Professional Documents
Culture Documents
Tobaco Industry SWOT
Tobaco Industry SWOT
INDUSTRIES
TERM REPORT
TOBACCO INDUSTRY
TABLE OF CONTENTS
PORTER’S DIOMAND MODEL
SUPPORTIVE INDUSTRIES
DEMAND CONDITIONS:
MARKET TRENDS
The demand for tobacco and its products have seen a steady growth
over the years. The reason for this growth largely has been the increase in
the population accompanied with easy availability of such products and
easing social norms(smoking not considered bad now it is a fashion symbol).
More choice is now available to smokers and the various brands in
themselves come in different varieties like the Soft Packs etc.
The problem is that this growth has been shared unequally between
the duty paid and evaded. Apart from the smuggling of tobacco and its
products, even the large multinationals don’t leave any opportunity to evade
taxes and duties.
A Daily Times survey revealed that wholesale dealers supply fake and
smuggled cigarettes to about 20,000 retailers of Lahore, who sell them to
ignorant consumers who can either not tell the difference or sent their
children or servants to buy cigarettes
According to the available statistics, out of about 71.80 billion
cigarettes sold in Pakistan in 2005, 15.40 billion were fake or smuggled.
Naveed Aftab, head of Pakistan Tobacco Board’s business department, said
smuggled and fake cigarettes were causing a loss of about Rs 6 billion to the
federal government, Rs 4 billion by tax evasion and Rs 2 billion by
smuggled or unauthorised brands 1
FOREIGN DEMAND
Most of the cigarettes produced in Pakistan are consumed locally.
Export markets of Pakistani national and international brands include the
Central Asian countries, Afghanistan and the Gulf countries. Exports of
Pakistani tobacco products have seen a growth over the years. Growth in
Pakistan tobacco exports indicates the growing popularity and acceptance of
Pakistan’s products for their quality, consistency and cost competitiveness.
The considerable high requirements, especially for flue-cured Virginia, are
indicative of increased cigarette sales in the domestic market, depleted
inventories with the manufacturers and a much robust showing on the export
front.
Pakistan’s tobacco and products have come a long way from the un-
impressive image they posessed about a decade and half back of poor quality
and standards. Besides becoming the fifth largest producer of finest flue
cured Virginia in the world with prospects of producing an optimum of upto
80,000 metric tons, investments in improved agronomic practices, use of
fertilizers and pesticides, introduction of international grading system and
state of the art green leaf threshing plants have led to yields of upto 2500 kgs
per hectare, one of the highest in the world. At the same time quality has
risen close to the best world leaf standards and prices have also been
favorable.
2
http://www.telmedpak.com/ngos.asp?a=tobacco3
http://www.sdpi.org/SDPI_in_the_press/media_coverage_2005.htm
planned to be established at the Pakistan Tobacco Board’s Head Office in
Peshawar in close collaboration with the tobacco manufacturing companies.
Pakistan has a locational advantage due to its strategic proximity and
easy access to the region. There is great necessity that these valuable
opportunities may be developed and are put to use for the increase of value
added exports of the country. 3
FACTOR CONDITIONS:
RAW MATERIALS
The local oriental types of tobaccos are cultivated in the plains of
NWFP and, to some extent, in the provinces of Punjab, Sindh and
Baluchistan. Punjab is, however, famous for the production of dark air-cured
and hookah type tobaccos. The crop provides basic raw material to some 55-
plus licensed manufacturers of tobacco products, including 29-plus cottage
level operators.
STRATEGY:
Under-pricing and excessive sales promotion programs are said to be
some of the strategies of the industry. While the domestic industry indulges
in what is known as under-pricing by selling their brands cheaper than those
of their rivals in the same category, the manufacturers are said to be
involved in excessive advertisements and other promotion programs. The
industry is known to be the largest spender on publicity worldwide. 7
STRUCTURE:
The Central Board of Revenue (CBR) has observed that the domestic
cigarettes industry has a monopoly like structure where two giants —
Pakistan Tobacco Company (PTC), a subsidiary of British American
6
CBR spells out procedure for cigarette industry record (News Item 8TH Jan 2007)
7
Deadly Tobacco promotion Intrudes SAARC activities
http://www.thenetwork.org.pk/pressrelease04-01-05.htm
Tobacco (BAT) and Lakson Tobacco Company (LTC) – jointly hold 98
percent market share.
RIVALRY:
Local Rivalry
Since the two major players in the Pakistani market are both foreign
subsidiaries, the cigarettes they produce are comparable in standard and
quality to those produced the world over. Following are profiles of major
two companies:
9
Who benefits from the tobacco business?
http://www.telmedpak.com/ngos.asp?a=tobacco6
manufacturing company in Pakistan. LTC was the first Tobacco Company in
Pakistan to acquire ISO-9000 certification for two of its divisions.
10
http://www.altria.com/media/press_release/03_02_pr_2007_01_19_07_01.asp
http://www.corporateinformation.com/snapshot.asp?cusip=C586P1970&Sentby=Home
http://www.brecorder.com/index.php?id=520899&currPageNo=1&query=&search=&term=&supDate=
PTC produces high quality tobacco products to meet the diverse
preferences of millions of consumers, and works in all areas of the business -
‘from seed to smoke’.
Operations in Pakistan began in 1947, making it one of Pakistan's first
foreign investments. Its two manufacturing sites are located at Jhelum,
Punjab and Akora Khattak, NWFP.
The Group's brands include Benson and Hedges, Gold Flake, John
Player Gold Leaf, Embassy, Capstan and Sundrop.
11
PTC’s Directors’ Report For The Year Ended June 30, 2006
12
http://www.corporateinformation.com/snapshot.asp?SentBy=Home&cusip=C58625910
13
Local Cigarette Manufacturers in Pakistan
FOREIGN RIVALRY
About 100 countries produce tobacco. The major producers are China,
India, Brazil, United States, Turkey, Zimbabwe and Malawi, which together
produce over eighty per cent of the world's tobacco. China alone accounts
for over 35 per cent of world production.
When it comes to tobacco giants who have the world tobacco industry
in their hands there are a few names that everyone knows: In UK; British
American Tobacco UK Ltd, Gallaher Ltd and Imperial Tobacco Ltd are
popular names of large manufacturers. In US; the four large companies that
were quoted were Philip Morris, R.J. Reynolds and Brown and Williamson.
13
http://www.pakistanibusiness.com/pakistani-companies/cigarette-manufacturers-in-pakistan-1743.htm
14
http://ptc.com.pk/OneWeb/sites/PAK_62VKZB.nsf/vwPagesWebLive/2BEF61B7B0F44D1BC1256F070
03D572E?opendocument&SID=&DTC=
Even though Pakistani cigarettes are of the one of the lowest costs in
the world, PTC and LTC comply with all international standards. Since the
two major players in the Pakistani market are both foreign subsidiaries, the
cigarettes they produce are comparable in both standard and quality to those
produced the world over.
15
International Trends
The latest quarterly report (September 2005) of BAT shows that its major
growth areas are in Asia-Pacific, Africa and Latin America, all developing
regions of the world. Pakistan, Bangladesh, Brazil, Chile, South Africa and
Venezuela are the star performers for the last year.
‘In Pakistan, higher margins and excellent volume growth by Gold Flake
and John Player Gold Leaf resulted in higher profit and market share. In
Asia-Pacific, regional profit rose by £41 million to £418 million because of
good performances in Australasia and Pakistan.’
Chemicals Industry
Paper Industry
The cigarette paper and the tipping paper includes paper and adhesive.
Hence paper industry also acts as a supporting industry.
Packaging Industry
15
Ayesha’s report Batch 2008
16
http://www.pested.org/informed/pdfs/Tobacco_chems.pdf
Cigarette packaging requires extensive packaging. Hence it is also one
of the tobacco supporting industries.
The Pakistan Sports Board and all sports associations under its aegis
accept tobacco sponsorships. The monetary value of these sponsorships
runs into millions of rupees.
Tax Revenue:
Tax revenue is raised from the tobacco industry through two means:
The industry suggested to CBR that they should fix the minimum
price for cigarettes in the market during the last budget; the proposal was
accepted and the required changes were made in the law. The main reason
for suggesting this proposal was that currently there are many companies
that are selling cigarettes packs for Rs. 5 and less whereas minimum duties
on a pack of cigarette are around Rs. 5.66. This will not only help control the
17
http://www.telmedpak.com/ngos.asp?a=tobacco7
18
News Item (8th January 2007, Dawn)
19
Tobacco Sector Profile Experts Advisory Cell 2004
tax evaded products in the market but also price these out of the reach of
most youth.20
20
http://ptc.com.pk/OneWeb/sites/PAK_62VKZB.nsf/vwPagesWebLive/B2CA5978B10BE753C1256F070
045334E?opendocument&SID=&DTC=
21
http://www.dailytimes.com.pk/default.asp?page=2006\03\08\story_8-3-2006_pg7_27
Obligations to the Cigarette Industry by
PTB:
The cigarette industry has conveyed to the CBR that if compliance
practices of cigarette manufacturers are not standardized, the industry will
face unnecessary problems at the time of departmental or external audit.
Keeping this in view, the board has specified the following uniform
documentation and other related obligations for the cigarette manufacturers:
Register for receipts, issues and balances of major raw materials: A register
shall be maintained for major raw materials such as cigarette paper and filter
rods for cigarettes, other than un-manufactured tobacco used in the
manufacture of cigarettes.
In a planning statement for the crop of 2005, the Board said according
to legal requirements, the tobacco manufacturing and/or exporting
companies are required to indicate their tobacco requirements by October 21
of each year in respect of the ensuing crop to the PTB.
22
http://www.dailytimes.com.pk/default.asp?page=story_6-9-2005_pg5_14
23
http://jang.com.pk/thenews/jul2005-daily/08-07-2005/business/b12.htm
24
http://www.dawn.com/2006/02/27/ebr15.htm
companies of their choice so that no problem is encountered in its proper
marketing at fair prices.
25
http://jang.com.pk/thenews/jan2005-daily/02-01-2005/business/b1.htm
SWOT ANALYSIS
Strengths
• Extensive availability of raw material
• Availability of basic infrastructure facilities like roads,
railway, electricity, fuel and gas.
• Market for end products
• Gateway to Afghanistan and Central Asian states.
• Due to proximity to Afghanistan, businesses can be
strengthened by international business deal with Central Asian countries.
• Strong media backing aids in increasing revenues for the
industry. While TV channels treat the statistics of revenue earning from
advertisement as a well-guarded secret, one can understand the
magnitude of revenue from airing cigarettes advertisements.
Weaknesses
• Under-pricing and excessive sales promotion programmes
are said to be some of the major problems of the industry. While the
domestic industry indulges in what is known as under-pricing by selling
their brands cheaper than those of their rivals in the same category, the
manufacturers are said to be involved in excessive advertisements and
other promotion programmes. The industry is known to be the largest
spender on publicity worldwide.
• Unionism of labors may be invited due to concentration of
industries in the same place.
• Easily available smuggled goods - no level playing field for
companies in the organized sector.
• The foreign cigarettes have been here since the days of the
drug-lords when cigarettes were brought in from Dubai. The trade
reached its zenith during the Afghan Transit Trade. All the consumer
items that are offloaded in Bandar Abbas in Iran soon find their way to
Karachi through Quetta.
• Media pressure on youngsters towards smoking
Cigarette ads tend to glamourize smoking as something of a macho habit
luring the youngsters to get addicted to nicotine in the earlier years of
their life. Cigarette ads being extremely alluring encourage smoking,
particularly among youngsters as one usually becomes a smoker before
the age of twenty-one, which is strongly being apposed by health to
concern organization.
Opportunities
• Pakistan has a locational advantage due to its strategic
proximity and easy access to the region. There is great necessity that
these valuable opportunities may be developed and are put to use for the
increase of value added exports of the country.
• The creation of the independent Central Asian States and
development in Afghanistan led to the opening of new opportunities for
investment and trade.
• Europe, Africa, and Australia are trying their level best to
acquire some unexplored niche of the area.
• PMI has acquired around 90 % stakes in Lakson Tobacco.
This acquisition combines PMI’s international expertise and global brand
portfolio with Lakson Tobacco’s local knowledge and strong brands,
including market leader Morven Gold. This mega deal is expected to
give a fillip to ancillary industry related to cigarette manufacturing such
as: tobacco processing units, packaging material, tipping paper etc. It
could also enhance export of raw tobacco.
Threats
• Legally imported foreign cigarettes have entered the market
and the local tobacco industry is worried about its very survival. The
locals claim that the high rates of taxes imposed by the government will
make it difficult for them to compete with the foreign varieties.
• Since good labor has already been engaged by the
competitors, therefore efforts will be to make available the experienced
staff on good salary, otherwise it may be problem for the Mills in the
initial stages.
• Price reduction by foreign competitors resulting in low
return to the locals.
• The ratification of the FCTC, if truly implemented, could
lead to even more stringent controls on the tobacco industry.
• Laws by the network of consumer protection and Tobacco
Free-Initiative (TFI) to pressure the government to introduce adequate
controls on tobacco sale and promotion will pose further resistance to the
tobacco industry.
• High rates of taxes imposed by the government is forcing
local firms to close.
• High interest rates due to tight monetary policy
• The ministry of health's warning, 'Smoking is injurious to
your health' as printed on packets of cigarettes of all brands and the same
accompanies the voice-over on cigarette advertisements on TV.
ISSUES IN TOBBACCO INDUSTRY
GENERAL ISSUES
The Framework Convention Alliance (FCA) is an alliance of over 160
non-governmental organizations from around the world that are working
to support the development of a strong Framework Convention on
Tobacco Control, and related protocols. With the implementation of
FCTC recommendations the tobacco industry world over will suffer
severe losses. The 10 commitments that will have adverse affect over the
future demand of tobacco, globally as well as domestically, are:
9. The right to smoke-free life. The FCTC should recognize the right
not to breathe second-hand smoke - a toxic and carcinogenic pollutant. The
aim of the FCTC must be to eliminate involuntary exposure to tobacco
smoke. There is no need to specify vulnerable groups in the text: everyone
deserves protection.
Tax Evasion
Due to the absence of a level playing field in the tobacco industry and
uneven business environment, tax evasion had risen to 21 per cent of the
total market share. The phenomenon has shown a rising trend every time
there was an increase in price/duty ratio.
The government is planning to introduce strict budgetary measures to
curb the persistent tax evasion by the tobacco industry, causing an annual
loss of around Rs6 billion to the national exchequer. Managing director of
the Pakistan Tobacco Company (PTC) Jeremy Pike has been urging the
government to check duty evasion and curb the incidence of smuggling. It is
vital to resolve problems being faced by the tobacco industry.
Smuggling
Last year, over 74 billion cigarettes were released to the local market
including 60 billion cigarettes of legitimate brands while the rest 14 billion
cigarettes were smuggled, counterfeited and tax evaded by those who are
heavily involved in corrupt practices from smuggling, low quality tobacco
cropping to fake or substandard cigarette making level. 27
Apart from the detrimental effect on the industry and loss to the
government revenues, this also deters new foreign investment particularly in
view of continuous infringement of Intellectual Property Rights i.e.
International trademark infringements.
The adverse impact of counterfeit & smuggled goods affects not only the
tobacco industry, but pervades all sectors of consumer goods. The easy and
pervasive availability of counterfeit cheats consumers and robs brand owners
of the investment in building brand image.
26
27
http://paktribune.com/news/index.shtml?166062
Under-pricing and excessive sales
promotion
Under-pricing and excessive sales promotion programmes are said to
be some of the major problems of the industry. While the domestic industry
indulges in what is known as under-pricing by selling their brands cheaper
than those of their rivals in the same category, the manufacturers are said to
be involved in excessive advertisements and other promotion programmes.
The industry is known to be the largest spender on publicity worldwide.
On the other hand, tax collectors opined that the reason of difference
in retail price printed on the pack and that charged by the retailer is due to
additional 3 per cent sales tax, which is being charged by the
distributor/dealer from un-registered retailer and the same is reflected in the
price charged by the retailer.
The Collector, Sales Tax and Central Excise, Peshawar, submitted that
the Sales Tax Act has not been extended to Federally Administered Tribal
Areas (FATA) and Provincially Administered Tribal Areas (FATA), which
caused enforcement difficulties. The cigarette manufacturers should supply
list of both registered and un-registered dealers/distributors of settled as well
as FATA/PATA so that some enforcement measure may be taken.
Foreign Influx
The local tobacco industry is worried about its very survival, now that
legally imported foreign cigarettes have entered the market. The locals claim
that the high rates of taxes imposed by the government will make it difficult
for them to compete with the foreign varieties. It is argued that the country's
28
http://paktribune.com/news/index.shtml?166064
29
http://www.paktribune.com/news/index.shtml?174961
30
News Item 6th Feb, 2007, Dawn
balance of trade would be further aggravated with legitimate cigarette
imports which will soon shoot up sharply causing a drain on the country's
foreign reserves.
Cigarette Advertisements
Cigarette ads tend to glamourize smoking as something of a macho
habit luring the youngsters to get addicted to nicotine in the earlier years of
their life. Cigarette ads being extremely alluring encourage smoking,
particularly among youngsters as one usually becomes a smoker before the
age of twenty-one, which is strongly being apposed by health to concern
organization.
31
http://www.takingontobacco.org/itab/0203.html
32
http://www.telmedpak.com/ngos.asp?a=Tobacco_Free_Initiative
RECOMMENDATIONS TO THE
TOBBACO INDUSTRY
Timely control
Disease attack on crop is widely reported. Timely control of disease through
application of the recommended pesticide is important to avoid quantitative
and qualitative losses.
Other Recommendations:
• The price of per pack of 10 cigarettes should not cost less
than Rs. 4.15 plus sales tax. It is commercially not viable to sell
below this threshold keeping in view manufacturing cost Excise duty
and trade margins.
• The patent laws in this regard are weak and should be made
more stringent with stricter punishments. There should be proper
implementation of IPRs. (Intellectual Property Rights)
• Regular raids on the retailers to check the smuggled items.
This will reduce the availability and thus increase the price of the
cigarettes.
• In the long run the borders should be sealed for any kind of
illegitimate trade.
Phillip Morris is expected to invest over $400 million for acquisition of the
full company and is expected to retain the name as well. This mega deal is
expected to give a fillip to ancillary industry related to cigarette
manufacturing such as: tobacco processing units, packaging material, tipping
paper etc. It could also enhance export of raw tobacco.
At present, both Phillip Morris and BAT industries feed the Central Asian
countries from Europe. Shifting of this business to Pakistan is now a
possibility. Over $400 million investment by a US conglomerate reflects a
confidence in the country's economy and should attract further US
investment.33
“PMI looks forward to a bright future for Lakson Tobacco in Pakistan,” said
Matteo Pellegrini, President of PMI’s Western Asia region. “This
acquisition combines PMI’s international expertise and global brand
portfolio with Lakson Tobacco’s local knowledge and strong brands,
including market leader Morven Gold. We look forward to continuing to
work with the management and employees of Lakson Tobacco to further
solidify its market position and ensure the continued success of the company
in Pakistan.”
Looking to the future, Salman Hameed, the newly appointed chairman and
chief executive of Lakson Tobacco said: “Our focus will be to bring together
the complementary strengths of Lakson Tobacco and PMI,” adding that:
“Lakson’s business performance over the years provides a strong platform
for growth.” 34
Other Developments
There was an increase in plant capacity in 2006, where the Frontier
province has 25 factories with installed annual capacity of more than 35
billion sticks. The nine factories in Sindh and four in Punjab have annual
capacities of nearly 22 billion sticks and nearly 30 billion sticks respectively.
The tobacco export of Pakistan has increased since 2001 and if the
growth continues, the country would reach a total export target of almost
$30 million by end of 2007. The exports during 2003-04 were 111.68
percent higher than those for the corresponding period of previous year. This
growth in Pakistan tobacco exports indicates the growing popularity and
acceptance of Pakistan’s products for their quality, consistency and cost
competitiveness.35
33
http://www.brecorder.com/index.php?id=520899&currPageNo=1&query=&search=&term=&supDate=
34
http://www.dailytimes.com.pk/default.asp?page=2007\03\10\story_10-3-2007_pg5_5
35
http://www.dailytimes.com.pk/default.asp?page=story_21-1-2005_pg7_15