Two goals behind the reduction in cigarette prices

A fierce war has broken out in the Greek tobacco market, with manufacturers and traders slashing prices for the first time in their history.

The first blood was drawn at the beginning of the year by the unrivaled champion of the market, Philip Morris, which reduced the price of its Marlboro brand by 12.5 percent to 3.50 euros per packet of 20 cigarettes. It was soon followed by its competitors (British American Tobacco, Japan Tobacco International etc), some of which went ahead with even bigger price cuts, such as JTI, which reduced the price of a pack of Camel from 4 euros to 3.20 euros.

This price war is unprecedented in the Greek tobacco market, with one professional saying that ?if you exclude the introduction of cheap cigarettes in 2003 [of brands such as Leader], this is the first time that companies are reducing the prices on leading brands.?

The strategy is aimed at achieving a number of different goals, first and foremost of which is for companies to hold on to their existing market share, as sharp price hikes push consumers to cheaper solutions such as rolling tobacco, after which it is difficult to win them back. They also push smokers to substitutes such as electronic cigarettes, while the drop in incomes has compelled many to look for cheaper alternatives like illegally traded cigarettes.

According to the data, in the 2010-11 period, sales of packaged cigarettes declined by 21.7 percent, or 6.6 billion cigarettes, to reach 23.8 billion cigarettes by the end of 2011. In contrast, sales of untaxed cigarettes (illegal imports, duty-free and purchases from neighboring countries) tripled in the same two-year period from 0.9 billion cigarettes to 3.1 billion.

The second big objective of tobacco importers, meanwhile, is to target the government, with which they have been strongly displeased over the past two years because of the imposition of successive tax hikes without giving the industry time to respond with new marketing strategies.

According to one market official, ?unfortunately, the government, in its panic to increase revenues, did not listen to the experts,? resulting in an ?excessive? increase in tobacco taxes, which rose from 73.5 percent in 2009 to 83.7 percent at the end of last year. At one point, the tax went up to 85.7 percent, but the Finance Ministry decided to reduce this slightly after seeing that successive tax hikes were not having the desired benefits. The tax on rolling tobacco is 93.4 percent on average.

The reduction in the price of cigarettes will have a definitive effect on the proportionate tax, which will come to an average of 52 percent on the brands whose prices have been reduced. The fact that the price war means less revenues for the state has led many in the market to see the strategy as the industry taking revenge on the government for its taxation policies.

Meanwhile, sales are dropping and many companies are seeing their profits shrink, meaning that the government?s revenues will shrink as well.

In 2010, the government aimed at generating revenues of 4.3 billion euros from tobacco taxes, but ended up collecting just 3.7 billion euros, while revenues in 2011 were at similar levels to the previous year. According to industry professionals, this means that any further hikes in taxes will barely register in public revenues.

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