Philip Morris and its Philippine saga

By Lala Rimando,

Posted at Feb 25 2010 04:09 PM | Updated as of Feb 26 2010 11:28 PM

MANILA, Philippines - The joint venture deal between Philip Morris and Fortune Tobacco Corp does not only seal the end of the local firm’s monopoly days, it also culminates an almost 55-year-long presence in one of the world’s biggest cigarette markets. 

On Thursday, Philip Morris announced the deal between long-time industry leader Fortune Tobacco, owned by Lucio Tan, a staple name in the Philippine cigarette market. Tan was granted concessions by former President Ferdinand Marcos that resulted in a virtual monopoly for over 4 decades.

Yet, Filipinos were introduced to Marlboro cigarettes way back in 1955, around the same time that this Philip Morris-made brand was emerging as Americans’ favorite.

At the time, Philip Morris Incorporated entered into its exclusive licensing agreement with Filipino-owned La Suerte Cigar and Cigarette Factory. The agreement was Philip Morris’ first outside the US.

La Suerte produced and sold what was then considered an up-and-coming filter-tipped cigarette. For 40 years, local cigarette makers rolled, marketed and distributed Marlboro, and eventually another brand, Philip Morris 100’s, in the Philippines.

By 1995, Philip Morris Philippines Inc (PMPH) was set up to provide marketing support to its brands and to start organizing leaf-buying activities for its operations in the region. 

How the sin tax policy created a duopoly  

While businessman Lucio Tan has been generally perceived to have perfected the art of influencing regulation and tax schemes to favor his Fortune Tobacco Corp., the expansion efforts of multinational player Philip Morris in the Philippines have changed the playing field. Read More

Global expansion

At the turn of the century, Western-based tobacco companies faced stiffer regulation, numerous cases in court, and growing anti-tobacco advocacy groups. Multinational companies, like Philip Morris, started training their eyes on growth markets that have yet to impose Western-style regulatory and other restrictions on the deadly habit.

Asia, with its large population base, became a promise land. Outside China and Japan, Philip Morris eyed economies that seemed easy to penetrate: Indonesia, the largest cigarette market in Asia, and the Philippines, the second largest.

At the time, the Philippines was promoting itself to foreign investors and citing liberalization efforts as one of the come-ons. For decades, the cigarette industry was dominated by Fortune Tobacco, which is owned by Lucio Tan, one of the richest and politically-connected businessmen in the country.

In a previous interview with Newsbreak, Chris Nelson, who heads the local unit of Philip Morris, said there were talks with local partner, La Suerte, for a possible joint venture. The talks fizzled out, and the 47-year-old licensing agreement came to a halt.

In 2003, Philip Morris Philippines Manufacturing Inc. (PMPMI) inaugurated its US$300 million manufacturing plant at the First Philippine Industrial Park in Batangas. President Arroyo lauded it as a proof of investor confidence on her administration.

In January 2010, PMPMI broke ground for its regional tobacco warehouse facility at the Subic Bay Techno Park in Central Luzon. The P1-billion facility, which will be built in phases, sits on a 50,000-sq-m parcel of land that PMPMI had leased from the Subic freeport zone authority for 50 years.

The freeport’s officials, who recently lost locators, like Fedex, to China, trumpeted the event as a vote of confidence to Subic’s status as a maritime logistics and transshipment center.
Regional free trade

More than Subic’s location, however, key to the multinational cigarette firm’s decision to invest in the Philippines is a free trade agreement among ASEAN countries that reduced import duty rate for select products to 5% or less. The reduction in import duty rates was vital, considering that, before the free trade accord, cigarettes traded within countries in the region were slapped by as much as 60% import duty.

Tobacco products are included under the scheme by Thailand, Philippines, Singapore, Malaysia and Indonesia. Of the 5 countries, Philip Morris has manufacturing operations in the Philippines, Indonesia, and Malaysia, but markets, like Thailand, still have homegrown firms that are lording over the local industry.

To keep its costs down, partly through the preferential tariff rates, PMPMI maximizes its facilities in the Philippines by consolidating tobacco leaves from suppliers and manufacturers in Asia. The factories here also ship out ready-to-puff Marlboro and Philip Morris sticks to markets like Thailand.

Portfolio in the Philippines

As Philip Morris International, PMPMI’s parent, consolidated its operations in Asia, it bought Indonesian cigarette company, Sampoerna, in 2003. In essence, Philip Morris International (PMI) was capturing market share in Indonesia, and Sampoerna’s distribution system in a country where over 50 million people smoke.

The strategy was replicated in the Philippines where Sampoerna’s trademark brands were being manufactured and sold by local firm Sterling Tobacco Corp..

PMPMI, in effect, acquired Sterling’s 4 cigarette brands that were strong in Visayas and Mindanao regions, areas that PMPMI was still starting to penetrate. Sterling’s brands— Bowling Gold, Stork, Miller, and Bowling Green—are in the low-priced cigarette segment, which PMPMI had zero presence in.

It was a strategy to start its head-on competition against market leader Fortune Tobacco Corp, which dominated the low-priced segment.

The Sterling brands completed PMPMI’s portfolio. Its flagship brands, Marlboro and Philip Morris King size, are its premium products that already have a strong following. L&M is its mid-sized brand that hasn’t had the same success.

Fast forward to 2010. Despite PMPMI’s aggressive marketing, wider distribution reach, and learning the ropes of political economy in the Philippines, its cheaper brands remain second fiddle to Fortune’s brands.

It did not help that progressively increasing sin taxes and a slowing economy that squeezed personal budgets for cigarettes have pushed smokers to trade down to cheaper brands.

The deal to merge with Fortune, however, changed all that.