Smokers must cough up more

From this month, cigarette excise is up 20 percent. The consumer will have to pay more for each cigarette package bought. But price changes for cigarettes don't stop here. For next year, the Fiscal Code has established an excise of EUR 50 per 1,000 cigarettes.
Also, Romania has to apply a calendar for increasing the excise that has to reach EUR 74 per 1,000 cigarettes by 2010. The measure has prompted a vehement reaction from local producers who consider this an extra tax burden.
“To absorb the rise of the excise, we had to raise the prices at the beginning of this year to make the price increase bearable. So, this year we increased the price three times, the total rise being EUR 0.25,” Gilda Lazar, director of corporate affairs at JTI Romania, told Business Review.
Representatives from BAT believe that one important effect of the excise increase will be “a reduction in legal consumption of cigarettes strongly stimulating demand for cheap cigarettes.”

Expensive vice
According to the local manufacturer one other factor that leads to a price increase for cigarettes is the vice tax.
Adrian Popa, corporate & regulatory affairs director at BAT Romania, told Business Review that because of this tax, the company had to increase prices by 30 percent last year.
He added that money representing the tax, EUR 10 per 1,000 cigarettes, was added to the minimum level imposed by the European Union, meaning EUR 64 per 1,000 cigarettes, and said “The worst effects will be seen in the next two years, if the Romanian authorities don't apply just the minimum sum imposed by the EU.” He also gave example of how the price of cigarettes has changed. “A packet of Kent was EUR 0.81 in December 2004 and is now EUR 1.63 and the price of a packet of Pall Mall increased from EUR 0.71 to EUR 1.45,” said Popa.
Other manufacturers are even more vehement about this tax. Peter Imre, of PMI Romania, thinks that the vice tax promoted by health minister Eugen Nicolaescu is illegal and only leads to an increase in contraband cigarettes. In his opinion, “For the several hundred million euros that will go to the health budget another several hundred million euros will be spent fighting against the trafficking of illegal cigarettes.”
This year, the Romanian authorities estimate that they will receive EUR 300 million from the vice tax.

Duty-free stores, a contraband channel?
The reopening of duty-free stores restarted discussions between authorities and manufacturers, but amongst local players, attitudes regarding this issue are mixed. JTI representatives say that “The reopening of duty-free is a decision by Parliament that we respect.”
But BAT officials are unhappy with the move. “It is hard for me to understand the economic justification for the reopening of duty-free at the border with non-EU countries, especially when the same products can be bought legally in neighboring countries two-three times cheaper than the prices we have here. According to our research, the cigarettes that come from this type of stores represent 50 percent of the total illegal volume,” said the corporate & regulatory affairs director at BAT Romania.
The local authorities say that duty-free stores offer a source of contraband. “The increase of cigarette trafficking during 2004 to 2006 was due to duty-free stores at the borders. This trafficking represents 50 percent of the illegal market of tobacco,” said Dan Valentin Fatuloiu, chief of the Romanian Police. For the five months of this year, customs officials say that illegal traffic rose by 152 percent compared with the same period of 2005.

Profit won't go up in smoke
But despite all complaints from manufacturers, the only group affected by these changes are consumers, who have to pay more to light up. The profits and turnover of cigarette makers remain robust. For example, last year, BAT registered a turnover of EUR 561 million and for this year has set a target of EUR 664 million. The company's net profit was EUR 40 million in 2006, up 49 percent over the previous year.
Meanwhile, JTI reported a turnover of EUR 270 million in 2006 and almost EUR 73 million in the first quarter of this year, 26.5 percent more than in the same period of last year.
Tobacco companies have development plans for other markets too. Philip Morris intends to become the most important brand in Bulgaria according to Andrei Vasilescu, company manager for Bulgaria. Competitor JTI also plans to conquer other markets.
“From this year we will export part of our production to the Baltic Countries. We will continue to invest in innovation and quality,” added Gilda Lazar. According to her, the company's total investment in Romania rose to $100 million.
In his turn, Adrian Popa said BAT has been interested since 1997 in the opening of a factory in Ploiesti for EUR 140 million. “We will continue investing in our brands, community and employee training,” he said, adding that “Expansion plans for production capacity aren't yet finished.”

All budgeted out and nowhere to advertise
At the start of this month, England introduced a ban on smoking in all public spaces.
Meanwhile, across the ocean, several members of the US congress are demanding the removal of cigarette commercials from magazines.
This news, despite being so far from Romania, gives local producers shivers.
Already, producers are banned from promoting their products through outdoor and written media. “We have the same promotional budgets but now we have to spend them on other channels such as promotions, inserts and direct marketing,” said Gilda Lazar.
In other words, customers are treated to promotions and contests while also paying more for the privilege.

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