As the regulatory environment becomes more stringent in the West, Philip Morris International (NYSE:PM) is aiming to diversify its strategy based on the region it operates in. In advanced economies, tobacco companies have accepted the fact that cigarette consumption will decrease and are left with no option but to raise the prices periodically to make up for the declining volumes. In addition, the tobacco companies are pushing for smokeless tobacco products which are generally perceived to be less harmful than cigarettes.
On the other hand, lax regulations and rising disposable incomes in developing and emerging economies present a tremendous opportunity for the company to increase the cigarette volumes by predatory pricing, or cutting prices to grab market share. Philip Morris International competes with British America Tobacco (AMEX:BTI) and Imperial Tobacco Group (LSE:IMT) in its various geographical segments.
We have a $75 price estimate for Philip Morris International, which is about 5% lower than the market price.
Philip Morris Slashes Marlboro Price in Senegal
The company reduced the prices of its premium brand Marlboro by 40% in Senegal. While a pack of Marlboro costs $6 in the U.S., it costs a paltry 79 cents in Senegal. This comes in spite of the fact that high-end cigarettes like Marlboro are taxed at 45% in the country. The cheaper, locally made cigarettes are only taxed 20%. There is no law prohibiting the sale of cigarettes to youth in Senegal. It is estimated that 33% of adults and 20% of the youth are already smoking.  The move will help Marlboro compete against the locally-made cigarettes.
We estimate that East Europe, Middle East and Africa combined constitute 23% to the company’s stock price. The price-cut will help the company increase the market share gradually from 23.1% currently to 23.6% by the end of 2014.
Australia Fights Back
In a response filed this week, Australia’s Federal Government accused Philip Morris Asia of altering its corporate structure just so that it could launch legal action against the plain packaging mandate.  Last month, the company sued the Australian government accusing it of violating Australian-Hong Kong Bilateral Investment Treaty (BIT). According to the government, Philip Morris Asia acquired a stake in Philip Morris’s Australia operation in February this year because it knew that plain packaging mandate was going to be passed sooner or later.
The cigarette industry will likely see turbulent times ahead as the regulatory environment gets harsher. At the same time, there are still plenty of regions in the world that offer significant potential for cigarette companies to establish their foothold.Notes:
- Senegal to snub cheaper ‘Welcome to Marlboro Country, December 22, 2011 [↩]
- Philip Morris accused of trickery in attempt to flout tobacco packaging legislation, couriermail.com.au, December 23, 2011 [↩]