This project is based on analysis of the tobacco industry because Tobacco in Pakistan holds an economic significance in Pakistan economy. Pakistan is second largest cigarette consumer in south Asia. It is a great source of revenue for major players and for Pakistan economy. It gives the highest revenue to government in terms of taxes. Pakistan tobacco company is dominated by two major players Pakistan tobacco company and philip Morrris. They have brands which hold the maximum share in the cigarratte market few are dunhill, gold leaf, capstan, gold flake, benson and hedges, Marlboro, embassy, and red and white. They have high demand for these brands. The increase in demand and supply may be due to more brands offered by the cigarettes manufactures and in the late 1990’s tobacco companies were allowed to advertise their brands. However the consumption of cigarettes is more than the official data mainly due to no record of smuggling and unregistered cigarettes manufacturers. The demand supply also vary because of seasonal fluctuations, holy month of Ramadan, inflation and increase in population. The companies have enough capacity but they do not utilize that capacity because currently smuggling is practiced in a country at high level. There is an availability of raw material in different regions of the country but NWFP and Punjab are the major producer of the raw material. Tobacco duty structure in Pakistan divided into complicated 3 levels. Lower, lower mid and premium. There are few issues related to the industry the main issue is the smuggling which affects the market badly other are the advertisement, health before trade, increase taxes, close down duty free, tax evasion. These issues have risen because no action taken by the government. They should control smuggling by tracing the distributors which would also helpful in a way to control tax evasion, companies should use modern technologies and should have timely control to have more yield.
Table of Contents
OVERVIEW
Tobacco in Pakistan holds an economic significance in Pakistan economy. Tobacco is grown throughout the country but major source of tobacco raw material is in the Khyber Pakhtoon khowa. In Pakistan, although tobacco cultivation occupies a relatively small area of 0.27% of the total irrigated land in the country and about 3% in Khyber Pakhtunkhwa. Pakistan was a net importer of tobacco in 1948 but became self sufficient in tobacco production in 1969. It was mainly due increase in productivity and new method used for tobacco cultivation. Pakistan tobacco exports and imports countries are prominent. Pakistan within 30 years of Independence became 5th largest tobacco producer in the world and 4th highest in yield. Currently tobacco industry in Pakistan is dominated by two multinational firms Pakistan Tobacco Company LTD and Phillip Morris Pakistan LTD. Though there are others firms but their influence on tobacco industry is not significant. Other companies are: Sarhad Cigarette Industry, Walton Tobacco Company, International Cigarette Industry, Khyber Tobacco Company, Imperial Cigarette Industry, Universal Tobacco Company, Saleem Cigarette Industry, Souvenir Tobacco Company. Cigarette industry contributes nearly 3.5 percent of total FBR revenue currently the major challenge for Tobacco industry is the increasing trend of smuggling.
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Overview of the market share of tobacco industry in Pakistan
Economic Significance
This crop possesses immense economic significance and its impact on the fiscal and monetary policies of Pakistan. Tobacco possesses great source of revenue, employment and foreign exchange earnings to the country. It give the highest revenue to government in terms of taxes. Tobacco industry currently employs about 80,000 workers in cultivation, 50,000 are employed in 21 factories of the tobacco industry and it also provides 1 million indirect employments. It is also an important source of foreign exchange earnings for the country approximately US$ 61.349 million during the fiscal year of 2010-2011.Pakistan Tobacco board have played an important role in developing the production of tobacco crop on scientific methods, if it had not been developed the country would have been importing raw material worth Rs.8-10 billion per annum (2009-2010).
Exports
Year
Quantity exported
Value
Total Value
Tobacco
Cigarettes
Cigars
Tobacco
Cigarettes
Cigars
(M.Rs)
(M.US$)
(M.Kgs)
(M.Nos)
M.Nos
(M.Rs)
(M.Rs)
M.Rs
1999-2000
3.90
16.060
273.13
7.440
280.57
5.420
2000-2001
5.98
11.770
578.05
6.220
586.18
10.032
2001-2002
3.20
108.240
231.11
49.180
286.41
4.659
2002-2003
5.49
74.23
316.75
45.62
362.37
6.25
2003-2004
8.27
163.96
642.74
124.35
767.09
13.23
2004-2005
7.17
44.73
626.67
46.94
673.61
11.23
2005-2006
3.83
21.00
332.80
66.70
339.47
5.66
2006-2007
5.77
26.12
0.77
543.85
24.64
1.69
570.18
9.50
2007-2008
4.72
3.97
0.13
449.82
4.17
0.16
454.15
5.68
2008-2009
4.77
10.97
0.02
963.27
14.84
0.03
978.14
13.973
2009-2010
5.17
13.94
11.10
1201.08
24.22
16.41
1241.71
15.521
2010-2011
8.39
23.49
—
2294.53
39.75
—-
2334.28
24.571
Pakistan main exporter for tobacco is US because it does not produce quality unmanufactured tobacco. The value increase by 85% during 2000-2001 fiscal yea. However the value decline by 53% from 10.032 to 4.659 in 2001-2002. The main reason for decline was the aftermath of 9/11 which resulted in exports orders cancelled. Foreign business people were advise to take security clearance. Year 2003-2004 saw a 100% increase in value from pervious year. In 2005-2006 year tobacco industry experienced a fall of around 50% in value and the trend remained till 2007-2008 year. During the last fiscal year Pakistan tobacco industry achieved the highest value of exports at around 24.571 million.
FLOW CHART/ MANUFACTURING PROCESS
Processing and manufacturing
After harvesting and curing, the cured leaf is processed through a Green Leaf threshing plant.
The main purpose of this processing is to:
Remove sand, dust and other particles
Separate the lamina from the stem (threshing)
Drive down the moisture content to safe storage levels.
Manufacturing
At Tobacco factories, the matured tobacco is checked for quality and then carefully mixed with other ingredients to make different forms of tobacco, such as flavorings or pre-processed tobacco. Technical tools are used to keep track of various types of tobacco; computers are increasingly used to keep track of the process.
Moisture content is an important part of tobacco process. Too dry and the tobacco leaf will crumble; too moist and it may spoil during storage. Right amount of steam is required to treat the blended tobacco and exact amount of water to make it elastic and then cut into the form in which it appears in the cigarette. Excess moisture is then removed so the cut tobacco can be given a final blending and quality check.
Traditionally Cigarette making was done by hand but nowadays it is almost fully automated, with the cut tobacco, cigarette paper and filters continuously fed into cigarette-making machines. The technology has advanced dramatically over the years which have not wear down the quality; each cigarette is automatically quality controlled to ensure that it meets every benchmark for its specification.
STRUCTURAL COMPOSITION
Product Mix
Since Pakistan tobacco industry is dominated by two multinational companies Philip Morris and Pakistan Tobacco Company. Both companies have many brands in cigarettes which are produced to cater different income class.
Pakistan Tobacco Company Brands available in Pakistan
Super Premium
Duhill
High and Premium
John Player Gold Leaf
Benson & Hedges
Medium Category
Gold Flake
Wills Kings
Capstan
Low category
Embassy
Super Premium
Marlboro
High and Premium
Red and white
Medium Category
Moven gold
Low category
K-2
Diplomat
Philip Morris Pakistan Brands available in Pakistan
Cigarette market in Pakistan is dominated by lower mid-priced cigarettes which are almost 90 percent of the market. Market for Premium category is only 10%. John Player Gold Leaf has a market share of 9.83 percent in the country whereas world leading brand Marlboro which is in the premium category have insignificant share ranging from 0.1 to 0.25% of the total market. In the middle category, Gold Flake has major market share of 38.64 percent followed by Morven Gold which caters to the 37 percent of the market need. Capstan has started losing its share as Pakistan Tobacco Company has introduced another brand as Capstan by Pall Mall, which has started capturing its share in the market. In the lower class Embassy has a market share of almost 4.5 percent whereas Diplomat has a market share of about 2.5 percent followed by K-2 with the market share of 1.5 percent of the total sales. At present, consumer price of a pack of 20 of most sold brand in the country is Rs 28.80 (US $0.33) which is almost lowest in the world.
Installed capacity
Installed capacity for cigarettes sticks in billions 2010-2011
Average Industry
126
Pakistan Tobacco Company
45.1
Philip Morris Pakistan
50.1
Others
31
Average installed capacity for cigarettes manufacturing company in tobacco industry is 126 billion stick per year. Pakistan Tobacco Company Ltd which holds the largest market share in industry has an annual capacity of 45.1 billion cigarettes. Philip Morris Pakistan which is the second largest producer of Cigarettes has an annual capacity of 50.1 billion
Capacity utilization
Capacity utilization increased from 49.6 billion sticks in 2002-2003 to 75.8 billion sticks 2010-2011. Average 68 billion sticks are produced annually. Pakistan Tobacco Company produced 40.5 billion sticks out of a capacity of 45.1 billion during 2010-2011. Philip Morris produced 22.4 billion sticks from capacity of 50.1 billion during the same year. The reason for under utilization of capacity for Philip Morris is due to smuggling and illegal trade which will be discuss later in the report.
Capacity utilization of Cigarettes sticks in Billion 2010-2011
Average industry utilization
68
Pakistan Tobacco Company
40.5
Phillip Morris Pakistan
22.4
RAW MATERIAL AVAILABILITY
tobzones.jpg
The map shows different types of raw materials available all over Pakistan. The major portion of raw material comes from NWFP and Punjab. Pakistan gets the majority of different types of raw material from NWFP mainly due to fertility of soil and suitable weather. NWFP produces around three-fourths of the tobacco leaf grown in the country. The specific raw materials that come from NWFP are Virginia flue-cured, Burley, Nicotiana rustica (country sum-cured/White Patta). Flue Cured Virginia tobacco is now the most widely grown and widely used type of cigarette tobacco in Pakistan and the total production of this high value commodity have increased from 23.8 million kgs in 1967-68 to 66 million kgs in 2007. Punjab is second largest in terms of raw material availability. Punjab is famous for the production of dark air-cured and hookah type tobaccos. Apart from these two raw material Kala Patta (snuff) is also cultivated in Punjab region. Sindh and Balochistan produces Nicotiana Rustica and Country air-cured (Snuff) respectively. Virginia and Burley is procured mostly from local farmers on contract basis
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Tobacco raw material is available extensively all over Pakistan is a major strength for Tobacco industry mainly. Pakistan is now the 7th largest producer of flue-cured tobacco. Deep researches and development have been carried out by Pakistan Tobacco Board in collaboration with tobacco companies in order to reduce dependence on the import of good quality tobacco leaf such as suitable climatic conditions have been explored in areas of Mansehra, Buner, Swat and Dir districts to meet the quality requirements of cigarettes for domestic use.
Forms of Tobacco Intake
Raw material is used for to make different form of tobacco such as Chilumhuqqah, chewing tobacco in pan, snuff and niswar. Experts divide tobacco use into two broad categories -smoking and smokeless tobacco. According to a survey conducted by PMRC apart from cigarettes moist dry snuff and chewing tobacco is commonly used in Pakistan. Huqqah and Chilum, are the oldest means of tobacco intake in this region.
Production Of Different Types Of Tobacco In Pakistan (Million Kgs)
Year
Flue-cured Virginia
Dark air-cured
White Patta
Burley
Others
Total
2000-2001
50.96
1.17
9.65
0.58
23.38
85.74
2001-2002
59.61
1.94
9.38
0.95
20.70
92.58
2002-2003
51.31
1.42
10.83
2.15
22.55
88.26
2003-2004
50.29
0.69
10.98
1.60
22.63
86.19
2004-2005
65.78
0.86
9.91
1.64
*22.63
100.82
2005-2006
73.7
1.6
13.2
0.9
23.12
89.47
2006-2007
65.75
0.80
11.62
0.8
24.27
78.97
2007-2008
69.54
0.96
14.98
0.35
21.93
85.83
2008-2009
71.32
1.38
25.98
—-
—-
98.68
2009-2010
79.79
2.83
26.64
—
—-
109.26
2010-2011
64.670
13.540
—
—
—-
78.210
Annual estimated requirement of tobacco crop in 2012
Type of Tobacco (MillionKgs)
Flue-cured Virginia 66.680
Dark Air-cured 1.085
White Patta 2.190
Burley 0.100
Sun Cured 1.100
Rustica 1.800
Total 72.955
Current production till April/may 2012
White PattaType of Tobacco (MillionKgs)
Flue-cured Virginia 75.94
Dark Air-cured 1.41
7.40
Minimum price of raw material
Rs.121
Current Market price
Rs.140
Prices of raw material
Duty Structure
Tobacco duty structure in Pakistan divided into complicated 3 levels. Lower, lower mid and premium. In lower level there is an excise duty of Rs.9.5 for a pack of 20 cigarettes below retail price of Rs.20 excluding sales tax. Excise duty is 46% on most sold consumer brand, 56% excise duty on premium brand and 50% on cheapest brand. The excise duty is very low and difficult to understand. The Total revenue potential of the cigarette industry is around Rs 80 billion per year and around Rs.50.2818 billion taxes was collected during 2011-2012 from two multinationals and some other manufacturers. The difference shows that tax evasion in tobacco industry is high. Approximately Rs.9-10 billion tax is evaded annually. The main reason for this evasion is because of the complex tax structure and it is reported that multinationals and federal board of Revenue (FBR) have intentionally made tax difficult so that less amount can be charged thus benefiting cigarettes manufactures tax collection has also been affected due to inefficient check and balance.
DEMAND AND SUPPLY ANALYSIS
Estimated demand
The demand/consumption for cigarettes has seen a steady growth over the years. domestic cnosumption by year.bmp
consumption table 2.bmpconsumtion table.bmp
The data above shows that consumption of cigarettes has been increasing since 1960 onwards. The data reveals that there have been massive increases in consumption pattern of cigarettes since 1996 mainly due to availability of more brands offered by cigarettes manufactured. Around 200 million cigarette sticks were consumed in 2011. There are about 22 million smokers in the country and 55% of the house households have at least one individual who smokes cigarettes. This consumption trend makes Pakistan an attractive market for cigarettes manufactures.
Demographic cigarettes consumption trend
29% of men and 3.4% of women smoke cigarettes regularly according to national health survey
Heavy consumption of smoking (20 or more cigarettes per day) is most common and among men 25-44 years of age in Pakistan.
37% of heavy smoking is done in urban areas in contrast to 26% in rural areas.
Total cigarettes consumption in South Asia.
total consumtion pie chart1.bmp
The data shows that Pakistan is second largest cigarette consumer in south Asia. India is biggest consumer of cigarettes in south asia mainly due to highest population in the south asian region.
Estimated supply
tobacco3.bmp
The table has been taken from Pakistan economic survey 2010-2011. Te table shows that since 1990 the supply/ production of cigarettes have been increasing. This table illustrates that production of cigarettes increased during 1995-1996. During 2008-2009 fiscal year supply reached its peak of 75,609 millions.
Demand and Supply analysis
There are certain points that we can derive from demand and supply of tobacco industry. Firstly there was a huge increase in consumption and production of Cigarettes in 199. The increase in demand and supply may be due to more brands offered by the cigarettes manufactures and in the late 1990’s tobacco companies were allowed to advertise their brands. However the consumption of cigarettes is more than the official data mainly due to no record of smuggling and unregistered cigarettes manufacturers accurate. Some common factors for demand and supply fluctuation are discussed below
Seasonal Fluctuations in demand
Seasonal do play a part in consumption of cigarettes. During winter the demand for cigarettes increases. Demographics are also important, northern areas of Pakistan generally have a higher demand for cigarettes.
Religious month of Ramdan
Ramdan effects the consumption of cigarettes. During the month of Ramadan consumption of cigarettes decreases as people only smoke after fast or those who don’t smoke tend to avoid smoking in front of people as it is unwelcomed by the society.
Increase in population and availability of brands
Increase in the population of Pakistan along with more availability of cigarettes brands by manufacturers have contributed in increasing the demand and supply of cigarettes. Moreover increasing trend of smoking being considered as fashionable has also contributed towards the increase in consumption. Different varieties means more choice for consumer. A Daily Times survey revealed that wholesale dealers supply fake and smuggled cigarettes to about 20,000 retailers of Lahore, who sell them to ignorant consumers who can either not tell the difference or sent their children or servants to buy cigarettes
Natural disasters
Natural calamities is another factor for fluctuation in demand and supply of Cigarettes. The worst floods in 2010 since 1974 damaged fertile tobacco-producing land such as in NWFP
Taxation and inflation
Changes in tax structure and inflation affect the production and consumption of cigarettes. An increase in tax results in decrease in production and increase in price thus reducing the demand for cigarettes. Inflation level in Pakistan is always increasing, the increase in price level make it worse for manufacturers and government as people shift to smuggled brands which are available at cheaper price. This act result in loss of revenue to government in terms of taxes and loss of sales for manufacturersporter.jpg
Porter’s five Forces Model
By using Porter’s Five Forces Framework we will discuss five basic competitive forces within the tobacco industry. The threat of potential new entrants, the bargaining power of suppliers, the bargaining power of buyers, the threat of substitutes, and the extent of competitive rivalry.
Threat of new Entrants
The barriers to entry in the Pakistan tobacco industry are low mainly due to less competition in the industry and local companies can easily enter the market however the barriers to enter the market nationally are very high. The reason for high barriers at national level is due to high manufacturing, distribution and marketing cost which makes it difficult for local companies to sustain themselves at national stage. High investment cost is required to build production facilities that can mass-produce tobacco products at the national level. Moreover packaging cost of cigarettes countrywide is very high which cannot be afforded by the new local firm.
Brand identity is another barrier to entry in Pakistan Tobacco industry. Brand awareness is very important in any industry. In Pakistan government has imposed restriction on advertising. The ban on cigarettes adverstising is acting as a barrier to entry because advertising and communication is required to product strength in the mind of consumers. This ban is also effecting existing companies in a way that they cannot reinforce their current brands and will find difficulty in launching new brands. High brand loyalty in Tobacco industry is another entry barrier for new firms. Example Benson & Hedges users will not shift to a new product because of high emotional attached to it.
Bargaining power of Suppliers
In Pakistan tobacco industry raw material for cigarettes is provided by farmers to manufacturers. Apart from Green Revolution agricultural products have been exploited in all decades this as resulted in low prices of agricultural products but throughout Pakistan history policies have been favoring industries, finished goods are sold at higher price whereas raw material are bought at lower prices. In Tobacco sector supplier has less bargaining power because of less competitors in tobacco industry. Many of the tobacco farmers are located in NWFP, Punjab. Even though government has imposed minimum price but it has been ineffective due to dominance of multinational firms in the tobacco sector. Multinational have bargaining power because they control more than 70% of the market thus illustrating that the farmers have little bargaining power due to the government interaction.
Bargaining power of Buyers
Economy plays an important role in buying cigarettes in tobacco industry. As we know Pakistan economy is uncertain with high unemployment, increasing inflation and political instability. These factors affect the buying power of consumers. Buyer power in tobacco industry also depends on disposable income. A decline in buyer’s disposable income results in buying cheaper brands of cigarettes and if a buyer’s disposable income increases, then they are more likely to buy more expensive brands. By looking at the current scenario Pakistan Tobacco Company launched a low price brand Capstan which became very popular among consumer and captured 14% of market share which effected the market share of Philip Morris brand Moven gold. A recent example of Pakistan Tobacco Company increased the price of Dunhill which resulted in decrease of their market share as consumers shifted towards low price brand Capstan.
Consumers in the United States are now increasingly becoming more concerned with health issues. Consumer health awareness has hurt the market for tobacco sellers and has also led to the increase for government regulation. But in Pakistan which has more population than United States serves as an attractive market. Moreover less government regulation results in cigarettes manufacturers exploiting consumers.
Threat of Substitutes
The biggest substitute for tobacco users is to just quit using any type of tobacco product. many companies are trying to make product which is beneficial for the smokers to quit smoking, for this purpose they started campaign promoting awareness regarding health isssues. There are many services to help people using tobacco. As health issues and diseases increases day by day so people themselves willing to quit smoking for this purpose they started using different product or services like they started workout which would be the motivating factor or them to quit smoking. There are also some government websites which teaches different method to quit smoking and live a healthier life. Some people prefer to consult doctor and they provide them with prescription tablets or pills which would make them able to forget about smoking and it would be a source for them to live normal life, this also be one of the substitute for tobacco products. .
There are many benefits which motivates the consumer of tobacco to quit like smokers will to live the heather life would be the motivating factor other than this the cost involves in getting cigarette is very high and due to inflation and rising prices of the cigarette consumer could not afford to have additional items into their daily routine so they started involved in different methods to quit smoking and Buyer propensity toward tobacco substitutes seems to have increased over time with the evidence that smoking can lead to health risks such as lung cancer, emphysema, heart disease, pregnancy complications, and other health problems.
Competitive rivalry
Competitive rivalry in tobacco sector is medium to high because more than 70% of the tobacco market is controlled by Pakistan Tobacco Company and Phillip Morris Pakistan. Both firms are involved in intensive price wars in order to get a market share. Dominant firm like PTC is continuously decreasing its in order to maintain its market leadership. Pakistan Tobacco Company reduced the price of its medium-price to sustain market share. This triggered threat to Philip Morris Pakistan as they also had to reduce their prices. Pakistan Tobacco Company controls the largest market share at around 60%. Pakistan tobacco company brand gold flake contributes largest revenue for the company. Both companies have divided their brands into different segments to cater different income class people. Even though the volume of cigarettes have been steady for the past few years the revenue continue to increase, thus making cigarettes manufacturers financial position stronger
Rivalry in the low and medium sector of cigarettes has been a strong focus of the leading companies in recent years. The market for low and medium category is increasing in country mainly because of the income level in Pakistan. Pakistan Tobacco Company leads in this sector by having around 3 brands for medium and 1 brand to cater low income class. With the potential growth in middle and low category Pakistan Tobacco Company introduced another brand by name “Capstan by mall pall” even though it had Capstan brand. Philip Morris are also introducing new brands under medium and low category to extract the profitability.
By using the Porter’s Five Forces Framework we were able to discuss the five basic competitive forces within the tobacco industry. The level of difficulty for new entrants; the lack of bargaining power of suppliers; the bargaining power of buyers between different brands; the high level of potential substitutes; and the competition rivalry, as well as domestic growth areas; were all analyzed within the tobacco industry using the Porter’s Five Forces Framework. Dominant forces such as government regulation and health awareness influence change in the tobacco industry. The potential impact that theses forces could play on the tobacco industry could be harsh if companies don’t adjust and change with them.
MAJOR PLAYERS
Pakistan Tobacco Company LTD
In 1947 Pakistan Tobacco Company Limited was established. The company congratulate itself for being the first multi-national company to start its business in Pakistan. Pakistan Tobacco Company is the subsidiary company of British American Tobacco which started its operations for over 100 years now and dealt in over 180 countries. The Company has international reputation for manufacturing and marketing high quality brands for the adults.
PTC is one of the leading companies in Pakistan. PTC has two art factories in two different states and has more than 1,700 people working there and more than a million people working in various aspects of the business indirectly. PTC is the market leader. PTC has a vision of being the leaders of growth, champions of productivity, responsibility and a leading organization
PerformanceClipboard01gross turnover of ptc.bmp
The gross revenue was increased of about 67 million in year 2011 from 60 million in year 2010 because of the successful introduction of brand capstan which occupied 14% of the market share. In 2011, the growth was initiated by new performance of its brand Capstan established in July 2010. PTC captures a market share of about 49.4 percent in the overall market. At the beginning of 2012, the company’s brands have performed well against the competition. The 77 percent increase in such marketing, distribution and selling activities during the period, the operating margins decreased to 9.76 percent in 2012 from 10.27 percent in 2011.
The operating margin declined, but still the Company was able to control costs during the period. The gross profit increased to 30.71 percent in 2012 from 25.75 percent last year as
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