According to official statistics, the results of selling cigarettes and mouthpiece cigarettes in Russia for 2014 were adjusted from the pre-published data of 350.6 billion pcs (this was previously cited in our article) to 319.9 billion pcs amounting to 2,200 cigarettes per capita1.
At the same time, the stock of cigarettes and mouthpiece cigarettes increased by 4.8% from 88.1 to 92.3 billion pcs at year-end 2014. To put that into perspective, the stock of tobacco products accounted for only 4.2 billion cigarettes in 2000 and for 23.6 billion pcs in 2005.
At the end of 2015, despite a slowdown in the production decline rate, production volumes continued to decrease and the fall was 3.4% compared to the previous year. Tobacco processing plants produced 343.7 billion cigarettes and mouthpiece cigarettes that year including 342.9 billion pcs or 99.8% of cigarettes (Fig. 1).
The slowdown in the rate of tobacco market reduction in Russia was caused by the higher consumer demand. However, under the influence of rising product prices primarily due to the increased excise rates and weakened economy of the country in general, the final consumption of tobacco products dropped by 6.3% according to JTI, and by 6, 2% from 314.1 to 294.5 billion cigarettes according to PMI Russia experts.
It is worth noting that all the experts prepared for the worst and expected a far greater market decline in 2015 - up to 12%.
Therefore, 3.4% cutback in production and 6.2-6.3% decrease in consumption is a quite good result.
Let us consider the production of different types of tobacco goods in detail.
In 2015, the production of filter-tipped cigarette decreased by 3.1% to 283.6 billion pcs, of non-filtered cigarettes - by 4% to 59.3 billion pcs, and mouthpiece cigarette output dropped by 18.1% to 757 million pcs.
However, the first seven months of 2016 show a positive trend. For the first time during six years, the total volume of cigarette and mouthpiece cigarette production in the Russian Federation increased by 11.9 billion pcs or 7.1% to 180.3 billion pcs versus the same period of the last year (Fig. 2).
This happened due to the increased production of non-filter cigarettes by 8.2 billion pcs or 28.9% to 36.7 billion pcs, as well as filter-tipped cigarettes - to 4 billion pcs or by 2.8% to 143.4 billion pcs.
As for the mouthpiece cigarette sector, a production decrease was recorded in the country by 311 million pcs or 68.4% to 144 million pcs. The structure of cigarette and mouthpiece cigarette production in 2015 has changed slightly, but dramatically. The share of filter-tipped cigarettes after six-year tremendous reduction increased by 0.17 percentage points up to 82.52%. Consequently, a reduction in the relative share of non-filtered cigarettes was 0.13 percentage points to 17.26%, and that of mouthpiece cigarettes - by 0.04 percentage points to 0.22% (Fig. 3).
In 2016 the relative share of cigarettes continued to increase by 0.19 percentage points to 99.9%. But in this case, in particular, the share of filter-tipped cigarettes plummeted by 3.27 percentage points to 79.54% due to the increase in production of non-filtered cigarettes, the share of which increased by 3.46 percentage points up to 20.38%.
The share of mouthpiece cigarettes in production decreased by 0.19 percentage points to only 0.08% based on 7-month results in 2016.
Representatives of anti-smoking organizations attribute this to the increase of the Russian cigarette smuggling in Europe, where the excise rate is several times higher than in Russia. But in a greater degree this is determined by the desire of manufacturers be in time to produce as much as possible items with the old packs, which will not be subject to the new rules of the Customs Union Technical Regulations for tobacco goods registration (such an unex-pected increase in production can hardly be explained by the "explosion" of smuggling from the Russian Federation where population living standards decline consistently and people actively switch to cheaper segments of tobacco products including non-filtered cigarettes. This in turn affected the decrease in consumption and pro-duction of premium cigarettes, which are the main commodity group of leading market players - transnational corporations. Another factor in the emerging trend is expansion and successful export of tobacco products by manufacturers to other countries. - Editor's note).
This can be refuted or confirmed by the analysis of stocks. Thus, according to the results of July 2016, the stocks amounted to 60.6 billion pcs of cigarettes including 45.7 billion pcs of filter-tipped cigarettes, that 87.8% more versus the corresponding month of 20152.
It is to be recalled that EEC Council Decision No. 107 of November 12, 2014 approved the "Technical Regulations on Tobacco Products" (CU TR 035/2014) which came into effect as of May 15, 2016 and tightened rules for cigarette pack design.
Decision No. 53 of the Board of the Eurasian Economic Commission dated May 12, 2015 established a transitional period until November 15, 2017. Until that time it is possible to produce and put tobacco products into circulation in the territory of the EEU in accordance with the mandatory requirements of regulations included in the Union law or national law of member states, if there are documents on the assessment of products conformity to the specified mandatory requirements issued or accepted before May 15, 2016. Circulation of such tobacco products is allowed up to their full realization in the member states where it was put into circulation.
Until November 15, 2016 it is allowed to produce and put tobacco products into circulation in the EEU territory that are not subject of the mandatory conformity assessment before the technical regulations come into force, without any documents on such assessment or any national conformity mark (market circulation mark). These tobacco products are allowed to circulate up to their full realization in the member states where they were put into circulation.
It should be added that there is an increasing number of reports on a new scheme on the illicit tobacco market in Russia. Thus, part of Russian cigarettes produced in the country for export and obviously not subject to excise duty is officially "exported" to Ukraine and then returned to Russia through the territory of Donetsk and Lugansk People's Republics falling into the illicit trade on our market.
This scheme is quite attractive for dishonest traders who increase their profits significantly by the unpaid excise duty, which amounts to almost half of the retail price. Although, such a scam requires no cargo hauling over thousands of kilometers through the battle zones. It is enough to put a customs stamp on the documents indicating that the goods were allegedly shipped to a neighboring territory.
According to the All-Russian Public Opinion Research Center (VCIOM), the share of smoking citizens in the Russian Federation continues to decline and amounts to 31% in 2016 versus 41% in 2009. Studies have shown that 17% of respondents smoke one or more packs a day that is 7 percentage points less than it was in 2013 (24%). It is noted that men (45%) and young people (30% among 18-24 year olds) continue to be more active consumers of tobacco products than women (17%) and elderly people (15% among persons aged 60 years and older).
In 2016, 69% of respondents said they did not smoke at all, while 57% of respondents reported that they had never smoked before.
The researchers said that 28% of smokers have reduced the volume of cigarette consumption in the last year, and primarily they include people of retirement age (41%). For the last two years, the proportion of respondents who said that they began to smoke increased more from 10% in 2014 to 16% in 2016. Besides, the proportion of this smoker category in Moscow and St. Petersburg is more and amounts 21%. The remaining 54% of respondents have not changed their habits and now smoke as before.
The number of people who smoke only in places allowed by law remained on the level of 56-55% in 2015-2016. Thereby, the number of anti-smoking law violators declined substantially. Their share dropped from 42% in 2014 to 33% in 20163.
Official statistics also show a decrease in retail sales of tobacco products measured by volume in recent years. In 2015, particularly, 91% of the 2014 cigarette volume was sold.
However, despite the reduced volume of saleable tobacco products in Russia, 2015 saw a 2% increase of gross sales in monetary terms since the product prices rose 26.6% versus 2014.
According to the Russian Federal State Statistics Service (Rosstat), tobacco products in Russia has become the goods with the most rapidly rising prices in the country and the level of inflation in the country amounted to 12.9% in 2015.
Figure 8 presents the overall dynamics of production prices for cigarettes in the Russian Federation and divided up by federal districts from January 2012 to July 2016.
By the way, experts of the Central Bank of Russia calculated the consequences of increased tobacco excise duties and correspondingly the rise in cigarette prices in 2016 for the state's economy: "The price of a pack of cigarettes will increase by 7 rubles (or by 10%), which will add 0.1 percentage points to the annual inflation rate."4
It should be reminded that the share of excise duty in the consumer price of tobacco products was 52.6% in 2015, while the rate of excise duty growth in 2016 is expected to be 25.5%.
In the previous article studying the tobacco market in Russia we predicted that we would observe in the future as packs of cigarettes "get fat" to 25-30 pcs in a pack. A year later, we have to adjust our assumptions.
The attractiveness of new products was so obvious to everyone that Russia passed a law prohibiting to sale more than 20 cigarettes in a pack as of July 1, 2016. However, consumers of tobacco products in the difficult current economic conditions could save up to 20% of their costs.
By the way, not all cigarette manufacturers were disappointed with this law. Especially when their competitors had to fold the pioneering development after tens of millions of dollars spent on the modernization of tobacco lines.
The legal tobacco market in Russia continued to decline in 2016 at the consumer level. According to PMI Russia, the market reduced by 6% by volume in the first quarter and amounted to 57.8 billion cigarettes. In the second quarter market decline was 6.8% to 72.1 billion pcs.
In general, the total market of cigarettes in the Russian Federation decreased by 5.3% to 131.5 billion pcs for six months in 2016. At such a rate, one can expect that the legal cigarette market will have been about 270 billion pcs by the end of 2016.
As before, the reason for such dynamics was the increase in excise duty and, consequently, the rising prices for cigarettes. Thus, since January 1, the specific part of the excise duty on cigarettes has increased from 960 to 1250 rubles for 1 thousand pcs, and the ad valorem one (percentage of the retail price) - from 11% to 12%.
Since the beginning of the year the price of cigarettes has increased by 15 17%, and the average cost of a pack has reached 80 rubles. And it's only the beginning. As the Ministry of Health of Russia stated previously, it is planned to increase the price per pack up to 220 rubles by 2020.
But let's take a closer look at the analysis of business results achieved by major cigarette manufacturers in the Russian Federation in 2015.
So, a year later, all the five Russian market leaders maintained their positions, although some players experienced low stability in their market share.
In 2015, experts estimated the volume of the Russian domestic market at 294.5 billion cigarettes.
#1 JTI RUSSIA
Japan Tobacco International (JTI) Russia holds its leading position. Last year, JTI Russian factories produced 101 billion cigarettes - 68 billion pcs were produced by the Petro factory in St. Petersburg and 33 billion pcs were made by Liggett-Ducat in Moscow.
However, the share of JTI Russia decreased by 1.26 percentage points to 33.6% of the market in 2015 (Table 1).
Although, according to the results of the last year, the market share of major JTI brands (Winston, LD, Mevius, Camel, Sobranie and Glamour) increased by 0.2 percentage points to 24.1%. But, as we can see, this could not prevent the company from market share reduction for the third year in a row against the background of rising prices for tobacco products and changes in consumer preferences towards the cheaper products.
It should be noted that market share reduction was influenced by the competitors who were very active during all the year in the lower price segments while introducing new product formats to the market in a lower price category than that of JTI, and launching products with more cigarettes in a pack.
Despite the continuing trend of consumers' switching to the lower price brands, Winston remained the best-selling cigarette brand in Russia with a market share of 15.1%. Additionally, LD reached a record market share of 6.5% consolidating the third position in the rating of most popular cigarette brands among Russians.
As it turned out, JTI Russia deliberately opted for the further development of the key flagship brands with strong consumer demand. And the choice is quite justified. Consumers with large incomes are less sensitive to rising prices for cigarettes and they will not switch to cheaper cigarettes. Thus, the company gets stable earnings even with a reduced number of sold cigarettes.
Another reason for a decline in market share was the optimization of wholesale inventories in JTI Russia. By doing so the company sought to avoid any possible accumulation of goods with the old prices and achieve higher earnings when converting to foreign currency with the weakening of the ruble.
In general, JTI Russia management continues to keep the tobacco market in Russia attractive. In 2015, over 47 million US dollars were invested in the further re-equipment of Russian-based company factories.
JTI Russia reports for the second quarter of 2016 show a decrease in cigarette shipments on the Russian market by 8.6% compared to the previous year. The company reported that sales of global JTI flagship brands in Russia decreased by 3.2%. Falling sales in Russia is connected with the tobacco market reduction estimated at 5.4% in the second quarter, and with the continuing activity of competitors in the lower price segment of the market. According to the company estimates, its share on the Russian tobacco market decreased by 0.7 percentage points to 34.4% in value terms and by 0.8 percentage points to 33.4% in volume terms for six months.
#2 PMI RUSSIA
The second position in the Russian tobacco market is occupied by Philip Morris International affiliates in Russia (CJSC "Philip Morris Izhora" in the Leningrad region and CJSC "Philip Morris Kuban" in Krasnodar, as well as LLC "Philip Morris Sales and Marketing" with branches in around 100 cities of the country).
The company's share was 28.4% in 2015 that exceeded the 2014 level by 1.25 percentage points according to some estimates and by 0.9 percentage points according to their own calculations (Table 2).
The negative dynamics of PMI Russia cigarette shipments was the result of the overall reduction in the market that was partially offset by the expanded share of PMI brands in their respective segments. Main contributors were Parliament, the premium brand, and Bond Street, especially its Compact 7.0 version in the low-price segment, as well as Next in the segment of ultra-cheap cigarettes.
The company is one of major taxpayers. The amount of taxes paid to the budgets of all levels in 2015 amounted to about 151 billion rubles.
The global mission of Philip Morris International is to try to offer all adult smokers to switch to products that cause less harm to health than regular cigarettes.
The company invests heavily in the development of innovations that have the potential to significantly reduce the risk of smoking-associated diseases, and one of these products under the iQOS brand was introduced into the Russian market in 2015.
In 2016-17 the company plans to invest 30 million US dollars In the modernization of production facilities and the Philip Morris Kuban infrastructure.
According to PMI Russia's information, charitable programs implemented by the company are primarily aimed at assistance in solving major social problems. In 2015, the charity budget of PMI Russia affiliates amounted to about 85 million rubles. These funds were spent on the projects in a number of Russian regions, including the federal program "Status: Online" intended to increase computer literacy for elderly people and disabled adults. The company also supports volunteering initiatives of its employees including environmental activities and elderly care.
In February 2016, PMI reported that in connection with another increase of excise duty it raised retail prices for the most cigarettes of its portfolio in two stages - first by 5 rubles in November last year, and at the same rate in January this year.
The share of PMI in Russia, which grew throughout 2015, declined in the first quarter of this year - according to the February data, it was 27.8% versus 28% in the same month a year earlier. The share of Parliament decreased from 4% to 3.9%, the share of Marlboro remained at 1.4%, while the share of Bond Street, on the contrary, increased from 8% to 8.4%, the company reported. The company referred its market share reduction to the fact that they had increased prices for some of their brands earlier than their competitors did, and some customers switched to competitors' brands.
During the first half of 2016 PMI Russia reduced the cigarette supplies by 8.9% to 38.3 billion pcs versus the same period in 2015. Reduction in the company's market share is due to lower L&M and Chesterfield sales in the mid-price segment, as well as Optima in the low-price segment.
In general, the company estimates its share in the Russian tobacco market at 27.4% (this figure fell by 0.4 percentage points in a year) based on 7-month results. At the same time the share of Parliament and Marlboro in the premium segment remained at the previous year's level (1.4% and 3.9% respectively), while the share of Bond Street in the low-price segment grew by 0.1 percentage points to 8 2%.
#3 BАТ RUSSIA
BAT Russia still occupies the third position. The increased sales of its Rothmans of London and stable position of other brands enabled BAT Russia to strengthen its positions on the Russian tobacco market in 2015. According to the company's data, the market share increased by 0.12 percentage points and reached 21.17% (Table 3). However, according to the last year reports, experts estimated their share at 21.34%, which indicates a slight decline.
Company's shipments decreased by 2.3% to 55.9 billion cigarettes in 2015. At the same time, the total volume of the Russian tobacco market declined by 4.5% according to BAT Russia estimates, which is quite leaner than was reported by the experts of other tobacco companies.
Due to the rise in cigarette prices caused by the increased excise duties, there was a significant change in the demand structure - consumers switched to the "value-for-money" segment. The market share of this segment increased in the past year from 33.6 to 34.6%. The share of BAT Russia in this segment increased to 25.6% owing to its Rothmans of London.
Rothmans of London has become an undisputed leader in the growth of the company's portfolio having increased its market share by 1.92 percentage points to 5.28%. As a result, the brand ranked among the top five tobacco brands in Russia just three years after the sales started.
The key international brands (Dunhill, Kent, Lucky Strike, Pall Mall and Rothmans) of BAT Russia increased their market share by 1.1 percentage points to 10.8%.
The volume of export production at the St. Petersburg and Saratov factories increased by 23.6% to 11 billion cigarettes.
In 2015, BAT Russia increased investments in its Russian factories by 24% - to 2.8 billion rubles from 2.2 billion rubles in 2014. The funds were allocated for modernization of equipment and installation of new production lines.
BAT Russia paid 102.7 billion rubles of taxes to the budgets of different levels in 2015 that is 27.9% more than in 2014.
#4 DONSKOY TABAK
Against the background of a shrinking market, Donskoy Tabak secured its fourth market position having increased the company's share on the Russian market by 0.7% to 9.5% according to their own estimates. A.C. Nielsen estimated the market share of Donskoy Tabak at 7.5%.
In 2015, the production volume of Donskoy Tabak amounted to 32.9 billion pcs of cigarettes, which is 5% higher than in 2014.
Total sales increased by 3% and amounted to 33.1 billion pcs of cigarettes. Sales in the Russian market remained at the 2014 level in the amount of 26.8 billion pcs of cigarettes.
Today, the company's portfolio includes more than 120 types of tobacco products. Leaders in the overall sales structure are such brands as Donskoy Tabak, Kiss, PLAY, Continent, Armada, Nasha Marka.
In 2015, the market introduced new tobacco products: Continent SMARTLINE Kavkaz, Kiss CHERRY, Kiss additive free, DONTABAK in Queen-size format.
In 2015, 6.05 billion cigarettes were sold for export. The main external markets for the company were Abkhazia, Georgia, South Ossetia, Kazakhstan and Kyrgyzstan. New directions were opened for the product that year such as Belgium, Palestine, Paraguay and Nigeria.
The company increased its gross sales by 33% to a level of 63 billion rubles. At the same time, net sales grew by 36% to 19.4 billion rubles. EBITDA amounted to 6.2 billion rubles, which is 31% higher than in the previous period.
In 2015, the company continued active implementation of the production system contributing to minimized losses and costs. Equipment was also purchased for the production of cigarettes in queen-size format. The company invested about 14 million euro in these new lines.
The amount of taxes paid to the budgets of all levels increased by 24% to 39.8 billion rubles.
#5 IMPERIAL TOBACCO RUSSIA
Imperial Tobacco Russia still ranks fifth among the major cigarette manufacturers. ITG production volumes in Russia amounted to 32.5 billion pcs in 2015 including 7 billion cigarettes made for export.
The company faced the highest challenge of brand promotion after the ban on advertising of tobacco and tobacco products in Russia. Therefore, in 2015 the company made a conscious decision to cease cigarette sales in the Russian market under such brands as R1, Zolotoe Koltso, Balkan Star, Smart Blue, BS, Gauloises, Prima Lux and Prima BS, thus leaving only 5 of the 14 brands previously marketed in the Russian Federation. The company changes its strategy promoting only the most popular brands.
CJSC "Imperial Tobacco Yaroslavl" and LLC "Imperial Tobacco Volga" together with LLC "Imperial Tobacco Sales and Marketing" paid about 36 billion rubles of taxes (including excise duty) in the Russian state budgets of federal and regional levels in 2015 respectively.
Let us mention briefly the production of other product types on the Russian tobacco market.
Russia has not growing tobacco in industrial-scale volumes over several decades. However, since 2000 the output of the industrial produced tobacco and its substitutes revived and began rising year by year. Imported tobacco is used as a raw material, which is predominantly tobacco waste used for reconstituted tobacco and expanded stem production.
In 2010, the production volume of this tobacco amounted to 2.9 thousand tons. A year later, the production increased by 9 times to 26 thousand tons. A production peak (Fig. 9) was reached in that year.
In 2015, 24.3 thousand tons of industrially produced tobacco were made, which is 16.4% more than it was in 2014. 13.5 thousand tons of tobacco were produced for 7 months of 2016, which is 5.8% more versus the same period last year. It is estimated that the volume of industrially produced tobacco will have reached 26 thousand tons by the end of the year.
The cumulative production of smoking tobacco (pipe, roll your own, hookah) in Russia is estimated by experts in the amount of 364.9 tons in 2015, which is 5.6 times more than it was produced in 2014 (Fig. 10). At the same time, the annual capacity of the Russian market by categories may have the following amounts: pipe tobacco - up to 80 tons, roll your own tobacco - 120 140 tons, hookah tobacco - about 800 tons. 208 tons of smoking tobacco were produced in the first 7 months of 2016, which is 10% more than in the same period of 2015. At the end of 2016, manufacturers may well reach the milestone of 400 tons of this tobacco category. Let us recall that the volume of smoking tobacco produced in 2010 was 3 tons at most.
1 – Trade in Russia, 2015. Internet source: http://www.gks.ru/free_doc/doc_2015/torg15.pdf
2 – According to the Unified Interagency Statistical Information System website https://fedstat.ru
3 . To Smoke or Not to Smoke. // Press Release No. 3116. 31.05.2016 . VCIOM. Internet source: http://infographics.wciom.ru/theme-archive/society/
social.problems/health/article/kurit-ili-ne-kurit-monitoring.html ; https://wciom.ru/index.php?id=236&uid=115711
4 – Report on Monetary Policy No. 1 (13) of March 2016. The Central Bank of the Russian Federation. Internet source: https://www.cbr.ru/publ/ddcp/2016_01_ddcp.pdf
5 – Data provided by companies, Nielsen estimates.
6 – According to the A.C. Nielsen independent agency estimate