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July / August, 2007

Welcome to the Big Leagues...

It’s a tumultuous time in the tobacco business. An increasingly hostile Western market is pushing the industry as a whole Eastward and Southward. It’s an industry that is having to constantly adapt to constant new problems, as well as finding ways to explore new frontiers: change is the outcome of both conflict and ambition.

The long bidding war for the Franco-Spanish company Altadis may have finally come to an end. Altadis’ board has given the green light to a takeover bid from Britain’s Imperial Tobacco for US$22.4 bn to create the world’s fourth largest to­bacco manufacturer. Following on the heels of Japan Tobacco’s purchase of Gallaher, this is another example of consolidating tobacco giants coming together to face the onslaught of regulation, taxes, and media assault.

In late June, Altria announced a shakeup in both its Philip Morris International (PMI) and Philip Morris USA (PM USA) holdings. PMI announced it will be transfer­ring its US-based production for non-US markets over to Europe. Also within the span of a month, PMI announced an investment of US$20 mn into a warehouse in Subic Bay in the Philippines, as well as future plans to open an $80 mn facility in either Subic Bay or Singapore. The current Subic Bay facility will serve as the company’s interim transshipment hub for tobacco leaf in Asia and be used to consolidate leaf from Vietnam, the Philippines, as well as Indonesia. And speaking of Indonesia, PMI also re­cently introduced a kretek (clove cigarette) line to be released under the Marlboro name for the first time in the archipelago nation. Marlboro is a leading brand in Indonesia’s “white stick” market, but PMI is betting that Marlboro Mix 9 will bring in a range of smokers in the lucrative kretek market. Altria, however, isn’t giving up on the North American continent altogether, and recently announced plans for PMI to take an addi­tional 30% stake in Grupo Carso, a Mexican company, bringing its total share to 80%.

On the US side of things, due to declining cigarette volume, PM USA will close its North Carolina plant and consolidate its resources into one Virginia facility. However, the company has announced plans to invest US$350 mn in a new research facility. This stands in the wake of a US congress mulling over a bill that would give the Food and Drug Administration (FDA) authority over tobacco products for the first time. The move maybe signs of PM USA taking cues from the pharmaceutical industry, which has had to learn to maneuver under the guise of the FDA with the help of robust scientific infrastructure. The third of a bn investment is aimed to help PM USA survive under increased government scrutiny by using innovation to rapidly adapt to regulation. Meanwhile in Washington, the powerful Senate Finance Committee recently voted to pass a federal tobacco tax increase that will have huge effects on the US tobacco industry as a whole. The federal tax on a pack of smokes will go up from 39 cents to US$1, while a new tax on a cigars will go from Scents to 53.13% of the manufacturer’s or importer’s sales price, (which in some cases will be as much as US$10 for a premium cigar, or an increase of 20,000%!).

It’s an exciting, versatile> and ever-changing market out there. Some plans for survival and expansion will work, some will not. Time will tell which companies have the foresight and wherewithal to ride the waves of this very choppy sea.

- Evan D. Dashevsky

Tobacco International - July/August, 2007

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