Malaysia: Philip Morris Shifts Focus To Cheaper Cigarettes

Source from:  The Edge Markets MY 05/09/2017

Philip Morris (M) Sdn Bhd (PMM), which like other local tobacco majors has seen yearly declines in earnings and revenue since 2015, is turning towards offering more quality yet affordable cigarettes and reduced-risk products (RRPs) in order to defend its market position against the threat of rising illicit trade amid a high tax environment.

Its managing director Kang TaeKoo cited the launch of a new cheaper brand of cigarettes called Chesterfield early last year as an example. The product retails at RM12 per 20-stick pack, placing it in the lower segment of cigarettes where the price of premium cigarettes can cost as much as RM17 per pack.

"It was a strategic decision that we made in view of the difficult times we are in. We wanted to offer products that are more affordable. Sales of the product have picked up quite nicely [since it was launched] and it has helped us gain some good figures," Kang told The Edge Financial Daily in an interview.

He said Chesterfield has become the company's second bestselling brand after Marlboro. Its other brands include L&M and Sampoerna.

As part of Philip Morris International Inc's (PMI) goal to lead the world into a "smoke-free" future, Kang said PMM hopes to bring to the local market a range of RRPs.

They include its smokeless electronically heated tobacco product IQOS, which has gained a passionate following in Japan. Unlike tobacco in cigarettes which burns above 600°C, IQOS heats tobacco to temperatures below 350°C without combustion, fire, ash or smoke.

Kang declined to reveal when the company will introduce IQOS in the country, except to say that awareness of RRPs among the Malaysian population of smokers should first be done.

"Looking at the whole debate on e-cigarettes, only then there will be greater and more positive reception towards RRPs," he added.

Meanwhile, Kang urged the Malaysian government to provide industry players with a "reasonable" framework to work with that would drive healthier competition within the sector.

A major concern for PMM is the implementation of extreme measures concerning excise duties and raising the minimum legal age for smoking that would lead to further increase in illicit tobacco consumption, instead of helping the legal tobacco industry stabilise.

In November 2015, Malaysia raised cigarette taxes by more than 40%, compounding the decline in tobacco volume already created by a 12% increase in cigarette excise barely a year before and the implementation of the goods and services tax at 6% on April 1, 2015.

"Any tax increase that is beyond what we have today should be executed very prudently. We had a tax moratorium in 2016 and we hope it stays that way this year. In a way, that would give us (industry players) some time to restore our sales volume," said Kang.

"As agreeable as we are towards regulations concerning restricting tobacco sales to minors, we take an opposition stance on others, which can be extreme and in turn become an advantage for illegal tobacco trade," he added.

"We need to be careful as already 50% of cigarettes sold in the country are not subject to taxes, and if you give these 50% a free ride, it defeats the purpose of addressing the main issue.

"We can truly relate to the sentiments expressed by our competitors [British American Tobacco (M) Bhd (BAT) and JT International Bhd (JTI)]. It's bad enough that cigarette prices in Malaysia are among the highest in the Asean region and when you put that against illicit cigarette prices, which are as low as RM3.50, it's really tough to compete with that," he said.

Kang assumed his current post on Oct 1 last year, after serving as PMI area vice-president for Eastern Russia. He also held the post of general manager for Indochina in 2007, and thereafter director of sales and distribution for South Korea in 2011.

He comes at a time when the company is facing revenue and net profit declines. According to Companies Commission of Malaysia data, PMM's net profit declined by 75.5% to RM15.77 million in the financial year ended Dec 31, 2015 (FY15), from RM64.29 million in FY14, while revenue fell 14.6% year-on-year to RM133.24 million from RM156.16 million.

However, Kang noted that PMM's market share has grown to 19.5% from 17% in 2016 and 15% in 2015 due to down-trading by smokers to cheaper or sometimes illegal alternatives.

"We're growing market share in a shrinking industry. But in terms of profit and sales volume, and looking at how we fared in the previous years, we are not doing very well. Still, our share is gaining ground, so we are quite happy," he said.

"Looking at the gap between the prices of illicit (RM3.50 to RM5 per 20-stick pack) and legal cigarettes, we just do all we can as a tobacco company to come up with quality products," Kang added.

"But there is light at the end of the tunnel. Seeing the outcome of engagements we have had with the government, we are relieved to see that the authorities are seeing the gravity of the situation [of illicit cigarette trade]."

Recently, Second Finance Minister Datuk Seri Johari Abdul Ghani has been reported as saying that the government is not looking to increase cigarette taxes at this point in time and that the government will focus on curbing the illegal industry. Enditem