Philip Morris sees smokers’ shift to cheaper cigarettes

ABS-CBN News

Posted at Oct 29 2008 08:54 PM | Updated as of Oct 30 2008 04:54 AM

The local manufacturing and marketing arm of the maker of Philip Morris and Marlboro cigarette brands is seeking to align business plans with Filipino smokers’ shift to lower-priced cigarettes, a multinational executive said Wednesday.

Chris Nelson, managing director of Philip Morris Philippines Manufacturing Inc. (PMPI) said that even before the US-led financial crisis erupted recently, they have already noted that their target markets have been buying more cheaper cigarettes.

Nelson attributed this shift to the rising cost of goods.

"If you want to be competitive in the Philippines, you should be on the lookout for the changes in consumer (pattern),” Nelson said.

PMPMI is the country’s second biggest cigarette player with a market share of 32 percent. It trails behind Lucio Tan-owned Fortune Tobacco Corporation, which has a firm grip of about 60 percent.

PMPMI’s flagship brands, Philip Morris and Marlboro, are categorized as premium brands, which are priced above Fortune’s more affordable and popular brands.

Fortune, which dominates the low-priced market segment, has a wider distribution network for its Champion, Salem, Camel, and Winston brands.

PMPMI has Miller Silver brand for its below-premium market segment, and Bowling Gold and Stork for its low-priced segment. But Nelson admitted that "the competitor is stronger in this segment."

Sachet packaging

To compete, PMPMI launched sachet-like packs with 5 and 10 sticks to make its premium brands more affordable.

Standard cigarette packs usually have 20 sticks that cost anywhere from P27 to P40, which eat into shrinking budgets of Filipinos who have to deal rising cost of food and other basic goods.

Cigarettes in the Philippines are  mostly sold by jumpboys who sell these in streets on a per stick basis.

Considered as “sin” products for their impact to the health of primary and second-hand smokers, sin taxes are usually levied on cigarettes to discourage users from consuming more.

In the Philippines, taxation on cigarette products have been contentious as anti-smoking advocates pushed for tax rules that measure up to the more stringent sin taxes in other countries.

Sin taxes usually dictate how much the cigarettes are sold.

Tax rules and predictability

PMPI and other cigarette manufacturers have taken the stand that since sin taxes are here to stay, they are just pushing for consistency.

Nelson said, “Consistency and predictability is important as these allow the company to plan its business."

Currently, cigarettes are subjected to a four-tiered tax structure. The 2005 excise tax law has scheduled tax increases until 2011.

But finance department is pushing for the passage of a bill imposing a uniform excise tax rate of P14 per pack on all cigarette brands starting 2010 to collect more taxes.

The potential shift will affect PMPMI’s business plans, which according to Nelson, was based on the existing taxation schedule.

"That was the (basis) of our business plan and it has given us predictability. We supported that law as did the rest of the industry, as did the executive and Congress,” Nelson said. 

Nonetheless, Nelson said PMPMI supports the principle of a single rate since it benefits the national government. But the company questions its timing since it has made previous business decisions based on the current four-tiered tax law.

“What the business needs is predictability, It's good for government and good for business," Nelson said.

P1-B Subic investment

PMPMI recently inaugurated its P70 million-worth finished goods storage facility at its plant at the First Philippine Industrial Park in Batangas and has plans to invest another P1 billion to expand its tobacco leaf warehouse in Subic.

The P30 million-worth Subic warehouse expansion, which was inaugurated last January, would increase the facility’s current storage capacity four-fold to 24,000 tons from the current 6,000 tons.

The warehouse expansion, which will start in 2009, will consolidate the sourcing of tobacco leaves purchased not just in the Philippines, but also from Indonesia, India, China and Thailand.

The regional warehouse will then send the tobacco leaves to the Batangas plant for processing into finished products, some of which will be exported back to Thailand.