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Imperial Tobacco warns after Spain cuts

Financial Times

By Rose Jacobs

Published: June 13 2011 11:41 | Last updated: June 13 2011 11:41

Imperial Tobacco has issued a profit warning stemming from a price war in Spain.

The company, which owns the Davidoff and Gauloises brands of cigarettes, said on Monday that adjusted operating profits in the region could be as much as £110m lower than previously forecast.

It said the decision to cut prices in recent weeks, having previously raised them in Spain, was “to protect our market position and the long-term sustainability of our Spanish business”.

The country has been a thorn in the company’s side for some time, as a weak economy, coupled with a new public-smoking ban, helped push down volumes dramatically.

Imperial’s larger US rival Philip Morris International, whose Spanish brands include market-leader Marlboro,responded to the difficult market conditions by slashing prices on a number of its brands.

Imperial has subsequently followed suit with price cuts for its Fortuna mid-market brand and value cigarette Ducados, among other products.

Alison Cooper, Imperial’s chief executive, told the Financial Times this spring that she believed declines in Spain would “ameliorate next year”.

Of the £110m of operating profits Imperial believes it may lose, £40m derives from a one-off hit to its logistics business. Outside Spain, the board expects the company’s performance to meet its expectations.

Imperial made an adjusted operating profit of £268m in Spain in the year to September 2010 out of a group total of £2.9bn.

The shares fell 1.4 per cent in early trading on Monday, to £20.56.

Industry observers are uncertain whether Spain is a unique case, or if Imperial could find itself squeezed by its bigger rivals elsewhere, too. “It could be that either Philip Morris or BAT feel there’s a point in the cycle where they’ll take a bit of a hit to keep people smoking,” said one City analyst.

That could mean trouble for Imperial “not just in Spain, but in other markets where they are in close competition with PMI,” said Martin Deboo, an analyst with Investec, in a note last month.

Imperial had hoped rising Spanish consumption of cheaper rolling tobacco would help soften the impact of the waning demand for cigarettes. Its attempts to stem the fall in sales include a smart-phone app that helps smokers find the nearest bar that allows smoking.

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