines raised levies on liquor and cigarettes, so-called sin taxes, to boost collection and fund health-related expenses while increasing spending on infrastructure to spur economic growth.

"Higher taxes are just one side of the story behind the market share loss," said Jonathan Ravelas, chief market strategist at BDO Unibank Inc. "Competition definitely had a hand. Some consumers shifted to lower priced brands because of budget constraints, while there are those who shifted to alternatives like electronic cigarettes for health reasons."

Price Difference

Mighty's estimated retail price last year was 1 peso (2.2 U.S. cents) per stick, compared with PMFTC's Marlboro's 3 pesos, according to Dave Gomez, PMFTC's communications manager. Fortune, PMFTC's low-end brand, sold for 1.50 pesos, he said.

Oscar Barrientos, executive vice president at Mighty and the company's spokesman, couldn't immediately be reached at his office after business hours yesterday.

PMFTC's sales volume fell by 25 percent in 2013 and its market share shrank as some competitors sold at "unrealistic" prices, Riley said.

President Benigno Aquino raised sin taxes last year to boost annual tax collections by at least 34 billion pesos. In October, the country received an investment-grade credit rating from Moody's Investors Service as Aquino leads a growth resurgence.

The government raised taxes on cigarettes to 12 pesos a pack for low-end brands and 25 pesos for higher-priced ones starting last year, compared with levies ranging from 1 peso to 12 pesos previously. The tax for low-end brands will increase 150 percent by 2017, while the levy for high-end brands will rise 20 percent in the same period. A uniform tax of 30 pesos on each pack will apply for both categories by 2017.

Tax Collection

PMFTC is seeking stricter implementation of collection of taxes, Riley said.

"We have no intention to change the law," Michael Tan, president of LT Group and the tycoon's son, said in the same interview with Riley. "We just want it enforced."

The Philippines tax bureau collected more than the 33.95 billion pesos target set from higher levies on tobacco and liquor for last year, said Kim Henares, commissioner of Bureau of Internal Revenue.

The bureau will look into any allegations regarding tax collections and is monitoring them, she said.

PMFTC could lose more market share if competitors don't adjust prices to reflect higher taxes, Riley said.

"There'll be more erosion if prices don't move up," Riley said. "A lot will depend on" the right administration of tax collection, he said. Enditem