Cigarettes for Eastern Europe

Japan Tobacco (JTI) intends to increase capacity of its Russian factory in Petersburg by 40%, till 100 billions cigarettes per year. Analogical plans were told before by Philip Morris and British American Tobacco (BAT). Considering the statements of three leaders of Russian tobacco market in 3-4 years productivity of their Russian factories will correspond to more than 90 % of the market. Experts consider that transnational companies will manage to provide loading of their Russian enterprises at the expense of expansion to lower price segment and also export of the product to the other long-distance located countries.

Last week the president of holding Hiroshi Kimura told that JTI is planning to increase the manufacturing of cigarettes in Russia by 40% to 100 billion cigarettes per year. He also added that modernization of Petro factory in Petersburg will take up to 4 years.

Increasing of manufacturing in Russia Hiroshi Kimura explains by the fact that JTI is predicting decreasing of sales at the Japanese market by 2,5% because of lately price increasing on cigarettes on account of tax increasing. In lately interview the president of JTI by the following countries: CIS, the Baltic states, Romania, Turkey and world wide duty free martin Baddock estimated the actual productive capacity of “Petro” as 75 billion cigarettes per year, from which 62 billions company sold in 2005. Baddock also was talking about the plans of extending the production of “Petro” but did not mention any figures.

Experts say that the potential of growth in the Russian market have five JTI brands. President of the company “Business Tabak” (this is distributor of JTI in the central Russia) Mikhail Danilov says that the most sales potential have such brands as Wings by Winston, More, Mild Seven. Besides it, company intends to launch a new version of cigarettes Lucia without menthol and also to support positive dynamic of sales of Winston brand which is the leader of its segment”, - specified Mr. Danilov.

The head of informational agency “Russian Tobacco” Maxim Korolev considers that JTI may have a joker. Company with increasing of productivity may launch one more cheap brand including non-filtered cigarettes, to occupy the gap of local manufacturers which will hardly survive the new excise tax that is being introduced in 2007.” Another expert of tobacco market estimates the investments for “Petro” modernization in 100-150 billion dollars.

JTI is not the first company which announced about increasing of its potential in Russia. SO, in the beginning of this year investment program of Philip Morris was finished. Its price was $220 bln. By increasing the potential of Philip Morris Ijora factory in Leningrad region from 25 bln to 70 bln cigarettes. Thus, the combined potentials of both fabrics Philip Morris (the second one is Philip Morris Cuban in Krasnodar) made up 100 billion cigarettes a year.

In September 2005 BAT decided to invest in Russian factories which planned that potential of factories “BAT SPB”, “BAT STF” and “BAT Java” will increase from 83 billion pieces to 115 billion. BAT estimates this project in 170 million dollars.

Branch association “Tabakprom” estimates the potential of Russian tobacco market as 350-360 billion cigarettes a year, so if plans predicted by JTI and BAT will be realized, the potentials of three leaders of the market till 2009-2010 will consist 315 billion cigarettes, or 90% of Russian market. Today, for May 2006 this figure is 63% (PM - 26,61%, BAT- 18,54%, JTI - 17,98%).

At the same time market experts doubt that such volume will be sold by this companies at the Russian market.

“Unambiguously, declared volumes of production could not be sold in future in Russia, but it did not exclude that fact that corporations will optimize their production for example in Europe. I suppose that tobacco giants may refuse from developing of small European factories by covering up the sales volumes at the expense of Russian export.”, tells Maxim Korolev from “Russian Tobacco”.

During a couple of last years almost all transnational corporations took the decision to cut down a part of European factories. By quality Russian cigarettes of transnational companies correspond to European ones and that is why they are relevant on the external market, says deputy director of “TabakProm” Victor Stefashin. “And the labor force and energy sources in Russia are cheaper than European, that is why transnationals will continue closing down the small factories in Old World and move these volumes to Russia.” With this opinion agrees deputy director of “Donskoy Tabak” company, Serghey Sapotnitsky, he tells that net 2-3 years the three leaders will begin the fight and for cheap segment of the tobacco market.

Today the volume of sales of Prima brand is rising and consists about 50-60 billion pieces per year. The tendency at the market is the following: it does not grow in volume, meanwhile smokers switch to more expensive products. I suppose in a couple of years non-filtered cigarettes will loose the share approximately about 30 billion and their place may take cheap cigarettes with filter from transnational companies. Today leaders launch new or renew the design of old brands in this segment: Philip Morris - Trend, British American - Viceroy, Alliance, JTI - More, Gallaher - Ronson, "Donskoy Tabak" - Marshal and Armada".