Modest markets

| October 1, 2017

Tobacco consumption is growing in Laos and Cambodia, but not at the rates that were once common in Southeast Asia.

By Shane MacGuill

Tobacco advertising has been severely restricted in Cambodia. Billboards such as these are no longer permitted.

Cambodia and Laos are routinely regarded as frontier markets for the tobacco industry, primed to deliver substantial growth. New research from Euromonitor International shows that while both are forecast to experience vertiginous volume growth relative to developed markets, the narrative is not one of uncomplicated expansion. Currently, sales in each market are below 10 billion sticks annually.

Continuing affordability, driven by growing disposable incomes, is countered by tightening anti-tobacco legislation and decreasing social acceptability of smoking. As in other markets, smoking prevalence in Cambodia and Laos is closely correlated with income and education level. In each country, low-income men and rural men not only have lower average education levels but are considerably more likely to smoke than their wealthier and urban counterparts. Similarly, low-income women and rural women are more likely to use chewing tobacco in comparison with other Cambodian and Laotian women.

For low-income consumers, whether in urban or rural areas, price is the main factor influencing purchasing decisions. These consumers generally buy economy cigarettes and are more likely to buy individual sticks rather than packs. Low-income men are also most likely to buy illicit cigarettes, whether smuggled or domestically produced, and to smoke bidis (leaf-wrapped tobacco). Low-income women rarely smoke, but many chew tobacco mixtures wrapped in betel leaves. Extensive tobacco cultivation in both Laos and Cambodia means that ordinary consumers can generally access unpackaged tobacco at low prices. Many low-income tobacco users are, however, trading up to economy cigarettes as disposable income levels rise.

Cigarettes and tobacco products are widely accessible in both markets, being sold on virtually every street. Despite growing competition from modern grocery retail, independent small grocers are by a considerable distance the most significant distribution channel, due to their widespread presence, accounting for around a third and a half of 2016 cigarette retail volume sales in Cambodia and Laos respectively. These are often the only outlets in rural areas, which are home to the vast majority of the population.

Street vendors are also significant, accounting for close to a fifth of 2016 cigarette retail volumes in each market. This channel is seeing some share loss due to consumers’ concerns over counterfeiting and smuggled cigarettes. However, both independent small grocers and street vendors continue to attract many due to their economy product-focused portfolios and their willingness to sell cigarettes by the stick (which is illegal).

The tobacco control framework in each country is now restrictive in an international context, and both nations have recently updated their legislation. Cambodia’s 2015 Tobacco Control Law drastically limited the distribution of tobacco products, banning sale in certain institutions and retail channels and restricting display in all other outlets. The law also introduced mandatory graphic health warnings, a public smoking ban (enforced from September 2016) and prohibitions on the advertising and promotion of tobacco. Interestingly, the law also includes a provision prohibiting the sale of tobacco products to visibly pregnant women.

Shane MacGuill is head of tobacco research at Euromonitor International.

In 2016, in Laos the government updated and strengthened its 2009 Tobacco Control Act, intensifying the use of health warnings, extending the public smoking ban and further restricting marketing of tobacco. The amendment made graphic health messaging mandatory, with warnings required to cover 75 percent of tobacco packaging. This amendment was originally set to come into force in October 2016. However, enforcement was subsequently postponed to May 1, 2017, to allow producers to use up packaging stocks. A request by the tobacco industry to reduce the minimum warning size to 50 percent was summarily refused by the government.

Despite the relative restrictiveness of regulation in other areas, there is no legal limit on cigarette tar levels in either market. The tar levels of local brands such A Deng (Laos) and Ara (Cambodia) are high by international standards. Even in the absence of such restrictions, Laos’ updated Tobacco Control Act bans the use of “misleading” terms such as “light” and “mild.”

In both markets, low levels of tobacco-specific excise contribute to low pack prices. The Cambodian government, however, has increased excise duty on cigarettes in recent years. Following slight increases in 2014 and 2015, cigarette excise duty jumped from 15 percent to 20 percent in April 2016.

While excise increases in recent years appear to have had an impact on domestic illicit consumption (edging upward to around 7 percent of the market), Cambodia’s low pack prices make it a source rather than a destination of illegal tobacco. The brands Jet and Hero are central among those moving illegally from Cambodia into Vietnam and other proximate markets.

In 2001, the Laotian National Committee for Planning and Investments signed a 25-year investment license agreement with local tobacco producers. This set excise duty at just 15 percent for cigarettes with a production cost of less than lak1,500 ($0.18) and 30 percent for those with production costs above this level. With domestic manufacturers focusing on economy products, these fall into the lower tax band. Domestic producers also pay the state 15 percent of production cost as a royalty fee.

On the back of increased enforcement at the borders and rising disposable income, levels of illicit consumption in Laos declined to 8 percent of total tobacco consumption in 2016—half the level of 2013.

In Cambodia, there are two strong leaders in cigarettes, with British American Tobacco (BAT) and Huotraco International accounting for 32 percent and 31 percent total volume shares respectively in 2016. BAT benefits primarily from the strength of its Ara brand, which has a long history in the country and is available at affordable prices. This brand thus has a strong appeal to low-income consumers, while also benefiting from its extensive rural distribution presence. Ara continued to gain share in 2016, thanks to its affordable pricing, although this was counterbalanced by a poor performance for the company’s higher-priced international brands.

Huotraco is a subsidiary of Imperial Brands, which changed its name from Imperial Tobacco in 2016. Huotraco saw a strong performance for its affordable and domestically produced Fine brand in 2016, counterbalanced by a poor performance for Imperial’s international brands in Cambodia. Fine had been produced by a third party, Usine de Tabac du Cambodge (UTC), in recent years. However, this arrangement was discontinued in January 2017, with Imperial Brands taking full control over production. The brand maintained a consistent distribution presence following this shift and continued to see strong sales.

In general terms, economy cigarettes are seeing the strongest performance in the market. As taxes and prices rise, many existing smokers are trading down to the most affordable brands. Conversely, some users of other tobacco products are accessing the cigarette category—that is, trading up—in this segment. Viniton’s Luxury, whose name belies its low price, particularly benefited from this trend and saw the strongest retail volume share gain of all brands in 2016.

In Laos, meanwhile, Lao Tobacco is the dominant player in cigarettes, controlling about two thirds of the market. It gained share strongly in 2016, thanks to its affordable prices and growing demand from low-income consumers. Formed in 2001, the company is operated as a joint venture. While Imperial Brands is the majority shareholder and owns 53 percent of the company, the Laotian government and domestic investment company S3T are also shareholders. The company benefits from vertical integration, operating its own leaf processing factory, cigarette factory, and sales and marketing departments. It expanded production capacity between 2014–2016. Domestic supply of raw tobacco enables Lao Tobacco to maintain a low price point for its leading A Deng brand, in turn ensuring widespread demand in both rural and urban areas. Second-ranked Lao-China Hongta Good Luck Tobacco benefits from its long history in Laos, having been present since 1992 and operating a long-established and widespread distribution network.

Domestically produced economy cigarettes are driving sales growth as disposable income levels continue to rise for low-income smokers. These are the main consumers of cigarettes and account for a growing share of sales, with price being the main factor behind their purchasing decisions. These consumers often prefer domestic brands, trusting these to offer reliable quality among concern about counterfeiting when buying imported brands. Because of declining demand for imported brands, the market has become increasingly consolidated in recent years.

Looking forward, cigarette volume sales in each market are expected to record solid but far from stratospheric volume growth up to 2021. In Cambodia, further excise increases and enforcement of anti-smoking measures, such as the public smoking ban, are likely to restrain compound annual volume growth to about 1 percent between 2016 and 2021. The contradictory impacts of tax hikes and downtrading will see value brands expand at around the same rate in constant terms. Meanwhile, the Laotian government’s desire to reduce smoking prevalence and increase tobacco tax revenue is likely to be counterbalanced by the importance of the tobacco industry to Laos’ economy. The belief that higher taxation will result in a surge in illicit consumption is also pervasive. As a result, Euromonitor International expects compound annual volume growth of just under 2 percent between 2016 and 2021 with a commensurate growth in market value.

 

 

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