CIGARETTE PRICE INCREASE LIKE TO AFFECT SALES

The hike in cigarette prices announced Oct 4, 2010 caught many by surprise, not only for the huge quantum of the increase, but also the lack of immediate official announcement on the new pricing structure.

Analysts had viewed the cigarette price increase as a 'pre-emptive' strike against a Government-imposed excise duty hike ahead of the upcoming Budget 2011 to be tabled on Oct 15, 2010. Premium 20-cigarette packs are now priced at RM10 per pack.

BRITISH AMERICAN TOBACCO (BAT) said Oct 4, 2010 that the Government increased cigarette excise duty by 3 sen a stick across the board from Oct 1, from 19 sen previously. This was confirmed by a Finance Ministry spokesman on Oct 4, 2010.

PACK OF 20s
For a pack of 20 sticks, the additional 3 sen excise duty amounted to 60 sen. The new price of RM10 for a pack of Dunhill was 70 sen higher compared with the previous selling price of RM9.30.

In the value-for-money segment, prices went up from RM7.80 a pack to RM8.50.

" .... Historically, manufacturers have always increased retail selling prices by a higher amount than the hike in excise duty due to higher advertising and promotion (A&P) expenses in anticipation of lower sales volume ...." said AMRESEARCH. More expensive cigarettes are likely to translate to lower sales volume.

VOLUME SALES FELL PREVIOUSLY
OSK RESEARCH said that in 2008, total industry volume (TIV) dropped by 11.2% following an 80 sen price hike per pack. " .... A greater than 10% fall in TIV is possible next year (2011) ...." the firm said, as the pricing for a 20-stick pack hit what it called a 'psychological' important RM10 level.

BAT shares declined 90 sen, or 1.8%, to RM47.50 on Oct 4, 2010. The stock hit a record high of RM48.64 on Sept 29, 2010. Rival JT INTERNATIONAL's share price was flat at RM5.68.

AMRESEARCH which tracks total cigarette industry volume sales said that sales volume had dropped from just above 20 bil sticks a year in 2002 to just a shade below 15 bil sticks in 2009. Estimates put BAT with a local market share of 65%, followed by JTI at 22% and Philip Morris (M) Sdn Bhd at 13%.

Legal cigarette sales have fallen in the past 8 years due to the illegal cigarette trade which has grown significantly according to industry players.

ILLICIT CIGARETTE TRADE
BAT said Oct 4, 2010 that the illicit cigarette market in the country as 'excessively rampant' and said the huge price discrepancy between legal and illicit cigarettes meant it would face a 'greater challenge' to sustain its sales volume. The sentiment was shared by PHILIP MORRIS. " .... We were extremely disappointed to learn of this 16% increase in excise tax, which is eight times in excess of the current inflation rate ...." said Corporate Affairs Director, RICHARD JAMES. " .... This will surely boost Malaysia's incidence of illicit cigarettes, already at 37%, which according to a research report by GOLDMAN SACHS GROUP, is the world's highest. " .... Our only hope from this announcement is that a commitment will be made to apportion a significant amount from this increase to fund enforcement efforts to fight illicit trade ...." he added.