Report On Pakistan Tobacco Industry

Report On Pakistan Tobacco IndustryThis project is base on analysis of the baccy plant industriousness because Tobacco in Pakistan holds an scotchal significance in Pakistan economy. Pakistan is second largest cig artte consumer in south Asia. It is a smashing inception of tax tax for study players and for Pakistan economy. It gives the full(prenominal)est r heretoforeue to g any everyplacenment in terms of taxes. Pakistan baccy company is dominated by both major players Pakistan baccy company and philip Morrris. They yield smirchs which hold the maximum sh ar in the cigarratte mart hardly a(prenominal) be dunhill, gold foliage, capstan, gold flake, benson and hedges, Marlboro, embassy, and red and white. They keep up gamey strike for these tarnishs. The increase in subscribe to and supply whitethorn be due to to a greater extent(prenominal) tell ons offered by the sterns manufactures and in the late mid-nineties tobacco companies were al modested to a dvertise their brands. However the usage of derrieres is more than than the official entropy chiefly due to no evidence of smuggling and unregistered cig bettes manufacturers. The demand supply a deal vary because of seasonal magnetic variations, holy month of Ramadan, splashiness and increase in tribe. The companies leave enough capacity more all over they do non utilize that capacity because currently smuggling is practiced in a country at full(prenominal) aim. there is an availability of novel substantial in polar regions of the country that NWFP and Punjab are the major producer of the put onionate material. Tobacco duty structure in Pakistan separate into tangled 3 levels. Lower, patheticer mid and premium. in that respect are fewer issues related to the industriousness the master(prenominal) issue is the smuggling which affects the securities exertion bad other are the advertisement, health before trade, increase taxes, close subject duty free, tax evasion. These issues brook risen because no action taken by the presidential term. They should break smuggling by tracing the distributors which would overly assistive in a way to control tax evasion, companies should use advanced(a) technologies and should have whilely control to have more yield.T qualified of circumvent of substancesOVERVIEWTobacco in Pakistan holds an economic significance in Pakistan economy. Tobacco is large throughout the country but major source of tobacco sensible material is in the Khyber Pakhtoon khowa. In Pakistan, although tobacco cultivation occupies a relatively small area of 0.27% of the ingrained irrigated land in the country and whatever 3% in Khyber Pakhtunkhwa. Pakistan was a net importer of tobacco in 1948 but became self sufficient in tobacco take in 1969. It was principal(prenominal)ly due increase in intersectionivity and new method use for tobacco cultivation. Pakistan tobacco exports and imports countries are prominen t. Pakistan deep down 30 age of license became 5th largest tobacco producer in the world and 4th highest in yield. Currently tobacco pains in Pakistan is dominated by both multinational firms Pakistan Tobacco keep company LTD and Phillip Morris Pakistan LTD. Though in that location are others firms but their influence on tobacco manufacture is not significant. Other companies are Sarhad rump Industry, Walton Tobacco company, International Cigarette Industry, Khyber Tobacco play along, Imperial Cigarette Industry, Universal Tobacco society, Saleem Cigarette Industry, Souvenir Tobacco fraternity. Cigarette labor contributes nearly 3.5 share of total FBR revenue currently the major contend for Tobacco pains is the increasing curl of smuggling.Overview of the grocery store allocate of tobacco exertion in PakistanEconomic SignificanceThis crop possesses immense economic significance and its impact on the financial and monetary policies of Pakistan. Tobacco possess es great source of revenue, employment and foreign exchange earnings to the country. It give the highest revenue to authorities in terms of taxes. Tobacco industry currently employs round 80,000 workers in cultivation, 50,000 are employed in 21 promoteries of the tobacco industry and it also provides 1 meg indirect employments. It is also an weighty source of foreign exchange earnings for the country approximately US$ 61.349 million during the financial year of 2010-2011.Pakistan Tobacco board have played an all important(p) role in developing the production of tobacco crop on scientific methods, if it had not been developed the country would have been importing desolate material worth Rs.8-10 one million million per annum (2009-2010).ExportsYearQuantity exportedValue original ValueTobaccoCigarettesCigarsTobaccoCigarettesCigars(M.Rs)(M.US$)(M.Kgs)(M.Nos)M.Nos(M.Rs)(M.Rs)M.Rs1999-20003.9016.060273.137.440280.575.4202000-20015.9811.770578.056.220586.1810.0322001-20023.20108.2 40231.1149.180286.414.6592002-20035.4974.23316.7545.62362.376.252003-20048.27163.96642.74124.35767.0913.232004-20057.1744.73626.6746.94673.6111.232005-20063.8321.00332.8066.70339.475.662006-20075.7726.120.77543.8524.641.69570.189.502007-20084.723.970.13449.824.170.16454.155.682008-20094.7710.970.02963.2714.840.03978.1413.9732009-20105.1713.9411.101201.0824.2216.411241.7115.5212010-20118.3923.492294.5339.75-2334.2824.571Pakistan main exporter for tobacco is US because it does not produce grapheme unmanufactured tobacco. The value increase by 85% during 2000-2001 fiscal yea. However the value decline by 53% from 10.032 to 4.659 in 2001-2002. The main reason for decline was the aftermath of 9/11 which resulted in exports formats cancelled. impertinent business flock were advise to take security clearance. Year 2003-2004 axiom a 100% increase in value from pervious year. In 2005-2006 year tobacco industry experienced a fall of al al or so 50% in value and the trend remained mange r 2007-2008 year. During the last fiscal year Pakistan tobacco industry achieved the highest value of exports at roughly 24.571 million. take to the woods CHART/ MANUFACTURING PROCESSProcessing and manufacturingAfter harvesting and curing, the cured switch is processed through a Green Leaf threshing plant.The main purpose of this processing is toRemove sand, dust and other particlesSeparate the lamina from the arc (threshing)Drive down the dampure content to safe storage levels.ManufacturingAt Tobacco factories, the matured tobacco is checked for quality and then cautiously mixed with other ingredients to generate different images of tobacco, much(prenominal) as flavorings or pre-processed tobacco. Technical tools are utilise to keep track of various types of tobacco computers are increasingly used to keep track of the process.Moisture content is an important part of tobacco process. Too dry and the tobacco leaf will crumble too moist and it may spoil during storage. in eff ect(p) aggregate of steam is required to treat the blended tobacco and read amount of water to make it elastic and then cut into the form in which it appears in the cigarette. Excess moisture is then removed so the cut tobacco can be given a last blending and quality check.Traditionally Cigarette making was done by hand but immediatelya twenty-four hour periods it is almost fully automated, with the cut tobacco, cigarette paper and filters perpetually fed into cigarette-making machines. The technology has advanced dramatically over the years which have not wear down the quality to each one cigarette is automatically quality controlled to ensure that it meets every benchmark for its particularisedation. morphologic COMPOSITIONProduct MixSince Pakistan tobacco industry is dominated by two multinational companies Philip Morris and Pakistan Tobacco fraternity. both(prenominal) companies have umteen brands in cigarettes which are produced to cater different income screen.Pakis tan Tobacco Company mails avail adequate in PakistanSuper PremiumDuhill laid-back and PremiumJohn Player halcyon LeafBenson Hedges moderate CategoryGold FlakeWills KingsCapstanLow phratryEmbassySuper PremiumMarlboroHigh and PremiumRed and whiteMedium CategoryMoven goldLow categoryK-2DiplomatPhilip Morris Pakistan inciters avail adequate to(p) in PakistanCigarette marketplace in Pakistan is dominated by lower mid-priced cigarettes which are almost 90 percent of the market. Market for Premium category is merely 10%. John Player Gold Leaf has a market get by of 9.83 percent in the country whereas world leading(p) brand Marlboro which is in the premium category have insignificant share ranging from 0.1 to 0.25% of the total market. In the middle category, Gold Flake has major market share of 38.64 percent followed by Morven Gold which caters to the 37 percent of the market need. Capstan has started losing its share as Pakistan Tobacco Company has introduced another(prenominal) brand as Capstan by Pall Mall, which has started capturing its share in the market. In the lower class Embassy has a market share of almost 4.5 percent whereas Diplomat has a market share of almost 2.5 percent followed by K-2 with the market share of 1.5 percent of the total sales. At present, consumer price of a pack of 20 of most sold brand in the country is Rs 28.80 (US $0.33) which is almost lowest in the world.Installed capacityInstalled capacity for cigarettes sticks in billions 2010-2011Average Industry126Pakistan Tobacco Company45.1Philip Morris Pakistan50.1Others31Average installed capacity for cigarettes manufacturing company in tobacco industry is 126 billion stick per year. Pakistan Tobacco Company Ltd which holds the largest market share in industry has an one-year capacity of 45.1 billion cigarettes. Philip Morris Pakistan which is the second largest producer of Cigarettes has an annual capacity of 50.1 billionCapacity employmentCapacity utilization change magnitud e from 49.6 billion sticks in 2002-2003 to 75.8 billion sticks 2010-2011. Average 68 billion sticks are produced annually. Pakistan Tobacco Company produced 40.5 billion sticks out of a capacity of 45.1 billion during 2010-2011. Philip Morris produced 22.4 billion sticks from capacity of 50.1 billion during the same year. The reason for under utilization of capacity for Philip Morris is due to smuggling and illegal trade which will be dispute later in the report.Capacity utilization of Cigarettes sticks in meg 2010-2011Average industry utilization68Pakistan Tobacco Company40.5Phillip Morris Pakistan22.4 stark(a) MATERIAL AVAILABILITYtobzones.jpgThe map shows different types of sensible materials available all over Pakistan. The major portion of raw material comes from NWFP and Punjab. Pakistan gets the majority of different types of raw material from NWFP mainly due to fertility of soil and adequate weather. NWFP produces around three-fourths of the tobacco leaf grown in the cou ntry. The specific raw materials that come from NWFP are Virginia flue-cured, Burley, Nicotiana rustica (country sum-cured/White Patta). Flue aged Virginia tobacco is now the most widely grown and widely used type of cigarette tobacco in Pakistan and the total production of this high value commodity have increased from 23.8 million kgs in 1967-68 to 66 million kgs in 2007. Punjab is second largest in terms of raw material availability. Punjab is famous for the production of dark air-cured and hookah type tobaccos. Apart from these two raw material Kala Patta (snuff) is also cultivated in Punjab region. Sindh and Balochistan produces Nicotiana Rustica and artless(prenominal) air-cured (Snuff) respectively. Virginia and Burley is procured mostly from local farmers on contract basisTobacco raw material is available extensively all over Pakistan is a major strength for Tobacco industry mainly. Pakistan is now the 7th largest producer of flue-cured tobacco. incomprehensible researches and development have been carried out by Pakistan Tobacco Board in collaboration with tobacco companies in order to reduce dependence on the import of good quality tobacco leaf such as suitable climatic conditions have been explored in areas of Mansehra, Buner, Swat and Dir districts to meet the quality requirements of cigarettes for domestic use.Forms of Tobacco IntakeRaw material is used for to make different form of tobacco such as Chilumhuqqah, chewing tobacco in pan, snuff and niswar. Experts divide tobacco use into two panoptic categories - sens and great dealless tobacco. According to a survey conducted by PMRC apart from cigarettes moist dry snuff and chewing tobacco is commonly used in Pakistan. Huqqah and Chilum, are the oldest means of tobacco intake in this region.Production Of antithetical Types Of Tobacco In Pakistan (Million Kgs)YearFlue-cured Virginia drear air-curedWhite PattaBurleyOthers supply2000-200150.961.179.650.5823.3885.742001-200259.611.949.380.9520.7092 .582002-200351.311.4210.832.1522.5588.262003-200450.290.6910.981.6022.6386.192004-200565.780.869.911.64*22.63100.822005-200673.71.613.20.923.1289.472006-200765.750.8011.620.824.2778.972007-200869.540.9614.980.3521.9385.832008-200971.321.3825.98--98.682009-201079.792.8326.64-109.262010-201164.67013.540-78.210 yearbook estimated requirement of tobacco crop in 2012Type of Tobacco (MillionKgs)Flue-cured Virginia 66.680Dark Air-cured 1.085White Patta 2.190Burley 0.100Sun Cured 1.100Rustica 1.800Total 72.955Current production till April/may 2012White PattaType of Tobacco (MillionKgs)Flue-cured Virginia 75.94 Dark Air-cured 1.417.40Minimum price of raw materialRs.121Current Market priceRs.140Prices of raw materialduty StructureTobacco duty structure in Pakistan divided into complicated 3 levels. Lower, lower mid and premium. In lower level there is an excise duty of Rs.9.5 for a pack of 20 cigarettes below parcel out price of Rs.20 excluding sales tax. Excise duty is 46% on most sold con sumer brand, 56% excise duty on premium brand and 50% on cheapest brand. The excise duty is very low and sticky to understand. The Total revenue latent of the cigarette industry is around Rs 80 billion per year and around Rs.50.2818 billion taxes was collected during 2011-2012 from two multinationals and some other manufacturers. The difference shows that tax evasion in tobacco industry is high. Approximately Rs.9-10 billion tax is evaded annually. The main reason for this evasion is because of the multifactorial tax structure and it is reported that multinationals and federal board of Revenue (FBR) have intentionally made tax difficult so that less amount can be charged thus benefiting cigarettes manufactures tax collection has also been affected due to inefficient check and balance.DEMAND AND SUPPLY abstractEstimated demandThe demand/ outlay for cigarettes has seen a steady harvest-feast over the years. domestic cnosumption by year.bmp ingestion table 2.bmpconsumtion table.bm pThe data above shows that spending of cigarettes has been increasing since 1960 onwards. The data reveals that there have been massive increases in using up pattern of cigarettes since 1996 mainly due to availability of more brands offered by cigarettes manufactured. more or less 200 million cigarette sticks were consumed in 2011. There are about 22 million smokers in the country and 55% of the house households have at least one individual who smokes cigarettes. This utilization trend makes Pakistan an agreeable market for cigarettes manufactures.Demographic cigarettes consumption trend29% of men and 3.4% of women smoke cigarettes regularly according to national health surveyHeavy consumption of weed (20 or more cigarettes per day) is most common and among men 25-44 years of age in Pakistan.37% of heavy smoking is done in urban areas in contrast to 26% in rural areas.Total cigarettes consumption in South Asia.total consumtion pie chart1.bmpThe data shows that Pakistan is seco nd largest cigarette consumer in south Asia. India is biggest consumer of cigarettes in south asia mainly due to highest population in the south asian region.Estimated supplytobacco3.bmpThe table has been taken from Pakistan economic survey 2010-2011. Te table shows that since 1990 the supply/ production of cigarettes have been increasing. This table illustrates that production of cigarettes increased during 1995-1996. During 2008-2009 fiscal year supply reached its peak of 75,609 millions. take away and Supply analysisThere are certain points that we can attain from demand and supply of tobacco industry. Firstly there was a immense increase in consumption and production of Cigarettes in 199. The increase in demand and supply may be due to more brands offered by the cigarettes manufactures and in the late 1990s tobacco companies were allowed to advertise their brands. However the consumption of cigarettes is more than the official data mainly due to no record of smuggling and unre gistered cigarettes manufacturers accurate. Some common factors for demand and supply fluctuation are discussed belowSeasonal Fluctuations in demandSeasonal do play a part in consumption of cigarettes. During winter the demand for cigarettes increases. Demographics are also important, northern areas of Pakistan generally have a high demand for cigarettes.Religious month of RamdanRamdan effects the consumption of cigarettes. During the month of Ramadan consumption of cigarettes decreases as masses only smoke after fast or those who dont smoke tend to avoid smoking in front of people as it is unwelcomed by the society. outgrowth in population and availability of brandsIncrease in the population of Pakistan along with more availability of cigarettes brands by manufacturers have contributed in increasing the demand and supply of cigarettes. Moreover increasing trend of smoking cosmos considered as fashionable has also contributed towards the increase in consumption. Different varieti es means more choice for consumer. A Daily generation survey revealed that wholesale dealers supply fake and calamitous cigarettes to about 20,000 retailers of Lahore, who sell them to ignorant consumers who can either not tell the difference or sent their children or servants to buy cigarettesNatural disastersNatural calamities is another factor for fluctuation in demand and supply of Cigarettes. The worst floods in 2010 since 1974 modify fertile tobacco-producing land such as in NWFPTaxation and pretentiousnessChanges in tax structure and ostentation affect the production and consumption of cigarettes. An increase in tax results in decrease in production and increase in price thus reducing the demand for cigarettes. pretentiousness level in Pakistan is always increasing, the increase in price level make it worse for manufacturers and government as people shift to smuggled brands which are available at cheaper price. This act result in dismission of revenue to government in terms of taxes and loss of sales for manufacturersporter.jpgPorters five Forces ModelBy using Porters Five Forces Framework we will discuss five basic competitive forces within the tobacco industry. The threat of potential new entrants, the dicker major power of suppliers, the bargaining power of buyers, the threat of tacks, and the period of competitive rivalry.Threat of new EntrantsThe barriers to entry in the Pakistan tobacco industry are low mainly due to less competition in the industry and local companies can easily enter the market yet the barriers to enter the market nationally are very high. The reason for high barriers at national level is due to high manufacturing, distribution and market represent which makes it difficult for local companies to sustain themselves at national stage. High investment cost is required to build production facilities that can fabricate tobacco products at the national level. Moreover packaging cost of cigarettes nationwide is very high which cannot be afforded by the new local firm.Brand identity is another barrier to entry in Pakistan Tobacco industry. Brand sentience is very important in any industry. In Pakistan government has oblige restriction on advertising. The ban on cigarettes adverstising is acting as a barrier to entry because advertising and communication is required to product strength in the mind of consumers. This ban is also effecting existing companies in a way that they cannot reinforce their current brands and will find encumbrance in launching new brands. High brand loyalty in Tobacco industry is another entry barrier for new firms. object lesson Benson Hedges users will not shift to a new product because of high emotional attached to it.Bargaining power of SuppliersIn Pakistan tobacco industry raw material for cigarettes is provided by farmers to manufacturers. Apart from Green Revolution awkward products have been exploited in all decades this as resulted in low prices of agricultural products but throughout Pakistan history policies have been favoring industries, finished goods are sold at higher price whereas raw material are bought at lower prices. In Tobacco sector supplier has less bargaining power because of less competitors in tobacco industry. Many of the tobacco farmers are located in NWFP, Punjab. Even though government has imposed minimum price but it has been ineffective due to dominance of multinational firms in the tobacco sector. Multinational have bargaining power because they control more than 70% of the market thus illustrating that the farmers have little bargaining power due to the government interaction.Bargaining power of BuyersEconomy plays an important role in buying cigarettes in tobacco industry. As we contend Pakistan economy is uncertain with high unemployment, increasing inflation and political instability. These factors affect the buying power of consumers. Buyer power in tobacco industry also depends on expendable income. A declin e in buyers disposable income results in buying cheaper brands of cigarettes and if a buyers disposable income increases, then they are more likely to buy more expensive brands. By looking at the current scenario Pakistan Tobacco Company launched a low price brand Capstan which became very popular among consumer and captured 14% of market share which effected the market share of Philip Morris brand Moven gold. A recent example of Pakistan Tobacco Company increased the price of Dunhill which resulted in decrease of their market share as consumers shifted towards low price brand Capstan.Consumers in the United States are now increasingly becoming more concerned with health issues. Consumer health awareness has hurt the market for tobacco sellers and has also led to the increase for government regulation. But in Pakistan which has more population than United States serves as an showy market. Moreover less government regulation results in cigarettes manufacturers exploiting consumers.T hreat of SubstitutesThe biggest substitute for tobacco users is to just de-escalate using any type of tobacco product. many companies are trying to make product which is beneficial for the smokers to dispense with smoking, for this purpose they started campaign promoting awareness regarding health isssues. There are many services to help people using tobacco. As health issues and diseases increases day by day so people themselves willing to quit smoking for this purpose they started using different product or services like they started workout which would be the motivating factor or them to quit smoking. There are also some government websites which teaches different method to quit smoking and come through a healthier life. Some people prefer to consult doctor and they provide them with prescription tablets or pills which would make them able to forget about smoking and it would be a source for them to eff normal life, this also be one of the substitute for tobacco products. .T here are many benefits which motivates the consumer of tobacco to quit like smokers will to live the heather life would be the motivating factor other than this the cost involves in getting cigarette is very high and due to inflation and rising prices of the cigarette consumer could not afford to have additional items into their casual routine so they started involved in different methods to quit smoking and Buyer propensity toward tobacco substitutes seems to have increased over time with the evidence that smoking can lead to health risks such as lung cancer, emphysema, heart disease, pregnancy complications, and other health problems. combative rivalryCompetitive rivalry in tobacco sector is sensitive to high because more than 70% of the tobacco market is controlled by Pakistan Tobacco Company and Phillip Morris Pakistan. Both firms are involved in intensive price wars in order to get a market share. Dominant firm like PTC is continuously decreasing its in order to maintain its m arket leadership. Pakistan Tobacco Company reduced the price of its medium-price to sustain market share. This triggered threat to Philip Morris Pakistan as they also had to reduce their prices. Pakistan Tobacco Company controls the largest market share at around 60%. Pakistan tobacco company brand gold flake contributes largest revenue for the company. Both companies have divided their brands into different segments to cater different income class people. Even though the volume of cigarettes have been steady for the past few years the revenue continue to increase, thus making cigarettes manufacturers financial assign trueheartederRivalry in the low and medium sector of cigarettes has been a strong focus of the leading companies in recent years. The market for low and medium category is increasing in country mainly because of the income level in Pakistan. Pakistan Tobacco Company leads in this sector by having around 3 brands for medium and 1 brand to cater low income class. With the potential growth in middle and low category Pakistan Tobacco Company introduced another brand by name Capstan by mall pall even though it had Capstan brand. Philip Morris are also introducing new brands under medium and low category to extract the profitability.By using the Porters Five Forces Framework we were able to discuss the five basic competitive forces within the tobacco industry. The level of difficulty for new entrants the lack of bargaining power of suppliers the bargaining power of buyers between different brands the high level of potential substitutes and the competition rivalry, as well as domestic growth areas were all analyzed within the tobacco industry using the Porters Five Forces Framework. Dominant forces such as government regulation and health awareness influence change in the tobacco industry. The potential impact that theses forces could play on the tobacco industry could be harsh if companies dont adjust and change with them.MAJOR PLAYERSPakistan Tobacc o Company LTDIn 1947 Pakistan Tobacco Company Limited was established. The company congratulate itself for being the first multi-national company to start its business in Pakistan. Pakistan Tobacco Company is the subsidiary company of British American Tobacco which started its operations for over 100 years now and dealt in over 180 countries. The Company has international reputation for manufacturing and marketing high quality brands for the adults.PTC is one of the leading companies in Pakistan. PTC has two art factories in two different states and has more than 1,700 people working there and more than a million people working in various aspects of the business indirectly. PTC is the market leader. PTC has a pile of being the leaders of growth, champions of productivity, responsibility and a leading organizationPerformanceClipboard01gross employee turnover of ptc.bmpThe gross revenue was increased of about 67 million in year 2011 from 60 million in year 2010 because of the succes sful door of brand capstan which occupied 14% of the market share. In 2011, the growth was initiated by new performance of its brand Capstan established in July 2010. PTC captures a market share of about 49.4 percent in the overall market. At the blood of 2012, the companys brands have performed well against the competition. The 77 percent increase in such marketing, distribution and selling activities during the period, the operating margins decreased to 9.76 percent in 2012 from 10.27 percent in 2011. The operating margin declined, but still the Company was able to control costs during the period. The gross profit increased to 30.71 percent in 2012 from 25.75 percent last year as