Tobacco Industry (basic)

TOBACCO INDUSTRY IN PAKISTAN: Tobacco industry has been a great source of revenue generation for Pakistani economy because of its increased demand and increasing number of users for the past ten to fifteen years. Tobacco Industry, overall contributes 4.4% or Rs. 27.5 billion to the GDP of Pakistan. This industry provides largest contribution in terms of taxes (i.e. 5% of the all taxes received) and excise duty. It provides almost 312,500 jobs opportunities and employs nearly 1.2 million people in Pakistan. There are few (almost 7-8) players (both includes local and international firms) in the industry creating an oligopoly situation in the industry. 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 (PTC) is the market leader with Lakson Tobacco Company (LTC) in the second place. Because of increased consumption rate of tobacco and resulting health consequences because of use of cigarette, government of Pakistan imposes various restrictions on the firms operating in the industry i.e. let them pay high amount of taxes, excise duties and imposes strict rules and regulations which makes it difficult for the local firms to strive in the market. The threats of the local manufacturers have increased because of entry and existence of international Tobacco producing firms with low cost structure. Those include PMI (Philip Moris Int’l) comprising brands of L&M and Marlboro. Some dominant firms in the market are however, able to sustain in the market but lower prices and influence of the dominant firms like Pakistan Tobacco and 1

Lakson Tobacco are creating the situations tougher for the existing firms. Out of all the tobacco firms operating in the industry (mentioned above), the most competitive local firms are:

Khyber Tobacco Company, PTC, LTC, Sarhad

Cigarette industries. PROBLEM AREAS FOR THE LOCAL ENTERANTS AND THE EXISTING FIRMS: Because of intervention of international firms and most importantly presence of legally imported cigarette brands as well as illegally smuggled foreign brands on the retail outlets have made the conditions more adverse for the existing firms to compete. The high amount of taxes and easy availability of the foreign brands with low prices are pushing those firms run out of the market. According to a research report (whose reference is mentioned in the appendix at the end) if the market is swamped with the foreign varieties, the possibilities of survival of new entrants will be very low and would result in great price wars among the dominant firms in the market. (This in fact, has already been taken place discussed in more detail in price war section). But the past trends show that the influence of these external factors and imported goods had not been able to affect major players in the local market. Pakistan Tobacco and Lakson Tobacco continued to increase their after-tax profits since 1991 to up till now and enjoying good profits. These results show that major firms in the oligopoly (related to this specific industry), the dominants and the industry are doing well regardless of certain local and international firms and other factors. REGULATIONS (SPECIFICALLY IN TERMS OF PRICING): Pakistan Tobacco Board (PTB) is responsible for rules and regulations regarding tobacco industry. The main functions of this body are to protect the rights of stakeholders, buyers, growers, dealers etc., to maintain a balance between 2

demand and supply for tobacco (crops) by the companies. It takes into account different aspects including crop sizes, exports, domestic usage, prices, cultural operations, plant protection measures etc. Usually a special technical Committee comprising of all stakeholder and members of the body set the minimum and floor prices for the purchase of the tobacco crops for the local firms. Exhibit 1 shows the price ceilings and floors for the year 2004. PRICE WARS: Under pricing and excessive sales promotions are creating a war type situation in the industry. Dominant firms like PTC (which is the market leader as well) is continuously decreasing its prices in order to maintain its market leadership. The price war started when PTC reduced the prices of its middle-priced brands (in the start of this year). It cut down its prices from Rs. 19 to Rs.9 (almost 50% price cut) which reduced the excise duty from 63% to 43% with no change in the sales tax i.e.15%. Despite reducing prices, PTC was still able to earn normal profits and was at its break even. On the other hand, government argues that cigarette manufacturers should keeping on having high prices and avoid limit pricing so that they can better able to get higher revenues and moreover increased prices would help discourage excessive smoking among the users (reducing the health effects of smoking). Although prices of PTC are still competitive, the existing price war system is a matter of concern for Pakistan Tobacco Board (PTB) and the government itself No efforts are proved to be fruitful to reduce the gap created within the market.

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PROMOTION WARS: In addition to the price wars, promotion wars are also playing an important role in intensifying competition in the industry. The tobacco industry spends a lot of money in marketing programs. The enthusiastic, colorful and catchy advertisements, slogans, sponsorship of sports events and other marketing techniques are used to target a wide variety of customers (specifically youth), represent smoking activity as a part of status and youth symbol. Slogans like “Capstan men demand Capstan the world over”, “Gold Leaf for the taste alone”, “Gold Flake together in success” etc. attract a large amount of customers (making it more difficult for the new entrants to sustain in the industry). MERGERS AND ACQUISITIONS: Although PTC is cutting down its prices to be dominant in the market but Lakson Tobacco and PMI, in response are, doing mergers and acquisitions with other firms to be competitive in the market. Recently Philip Morris International (PMI mentioned before) acquired 50.21% stake from Lakson Tobacco company’s principal shareholders for PKR 666.89 per share. These sorts of actions can prove to be very significant in terms of dominance of the firm in the industry. PMI is an international company which is already a very established manufacturer of cigarette in Pakistani as well as international market with its strong brands Marlboro, Red & White, L&M etc. This can disturb the market power and competitive position of PTC in the market.

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CONCLUSION: Competitive actions are the most important and core actions in oligopoly. To maintain oligopoly power, companies need to be competitive and proactive. PTC’s action with regard to its competitor’s actions is not till yet predictable. However tight competition in the industry can influence the other companies to a great extent.

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APPENDIX Exhibit 1

TOBACCO PRICES 2004 CROP Types of tobacco crops

Prices

Flue-cured Virginia.

Rs.20.90 To Rs.48.88/kg (US$ 0.36 to 0.84)

Dark Air Cured.

Rs.14.99 To Rs.15.98/kg (US$ 0.26 to 0.28)

White patta(Rustica

Rs.10.92 To Rs.25.26/kg (US$ 0.19 to 0.44)

Oriental). Burley.

Rs.30.12 To Rs.40.14/kg (US$ 0.52 to 0.69) (1US$ = Rs.58)

REFERECES: •

http://www.pakistaneconomist.com/issue2000/issue31/i&e4.htm

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http://www.fias.net/ifcext/fias.nsf/AttachmentsByTitle/Conferences_Competition Policy_Abdul+Ghaffar.prn.pdf/$FILE/Conferences_CompetitionPolicy_Abdul+G haffar.prn.pdf

•

http://www.pakistaneconomist.com/issue2000/issue31/i&e4.htm

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http://www.fias.net/ifcext/fias.nsf/AttachmentsByTitle/Conferences_Competition Policy_Abdul+Ghaffar+2.prn.pdf/$FILE/Conferences_CompetitionPolicy_Abdul +Ghaffar+2.prn.pdf

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http://www.pakistaneconomist.com/issue2000/issue31/i&e4.htm

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http://www.reuters.com/article/mergersNews/idUSISL13794220070309

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http://www.cancer.org/downloads/AA/TobaccoAtlas20.pdf

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http://www.afronets.org/archive/200405/msg00102.php

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http://www.pakistaneconomist.com/database1/cover/c96-61.asp

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