THE ROLE OF PRICE IN THE GLOBAL CIGARETTE ARKET
1. TNTRODUCTTON
Cigarette PRICES have recently achieved a high public profile and become a
more significant issue in the discussion of strategy within the major tobacco
companies since 'Marlboro Fridzy' on April 2nd 1993.
The basic principles of cigarette pricing are no difTerent from any other Em.cw
product. However, there are a number of critical differences which render
cigarette pricing decisions difrerent
impact of excise taxation on price levels and price ranges
high level of purchase frequency and high brand loyalty
inelastic total market demand but variable price segment and
brand elasticity
the personal purchase of his/her cigarette by smokers and t@e
non delegation of the purchase decision
the purchase of cigarettes from small and independent retailers
Although Marlboro Friday has raised the profile of pricing. its role has not
suddenly and fundamentally changed since April 1993. Price is and always
be one of the most critical variWes within the global tobacco business. It
impacts upon virtually every aspect of the business and is the key basis of
market segmentation and determinant of market and brand profitability al c.-.
with brand added values.
There are three means of growing profitability over the longer term:
real prices increases
productivity gains
increased sales or better mix of sales
Over the past decade, all have contributed to the growth in real prozisin
BATs tobacco interests, but the most significant gains have becn :.-Om
real price increases.
ThM KEY QUESTIONS OVER THE NEXT FIVE YEARS ARE @V=HER
REAL PROFIT GROWTH CAN BE SUSTAINED AT THE SA@IE
MSTORICAL LEVELS AND WHETHER PRICE INCREASES WILL 3E
ABLE TO CONTRIBUTE AS 'MUCH TO THIS GROWTH AS THEY
HAVE EN THE PAST,
2. PRICING, BRANDS & ADDED VALUE
F,m-c-.3- marketing is all about building brand value and charging a premium for
this in order to optimise profitability. The concept of brand value and the
'declining' power of classic brands amid the rise of gcnerrics, own iabel and low
price brands, has become a major discussion point in business circ!es in , ecent
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years. The rise of multiple retailers, the increased awareness of value by
consumers coupled with the short temusm and poor marketing -skills of
manufacturers, have also contributed to this debate.
Although C12a.retteS are part of this general Em.c.g. phenomenon they have
certainly not suffered to the same extent as many'supemarkeV based products.
Cigarette distribution still remains predominantly in the hands of smaller
retailers despite the growing power of the multiples in Europe and North
Arrivica and parts of Asia Pacific. There is consider able evidence that large
numbers of smokers remain willing to pay a price premium for added value or
image, and indeed positively demand it.
The psychology of price plays a key role in the market place with smokers
using price as a major determinant of brand image. Many smokers continue to
want a part of the lif@style and promise ofrered to them by a premium brand
and can afford to pay for it because of the relatively low unit price payable
when compared with premium products in other categories such as cars,
electrical Pods ec.
Although cohere is concern about the ability of cigarette brands to continue to
command a price premium, there is less evidence of a problem in the cigarette
industry as with other f m.c.g. products. Cigarette brands are in a stronger
position and are demonstrating a greater resilience to I phenomenon
around the world. International brands demonstrace considerable resilience but
increasingiv it is the lights and innovatory brands which demonstrate the
greatest res'lience of ail.
3. PRICTNG T'N THE 1980-5
The phrase 'Value For ' Money Brands'became an integrai part of -he cig3rette
business cl-uring the I @ go's with the emergence of generic and own label
products and the increased frequency of price wars In some key markets.
It would be convenient lo explain the value for money phenomenon by blaming
it upon the tntry of non traditional tobacco companies (Tchlbo & Reemtsma.
Brooke & L&@i) into the market piace. Such an explanation although relevant,
is too simviis6c.
The growth of price competition and value brands during the tQS0 dvived
rrom the `--i I
excise structures which'subsidise' lower prices or beater value
static or declining total markets in the context of spare
production capacity
desperate competitors
economic recession
high price increases (.-excise and/or manufacturer)
retailer power
rising industry profit margins
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productivity pins leading to lower costs of production
Despite the undoubted growth of value brands. the international brand segment
maintained its strong growth throughout the decade thereby confirming that
smokers continued to demand added value brands in increming numbers and
were prepared to pay for such brands.
Major price wars occurred in every region of the world but these were
primarily induced by the competitor environment and less related to any
fundamental shift in smoker attitude to price.
Although the smoking issue had a major influence upon the decline of total
market sizes in the developed world, much of this decline is also attributable to
the higher prices of cigarettes.
Amid the increased use of price as a marketing weapon, and price wars the
proffitability of the major international tobacco companies increased
signincantiv throughout the decade with real price increases leading the way
particularly in the USA but also internationally. (See Appendix 1).
Profit margins Increased significantly throuvhout the 1980's with North
America, Europe. pans of Asia Pacific, Duty Free and Export markets leading
the way
4. PRTUNG IN THE 1990'S
Recent events in the United States coupled with total market declines in
Europe. the significant, growth of transit and the continued use of price to gain
share quickly. have led to the following questions being posed:
Is the tobaczo industry pushing too hard for pro Fit growth and relying
too heavilv upon pricing to achieve this?
- Is the smoker becoming more resistant to price increases?
- Is the price competition environment be-coming more severe"
- Can Intemaiional and other premium brands sustain current price levels
and continue to grow?
Analysis of pricing in selected markets reveals the following conclusions which
partly answer the above questions:
the industry has pushed hard for real price increases, led by the United
States. Internationally however, although margins have improved as a
result of price increases, such increases have been less dramatic while
profit growih has derived as much from the improvement in the brand
mix, grow-th in high margin markets and productivity gains.
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strategic international and drive national brands remain relatively strOng
with relatively little evidence to suggest that they are unable to sustain
current price levels. Although these brands come under pressure from
excise increases and competitor activity, their trend is essentially
upwards.
lights brands or line extensions (Salon, Barclay, Marlboro Lights) have
become the pacesetters within many markets, demonstrating the
greatest resilience to downtrading. Maintaining and enhancing added
value through innovation, brand and packaging development and
communications creativity will be a crucial success factor in the 90's.
overall demand remains inelastic in most markets but there is a growth
in downtrading elasticity in the race of economic and pricing pressures
in some markets, particularly in the developing world
there 'is growing evidence that some competitors are more disposed to
use -rice as a means of growing share quickly, particularly when
conventional added value brand marketing fOs to address their weak
and declining shares in some markets. At one time or another, all major
compe,itcrs have used price:value to active a breakthrough in the
market share. (? Morris in BrazE, Rothmans in UK, France, Reynolds
in Ni East).
pricing is used opportunistically and fle-ibiv in export markets with
product from var-ing sources being priced either at marginal cost or
below Ml profit;evel.
5. COMPETITOR PRICING STRATEGIES
Philip Morris
PIM has always prioritised the dv.,e!opment of Marlboro at a premium price
throughout the global c:9 business but has also supplemented this strate
f
with the development ofregional and market specific brands, some of which
are also high priced but n, any of which are mid or consumer priced.
What to do when Marlboro stops growing has long been the key question
within PNI. Aithough Varlboro will remain their global priority for some time
to come, with Lights and Medium compensating for the decline of the Red,
they will continue to develop corporate share by positioning international
trademarks - WM, Chesterfield. Lark, Parliament, Philip Morris - at the
consumer price class level in order to gain share from national brands which are
perceived to have lower added value.
PNI will monitor the balance between Marlboro's price and added value
elements as perceived by the smoker to ensure that Marlboro remains
'affordable'. The price gaps between Marlboro and other brands will be
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ruthlessly managed while willingness to move price upwards in real terms may
diminish if any significant signs of downtrading appear.
PM will continue to use price aggressively to destabUise markets and to gain
share, with BAT high margin and high share markets being a target.
Although the P.M strategy will become more adaptive and more market specific
in the future, their fundamental belief in building brands over the long term is
unlikely to change.
Revnolds
Reynolds will maintain the price positioning of Camel and Salem seeking to
grow sales and profitability on the back of their added value and pre-mum price
in most markets. However, they will be more flexible in Europe, particularly
with Camel to ensure further growth.
Winston is aiready used tactically and flexibly and will continue to be so while
other value brands (Gold Coast) will also be used in export and domestic
markets to support international growth aspirations.
Faced with an international business where most of the profit derives from a
few kev mark-em RJR will seek to build its two Priority strategic brands over
the!ongcr ten-n, while developing lower priced options in response to specific
market needs.
Rothmans
Rothmans 'faces a difficult future in almost all of its core markets except
lvfaiavsia. with declining market shares in almost every instance. Although
Support ofits two international brands will be maintained with their price
positioning also being maintained, they will be forced increasingly to become
more price:-.-alue aggressive in order to offset the decline In their national
brands.
Brands such as Royals 25's and Gaiden American wiU be positioned as value
ofrers against the higher priced international brands.
Japan
The ITI has and will continue io seek export led growth through aggressive
pricing strategies around the world but particularly in Asia Pacift. Market
destabilisation is a distinct possibility with no market being exempt over the
lonizer term.
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6. THE OUTLOOK FOR PRICING
The future will be more volatile than the past bemuse of the greater role played
by pricing in the strategies of aH our key competitors and because advertising
restrictions will constrain our ability to maintain and grow brand value over the
longer term.
As the developed world becomes a market of lower socio economic smokers,
pricing and value will become a more relevant dimension in consumer --hoice.
The use of pricing in protecting a critical mass for the total market Will become
more crucial. Declines in overall market demand may become more significant
if real price increases are pursued out orline with inflation, economic
prosperity and disposabiddiscretionary income growth.
Price increases in line with inflation will be acceptable to smokers. but a
willingness to downtrade such as has happened in the USA is rikeiv to grow.
Transit, already estimated at around 150 billions or 3% of global consumption
will make tax paid pricing decisions more complex.
Real excise increues are almost certain throughout most regions. Such
increases will make the management of price levels and price segmentation a
more critically importing element in the marketing rnix.
BATCO'S'VUL\E`RA8TLTTY
BATCo markets will become more vulnerable to the use of the pricing variable
because of anticipated higher volatility generally. However, a combination of
competitiveness, high margins and high market shares based upon national
brand strength means -vulnerability in the Co key markets:
Hone Kong. Switzerland
Chile South Africa
Venezuela Central America
Kenya Netherlands
Malaysia Belgium
Australia Denmark
Duty Free SriLanka
A contributory factor -In the case of Australia, Nialaysia and South Africa is
likely to be the inc. ease in excise from the current low level.
8. SUMMARY
Pricing will become a more critical variable within the marketiniz mix for
cigarettes both because of smoker attitudes and behaviour and because of
competitor proactivity
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Profit growth will probably come less from price increases and more from
productivity gains, sales growth and a better brand and market mix.
Pricing knowledge and information is probably the most underrated aspect
within both marketing and the body corporate.
Smokers will continue to demand and be willing to pay for premium and high
priced brands which will mainly be international brands offering a clear
Concept, high quality and added value.
Added value will be a critical success factor in every price segment wiEh
innovation, creativity and marketing excellence being essential ingredients of
brand strength.
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APPENDIX ONE
TOBACCO PROFTTABrLM
Total World Profit S17 500 mns
- USA Domestic S 9 200 mns
- International S 8 300 mns
BIG FOUR TOBACCO PROFITAM177-Y
GROWTH INDEX
IM 1 1992 ACTUAL REAL
USADOMISTIC 1893 8057 425 265
INTERNATIONAL 1249 5109 410 250
TOTAL WORLD 3150 13 200 41-0 260
P MORRIS. BAT, RJR. ROTHMANS
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APPENDIX 0
GLOBAL LOW PRICE COMPETMON
KEY COMPEnTOR BRANDS
Winston
Gold Coast
L&M
Chesterfield
Craven
-Peter Stuyvesant
Golden American
Petrillys
Winfield
Basic
West
Bond
Monterey
Monte Carlo
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APPENDIX THkEE
LEADINg BRANDS: PRICE SEGMENTATFON
MARXET FULL REVENU MID PRICE LOW PRICE
OU-4 comprnHoN I OWN 1 COMPETITION OW74 1 COMPETIT'liN
ARGENTINA LSTMKE MARLBORO J CLUB Lam DERBY LEMANS
CAMEL PARLIAMENT PA31SMNNES CHESTERFIELD 431M
a LEAF B&H COLT
1. P MORRIS I I
AUSTRALIA B&H DUNHILL ESCORT WINFIELD HORIZON HOLIDAY
MARLBORO ROTHMANS STXADBROXE LONGREACH
I PIACXSON I
BELGIUM BARCLAY MARLBORO SOUI.F. DIOR BELGA I DUCAL
CAMEL GAULOISES
P STUYVESANT RICIUMOND
BASTOS
BRAZIL PLAZA MARLBORO HOLLYWOOD BEL-kIONT LAM
FREE RITZ
I VICEROY
CHILE L ST;UKE MARLBORO DERBY CHESTERFIELD LIFE B014D
ADVAJNCE BELMONT RECORD TUM
VICT-10y I HIL10.x
CHINA szli! OU-11,11ILL KENT ROTHMANS HIL7014 LONDON
MARLBORO WT\STON CZAVEN
PARLIAMENT MILD SEVEN LARK
YSL IAO'MREY
FINLAND BAACLAY MARLBORO N STATE BELMONT PALL.,AALL LAW
L ST-,IXE DL'%'HILL COLT W12NSTON
CAMEL
FRANCE KOOL MARLBORO LSTRIKE aiESTERFIELD j CAUDISES
I, STUYVESANT X,. "Is-, ON G.T.A.14Z
CAMEL ROYALE
P IMORRIS 0 AMERICAN
OTti%
R , JANS C BLONDES
GOLD COAST
C E R.% I A,', Y FR:1.,Cz MARLBORO -YVESA."IT Fi
IT ?S-:
Bali CAMEL LSTRIKE ERNTE 23
LORD RC-IL'
I WEST
HONG KONG K@NT MARLBORO VICEROY WINSTON IIILTON G COMPAUNION
SALEM IIARVELS D I W?r%ESS
Ot-N111ILL
Y S L
HUNGARY L STRIKE MARLBORO SOPIANAE SYMPlIONIA
? MALL CA.',IEL HELIKON
GALIDISES KOSSUT11
MULTIFILTER
ITALY KIM MARLBORO MS .11AZIONAU
C..LqRl MERIT DIXNA ALFA
L STRIKE P MORRIS LIDO
%l%J1R,%TTI
I OTH @ I XN S
CAMEL
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MALAYSIA BAH ]PS PERULYS
MARLBORO V GOLD
SALEM MORE
KERT' GOLD FLA"
P
BAN SE533 POL LAM
ROTIOAMS
"C"ARJTIMORW L'ONDON
"'O"LF EAST GOLD COAST
N ETI BARCLAY MARLBORO GLADSTONE CABALLERO TIVOU
DUNHILL BELINDA P STUYVESAXT
MANTANO CAMEL
FALL SLALL
CIIESTERFIELD
PAK=AN GOLD LEAF US ROYALS
CAPSTAN COLD rLAXE RED A WHITE UtBASSY
I I MORVEN
SPAIN MARLOORO I LSTRIKE FORTUNA VICEROY DUCADOS
WINSTON R CROWN CITESTERFIELD GOLD COAST
LJVJ MONTE
N013FL
VENEZUELA LSTRIKE )61ARL3ORO BELMONT CONSLI FORTUNA
VICEROY ASTOR
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