Market Reports

Greece is thought to have produced about 20 million kg to 22 million kg of tobacco last year, comprising about 10-11 million kg each of Basma and Katerini.

            There was no production last year, however, of big leaf or non-classical oriental tobaccos, which collapsed in 2006 with the decoupling of EU premiums previously linked directly to production and finally died out in 2007.

           

There is always more than one way of looking at any situation, and though Greece’s leaf tobacco industry has been much reduced in size, it currently offers a good quality product that is in demand by an international trade willing to pay relatively high prices for it, and that might well want slightly more in the future.

            Yes, future. The “new” Greek leaf industry, having been weaned of the need for EU premiums, is about to start its fourth season without subsidies linked directly to production; so it can look forward to a future that is largely in its own hands and that will not be governed by changes to the EU’s Common Agricultural Policy.

            For the past three years it has stood firmly on its own feet. Village prices for 2007-crop tobaccos averaged €4.10 ($5.40) per kg for Basma and €3.70 per kg for Katerini—that’s up by 50 percent and 60 percent respectively on the mean of average prices for 2003-, 2004- and 2005-crop tobaccos.

            These prices will not make millionaires of tobacco farmers, but they at least cover their direct costs and leave some cash over so that they can realize a profit or pay themselves a wage. The total direct cost of production of Basma and Katerini, including the cost of any additional labor used, is reckoned to be about €2 per kg.

            And these increased prices have not been paid simply because a desperate manufacturing industry has watched as the total annual production of classical oriental tobaccos in the four main producing countries of Turkey, Greece, Bulgaria and the FYR of Macedonia has fallen to the point where it is unlikely to rise above 120 million kg in the foreseeable future. Industry doyen Nikos Allamanis told me dealers had reported that processing yields of top grades had risen by 15-25 percentage points between 2002 and 2005.

            There are a number of reasons why yields of top grades have risen in this way. Partly it is to do with the fact that the farmers who continued to grow tobacco after it was no longer necessary to do so in order to receive EU premiums were from the pool of more competent growers. And partly it is to do with the fact that the continuing growers can better afford to produce their tobacco on the best land, since this is now less in demand and, therefore, cheaper.

            One major factor, however, is that the crops produced are now more closely monitored. Some years ago, the big manufacturers required dealers to start creating agronomy departments so that the use of seeds and agro-inputs could be controlled, and this later led to the closer monitoring of compliance with good agricultural practices in general—the sorts of practices that might be governed by EU regulations as well as by industry rules. “Whereas 20 years ago there were no agronomists, no contact; now it is the opposite,” said Allamanis.

            And at least one other factor has been at work in raising standards. Whereas in the past the payment of subsidies tended to have a leveling effect on prices across the grades, now the price range is wider and so tends to encourage the production of in-demand styles. Allamanis told me that prices for 2007-crop Basma had ranged from a minimum of €2.50 a kg to a maximum of €5.40 a kg. Clearly, there is a big incentive here to produce sought-after styles of tobacco.

           

A modest rebound

As to the future; there is likely to be some increase in demand for Greece’s Basma and Katerini, and if there is it might well be that more will be grown: perhaps as much as 15-20 percent more, according to Nikos Tzoumas, the managing director of Missirian. There are a number of reasons why demand might increase; one of them being simply that classical oriental is in tight supply. The production of this type of tobacco by traditional producer countries is currently close to what is a rough estimate of the minimum worldwide demand, 100 million kg.

            One unknown factor is what will happen on the U.S. market once the new administration gets its feet under the desk (this report was written at the beginning of January). As is described in another report in this issue, it is widely expected that the Family Smoking Prevention and Tobacco Control Bill will be passed, which will mean tobacco products being regulated by the Food and Drug Administration and, apparently, a ban being placed on the use of flavors in cigarettes.

            It is impossible to know for sure whether this will happen or how the FDA might define a flavor if it does happen. It is not known either how manufacturers would react, but it is not beyond the realm of possibility that they would aim to compensate for the loss of flavors by adding increased amounts of flavor tobacco—possibly oriental. What gives additional credence to such an argument is that oriental tobacco is no longer as expensive as it once was relative to broad leaf types, whose prices have been increasing sharply.

            But if there is increased demand, will Greece be willing and able to meet it? When considering this question, it is easy to jump to the conclusion “no.” After all, while a rump of Greek growers has survived well enough since the government decided to move to 100 percent decoupling of tobacco premiums at the first opportunity, these growers, and ex-growers, do still receive premiums (based on premium receipts during the reference period 2000-2002), but those subsidies will be reduced in the future.

            But Allamanis points out that this loss of income might in fact lead to a rising interest in tobacco growing because increasing production, or returning to production in the case of ex-growers, could be the only way that some farmers would be able to maintain their income levels.

And, he points out, the current economic situation might be a further spur to growers and ex-growers. After all, employment opportunities elsewhere will certainly come under threat, and when they do, making use of his land to produce tobacco could become a farmer’s only option.

            Well, almost his only option. Some money and effort is being put into finding new products and activities that tobacco farmers and ex-tobacco farmers can turn to, and indeed, more money is likely to be spent this way as from 2010, when 50 percent of the EU’s tobacco funds are diverted to the agricultural development fund. But it has to be said that, so far, such efforts have met with only limited success.

            I wrote near the start of this report that most things could be looked at in more than one way and some might feel that, despite the obvious success that the Greek tobacco industry has managed to snatch from the jaws of disaster, its production levels have been decimated, many of its farmers have drifted away leaving former growing regions abandoned to who-knows-what fate, and most of its processing plants have been shut down and its processing employees left without work.

            The question is, do the gains outweigh the losses? I can’t help feeling they don’t. Sure, for a good many years Greece grew too much tobacco and some of it, especially the big-leaf types and the nontraditional oriental varieties, was not of the highest quality, given that such a term has a definition meaningful beyond “demand.” And certainly the whole business got a little messy at times, and there were disputes and the numbers didn’t always add up. But the industry had a human face and provided a lot of meaningful employment to a lot more people than it does now.

            The trouble is, tobacco growing is a messy business and the columns of figures won’t always add up as some in Brussels would like them to do. Apparently, on being told that it might not be possible to raise the market price of tobacco so that it covered the cost of production, EU Commissioner for Agriculture and Rural Development Mariann Fischer Boel suggested that farmers should in that case switch to crops for which the market price did cover the cost.

            This reply is so chillingly rational it could have been generated by a computer—one that might suggest also that those without bread should eat cake. Perhaps it would be as well to reflect on such things in the aftermath of the civil unrest that Greece suffered in December.

           

Reasonable regulation

It is possible that part of the problem associated with the industry can be traced back to the fact that the Greek psyche was just not geared to accept coupled premiums. Coupled seems to imply a rigidity that is perhaps not agreeable to the Greek mind.

            Greece, along with countries such as Spain and Germany, seems to be an adult country where tobacco regulations are designed gently to guide adult populations within certain boundaries that are themselves within reason.

            For instance, a law that is due to come into force in Greece on July 1 will restrict rather than ban smoking in enclosed public places. After that date, smoking will be allowed only in designated sections of indoor workplaces, and restaurants, cafés and bars of more than 70 square meters. Smaller restaurants, cafés and bars will be allowed to designate whether they allow smoking or not.

            Smoking will be restricted in airports to designated lounges, but it will be banned in all forms of public transport and in all types of indoor lobbies.

            Clearly, some thought has been given to this law. It sets out to ban smoking in places where smokers and nonsmokers have no option but to mix, but it allows smoking in places were choice is possible.

            There are many other provisions to the law, most of which seem reasonable, or seem to have been born of reason, which isn’t necessarily the same thing. A number of provisions seem aimed at preventing youth smoking, though, as in other countries, some of these must surely be swaddled more in hope than in expectation. It would be easy to quibble about the reasoning behind some of the provisions, such as the ban on the sale of cigarettes in packs of fewer than 20, and it would be interesting to know from where the impetus to ban the sale of electronic cigarettes came, and what is the reasoning behind such a ban. But overall, the law seems to make a good attempt at finding a balance.

            There is a relatively more balanced approach also to tobacco advertising in Greece than in many other countries of Europe, so that it is still possible for tobacco manufacturers operating there to communicate with smokers in a limited way.

            And presumably the tobacco taxation regime in Greece is not of major concern at the moment because not one of the four companies operating on the Greek market who responded to a list of questions from Tobacco Reporter took the opportunity to suggest that cigarette taxation was an issue.

Market trends

The interesting thing here is that Greece, with what some would call a fairly relaxed attitude to tobacco, especially until the new law comes into force, has what I would describe as a stable to slightly declining market that has an illicit trade segment of up to 3 percent (one estimate put it at 1 percent, another at 2-3 percent), which is low by European standards.

            Detractors would complain, however, that Greek people tend, under this regime, to be heavy smokers, and they would be right. The smoking incidence in Greece among people 18 years of age and older is high, with one manufacturer putting it at 34.7 percent (39 percent of men and 30.5 percent of women) and another, quoting the Habits Survey conducted by the Greek market research institute Qed, putting it at 39 percent (about 41 percent of men and 39 percent of women). Fifty-seven percent of smokers are 35 years of age or older, while 43 percent are 18-34, according to the Qed survey, which puts the average daily consumption by smokers at 22 sticks (men 25 sticks, women 20 sticks).

            These smokers have an increasing preference for products with lower tar and nicotine deliveries and, according to one manufacturer, currently “light” and “ultra light” cigarettes account for 54 percent of the market. Another manufacturer suggested, in fact, that full-flavor cigarettes were still dominant but nevertheless conceded that lower-tar cigarettes were gaining ground.

            Slims products currently account for 9 percent of the market and growing, and one account said that the premium segment was increasing also, though this trend might come under pressure as the economic slowdown bites.

            Figures provided by three of the four manufacturers for the market as a whole varied slightly, averaging out at 33.6 billion for 2005, 33.2 billion for 2006 and 32.8 billion for 2007. It is believed that the market fell by something like 2 percent during 2008, though the figure is more likely to have been 1 percent if sales of roll-your-own products are factored in.

            This is not surprising. While fine-cut tobacco has only a 5 percent share of the total market for manufactured and R-Y-O cigarettes, its sales are growing by about 7 percent a year.

            The Greek market is highly competitive and image-driven, with the result that it is fragmented with more than 300 SKUs. Prices of packs of 20 cigarettes range from €2 to €4, but there is currently no sign of the price volatility that broke out in 2003.

            Although cigarette prices and, therefore, margins are relatively low, the Greek market is a profitable one, and manufacturers are clearly keen to be part of it.

            Imperial Tobacco Hellas (ITH) is aiming to maintain the momentum that, according to Nielsen figures, has made it the fastest-growing tobacco company in Greece, both in terms of volume and value, during the past decade. The company has achieved consistent, double-digit growth and more than doubled its market share during the past decade. It accounts for 10.7 percent of the market in volume and 11.8 percent in value, and it is currently the fourth-largest tobacco company in Greece.

            Last year, ITH integrated Altadis’ cigarette business in Greece following the takeover of Altadis by the Imperial Tobacco Group.

            JT International Hellas (JTIH) has also been doing well. The company says that following the acquisition of Gallaher in 2007, and based on Nielsen data, JTIH was the fastest-growing tobacco company last year in respect of volume and market share, which stood at 14.9 percent of the ready-made cigarette market.

            Furthermore, said a company spokesperson, and again according to Nielsen data, the company maintained its number-one position on the RYO market and grew significantly in volume and market share, which stood at 49.7 percent.

            BATH became the second player on the Greek market with about 17 percent of the total after last year’s acquisition of Skandinavisk Tobakskompagni by the British American Tobacco Group. “Our combined portfolio rejuvenated our business and gave us the opportunity to offer a better choice to the adult consumers as a result of combining the best out of two,” a BATH spokesperson said. 

            Papastratos, the largest cigarette manufacturing company in Greece, is certainly committed to the market. Currently, it is completing a €100 million building program that will provide it with new manufacturing and administrative facilities in Aspropyrgos, Attica. 

            The investment represents one of the largest direct foreign investments ever made in Greece, and Papastratos believes that its new facilities will provide it with the opportunity to grow its business in Greece, enhance its efficiency and competitiveness and offer important development opportunities to its employees.

            The new facilities, which will have a production capacity of 20 billion cigarettes a year, will include one of PM International’s most advanced European factories.

            In all, the new factory and office facilities cover an area of more than 40,000 square meters that have been built within a 200,000-square-meter site. They include meeting rooms with modern audiovisual equipment, a restaurant that can accommodate about 300 people and a 500-place parking lot.