More often than not, tobacco companies have been able to demonstrate resilience in an economic downturn, but with the ravaging global financial crisis and strict government regulations, tobacco player Philip Morris (Malaysia) Sdn Bhd is bracing itself for challenging times.
With most markets sliding into an economic downturn, the tobacco firm's managing director Ilwoo Chong said the industry could see a slowdown in cigarette consumption.
"The Asian market is not a growing market. For Malaysia, it has come to a point where (growth) would be stagnant," Chong told The Edge Financial Daily .
According to statistics by the Confederation of Malaysian Tobacco Manufacturers, the overall industry volume in the first three quarters of 2008 dropped 2.2% from the same period a year earlier.
Another player, British American Tobacco (M) Bhd (BAT), has been quoted as saying cigarette sales volumes would face pressure as hefty tax imposed on the industry would lead to price jumps, which would inevitably see growth in illicit Cigarettes.
That would not be the only challenge the Big Three tobacco players - Philip Morris, BAT and JT International Bhd - would face, as the government had announced last year that cigarette packs sold in the country would have to bear pictorial warnings to discourage smoking.
Also, the Health Ministry was reported to consider plans to increase no-smoking zones. The government also announced a minimum pricing of RM6 for a pack of 20s. The pictorial warnings and the floor pricing measures were planned to be enforced this month.
Asked on the minimum pricing mechanism, Chong said the tobacco firm was in support of the move, adding that it would "give a level-playing field for all".
With the introduction of the RM6 floor price, the retail price difference between the Big Three brands and the extremely low-priced Cigarettes (ELPC) would be reduced to as little as 50 sen per pack of 20s from a difference of RM2 to RM3.50 per pack.
This works in favour of the Big Three brands. The ELPC brands had been steadily gaining market share as tax imposed on the tobacco firms led to More expensive Cigarettes.
From a market share of 2.5% in 2005, ELPC has raised its market share to 8% as at the second quarter of last year, according to a report by Maybank Investment Bank Bhd.
For the industry players, however, a bigger concern was the increase in illicit Cigarettes. According to Chong, illicit Cigarettes account for about 25% of industry share last year from 14% five years ago.
"Illicit Cigarettes thrive when tobacco excise duties go up. This would also lead to lower revenue for the government as most switch (to cheaper illicit Cigarettes)," Chong said.
He added that it would be an uphill battle for the government and the industry to fight illicit cigarette trading. "The customs department has done its best in cracking down illicit trade. Even so, illicit trade has become so sophisticated that it is extremely hard to get around."
He also said the significant difference in cigarette prices in the region made it harder to curb illicit trade, echoing a statement made by the World Bank, which stated price differences between countries or states would clearly give rise the incentive to smuggle Cigarettes.