Introduction Final

SUBMITTED TO “SIR ABID SAEED”

MUHAMMAD HASSAN KHAN FARRKUH SALEEM FURQUAN SAEED ZEESHAN SHAFIQUE BURHAN AHMED JAHANZEB M. KHAN MEHMOOD HYDER

INTRODUCTION

British American Tobacco is the world’s most international tobacco group, with brands sold in 180 markets around the world. They produce high quality tobacco products to meet the diverse preferences of millions of consumers, and we work in all areas of the business – ‘from seed to smoke’. Their companies are committed to providing consumers with pleasure through excellent products, and to demonstrating that we are meeting our commercial goals in ways that are consistent with reasonable societal expectations of a responsible tobacco group in the 21st century. Pakistan Tobacco Company Limited (PTC). The Group's principal activities are to manufacture and market cigarettes and edible oils. The Group's brands include Wills King, Embassy, Capstan and Sun drop.

MISSION OUR MISSION IS TO CONTINUE CREATING LONG TERM SUSTAINABLE SHAREHOLDER VALUE, AND TO LEAD THE

TOBACCO INDUSTRY IN DEMONSTRATING CORPORATE SOCIAL RESPONSIBILITY AND WIDER ACCOUNTABILITY”

PRODUCTS: Pakistan Tobacco Company is the largest producer of tobacco in Pakistan, with a vast Varity of tobacco products, and brand names. PTC mainly produces cigarettes, which covers large Varity of its kind. Apart from its tobacco products, Pakistan Tobacco had launched sunflower cooking oil 'Sundrop'. Turnover during Jan-June '99 six months improved 14.2% to Rs 7,924.8m, from Rs 6,937.0m in the similar six months of '98.

PRODUCT DESCRIPTION: The cigarettes produced by PTC are:

Gold Flake Like many of PTC brands, also boasts its origins at W.D. & H.O. WILLS where it was a premium brand around the end of the 19th century. Launched in 1982, in a 'soft cup' packaging, the brand took off when it was repositioned in the value for money segment and later a 'hinge lid' variant was introduced in 2000. WILLS Takes its name from the heritage of one of the original Imperial Tobacco Company families: the Wills Brothers of London. EMBASSY The third leading volume brand in Pakistan is most popular in the Punjab where it enjoys a leading position due to its equity and loyalty.

BENSON & HEDGES In 1873, Richard Benson & William Hedges started a partnership in London. From the very start, the idea was to make Benson & Hedges a style statement, which is why the business started from London’s fashionable West End. PTC launched Benson & Hedges in Pakistan in March 2003. Made with the finest hand picked golden Virginia tobacco from across three continents, the brand is packed with perfection to seal its freshness.

JOHN PLAYER GOLD LEAF

The story of John Player Gold Leaf has to start from the story of its founder, John Player. An enterprising businessman, John Player started a small tobacco selling business in 1877 and turned it into a thriving cigarette company, John Player and Sons. With a distinct lifebuoy and sailor trademark, John Player Gold Leaf has an identity entrenched in sailing and maritime adventure. Thus staying true to John Player’s very first big brand - Player’s Gold Leaf Navy Cut cigarettes.

COMPATETORS PTC holds 38% of the market, the major compotator of PTC is LACKSON TOBBACO COMPNAY, which holds the 40% of market total share. Some other local compotators are: 1.Khyber Tobacco Company. 2. Souvenir Tobacco Company Limited. 3.Saleem Cigarette Industries. 4.Premier Tobacco Company Ltd. 5.Souvenir Tobacco Company Limited.

COMPETITIVE ADVANTAGE PTC is part of the trans-national British American Tobacco Group, which employs some 90,000 people worldwide at its operations in 180 countries. British American Tobacco has a position of market leader in more than 50 countries selling over 300 brands there. In 2004, the Group sold and produced a nearly 16% share of the global market of cigarettes. PTC is the largest excise tax generator in the private sector in the country. In 2004 alone, PTC paid the government close to Rs.16 Billion in excise and sales taxes. This amounts to over Rs. 50 million per working day. Over one million people are economically dependent on the industry in Pakistan Until some years ago, Pakistan Tobacco ranked among the top tier of the Blue chip companies that earned huge profits and paid robust dividends to The shareholders. Paid-up capital of the company has remained unchanged at Rs 319.4m for Many years now. Due to robust reserves of Rs 640.7m, break-up value of the Share works out at Rs30.06. The previous surplus also enables the company to wipe out the recurring red on the profit & loss account. The main competitive advantage of PTC is that it manufactures cigarettes for all classes, so the revenues comes from all type of people of Pakistan, who trust PTC due to its high quality products. The other distinctive feature is that company maintains its quality from the harvesting of tobacco up to its distribution. The company also performs corporate social responsibility, to provide some thing to the society and environment. e.g.

PTC has planted over 30 million trees since the project started in 1981. PTC is also looking into the possibility of expanding this activity in other parts of Pakistan. Clearly, our agricultural infrastructure is strongest where we work with our growers and therefore our focus on afforestation will be where we have the appropriate resource to support them. Considering the fact that only four percent of Pakistan's land mass is covered by forest (whereas ideally it should be at least twenty percent), we have instituted probably the largest private sector reforestation program in Pakistan. QUALITY The PTC manages quality from the harvesting of tobacco leaf up to its customer satisfaction. At the factory, the matured tobacco is checked for quality and then carefully blended with other ingredients which the brand recipe may call for, such as flavorings or pre-processed tobacco. Keeping track of the various types of tobacco and blend components is key and computers are increasingly used to track production runs. Moisture content is crucial. Too dry and the tobacco leaf will crumble; too moist and it may spoil during storage. The blended tobacco is treated with just the right amount of steam and water to make it supple and then cut into the form in which it appears in the cigarette. Excess moisture is then removed so the cut tobacco can be given a final blending and quality check. Cigarette making, once done entirely by hand, is today almost fully automated, with the cut tobacco, cigarette paper and filters continuously fed into the cigarette-making machines. The technology has advanced dramatically over the years, but quality is not forgotten; each cigarette is automatically quality controlled to ensure that it meets every aspect of its specification.

PRICING The pricing strategy of PTC is very strong it, the company produces cigarettes for all economic classes. Its produces WILL KING, EMBASSY, for lower economic class so that they can afford it, and be loyal to their brand Where as JOHAN PLAYER GOLD LEAF is produced for the middle class people who likes enjoy better taste in affordable price, last but not the least BENSON & HEDGES is produced for high economic class who beliefs in life styles.

DISTRIBUTION PTC’s aim is to build an excellent Trade Marketing & Distribution capability, which bears the hallmark of a worldclass field force for effective retailer and consumer contact. 375 exclusive Distributors employing a contingent of over 1200 distribution representatives provide direct store delivery service of our finished products to the 400,000 plus retail stores throughout the country. In doing so we aim to optimize our finished goods Supply Chain efficiencies in delivering products of consistent quality on-time, every time. The retail universe is classified into Supermarkets, Groceries, Convenience stores and recreation or leisure outlets such as hotels, cafes and restaurants. The company's Trade marketing field force provides value added services in complimenting the distribution effort, in select stores of the universe to enable mutually beneficial partnerships. company make substantial investment in Retail, through quality in-store and on-store furniture and fittings to stock and display our products for the convenience of consumers.

Market analysis summary In Pakistan, two transnational companies British American Tobacco (BAT) and Philip Morris Industries (PMI) hold 78% of the cigarette market. BAT holds 67% shares in the Pakistan Tobacco Company (PTC), while PMI has a 30% share in Lakson Tobacco Company (LTC). PTC holds 38% of the market, while LTC has a market share of slightly over 40%. Local companies such as Sarhad Cigarette Industries, Khyber Tobacco Company, Souvenir Tobacco Company Limited and

Saleem Cigarette Industries hold the rest of the market. According to the Tobacco Statistical Bulletin 1994, there were 32 tobacco companies having 38 cigarette manufacturing factories with an installed capacity of over 87 billion sticks per annum. However, unofficial reports put the number of factories much higher. According to one report, 75 unlicensed factories are in operation in the tobacco-rich Mardan Division and Lala Musa alone, which are manufacturing counterfeit major international brands and tax-evaded cigarettes. 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. Tobacco companies’ sell 50 billion sticks (out of their 87 billion stick installed capacity) every year in Pakistan. Around 10 billion smuggled, counterfeit or tax-evaded cigarettes are also consumed locally. The tobacco companies are continuously increasing their market size. The cigarette production rose from 29.9 billion sticks in 1990-91 to 48.21 billion sticks in 1997-98, an increase of more than 70% over seven years. Both companies rake in huge profits every year that run into millions of rupees. But the beneficiaries in this deadly business are not the tobacco companies alone. As elsewhere in the world, the government of Pakistan patronizes the tobacco business - at the expense of public health. The reason for this patronage is simple: the tobacco business generates much-needed taxes for the cash-strapped government. According to “Tobacco Control in the Third World: A Resource Atlas”, the Pakistani government collected Rs 15.86 billion ($311 million) as tobacco tax in 1990, making

up 10.5% of the total tax revenue. Tobacco taxes are continually rising since then. In 1999, only two companies, PTC and LTC, paid Rs 18.7 billion in government levies. In fact, the revenues collected by the government from the tobacco industry each year exceed the profits posted by the companies. According to the Pakistan Tobacco Company's 1999 Annual Report and Accounts, the company paid Rs 10.03 billion in government levies, while it posted an aftertax-profit of only Rs 136 million. Similarly, Lakson Tobacco Company deposited Rs 8.66 billion in the government kitty during the fiscal year 1998-1999 and it recorded a net profit of 180.7 million. It is estimated that around 70% of revenues generated by the tobacco companies are paid as excise duties and other government levies. How government patronizes tobacco industry Addicted to tobacco revenues, the government patronizes the tobacco business in a number of ways: 1. The Pakistan Tobacco Board (PTB) was established in 1968 with headquarters in Peshawar after the government recognized 'tobacco potential'. Attached to the Ministry of Commerce, the Board is to promote tobacco cultivation on scientific lines for domestic use and export. It regulates, controls, grades and exports tobacco products; undertakes research and training for the tobacco industry; renders assistance for the development of existing and new growing areas and establishment of model farms. 2. The government ensures that the tobacco industry makes prompt payments to tobacco farmers, which is not the case for other crops like sugarcane, cotton and fruits. Under the Deferred Payment Leaf Voucher Scheme, introduced in 1975, the government constituted a consortium of nationalized commercial banks for providing additional loans to tobacco companies during the marketing season of tobacco. The scheme is aimed at ensuring that tobacco growers are promptly paid for purchases made by the industry. In 1994, Rs 434.14 million were handed out to tobacco companies under this scheme.

3. 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. 4. The government gives tobacco companies a freehand to advertise their products on electronic and print media. While the total magnitude of tobacco advertisement in the print media is unknown, the state-owned Pakistan Television Corporation (PTV) earns almost 33% of its advertising income from the tobacco industry. According to press reports, PTV generated around Rs 280 million through tobacco advertisement.

MARKET SEGMENTATION: PTC has segmented its product by economic condition of the country. By producing cigarettes for different economic classes. Like wills and Embassy for lower class and Benson and Hedges for higher economic class. TARGET MARKET SEGMENTATION STRATEGY: British American Tobacco's brand strategy differentiates it from its competitors and underpins its approach to product development. The Group continues to build a focused, segmented and differentiated brand portfolio and allocates resources to a full range of brands deployed in the key industry areas that offer the most robust source of volume and profit growth. These are the international, premium lights and Adult Smokers Under the age of 30 (ASU30) segments. PTC continue to invest in our four global drive brands Dunhill, Kent, Lucky Strike and Pall Mall, which have grown combined volumes by almost 50 per cent since 1999. Rothmans, Kool, Benson & Hedges, State Express 555, Peter Stuyvesant, Viceroy and John Player Gold Leaf are also part of our international brand portfolio, playing a key strategic role in the different regions where we do business.

INDUSTRY ANALYSIS Despite numerous health and economic costs, the consumption of cigarettes continues to rise in Pakistan, making it a high cigarette consumption country. According to the Pakistan Pediatric Association, 1,000 to 1,200 children between the ages of 6 and 16 years take up smoking every day. Twenty-nine percent of men and 3.4% of women smoke cigarettes regularly, concluded the National Health Survey, while the Pakistan Society for Cancer Prevention says 37% of

men and 4% of women over 15 years of age are smokers. 1. Smoking is most common and most likely to be heavy (20 or more cigarettes per day) among men 25-44 years of age in Pakistan. 2. Approximately 90% of lung cancer cases in men and 79% in women are attributable to cigarette smoking. 3. Twenty-four percent of illiterate rural young men smoke as compared to 19% of illiterate urban young men. 4. Among rural smokers (15-64 years of age), 26% smoke heavily compared to 37% in urban areas. To advertise the Gold Flake price reduction, PTC ran an aggressive campaign on PTV during the Sharjah Cricket Cup and Triangular Series in the West Indies and bought threeday programming ownership on PTV World with Gold Flake Eid Hangama. A double-page advert also appeared in the Urdu-language newspaper Din. Countrywide, 800,000 posters and buntings and 150,000 leaflets plastered market walls. Three thematic Gold Flake Floats operated in some cities for 10 days. They featured live music, male and female models and comedians and also sold the brand at the reduced price. The company sponsored a Gold Flake Canal Mela in Lahore featuring Gold Flake streamers on both sides of the busy Canal Road and 35 banners throughout the city. All this only to advertise a single price cut! According to the prestigious Advertising Age magazine, LTC was the third largest advertiser in Pakistan in 1998, spending an astounding Rs 328 million (US $6.42 million). It was followed by BAT, which spent staggering Rs 295 million (US $5.77 million) during the same year. The marketing expenses of the two companies neared Rs 1.5 billion in 1999, with LTC spending Rs 804.75 million and BAT Rs

680.643 - all in the name of hooking new users, the lifeline of the tobacco industry. Tobacco companies’ sell 50 billion sticks (out of their 87 billion stick installed capacity) every year in Pakistan. Around 10 billion smuggled, counterfeit or tax-evaded cigarettes are also consumed locally. The tobacco companies are continuously increasing their market size. The cigarette production rose from 29.9 billion sticks in 1990-91 to 48.21 billion sticks in 1997-98, an increase of more than 70% over seven years. Both companies rake in huge profits every year that run into millions of rupees. But the beneficiaries in this deadly business are not the tobacco companies alone. As elsewhere in the world, the government of Pakistan patronizes the tobacco business - at the expense of public health. The reason for this patronage is simple: the tobacco business generates much-needed taxes for the cash-strapped government. According to “Tobacco Control in the Third World: A Resource Atlas”, the Pakistani government collected Rs 15.86 billion ($311 million) as tobacco tax in 1990, making up 10.5% of the total tax revenue. Tobacco taxes are continually rising since then. In 1999, only two companies, PTC and LTC, paid Rs 18.7 billion in government levies. In fact, the revenues collected by the government from the tobacco industry each year exceed the profits posted by the companies. According to the Pakistan Tobacco Company's 1999 Annual Report and Accounts, the company paid Rs 10.03 billion in government levies, while it posted an aftertax-profit of only Rs 136 million. Similarly, Lakson Tobacco Company deposited Rs 8.66 billion in the government kitty during the fiscal year 1998-1999 and it recorded a net profit of 180.7 million. It is estimated that around 70% of revenues generated by the tobacco companies are paid as excise duties and other government levies. MARKETING

We believe strongly that tobacco should never be marketed to youth. It should only be marketed to adult smokers, in an appropriate way that takes account of its health risks. Our consumers – adult smokers – drive everything

we

do.

We

invest

effort

and

care

in

understanding their preferences, and we know that just as adults make informed choices about smoking, adult smokers make informed choices about brands. We agree there should be different rules about tobacco marketing – and that’s part of the challenge our marketers are trained to meet. This will be one of the few websites from a leading global consumer goods company that does not advertise or sell its brands. An open corporate web site isn't the place for that. But I want to say something about British American Tobacco as a marketer, because it helps to define who we are. We are proud of our strong reputation for high quality brands. In our major markets, our trade marketers are frequently

rated

highly

in

customer

surveys

on

professionalism and service. We don't believe in 'one brand fits all', but with a strong, diversified global portfolio – well focused and defined – we offer a brand for all key consumer and market sectors. We aim to satisfy adult consumers' demands better and more profitably than our competitors. Importantly, we also

fully acknowledge our product poses risks to health, so it requires restrictions on how it is marketed. We know that public expectations about tobacco marketing are higher than for many other products. So we agree there should be different rules about tobacco marketing – and that’s part of the challenge our marketers are trained to meet. CORE BELIEFS We believe strongly tobacco should never be marketed to youth. It should only be marketed to adult smokers, in an appropriate way that takes account of the risks posed to health. We also believe adults who have chosen to smoke should be able to receive information about what they buy, and we should be able to communicate responsibly with them about our brands. Our consumers – adult smokers – drive everything we do. We invest effort and care in understanding their preferences, and we know that just as adults make informed choices about smoking, adult smokers make informed choices about brands. Our marketing is not designed to 'sell smoking'. That would be wrong – and a waste of marketing effort. We are working in a long-established, mature product category, where people already know what the basic product is. There would be no commercial sense to trying to market to informed customers who don't want the product.

Our marketing is about our brands; retaining the brand loyalty of our customers, and winning them over from competing brands. Our brands are amongst our most important assets. Why would we not take care to position them intelligently – to adult consumers who have chosen to smoke? As well as complying with all laws and many voluntary codes on marketing, we have for many years been guided by a

clear

set

of

British

American

Tobacco

Advertising

Principles. These have set out, for example, that our advertising and promotional activities will be directed at adult smokers, that no health claims will be made about tobacco products that people appearing in advertising will not be, or appear to be, younger than 25, that billboards will not be close to schools, and more. However,

society’s

expectations

about

tobacco

marketing continue to evolve - and so does our approach. Building on our Advertising Principles, we and several other tobacco companies have launched new International Marketing Standards. They represent a ‘rising of the bar’, and establish a benchmark for the industry world wide. MARKETING IN THE FUTURE The Marketing Standards are not only a further step to meet changing expectations but, in many ways, are part of

continuous marketing modernization. Looking ahead, we can imagine tobacco marketing being based substantially on relationship marketing and one-to-one permission-based marketing to adult smokers, with less reliance on channels such as mass media. We believe we are well prepared at British American Tobacco for marketing that is both effective and responsible in the 21st century.

MARKETING RESTRICTIONS We

believe

manufacturers

and

retailers

of

tobacco products have a right to freedom of speech. Amid

universal

awareness

of

the

health

risks

associated with tobacco consumption, we believe manufacturers and retailers should be entitled to communicate responsibly with adults who are in the market for such products. However, because the products pose

risks

to

health and

society

has

reasonable concerns about how such products are promoted, we believe all marketing activities should meet reasonable expectations. Our marketing practices are designed to attract adult smokers to our brands so they select our brands in preference to those of our competitors, and to retain the loyalty of our customers so they do not switch to competitor brands. We do not seek to persuade people, whether adults or youth, to begin or continue smoking. Experience has shown a substantial number of adults in every country will choose to smoke, whether or not tobacco marketing is permitted, for the most part simply because they enjoy smoking. We seek recognition of the right to compete for the custom of adult smokers in an appropriate manner.

We seek open discussion with governments, other industry members, and any other interest group, on what would

constitute

appropriate

restrictions

on

tobacco

marketing. We are committed to carrying out our marketing activities so they meet reasonable public expectations. In some countries, we and other tobacco manufacturers have established voluntary codes for the marketing of tobacco products. Often, it is a combination of legislation and voluntary code which sets the standards by which the tobacco industry operates. In September 2001, we and several other members of the

international

tobacco

industry launched globally

consistent Marketing Standards, defining the first panindustry

benchmark

for

tobacco

marketing

worldwide.

Building on our existing marketing principles, they cover all aspects from print, billboards and electronic media, to promotional

events,

packaging

and

sponsorship,

and

represent a new baseline that ‘raises the bar’. In countries where the new standards exceed existing restrictions, our companies are committed to endeavouring to see the standards incorporated into law or agreements that ensure effective local implementation. We will continue to support the enactment of legal restrictions and the adoption of legislated or voluntary standards whose objective is to ensure that:

•

Tobacco advertising and other marketing activities are directed at adults who already have chosen to consume tobacco products rather than other adults or young people;

•

Adult

consumers

of

tobacco

products

have

the

information they need to make informed choices, including informed choices with respect to individual brands; •

All tobacco companies comply in letter and spirit with the advertising and marketing standards that have been deemed to be appropriate, whatever those standards may be. While we will at all times work within the framework of

a country's laws - whatever those laws may be - we will continue

to

challenge

regulations

affecting

marketing

activities where those regulations are not sensible. We believe bans and/or severe restrictions on advertising of tobacco products do not achieve their objectives, and that the costs are disproportionate to the claimed benefits. In our view, such bans and severe restrictions do not constitute 'sensible regulation'. FINANCIAL ANALYSIS

2005

2004

Volume Turnover Excise and Sales Tax Net Turnover Operating Profit (Loss) Before Tax (Loss) After Tax (Loss) Per Share Before Tax (Loss) Per Share After Tax

millions Rs millions " " " " " Rs Rs

21,360 -----------------15,907 9,790 -----------------6,117 316 (854) (884) (16.9) (17.5)

18,694 -----------------14,938 9,345 -----------------5,593 344 (108) (136) (3.4) (4.3)

Shareholders Funds Capital Employed Capital Expenditure

Rs millions " "

2,218 2,430 841

867 1,324 515

Government Levies Customs, Excise Duties and Sales Tax Local Taxes and other Duties Corporate Tax Total

Rs millions " " "

10,230 74 31 10,335

9,927 83 28 10,038