Cigarettes Market in Iran

Cigarettes Market in Iran - Dissertation Writing Help

HEADLINES

Cigarettes posts volume growth of 4% in 2009 to reach 48.7 billion sticks with current value rising by 18% to IRR29.5 trillion

The illicit cigarette trade grows in 2009, with the decline seen over the review period starting to reverse

Ultra low tar cigarettes posts the strongest volume growth in 2009, rising by16%

Iranian Tobacco Co leads cigarettes with a 38% volume share; all commercial activities in cigarettes take place under the state-owned company’s strict control

Strict legislation is unable to hinder healthy cigarettes sales growth due to inadequate enforcement

Cigarettes is set to increase in volume by 7% CAGR over the forecast period

TRENDS

The main event in cigarettes in Iran in 2009 was the introduction of graphic health warnings onto the packaging of all tobacco products. These warnings, which became obligatory in February 2009, had a huge impact on both retail and illicit trade volume sales. For some reason, the majority of Iranian smokers believed that products bearing graphic health warnings were counterfeit and subsequently of inferior quality and sought out alternatives without graphic health warnings. This made illicit products, which don’t carry warnings, very popular and led to an increase in volume for the illicit cigarette trade in Iran for the first time since 2003. This growth in the illicit trade happened at the expense retail volume growth.

In 2009 cigarettes achieved volume growth of 4%, which was lower than the 7% volume CAGR recorded over the review period. This slowdown can be attributed to the efforts of the Government in terms of increasing public awareness of the harmful effects of smoking.

Current value growth was greater than volume growth due to the substantial rise in unit prices and high inflation rate experienced in Iran during 2009.Taxes on tobacco remained high and the Government put a lot of effort into controlling the high incidence of the illicit cigarette trade. All of this led to cigarettes growing considerable in value throughout the review period. Up to 2% of the income gained from tobacco taxation is transferred to the Iranian Treasury Department to be allocated to public organisations, charity foundations and non-governmental organisations.

Unit prices of cigarettes continued to rise in Iran during 2009 due to the high rate of inflation in the country and annual increase in tobacco taxes. Imported foreign cigarette brands were more sensitive to price increases in comparison to domestic cigarettes. Currently, three cigarettes subcategories can be defined in terms of price. Economy cigarettes carry a price of less than IRR10,000 per pack of 20, mid-priced cigarettes are sold for between IRR10,000 and IRR15,000 per pack of 20 sticks and premium cigarettes cost more than IRR15,000 per pack. Illicit brands are usually sold within the premium price range.

Sales of high tar cigarettes increased in volume by 1% in 2009, with mid tar cigarettes rising by 2%. Low tar and ultra low tar cigarettes enjoyed stronger volume growth, posting 13% and 16% respectively. The stronger growth recorded in low tar and ultra low tar cigarettes during 2009 was due mainly to the increasing efforts of the Ministry of Health and Medical Education (MOHME) to increase public awareness of the risks and dangers of smoking via the mass media. This anti-smoking publicity drove Iranian smokers to switch from high tar and mid tar cigarettes to low tar and ultra low tar cigarettes. In addition, more sophisticated products were introduced into low tar and ultra low tar cigarettes during 2009.

The advertising of cigarettes is totally forbidden by law in Iran. The only effective method of promotion left for cigarette producers is a focus on distribution channels.

Flavoured cigarettes are available in Iran and women represent the majority of consumers for flavoured cigarettes. Female smokers tend to appreciate the different taste of flavoured cigarettes more than male smokers. Menthol flavoured cigarettes are the most popular flavoured cigarettes in Iran. However, flavoured cigarettes remained a niche product in 2009.

COMPETITIVE LANDSCAPE

Iranian Tobacco Co (ITC) is one of the biggest state-owned monopolies in the world and all commercial activities undertaken in tobacco in Iran fall under its strict control. In 2002, the Government opened up tobacco in Iran and multinational tobacco companies started to enter the market. Some of them, including BAT Plc and Japan Tobacco Inc, formed agreements with ITC for the local state-owned monopoly to produce their products under licence in Iran.

ITC had plans to start mutual production of Winston cigarettes with Japan Tobacco on 11 February 2010 but mass opposition from the Ministry of Health and Hygiene, some members of the Iranian Parliament and health activists led to this joint venture being cancelled. However, ITC announced that in spite of the opposition to this joint venture going ahead, production would need to start very soon to combat the illicit trade of Winston cigarettes in Iran, which is currently quite substantial. It is unclear whether production has commenced or not as neither the government or the company are willing to confirm the status of Winston in Iran as of June 2010.

In 2009, domestic brands accounted for 38% of cigarettes volume sales in Iran, with the remaining 62% accounted for by multinational tobacco companies. Iranian smokers tend to prefer international brands as they offer superior taste, better quality and more attractive packaging, all of which also makes them much more expensive than domestic variants.

In 2009, BAT Pars both performed well and experienced an increase of around 1% in volume share. Two brands which enjoyed especially impressive sales performances during 2009 were Japan Tobacco Inc’s Winston and Kent by BAT Pars. These two brands have led cigarettes in Iran since 2003 and both continue to enjoy a very strong positive image among Iranian consumers.

KT&G Corp is another multinational which enjoyed a considerable increase in volume share over the review period through its popular brands such as Esse and Pine. KT&G Corp’s success was largely due to increased demand for low tar cigarettes and ultra low tar cigarettes. The company’s volume share increased from 4% in 2003 to 10% in 2009.

In line with measures implemented by the Iranian Government, ITC now exercises complete control over the quality standards of all imported cigarettes in Iran with the aim of catering to local demand and clarifying the trading framework of imported tobacco products. ITC has signed contracts with major multinational tobacco companies such as BAT Plc, Japan Tobacco inc, KT&G Corp and Imperial Tobacco for the joint domestic production of certain popular international cigarette brands and the importation of others through official agencies and importers. This has been greatly beneficial to the multinational tobacco companies in terms of easier and more convenient production, affording them greater coverage and penetration and improving volume shares.

Multinational cigarette companies are making a concerted effort to gain share in cigarettes in Iran, particularly in mid-priced cigarettes. At the start of the review period, the majority of Iranian smokers preferred economy cigarettes, but this changed over the course of the review period and in 2009 higher quality and lower tar levels were more important demand factors than price positioning, a trend which is predicted to continue at an increased level over the forecast period. The main reason behind this change is the increased awareness of the harmful effects of smoking.

Despite this consumer shift away from a focus on price, ITC continues to focus on the affordability of its products as a tool to maintain its competitive advantage. The company is the undisputed leader in economy cigarettes and benefits from a wide distribution network which makes it possible to target all Iranian tobacco consumers, even in more remote rural areas.

Legislative restrictions have not yet led to losses for the key players in tobacco in Iran. The leading player ITC was one of the few Iranian state-owned companies to post a significant profit during 2009, which reflects a slight conflict of interest as it is the Government itself which is responsible for the creation and implementation of tobacco control and anti-smoking legislation. Key multinationals are also well aware of the fact that they are present in a relatively untapped category and that the potential for further growth is such that the risks which may stem from increased legislative restrictions on smoking and the marketing and distribution of tobacco products become less of a threat.

NEW PRODUCT DEVELOPMENTS

There were very few new products launched in cigarettes in Iran during 2009. Due to the ban on tobacco advertising it is now very hard to track new launches. The head of ITC recently announced that there will be no permission granted for new brands to be launched in Iran as this will lead to increased tobacco consumption and consequently represents a serious threat to the health of the Iranian people. Many people believe that this is just a token gesture from the company to show their concern about the health issues stemming from tobacco consumption while, at the same time, they are very eager to increase tobacco consumption for commercial reasons. It is also worth mentioning that there are very tight regulations relating to the introduction of any new tobacco products in Iran. Even changes in pack size, packaging or any other aspect of a tobacco product require much attention from both regulatory agencies and the manufacturers themselves.

As the Iranian subsidiary of BAT Plc, BAT Pars introduced Kent NANOTEK slim cigarettes in 2009. The company launched this product in two formats: low tar and ultra low tar. The unique selling point is marketed as being ‘king size taste in a compact format’. The brand benefits from very attractive packaging but suffers from weak distribution. It can be found only through a limited number of newsagent-tobacconists/kiosks in major urban areas. With its retail price set at IRR20,000 per pack of 20, Kent NANOTEK can be classified as a premium brand. The importation of slim cigarettes into Iran was forbidden by ITC during the review period. This launch shows that BAT has been able to convince ITC to reconsider this restriction. The launch is also notable for being one of the first slim/superslim cigarettes introduced legally into Iran.

The ultra low tar version of Kent NANOTEK is expected to appeal primarily to female smokers. Its slim size as well as its very low tar content would make it difficult to target Kent NANOTEK to male smokers in Iran.

New products in cigarettes are usually imported brands from multinational producers. Under current Iranian law, key multinational suppliers have no opportunity to advertise new launches, which means that attractive packaging plays a key role in the success of newly launched products.

Few new product innovations are expected in cigarettes over the forecast period. Instead, the majority of producers and importers will focus on strengthening their existing brand equity and maintain and gain volume share through improved distribution. However, new innovations such as slim/superslim cigarettes and the use of carbon filters are expected to emerge by the end of the forecast period.

Summary 1 Cigarettes - New Product Launches
Brand	Company	USP / Notes	Date
Kent NANOTEK Low Tar	BAT Pars	A compact cigarette that is shorter and slimmer than a normal cigarette, but promising the same full Kent taste. The packaging has been designed to appeal to both men and women unlike other slim/superslim brands, which appeal mainly to women	Dec 2009
Kent NANOTEK Ultra Low Tar	BAT Pars	Marketed as providing ‘king size taste in a compact format’; the same as above, but with even lower tar levels	Dec 2009

Source: Store checks

DISTRIBUTION

The leading distribution channels for cigarettes in Iran are newsagent-tobacconists/kiosks and independent small grocers, both of which can be found almost everywhere in Iran and are easily accessible, even in the more remote rural areas of the country. However, supermarkets/hypermarkets is also a very popular channel for cigarette sales in urban areas.

Cigarettes in Iran are mainly distributed wholesale. During the review period, the majority of large multinational tobacco companies attempted to develop more widespread distribution networks. Some tried to use the distribution capabilities of other industries as a way of promoting their products. The Iranian Government shows little interest in how cigarettes are distributed.

The Government does, however, regulate where cigarettes can be sold, although this is not yet strictly enforced. All cigarette sellers must have an official licence from MOHME. However, since the Government is rather lax in terms of enforcing the law, in practice the majority of cigarette sellers have no official permits and are not taxed by the Government. No point-of-sale display materials are permitted for cigarettes in Iran, and not even ITC has the opportunity to utilise in-store marketing for its products.

Instead of point-of-sale displays and other similar in-store marketing methods, all of which are banned in Iran, tobacco companies are now focusing more on distribution as their last remaining marketing tool, and the aim now is to cover as many retail outlets as possible and reach consumers, even in remote rural areas.

Newsagent-tobacconists/kiosks is the most widely accessible channel for sales of single cigarette sticks. Research by the Ministry of Trade has revealed that newsagents’ profits derive largely from selling single cigarette sticks. Newsagent-tobacconists/kiosks is expected to lose share as government controls become tighter.

There were no sales of cigarettes in Iran through vending machines during the review period. Vending machines are not very common in the country and the few vending machines present sell mainly soft drinks and hot drinks as well as packaged food products such as chocolate confectionery and biscuits. There were no sales of cigarettes though vending machines largely because of the difficulty in controlling sales to minors.

The online sale of tobacco is also prohibited in Iran. ITC can only mention its products and their specifications on its website but the products cannot be purchased online.

PROSPECTS

Over the review period, it is expected that ITC will provide more opportunities to key multinational suppliers for the importation and domestic production of their products in order to combat the illicit cigarette trade. An easing of government restrictions and the lowering of customs duties and import taxes will be undertaken in line with this policy. On the other hand, key multinationals such as Philip Morris International which are not yet permitted to be active in Iran will continue to support the clandestine importation of their own products in a bid to try and force the Iranian government to issue them with permits to trade in Iran.

Over the review period high tar cigarettes lost share to mid tar and low tar cigarettes. With anti-smoking initiatives highlighting the damage smoking can do to one’s health, low tar and ultra low tar cigarettes are predicted to continue to gain further share. The majority of cigarette manufacturers present in Iran are already focusing on catering to this shift by introducing low tar and ultra low tar versions of their existing brands. In terms of price band, a large scale shift from economy cigarettes to mid price cigarettes seems likely to occur during the forecast period.

Cigarettes is expected to post a volume CAGR of 7% over the forecast period, which is similar to the volume CAGR registered over the review period. The main reasons for this increase will be the anticipated reduction in the illicit cigarette trade along with wider and more effective distribution from multinational companies.

Anti-smoking initiatives from MOHME and the increasing awareness of the harmful effects of cigarettes will be the main threats to growth over the forecast period. In addition, the level of illicit trade will also have an effect on growth.

It is expected that the Government will make efforts to reduce the illicit cigarette trade as much as possible during the forecast period. The only way to reach its goals will be to facilitate cigarette importation procedures and increase joint venture production. As a result, it is forecast that the importation process will become much easier by the end of the forecast period and tobacco import taxes will be even lower.

The domestic subsidiaries of large multinational companies such as BAT Pars and Japan Tobacco Inc are expected to focus on increasing their joint venture production in Iran during the forecast period. They will attempt to minimise the illicit trade in cigarettes by working closely with ITC to encourage the lowering of taxes and facilitate increased levels of production and importation. These activities will result in a weakening of ITC’s monopoly, which is currently the main aim of multinational players.

New launches are expected to be seen in low tar and ultra low tar cigarettes. Multinationals will look to explore consumer tastes by introducing new innovations in terms of filters and flavours, although these will be hampered to a certain extent by high unit prices.

CATEGORY BACKGROUND

Cigarettes: price bands

In Iran, prices are not printed on cigarette packets or boxes and there are no price banderoles. This explains the small deviations in cigarette prices in different shops for the same product. Currently, cigarettes can be classified into three distinct separate price bands. Economy brands have a price of less than IRR10,000 per pack, mid price brands sell for between IRR10,000 to IRR15,000 and premium brands are those which retail for more than IRR15,000.

Nearly all of the domestic Iranian cigarette brands are in the economy band while multinational brands are in the mid-priced and premium categories. The majority of multinational suppliers are attempting to position their brands as mid-priced instead of premium brands. This is because being positioned as mid-priced makes brands more competitive and gives them the opportunity to reach more consumers.

During the review period, ITC marketed some budget brands, which are even cheaper than economy brands. These brands are still available in smaller cities and rural areas. For instance, the Zar brand, which costs only IRR1,500 per pack of 20 sticks, can often be found in remote northern villages. Although the consumption of budget brands has declined considerably in recent years, these brands are still the only choice available for many of Iran’s lowest income consumers.

In contrast, many of the illicit brands sold in Iran can be categorised as super-premium. Due to their illicit nature, there is no regulation for these brands and unit prices differ from outlet to outlet. Marlboro is very significant example of a super-premium illicit brand.

In 2009, Winston saw an increase in unit price. Winston is the most popular cigarette brand in Iran and was previously known as a mid-priced brand but its position is now changing to the point where Winston is now a premium brand. In spite of this change, the brand’s sales did not record a decline. Winston has a very strong image among Iranian consumers and following the price increase they were willing to pay a premium to continue smoking their favourite brand.

ITC’s strong supervision does not leave much room for key multinationals to manoeuvre in terms of changes in the unit prices of their products. The effective monopoly controlled by the state-run ITC limits reductions in unit price. ITC does not tolerate any threat to its overall volume share, its economy brands or its controlling dominance of cigarettes in Iran posed by multinational players.

Summary 2 Cigarette Price Band Definitions
Price band	Price	Unit	Brand examples
Premium	Above IRR15,000	Pack of 20	SpringWaters, Marlboro
Mid-priced	IRR10,000-15,000	Pack of 20	Kent, More
Economy	Below IRR10,000	Pack of 20	Bahman, Tir, Montana, Magna

Source: Company reports, Store checks

Cigarettes: menthol/standard

Menthol cigarettes grew in popularity over the review period, increasing from 2% of total cigarette sales in 2003 to 6% in 2009. The category’s main consumers are women and young people. Menthol cigarettes are not traditionally popular in Iran and all available brands are imported into the country.

Demand for menthol cigarettes is increasing in Iran and sales are expected to rise gradually over the forecast period. Many different menthol cigarette brands were launched during the review period, including Esse, Vogue and Zest. It is expected that manufacturers will continue their efforts to introduce new flavours in a bid to boost sales with more sophisticated products.

Cigarettes: filter/non-filter

The majority of cigarettes in Iran are filtered and there is no significant demand for unfiltered brands. Traditionally, Iranian smokers prefer cigarettes with filters as they believe these have a better taste and are less damaging to health.

In 2009 filtered cigarettes accounted for 99% of volume sales. The majority of unfiltered cigarettes are the products of very cheap brands. The volume share of unfiltered cigarettes is not expected to increase over the forecast period and it will become increasingly difficult to find unfiltered cigarettes in Iran.

Cigarettes: carbon/standard filter

There is not much information available about carbon filters in Iran and, as such, consumers are not aware of their potential benefits. Nonetheless, the presence of carbon filters is expected to increase over the forecast period. The many anti-smoking initiatives will lead to carbon filters becoming more popular as they are perceived as being healthier than regular filters, thus leading to expansion in demand for these products.

Carbon filters are still not widely available through retail channels in Iran. However, cigarettes featuring filter innovation can be more easily found among illicit products. Two of the few brands with carbon filters are Kent and Marlboro Filter Plus. In 2009, carbon filters accounted for just 1% of total cigarettes volume sales.

Cigarettes: filter length

King size/regular is the most popular cigarette length in Iran and accounted for 83% of volume sales in 2009, with Superking/long and short cigarettes accounting for 5% and 12% of volume sales respectively.

King size/regular cigarettes will continue to dominate volume sales over the forecast period. There were no changes or trends during the review period to indicate any possible future switch in filter length.

Cigarettes: slim/superslim vs regular

The importation of slim/superslim cigarettes into Iran in any form was forbidden throughout the review period. As a result, any branded slim/superslim cigarettes in Iran could be regarded as illicit. In 2009, some key multinationals such as BAT started to import slim products. This change in trend shows that they could convince ITC to grant them the permission to import slim/superslim cigarettes. Domestic brands also market a limited number of slim products. Among these, Tir’s slim cigarettes are the most popular.

All in all, slim/superslim cigarettes still accounts for a small proportion of total cigarette consumption in Iran, representing only 2% of volume in 2009. However, the ongoing increase in female smoking prevalence in Iran indicates very strong potential for growth in slim/superslim cigarettes during the forecast period.

The main consumers of slim cigarettes in Iran are younger smokers and women. With the increased awareness among consumers of the adverse health effects of smoking, the popularity of slim/superslim cigarettes is expected to grow during the forecast period. Many consumers are likely to convert from regular to slim/superslim cigarette brands.

Cigarettes: pack size

The standard cigarette pack size in Iran is 20 sticks, as used by the leading player ITC. Other pack sizes were found only rarely over the review period and accounted for only 1% of volume sales in 2009.

Cigarettes: pack type

In 2009 flip-top (folding cartons) packaging accounted for a 92% share of volume sales, with soft packs (paper-based) accounting for the remaining 8% share. Other pack types are rare.