Tobacco industry: Philip Morris feeling the squeeze in Pakistan

Price war with Pakistan Tobacco leaves the firm worse off during 2011.

KARACHI:

Philip Morris Pakistan is beginning to feel a financial pinch, and is already reducing the scale and scope of some of its manufacturing operations inside the country.

In a statement released to the press on Saturday, the company announced that it will be reducing the operations in its smallest factory, located in Mandra, near Rawalpindi. The company cited “difficult economic conditions” including high taxes and low consumer purchasing power as a primary reason for the decision. The decision was described by Philip Morris as “difficult, but necessary.”

Among the key factors that specifically affected Mandra was a government regulation known as SRO 863(I), a 2010 law that effectively bans the marketing and sales of the smaller 10-cigarette packs, which were the mainstay of the company’s operations near Rawalpindi. Given the fact that Mandra is the company’s smallest factory, and that its main product is now illegal, the operational costs per cigarette at the plant would effectively become too high to be sustainable.

“The main activity of the factory has become obsolete,” said the company in its statement. It, however, declined to say whether the factory would be completely shut down.

Philip Morris did not disclose how many of its 2,363 employees in Pakistan work in Mandra and how many of them would be laid off. The company did, however, state that it would be paying the laid off workers a severance package that would exceed the legal minimum requirements.

“We are committed to ensuring that all retrenched employees are treated fairly and with dignity, and genuinely appreciate the contributions that each and every employee has made over the years,” said Arpad Konye, the managing director at Philip Morris Pakistan, in the statement released to the press.

The troubles at the Mandra facility are the latest in Philip Morris’ woes in Pakistan. The company had been operating as a joint venture with the Lakson Group (the parent company of Century Publications, the publisher of The Express Tribune) until 2007. In that year, the global company bought out its local partner’s share to retain well over 97% of the Pakistani subsidiary. (The remainder is listed on the Karachi Stock Exchange).

The acquisition, however, does not appear to have turned out well. Profits have gone from Rs1.5 billion in 2007 to Rs573 million in 2010, a nearly 62% drop. The year 2011 appears to have gone even worse, with the company earning a net loss of Rs284 million for the first three quarters of the year, ending September 30, 2011.

Philip Morris Pakistan has perennially been the number two player in the Pakistani tobacco industry, outshone by the Pakistan Tobacco Company, the local subsidiary of British American Tobacco. Industry insiders say that Pakistan Tobacco has better market penetration with its higher-end brands than Philip Morris. “Philip Morris got into a cut-through price war with Pakistan Tobacco over the lower-end brands,” said one person familiar with the matter. “And Pakistan Tobacco has an unassailable advantage on the higher-end segment of the market because of their Benson & Hedges and Gold Leaf brands.”

Philip Morris appears to have come out the worst of that price war, with revenues declining by 3.9% to Rs24.7 billion during the first nine months of 2011. By contrast, Pakistan Tobacco’s revenues went up by 12.3% to Rs49.9 billion during the same period.

Published in The Express Tribune, March 4^th, 2012.