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SEITA (June 1996)

The Domestic Cigarette Business

Volume trends

In 1995 SEITA's domestic cigarette volume fell 6% compared with an industry decline of 2%, the latter in line with the market's long term trend. The above average rate of decline in SEITA shipments reflects the company's salesmix bias towards the dark segment, which declined 7%. Note, however, that the decline in SEITA's blond sales (-6%) was also greater than the industry average (-4%), reflecting a loss of market share to Imperial Tobacco following the launch of JPS. All manufacturers lost market share to Imperial Tobacco in 1995.
Although the loss of volume to Imperial Tobacco in 1995 was exceptional, SEITA has consistently lost volume since 1990.1995 was symptomatic of two of SEITA's long term weaknesses:
• a bias in salesmix towards dark tobacco cigarettes which are declining at more than twice the rate of the total French cigarette market
• failure to increase share of the blond segment which represents 68% of the French cigarette market.
Since 1990 SEITA's domestic cigarette volume has fallen by 20%. This compares with a French industry decline of 7%; the above average rate of decline reflects a 30% decline in dark sales, of which SEITA is almost the only manufacturer. This has not been compensated by growth in blond sales; they have risen only 5% since 1990 compared with growth in industry sales of 7%.
Since 1989 SEITA's share of the French blond segment has fallen from 23.5% to 21.5%. As a result, SEITA's share of the total cigarette market has fallen from 49.7% to 43.5%.
The long term decline in SEITA's domestic market share also reflects loss of share in the growing fine-cut market (smoking tobacco). However, the principal reason is SEITA's failure to compensate for the above average decline in dark tobacco sales by growing its blonde business.
Of SEITA's leading cigarette brands, only Gauloises Blondes had greater sales in 1995 than it did in 1990. This was not sufficient to offset the decline in SEITA's overall sales.
Since 1990 the blond segment has risen from 59% of French cigarette sales to more than 68% in 1996. Over the same period, the proportion of SEITA's domestic sales represented by blond cigarettes has risen from 25% to only 33%. SEITA blond shipments have risen by only 5% compared with 7% growth in the blond market. Most of this growth in industry blond sales has gone to Philip Morris both in terms of units and market share; since 1990 Philip Morris's share of the French blond cigarette market has risen from 35% to 41%.

Leading Cigarette Brands in France:

Brand

Type

Manufacturer

1990

1992

1994

1995

Gauloises

dark

SEITA

24.68

21.52

20.30

19.1

Marlboro

blond

Philip Morris

18.74

20.47

16.82

18.1

Chesterfield

blond

Philip Morris

0.42

0.88

8.40

7.3

Gauloises Blondes

blond

SEITA

6.35

8.01

8.40

7.7

Gitanes

dairk

SEITA

10.39

9.15

7.95

7.6

Peter Stuyvesant

blond

Rothmans

9.00

8.09

5.71

5.2

Winston

blond

RJ Reynolds

0.88

0.86

5.36

5.7

Camel

blond

RJ Reynolds

7.42

7.06

4.24

4.0

JPS

blond

Imperial

-

-

0.1

3.7

Royals

blond

SEITA

4.65

4.61

3.85

3.6

Philip Morris

blond

Philip Morris

4.47

5.11

3.78

3.6

Volume impact
In terms of profitability, SEITA's long term loss of volume and market share has not so far been problematic.
First, SEITA's production costs have fallen due to factory closures and capital investment (see below). Secondly, gross margins have risen consistently since 1990 due to a series of producer price increases. This has meant that whereas, SEITA's domestic cigarette volume fell by 20% between 1990 and 1995, its sales value rose by 20%.
In other countries, cigarette manufacturers have been able to grow tobacco profits despite declining volume due to the combination of capital investment and producer price increases. SEITA in 1996 has now already experienced several years of high capital investment and above average price increases.
How much further, therefore, can SEITA continue to grow domestic tobacco profits against declining volume?

Volume outlook

In general, the industry assumption is that cigarette producers can raise prices by 5% p.a. without accelerating the long term decline in consumption of 2% p.a. For SEITA, this will not be sufficient to grow the sales value of dark cigarettes, where unit volume is declining at 6% p.a. Note that the sales value of SEITA's dark tobacco sales in 1995 was only marginally ahead of its value in 1989.
This has three implications:
> SEITA must continue to reduce productions costs.
> SEITA must continue to raise dark tobacco prices faster than the industry average.
> SEITA must grow its share of the blond segment.
SEITA's sales of blond cigarettes in 1995 (13.8bn units) was adversely affected by competition from Imperial Tobacco; however, they were also lower than SEITA's sales in 1993 (14.5bn), 1992 (15.6bn) and 1991 (14.5bn) since 1992.
SEITA has failed to grow its sales of blond cigarettes despite a series of new product developments including 25 packs (such as News) and US blends (Brooklyn).
SEITA's leading blonde brand is Gauloises Blondes with a market share in 1995 of 7.2%, the company's second largest brand behind Gauloises. Since 1990 Gauloises Blondes has represented 50% of SEITA's total blond sales; since 1992 Gauloises Blondes has declined both in terms of absolute volume and its share of the French blond cigarette market.
In 1996 Gauloises Blondes has been launched in 25s in response to the growth of discount brands. 1996 has also seen the repackaging of Gitanes Blondes, for the second time.

Taxation

Taxes represent on average 76% of the retail price of cigarettes in France, in line with the average for Benelux, Germany and die UK and the target rate for EU member states. On a low priced dark brand such as Gauloises taxation represents 79% of the retail price. Tobacco taxes comprise three ad valorem taxes (i.e. taxes based on the producer or retail price), together with a specific element (i.e. a flat rate).
The tax structure was changed in August 1995 when VAT was increased from 16% to 17%.
The increase in the ad valorem element is negative for cigarette producers; it means producer price increases are made greater at the retail level.
It is unlikely that the total rate of taxation will change in 1997 or 1998. As most of the tax is ad valorem, the French Treasury will benefit from any future increases in producer prices. The effective tax rate is in line with the target rate for EU member states, so unlike the experience of Spain, Greece, Portugal and Austria, there is no external pressure for an increase in the tax rate in France.

Producer prices

As in other countries, cigarette prices vary widely in France. The gap between a premium brand, such as Marlboro (FFr.18.00 per pack) and the lowest priced dark brands such as Gauloises (FFr.11.90) is 50%. Unlike cigarette markets such as Germany, the UK and USA, a single list price for each brand is maintained by law. There is no discounted and no private-label cigarette business in France.
There are three price segments: low price (mainly dark brands) medium price and premium (mainly international brands and 25s). The price of a 25 brand per unit is comparable to that of the low and medium price categories.
The low price segment has grown rapidly from 19% of industry sales in 1991 to 46% in 1995; over the same period the premium segment has declined from 73% to 46% of industry sales.
On average producer cigarette prices have risen by 28% since 1993. Prices rose by 5% in January 1996.
The prices of dark brands have risen faster than the industry average, i.e. by 36% since 1993. This is an important reason for the uplift in SEITA's operating profits since 1991.
In 1994 Imperial Tobacco launched JPS at FFr.13.0 per pack, representing a 6% discount to Gauloises Blondes. The discount was maintained throughout 1995 and partly explains SEJTA's loss of market share. In January 1996 the price of JPS was increased to FFr.15.20, in line with Gauloises Blondes.
We expect producer prices to rise by 5% in 1997 and dark tobacco brands by 6%.


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