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EU mandates push up price tag for non-premium smokers

By Stephan Delbos – Staff Writer |

February 10, 2010

Philip Morris will not increase the prices for Marlboro cigarettes, but smokers must pay 2.50 Kč more for nonpremium packs.

An excise tax hike on tobacco that went into effect Jan. 1 should have led to a 2.50 Kč (13 U.S. cents) price increase per pack of cigarettes, but many smokers are unlikely to see an increase in the price of their preferred brand due to the decision of one Czech tobacco industry leader.

Philip Morris, the largest tobacco distributor on the Czech market, has decided not to pass on the tax increase to smokers of its flagship brand, Marlboro, but will pay the tax themselves. Other premium cigarette manufacturers are unlikely to raise their prices as a result.

Philip Morris will increase the price of its nonpremium cigarettes, however, according to Andrea Gontkovičová, director of corporate affairs for Philip Morris Czech Republic, but there will be a delay before existing stocks with lower excise tax stamps are sold and the more expensive cigarettes hit stores, she said.

Smokers of premium brands may have been spared the latest excise tax increase, but more are on the way. The EU has called for further excise tax increases of 90 euros per 1,000 cigarettes before 2014, which will lead to an approximate increase of 12 Kč per pack in the Czech Republic, depending on the exchange rate, said Kamil Provazník, executive at Imperial Tobacco Czech Republic.

Cigarette prices

Excise taxes on cigarettes have steadily increased the average cost per pack of budget cigarettes, but smokers of premium cigarettes are spared the latest increase

Budget cigarettes
Dec. ’03: 31.5 Kč
Dec. ’07: 49 Kč
Dec. ’09: 56 Kč
Jan. ’10: 58.5 Kč

Premium cigarettes
Dec. ’03: 53 Kč
Dec. ’07: 74 Kč
March ’09: 82 Kč
Jan. ’10: 82 Kč

Source: Wholesalers’ price list

“The trend of excise tax increases will continue, and we will set our prices based on new tax rates,” he said. “It is not good or bad, but a necessity. We simply follow the rules.”

The 2010 budget passed by Parliament included a 2.50 Kč excise tax increase on each package of cigarettes, in hopes of generating needed revenues beyond the 40 billion Kč the government collects annually on tobacco taxes. Cigarette manufacturers usually pass on the tax, meaning increased state revenues come from smokers’ pockets. Philip Morris’ decision is an anomaly, but a welcome one for Marlboro smokers.

Gontkovičová explained that excise taxes already have an “extensive” effect on the price of cigarettes, accounting for up to 80 percent of the final price for the consumer, a percentage that has risen steadily over the past half-decade.

“Over the past five years, cigarettes have been a subject of continuous dramatic tax increases, which have put the legal market under serious pressure,” she said. “It is in this context that we make the final decisions on the pricing, including our flagship Marlboro.”

Philip Morris’ decision is clearly good news for those who smoke Marlboros but will also translate to savings for those who favor other brands as well. Due to the highly competitive nature of the Czech cigarette market, of which five companies hold 95 percent dominance, smaller cigarette manufacturers – such as Imperial Tobacco, which produces and distributes Davidoff, Rizla and Gauloises, among others – are forced to follow Philip Morris’ lead on pricing.

Imperial Tobacco will not increase prices on most brands of cigarettes this year as a result of Philip Morris’ decision, explained Provazník.

“Because Imperial is No. 3 on the Czech market, we must follow the price decision of bigger competitors,” he said. “So, if Philip Morris absorbs the cost of higher excise taxes, we can’t behave differently and increase the price of our cigarettes because we are simply a smaller company.”

The 2010 tax hikes come just two years after the largest tobacco excise tax increase in history raised prices an average of 6 Kč per pack. As prices continue to increase, many smokers are switching to cheaper brands and loose tobacco, meaning that every crown counts for tobacco producers.

Provazník conceded that the Czech tobacco market is “aggressive,” but hesitated to use the phrase “price war,” saying, “We aren’t in a war; we are in a free market.”

“All new prices are registered with the Finance Ministry,” he said. “What we are seeing are simply reactions to tax increases.”

Philip Morris is the particular focus of EU tobacco taxes, which are calculated around “the price category most in demand,” according to EU tax directives. The Czech Republic’s most popular brand of cigarette is Petra, produced and distributed by Philip Morris. According to Alessandro Tschirkov, EU affairs manager for the Confederation of the European Community of Cigarette Manufacturers (CECCM), tobacco producers throughout Europe must comply with EU tax directives but are free to decide whether to increase prices.

“Member states have autonomy to a certain extent, but they have to comply with requirements set out in the directives. These refer to minimum levels of excise duty, etc,” he said.

One unintended consequence of rising European tobacco taxes has been the increase of counterfeit branding and illegal smuggling of cigarettes from East European countries not subject to EU tax laws. EU agents recovered almost 750 million contraband cigarettes in 2009, including 8,500 cartons of Ukrainian cigarettes Austrian police discovered in a truck driven by a Czech man June 26. Such activity is bound to increase as excise taxes continue to swell, according to Lászlo Kovács, EU commissioner for taxation.

“High price and tax differentials are indeed [some] of the main reasons behind the substantial amounts of smuggling, in particular of cigarettes, from certain neighboring countries into the European Union,” he said.

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