Slow burning
Eastern Europe is a favorite haunt for tobacco companies, with some of the highest smoking rates in the world. But sales have fallen by 1.1 percent for the first three quarters of the year compared to the same period in 2003, according to the latest reports by KSPT, the National Tobacco Marketing Authority, a trade organization that acts on behalf of the leading tobacco producers. And industry experts expect a slow, downward burn as excise taxes are gradually raised up to EU levels.
"The forecast for the coming years is a slow and steady decline in cigarette sales," says the KSPT's president, Jerzy Skiba. And there is no question that the rising excise taxes have been and will continue to be the determining factor in this equation.
Mariola Krzyżaniak, the spokesperson for Imperial Tobacco, which has a plant in Jankowice near Poznań and sells the West, Mocne, Mars and Route 66 brands, concedes: "In our opinion next year's increase of excise duty will result in a further decline of the tobacco products market. Consumers will choose cheaper brands and the market share of [roll-your-own] tobacco is likely to increase."
Of course the fact that Imperial had a particularly bad year compared to others probably contributes to their less than optimistic prognosis. Perhaps even worse off was Atladis, whose sales dropped 9.9 percent over last year. Atladis' spokespeople were not available for comment.
Up to the level
With excise taxes on ready-made cigarettes in Poland sitting around €26.1 (zł.112) per 1,000 cigarettes, there is clearly some way to go before reaching the EU level of €64 (zł.280) per 1,000 cigarettes. The EU wants Poland to reach this level by 2008. Yet despite the inevitability of the government closing this gap, leading tobacco companies still raise concerns over the pace with which it's being done.
"The 15 percent cigarette excise tax increase that reportedly is being planned would go beyond the excise tax harmonization schedule that the Polish government has submitted to the EU," says Johan Puotila, director of corporate affairs for Philip Morris Polska. "According to the schedule, cigarette excise tax was to be increased by 9.1 percent in 2003 [while in fact it was increased by over 13 percent] and by 10.4 percent in 2005."
He says that such steep excise tax increases could lead to a similar situation as in Germany, where a March tax increase of E.40 has reportedly resulted in cross-border trading taking off and smokers switching to cheaper brands and self-made cigarettes. A situation that surely doesn't bode well for premium brands like those of Philip Morris.
Still winning biz
A 1.1 percent industry-wide drop in sales is hardly a fatal blow, however, considering tobacco's mature stage of development, not to mention the near constant spotlight placed on the ethical dubiousness of tobacco selling. And given that 1.1 percent was the net drop, it is not surprising that some players gained significantly at the expense of others.
The Gallaher group, which is the fifth largest tobacco concern in the world, capitalized on its retailer loyalty program, with an August 2004 market share in Poland of 5.3 percent compared to 2.2 percent in September 2003. And Scandinavian Tobacco reports a respectable (or not so respectable, depending on your tobacco stance) sales increase of 3.45 percent.
Philip Morris, tobacco's grandaddy giant with its dominant Marlboro brand, meanwhile, has successfully maneuvered itself in response to the excise structure by moving into the relatively less tax-burdened roll-your-own (RYO) category, a relatively new area for them in this neck of the woods.
"Based on currently available information, we estimate that since our August launch of four RYO tobacco brands, we have already achieved an approximately 30 percent market share in this segment," says Puotila. He says Philip Morris's overall tobacco market share in Poland now sits at 36 percent.
Puotila notes that the RYO segment "has grown rapidly at the expense of conventional ready-made cigarettes, from about 2 percent of the total market in early 2003 to an estimated 8 to 10 percent of the total market today. This growth appears to be explained by the fact that RYO tobacco enjoys a significant excise tax advantage compared to conventional cigarettes.
Old school smokin'
Given how price sensitive Poles are, it's little wonder why many have decided to "go natural" and roll their own cancer sticks. The country's tobacco growers, however, are less than excited about the developments.
"Tobacco for rolling is cheap, poor quality tobacco, whereas our members have, over the last 10 years, invested millions of dollars, mostly funded by bank credit," Przemyslaw Nowryta, president of the Polish Tobacco Growers Association, told the WBJ last June. "Discrimination in favor of RYO means that we can't get a realistic price for our tobacco."
Black market
Surely companies can opt to go the way of Philip Morris, and adjust by moving into the RYO category. A much worse problem arising from higher taxes and higher prices, however, is that of cigarette smuggling, particularly from the northern and eastern borders of the country.
"[The excise tax increases will] have an effect on decreasing sales and will increase smuggling of cigarettes, particularly from our eastern neighbors," says Skiba, who cites smuggling levels at 14 percent for 2004 so far. Market research institute Almers, meanwhile, reports that the market share of illegal goods in central Poland dropped from 13.2 percent in 2003 to an estimated 11.4 percent for 2004. The all-time record goes to the town of Sejny, which lies on the border with Lithuania, where the percentage of illegal tobacco products was recorded at a shocking 90 percent.
But whatever tobacco's problems, one can be reasonably confident that-whatever the circumstances-they'll manage.
"The forecast for the coming years is a slow and steady decline in cigarette sales," says the KSPT's president, Jerzy Skiba. And there is no question that the rising excise taxes have been and will continue to be the determining factor in this equation.
Mariola Krzyżaniak, the spokesperson for Imperial Tobacco, which has a plant in Jankowice near Poznań and sells the West, Mocne, Mars and Route 66 brands, concedes: "In our opinion next year's increase of excise duty will result in a further decline of the tobacco products market. Consumers will choose cheaper brands and the market share of [roll-your-own] tobacco is likely to increase."
Of course the fact that Imperial had a particularly bad year compared to others probably contributes to their less than optimistic prognosis. Perhaps even worse off was Atladis, whose sales dropped 9.9 percent over last year. Atladis' spokespeople were not available for comment.
Up to the level
With excise taxes on ready-made cigarettes in Poland sitting around €26.1 (zł.112) per 1,000 cigarettes, there is clearly some way to go before reaching the EU level of €64 (zł.280) per 1,000 cigarettes. The EU wants Poland to reach this level by 2008. Yet despite the inevitability of the government closing this gap, leading tobacco companies still raise concerns over the pace with which it's being done.
"The 15 percent cigarette excise tax increase that reportedly is being planned would go beyond the excise tax harmonization schedule that the Polish government has submitted to the EU," says Johan Puotila, director of corporate affairs for Philip Morris Polska. "According to the schedule, cigarette excise tax was to be increased by 9.1 percent in 2003 [while in fact it was increased by over 13 percent] and by 10.4 percent in 2005."
He says that such steep excise tax increases could lead to a similar situation as in Germany, where a March tax increase of E.40 has reportedly resulted in cross-border trading taking off and smokers switching to cheaper brands and self-made cigarettes. A situation that surely doesn't bode well for premium brands like those of Philip Morris.
Still winning biz
A 1.1 percent industry-wide drop in sales is hardly a fatal blow, however, considering tobacco's mature stage of development, not to mention the near constant spotlight placed on the ethical dubiousness of tobacco selling. And given that 1.1 percent was the net drop, it is not surprising that some players gained significantly at the expense of others.
The Gallaher group, which is the fifth largest tobacco concern in the world, capitalized on its retailer loyalty program, with an August 2004 market share in Poland of 5.3 percent compared to 2.2 percent in September 2003. And Scandinavian Tobacco reports a respectable (or not so respectable, depending on your tobacco stance) sales increase of 3.45 percent.
Philip Morris, tobacco's grandaddy giant with its dominant Marlboro brand, meanwhile, has successfully maneuvered itself in response to the excise structure by moving into the relatively less tax-burdened roll-your-own (RYO) category, a relatively new area for them in this neck of the woods.
"Based on currently available information, we estimate that since our August launch of four RYO tobacco brands, we have already achieved an approximately 30 percent market share in this segment," says Puotila. He says Philip Morris's overall tobacco market share in Poland now sits at 36 percent.
Puotila notes that the RYO segment "has grown rapidly at the expense of conventional ready-made cigarettes, from about 2 percent of the total market in early 2003 to an estimated 8 to 10 percent of the total market today. This growth appears to be explained by the fact that RYO tobacco enjoys a significant excise tax advantage compared to conventional cigarettes.
Old school smokin'
Given how price sensitive Poles are, it's little wonder why many have decided to "go natural" and roll their own cancer sticks. The country's tobacco growers, however, are less than excited about the developments.
"Tobacco for rolling is cheap, poor quality tobacco, whereas our members have, over the last 10 years, invested millions of dollars, mostly funded by bank credit," Przemyslaw Nowryta, president of the Polish Tobacco Growers Association, told the WBJ last June. "Discrimination in favor of RYO means that we can't get a realistic price for our tobacco."
Black market
Surely companies can opt to go the way of Philip Morris, and adjust by moving into the RYO category. A much worse problem arising from higher taxes and higher prices, however, is that of cigarette smuggling, particularly from the northern and eastern borders of the country.
"[The excise tax increases will] have an effect on decreasing sales and will increase smuggling of cigarettes, particularly from our eastern neighbors," says Skiba, who cites smuggling levels at 14 percent for 2004 so far. Market research institute Almers, meanwhile, reports that the market share of illegal goods in central Poland dropped from 13.2 percent in 2003 to an estimated 11.4 percent for 2004. The all-time record goes to the town of Sejny, which lies on the border with Lithuania, where the percentage of illegal tobacco products was recorded at a shocking 90 percent.
But whatever tobacco's problems, one can be reasonably confident that-whatever the circumstances-they'll manage.
