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Cigarette giants locked in price war: Loss of profits, revenue feared

RECORDER REPORT

ISLAMABAD: The two local cigarette manufacturing giants are fighting a price war by slashing the prices of their major middle volume brands which can have dire implications for government revenue besides sending the companies into a loss situation next year.

A month ago Pakistan Tobacco Company Limited decided to cut the street price of its Gold Flake cigarettes by half i.e. from Rs 20 to Rs 10 for a packet of 20 cigarettes, and reduced the price of Capstan by Rs 4/- per packet i.e. from Rs 24 to just under Rs 20/-. This decision was taken by the new management team at PTC which was put in place by the parent company i.e. BAT Industries plc. UK. PTC has been the market leader from the early days of this country and just under a decade ago its share was estimated to be 60 percent of the market. It used to produce as much as 1.8 billion cigarettes a month as compared to Rs 500 million of Premier Tobacco Industries and under 350 million of Lakson Tobacco Company. In the first year of merger of PTI with Lakson, the sales volume was 80 million cigarettes a month.

At present, Lakson is reported to be selling 2.2 billion cigarettes a months and PTC volume has slumped to 1.2 billion.

The decision by the new team at PTC to reposition their premier brands in the market has not be taken lightly by Lakson Tobacco. They have also decided to slash the price of Morven Gold cigarettes from Rs 20 to Rs 10 per packet of 20 cigarettes along with the Princeton. And, to face the competition from Capstan, brought their Premier Classic to the same price level.

REVENUE: Apparently, besides the benefit to the smokers, there is also a silver lining for government revenue, but it may not last long. The revenue loss due to slashing of prices is expected to be compensated with higher sales by the two giants while the six Mardan based companies remain closed in protest against being put on supervised clearance instead of fixed tax.

In 1998-99 the industry sold 50 billion cigarettes and paid Rs 14.5 billion as central excise to the exchequer. A growth of 10 percent in revenue collection was expected in 1999-2000. The sale volume, however, shrank by 16 percent, in the first four months of the current year as the Mardan companies were put on capacity or fixed tax resulting in a 5.5 percent fall in revenue. In July '98 to October '99, 13 billion cigarettes were sold with revenue paid of Rs 3.6 billion. In the corresponding period in the current financial year the volume has shrunk to 11 billion and central excise to Rs 3.4 billion.

The negative trend has persisted till end March, 2000. The volume has come down from 38 billion to 33 billion and the projection of sales for the whole year is being placed at 44 billion compared to 50 billion cigarettes last year with revenue falling from Rs 14.5 billion to Rs 14.2 billion. But sales volumes in the last quarter for both PTC and Lakson will improve as the vacuum from Mardan factories decision to close down to resist supervised clearance system, is filled by the giants.

Arithmetically, there may not be a loss to the government but the shareholders will feel the heat of the price war as margins come down. Financial experts believe the government needs to consult the industry to obtain revenue growth instead taking a unilateral decision in the budget like last year and a subsequent dialogue resulting in the Finance Minister retracting in the National Assembly.

COUNTERFEIT: Counterfeit manufacturing of major brands remains a menace for the manufacturers and cause of loss of revenue to the government. The punishment prescribed in the law is no match for windfall earned in the offence. And unless the law is amended to prescribe seizure of machines and property the illegal activity in the country will continue to flourish, say industry sources.