Cigarette price breakaway?

PETALING JAYA: Philip Morris (M) Sdn Bhd’s decision to maintain the price of its cigarettes so far hints of a breakaway from the industry’s traditional practice of raising prices in unison.

Following moves by British American Tobacco (M) Bhd (BAT) and JT International Bhd (JTI) that cited cost pressure to raise the prices of their cigarettes by RM1 a pack, the delay or reluctance by Philip Morris to plug the difference in pricing is being closely watched.

A refusal to do so will hint of a break-up in the oligopolistic nature of the industry where a floor price is set by the Government. Should all three companies increase their prices by the same quantum, then their moves might attract the attention of the Competition Commission.

The Philip Morris’ cigarette brands whose prices are unchanged are Sampoerna, Marlboro and L&M. BAT’s brands include Dunhill, Benson & Hedges and Kent and JTI’s brands are Mevius, Salem, Winston and Camel.

Despite the inaction by Philip Morris to raise its prices of cigarette brands by RM1, analysts feel it may be a matter of time before it follows suit.

“BAT is the market leader, so the other players would catch up to increase their prices as well,” Kenanga Research analyst Soong Wei Siang told StarBiz.

“So when these three tobacco players raise prices together, there will no migration of consumers between cigarette brands,” he said.

BAT’s move in raising prices because of cost pressure is just the second time it has done so in the past 10 years. Most hikes by the tobacco industry came after the Government raised taxes or duties.

The first time BAT made the move was in June last year when prices went up by 3% for all its brands.

Last week, BAT raised its cigarette prices by RM1 per pack for its best selling brands. BAT didn’t mince its words, saying the operating environment remained “very challenging”.

“We have worked hard to mitigate these challenges by introducing all cost effective measures available, while at all times maintaining the quality of our products.

“However, these measures cannot fully offset our increase in operating costs and deliver against shareholders expectations,” BAT Malaysia managing director Stefano Clini said in a statement dated Sept 7.

JTI followed BAT’s move a few days later when it increased prices for all its brands by RM1 effective last Friday.

However, Philip Morris said it would keep prices of its tobacco brands unchanged, at least for now.

“Our prices remain unchanged for now, but for competition reasons, we do not disclose information regarding our product pricing nor comment on our future business plans,” Philip Morris corporate affairs director Ozan Ibrisim told StarBiz.

One market observer felt it was odd for all three tobacco players, in the absence of regulatory reasons, to increase their cigarette prices by the same amount given that they operated under different conditions.

“Every company should have a different cost structure, but right now, two of the tobacco companies have increased their prices by the same rate,” an observer said.

Past practices might not find favour these days after competition rules were introduced in Malaysia but, in such an industry, old habits die hard, especially when it comes to prices being raised at the point of sale.

Checks with convenience store owners revealed they have not received word from Philip Morris on any price change but that has not stopped a number of stores from charging an additional RM1 for all brands under Philip Morris’ stable.

Breaking up the cigarette oligopoly could bring benefits to Philip Morris, said an analyst, who believed that should Philip Morris retain its prices, the firm would see a marginal pick-up in its overall sales volume.

The cigarette industry has seen a fall in sales volumes every time the cigarette prices are raised. The other worry is that raising prices will also lead to the market share of illicit cigarettes growing.

In September last year, BAT raised prices following a 14% increase in excise duty and according to estimates, the market share of illicit cigarettes jumped to 38.9% and legal industry volume dropped by about 17% year-on-year.

Illicit cigarettes, or smuggled cigarettes, are a lot cheaper, with retail prices lower by more than 50%. Cigarette companies are inclined to raise prices because it generally leads to higher profits.

RHB Research Institute analyst Fong Kah Yan said the recent increase in cigarette prices for all brands under BAT was to buffer the company’s declining sales volume.

From October 2013 to June 2014, BAT’s sales volume for its better known brands fell 12.5% compared with sales between January and September 2013. Sales volume of the company’s cheaper priced cigarettes such as Pall Mall, shrank 10%.

For the overall tobacco industry, total cigarette sales from October 2013 to June 2014 dropped 12% compared with the period between January and September 2013.

BAT’s revenue since 2010 to 2013 has been growing on a compounded annual growth rate of 3.31%.

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Business , tobacco , cigarette


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