Tobacco Industry

Industrial and competitive analysis Assignment 1 National University of Sciences and Technology NUST Institute of Management Sciences Spring 2006

Submitted to: Ms. Zainab Dar Submitted by: Ayesha Zulfiqar Faez Fayaz siddiqui Maria Riaz Saira Yousaf Sumayyah Rafiq Zuneera Khurshid BBA 2K5 A

Due Date: 4 April, 2007 th

Tobacco Industry: The tobacco industry is a source of revenues, employment and foreign exchange for the country. The industry has to pay very high excise and sales tax

while

complying

with various

strict

rules

and

regulations

of

the

government. During 2004-2005, it contributed above Rs.28 billion as Central Excise Duty and Sales Tax.

Despite its contribution to the economy, the

industry is highly criticized for its negative impacts on the society. Structure of Industry: In Pakistan the industry consists of farmers who grow tobacco, firms that convert the raw materials into finished goods (Cigarettes), exporters and importers of tobacco and its products. Smuggling of tobacco products to and from neighboring countries is also quite common. Size and number of sellers: In Pakistan, tobacco cultivation occupies a relatively small area of 0.27% of the total irrigated land. The country has been divided into various zones depending on the type of tobacco being grown in that region. The details and amount of production is mentioned in appendix1. The major firms involved in the manufacture of finished goods and exports include Pakistan Tobacco Company, Lakson Tobacco Company, Souvenir Tobacco Company, Saleem Cigarette Industry, Universal Tobacco Company, Imperial Cigarette Industry, Khyber Tobacco Company, International Cigarette Industry, Walton Tobacco Company and Sarhad Cigarette Industry. Of these

firms Pakistan Tobacco Company is the market leader with lakson Tobacco Company in second place. Number of buyers: The firms that manufacture finished goods act as purchasers themselves, buying it from the farmers. They serve as intermediaries that purchase, process and resell. In the local market, Twenty-nine percent of men and 3.4% of women smoke cigarettes regularly, concluded the National Health Survey, while the Pakistan Society of Cancer Prevention says 37% of men and 4% of women over 15 years of age are smokers. According to Pakistan Pediatric Association, 1,000 to 1,200 children between the ages of 6 and 16 years take up smoking every day. Cigarette consumption in Pakistan is five times higher than in India with 620 cigarettes per adult per annum against 119 for India¹. This shows that the market for tobacco industry is very immense locally. Chewing tobacco is in demand in the villages. Along side this; various countries are also acting as buyers for the tobacco industry. The export details are available in the appendix2 Product differentiation: The major product differentiation exists between chewing tobacco and cigarettes

and

cigars.

The

main

differentiation

exists

between

the

manufactured goods in the form of branded cigarettes. The firms target different segments of the society with different price levels. Differentiation also exists between imported and local cigarettes and cigars. Consumers are willing to pay a premium price for the imported product especially cigars.

1.

www.thenetwork.org.pk/pressrelease04-01-08.htm

Entry conditions and government regulations: There are no entry conditions as such but when a company enters the industry, it has to abide by all the rules and regulations of government. This is very costly especially in terms of advertising. The firms have to inform the consumers about the potential health hazards related to tobacco products. This implies that in order to enter as a manufacturer, heavy investment is required. The government is providing incentives to the tobacco growers in order to promote the industry. This is being done through the Pakistan tobacco board. The board tries to find out their problems and to educate them about the cultural operations, plant protection measures, picking and curing operations. Other responsibilities of the board are to regulate, control and promote the export of tobacco and tobacco products, and to fix grading standards. The board is also helping in the research and development to improve the quality. It looks after the interests of the industry. Demand and supply: The tobacco board also manages the demand and supply in the industry. According to legal requirements, the tobacco manufacturing and exporting companies are required to inform their tobacco requirements by the 21st of October to the Pakistan Tobacco Board. After discussions between the Board and other stakeholders like buyers, growers, dealers, etc. and taking into account factors like crop size, prices, domestic usage and exports, these figures are finalized.

In this way the growers get a rough estimate of how much they should grow. This creates a balance between demand and supply. The Pakistan Tobacco Board, in collaboration with tobacco companies, holds meetings in the tobacco growing areas to inform the growers about the requirements of tobacco companies. Image: The industry has a negative image among its consumers and the general public. This is due to the various health hazards associated with tobacco consumption. People are also blaming the government for its support for the industry. Smoking is the cause of lung cancer in 90% of the cases. Its users get addicted to it. Although the companies can not change the nature of their product, they are trying to build a socially responsible image in the eyes of the consumers. PTC is currently engaged in various programs such as afforestation, Mobile doctors program, Youth smoking prevention, learning resource centers. The laskson group has set up Lakson medical center (Sahiwal hospital) and a Medical complex in Sawabi NWFP. Price: The government fixes the lowest price that firms can pay to growers. There is a restriction that price for the current year can not be lower than that paid in the preceding year. The tobacco board has specified the criteria for fixing prices. Smuggling is resulting in revenue leakage for the government. Some groups say that high taxation on the tobacco industry is encouraging smuggling.

Future plans: To further improve the quality of tobacco in Pakistan the PTB imported two numbers of modern Tobacco Bulk Curing Barns from Greece. PTB, in collaboration with the growers and manufacturers is examining facilities of fabrication of cheaper versions of such barns locally which can be operated on C.N.G. or other alternate and cost-effective energy sources. A Tobacco Delegation consisting of growers, manufacturers, dealers and exporters is planned to visit Egypt to explore larger and new markets for Pakistani Tobacco. Efforts are also being made to set up an export display center.

References www.pakistaneconomist.com/database1/cover/c96-61. www.yespakistan.com/people/tobacco www.thenetwork.org.pk/pressrelease04-01-08.htm www.ptb.com.pk

Appendix1 AREA UNDER DIFFERENT TYPES OF TOBACCO IN PAKISTAN (HECTARES) Year

Flue-cured Virginia

Dark aircured

White Patta

Burley

Others

Total

19992000 20002001 20012002 20022003 20032004 20042005

27376

902

8069

237

19853

56437

21301

571

4990

257

19853

46972

24570

751

4749

432

19873

50575

20748

489

5469

933

18961

46600

20660

355

5472

878

18276

45641

26312

367

4929

943

*18276

50827

PRODUCTION OF DIFFERENT TYPES OF TOBACCO IN PAKISTAN (MILLION KGS)

Year 1999-2000 2000-2001 2001-2002 2002-2003 2003-2004 2004-2005

Flue-cured Virginia

Dark aircured

White Patta

Burley

Others

Total

64.96

2.44

15.10

0.29

24.86

107.65

50.96

1.17

9.65

0.58

23.38

85.74

59.61

1.94

9.38

0.95

20.70

92.58

51.31

1.42

10.83

2.15

22.55

88.26

50.29

0.69

10.98

1.60

22.63

86.19

65.78

0.86

9.91

1.64

*22.63

100.82

YIELD OF DIFFERENT TYPES OF TOBACCO IN PAKISTAN (KG/HECTARE) Year

Flue-cured Virginia

Dark aircured

White Patta

Burley

Others

Total

19992000 20002001

27376

902

8069

237

19853

56437

21301

571

4990

257

19853

46972

20012002 20022003 20032004 20042005

24570

751

4749

432

19873

50575

20748

489

5469

933

18961

46600

20660

355

5472

878

18276

45641

26312

367

4929

943

*18276

50827

Source: Pakistan tobacco board

Appendix 2 EXPORT OF TOBACCO AND ITS PRODUCTS DURING THE LAST FIVE YEARS Year

1999-2000

Quantity exported Tobacco Cigarettes (M.Kgs) (M.Nos) 3.90 16.060

Value realized Tobacco Cigarettes (M.Rs) (M.Rs) 273.13 7.440

Total Value (M.Rs) (M.US$) 280.57

5.420

2000-2001

5.98

11.770

578.05

6.220

586.18

10.032

2001-2002

3.20

108.240

231.11

49.180

286.41

4.659

2002-2003

5.49

74.23

316.75

45.62

362.37

6.25

2003-2004

8.27

163.96

642.74

124.35

767.09

13.23

2004-2005

7.17

44.73

626.67

46.94

673.61

11.23

Source: Pakistan tobacco board

Year 1998-99 1999-2000 2000-2001 2001-2002 2002-2003 2003-2004

Quantity exported Value realized Tobacco Cigarettes Tobacco Cigarettes (M.Kg) (M.Nos) (M.Rs) (M.Rs.) 3.42 0.200 235.11 0.057 3.90 16.060 273.13 7.440 5.98 11.770 578.05 6.220 3.21 84.190 231.11 46.200 5.49 74.032 316.746 45.206 8.27 163.961 642.743 124.351

Total (M.Rs)

Value (M.US$) .

235.17 280.57 586.18 286.41 362.368 767.094

Source: Federal Bureau of Statistics, Government of Pakistan.

4.688 5.420 10.032 4.659 6.248 13.226