New cigarette floor price augurs well for industry

The new floor price for a 20-pack cigarette at RM6.40 is a positive development for the tobbaco sector as it will narrow the gap between extremely-low priced cigarettes (ELPCs) and value-for-money (VFM) cigarettes produced by the industry’s main players.
The Health Ministry had announced that the minimum retail price of a 20-pack cigarette will be fixed at RM6.40 effective Jan 1.
The new regulations, aimed at discouraging smoking among children, youths and the lower income group, will also see the prohibition of promotional prices of cigarettes, although price discounts of not more than 5% are allowed up to three times a year.
The domestic tobacco industry’s main players include British American Tobacco Malaysia Bhd (BAT), JT International Bhd (JTI) and Philip Morris.
Maybank Investment Bank Bhd said the minimum pricing should be good news for BAT and JTI as their cheapest brands were sold from RM7.80 for a 20s pack.
“The minimum price places a ceiling on the price gap between ELPCs and the brands sold by BAT and JTI,” it said in a report yesterday. “ELPCs currently retail from RM4.50 per pack of 20s and now account for about 8% of total industry sales.”
Maybank Investment said the raft of new restrictions would affect ELPCs significantly.
“The banning of price cuts or discounts of more than 5% will mean the banning of price wars which erode manufacturers’ margins.
“But, given that contraband cigarettes account for nearly 40% of total consumption, such restrictions will not impact the overall consumption in the country,” it said.
Kenanga Research said ELPCs would be wiped out by the ruling, which would be positive for players like BAT.
BAT’s cheapest VFM 20s pack is already being sold at RM7.80 so no adjustment will be necessary in response to the floor price.
“The ruling will reduce competition from ELPCs, particularly in BAT’s value segment,” it said in its report yesterday, adding that Pall Mall, BAT’s leading VFM brand, saw a 0.6% decrease in retail audit market share as at Sept 30.
It said the minimum pricing, however, would not help curb illicit trade.
“The illicit segment accounts for 38.7% of all cigarettes sold in the country and presents the biggest threat to the biggest three tobacco players,” it said.
Another research house believes that an increase in the floor price would not have as great an impact on the big three cigarette players as they had differentiated their VFM packs from the ELPCs.
“This is done by raising the price bar to RM7.80 per pack of 20s, which is RM1.40 (or 22%) above the minimum threshold.
“It may result in some gains in market share, as consumers may switch to the VFM brands instead,” the research house said.