The biggest supplier of cigarettes to Russia - JTI has reduced shipping by record for market 18.8 %. One of the reasons is increased price competition.
Russian shipments of Japan Tobacco International (JTI) have reduced in 2nd quarter 2014 to the level of last year by 18.8 %, the Company informed. It doesn't hide absolute index. According to their data entire Russian market has reduced by 12.7% because of excise tax growth, and correspondingly prices on legal cigarettes - people started to buy more counterfeit products. Among other reasons of results' worsening, Company names "unfavorable changes" in stocked goods and reduction of sales in average and low price categories as result of "tactical price competition".
Competitors hold prices, but JTI took strategic decision not to participate in price war. Though in cigarettes' shipments JTI share in II quarter has reduced by 0.5 percentage point, to 35.7%, in money it remained on 36.4% level.
JTI first from transnational Companies recognizes that price competition influences the market. Philip Morris International (Russian shipments in 2nd quarter have reduced by 4.8% to 21.9 billion cigarettes) and British American Tobacco (has informed about reduction of shipments with no reason) have shown in their reports that sales of cigarettes in Russia reduce because of increase of excise taxes and as consequence increase of illegal trade.
From June 1st 2014 in Russian Federation is prohibited open display of cigarettes and the price became the only effective method of struggle for customer. In this situation manufacturers start to keep prices down artificially (especially, for cheap cigarettes), scarifying profitability only to keep customer and not make him switch to illegal products.
To hold back price war is possible by introducing common minimum price on cigarettes. Such draft law was introduced for consideration and supposes that from 2015 minimum price on cigarette pack will be increased and will be reconsidered with the excide tax change and also indexed according to inflation. Russian manufacturers are against such initiative as they consider that it will cause market monopolization by transnational companies.
Such Companies have major part of their brands in "premium", "super premium" and "middle plus" segments. And those who till today preferred cigarettes of last price category after their price increase may switch to cigarettes of lower segment and not obligatory the same brand. In JTI sales, about 17% fall to brands of low and average price categories, the same part - to "middle plus". If excise taxes will be indexed, expensive cigarettes will grow in price more, than cheap cigarettes and people will switch faster to cheaper brands and struggle for buyer will escalate.
Philip Morris and British American Tobacco have refused to give official comments.