Expansion Opportunities in the Middle East, North Africa

While the developed regions’ cigarette volumes contract year-on-year, with sales 2005-10 down by 12 per cent in Western Europe and 20 per cent in North America, cigarette volumes rose by 17 per cent in the Middle East and North Africa, making it the fastest growing region for cigarette consumption in the world, with its state companies and former state companies a particular target of the major tobacco companies.
Smoking culture is robust in the Middle East and North Africa with smoking prevalence varying from between some 36 per cent in Tunisia and 31 per cent in Egypt to some 19 per cent in Iran, where illicit trade is rife. This, and the fact that the smoking population in the region, according to Euromonitor International, increased by some 15 per cent over the years 2005-2010, explains the growth in cigarette consumption. With a strongly growing youthful population, these are markets with real growth potential for tobacco and, although tobacco control is becoming more of a factor in general, its influence remains weak.
Saudi Arabia is the biggest tobacco product importer, followed by Iran, Jordan, Morocco and Egypt. International brands are growing while the possibility of acquisitions of state companies adds spice to a region capable of delivering what is becoming the rarest of commodities in the tobacco industry — volume growth.
In the short-term, political turmoil in Egypt, Libya, Tunisia, Yemen, Bahrain and possibly elsewhere in the region will probably have an adverse effect on the duty paid tobacco market and boost illicit trade. In PMI’s EEMA (Eastern Europe, Middle East and Africa) region, volumes were down 0.8 per cent in the first quarter with the disruption primarily due to the ‘Arab Spring’ of political dissent in Egypt, Libya and Tunisia, though the company also cited growth in Algeria. However this effect is expected to be temporary and to represent a supply disruption rather than any fall in prevalence.

Not Immune to Tobacco Control
The Middle East has not been immune to the rise in tobacco control legislation. In August 2010, Egypt launched an ambitious, anti-smoking campaign combining new taxes with plans to ban all indoor smoking in major cities. Earlier in 2010, Syria banned smoking in most public places, including parks, restaurants and cafes, though water pipes were allowed in designated areas. Also in 2010, Jordan banned cigarette vending machines and billboards in the capital, Amman, while in Saudi Arabia, twelve people were fined for smoking at King Abdulaziz International Airport in Jeddah on the first day of an airport smoking ban, though fines were not being imposed on pilgrims. However the Middle East remains a region with a strong tobacco culture both for cigarette smoking and pipe tobacco used in shisha  or water pipes, and one effect of the ‘Arab Spring’ will certainly have been to put smoking regulations on the back burner.

Ideal Acquisition
The Egyptian state company, Eastern Tobacco, which has an 80 per cent share of the 80 billion stick cigarette market, would be an ideal acquisition for any international company. A privatisation programme for the Eastern Company, in which the government owns a 66 per cent stake, was initiated in 1997, but has not been completed. Eastern Company dominates the cigarette market due to the Cleopatra brand and is outperforming major international flagship brands because it is cheaper and stronger in taste, in keeping with local tastes. World Health Organization figures show the number of smokers in Egypt has grown twice as fast as the population over the past 30 years. In Egypt, the cigarette market in 2010 appears to have continued to grow despite the excise tax increase which caused cigarette prices to rise 40 per cent and shisha tobacco by 100 per cent. The market appears to have been similarly unaffected by the introduction of graphic pack warnings, with many smokers buying plastic ornamental pack covers to conceal the images.
The year 2011 could be different. The Egyptian revolution in January 2011 disrupted imported brands while, throughout the region, reduction in governmental authority has certainly slowed tobacco control and encouraged illicit trade.
To date, illicit trade has not been a big problem in Egypt where low prices have kept illicit penetration low. Elsewhere, it is a perennial problem with illicit penetration in Iran approaching 40 per cent and over 20 per cent in Saudi Arabia, Algeria and Morocco.
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 the tobacco market, and BAT and Japan Tobacco Inc. cut deals with ITC to produce their products under licences. This process has not run entirely smoothly. ITC had plans to start mutual production of Winston cigarettes with Japan Tobacco in early 2010 but opposition from the Ministry of Health and Hygiene and others led to the joint venture being cancelled only for ITC to say it should go ahead to combat major illicit trade in Winston cigarettes.
In Iran, a tobacco control measure backfired. February 2009 saw the introduction of graphic health warnings but, for some reason, the majority of Iranian smokers believed that products bearing graphic health warnings were counterfeit and consequently of inferior quality and sought out alternatives without graphic health warnings.
This helped boost illicit products (which do not carry health warnings), which grew by over 10 per cent in 2010 and were a factor in the fall of cigarette volumes, though another was government campaigns to increase public awareness of the harmful effects of smoking.

Algeria — Opportunity after the Monopoly
The tobacco monopoly of Sociéte Nationale des Tabacs et Allumettes (SNTA) ended in 2001, since then, the state company has experienced tough competition from Société des Tabacs Algéro-Emiratie (STAEM) and BAT Algeria, the only two manufacturers of international brands and of mid and low tar cigarettes.
This is a growth market for cigarettes with lack of control at point of sale and lack of observance of smoking bans where smoking prevalence among men runs at about 45 per cent. SNTA accounted for over 60 per cent of volume in 2010 through high tar cigarettes and economy brands. STAEM and BAT Algeria, which produce international brands, achieved 36 per cent and 1 per cent respectively. STAEM, created in 2002, is 49 per cent owned by SNTA and 49 per cent by investors from the United Arab Emirates.
Since the production of any tobacco products within Saudi Arabia is banned, all tobacco products consumed are imported. According to Saudi law, the sale of any cigarettes that contain a tar level higher than 10mg per stick is illegal and all imported cigarettes must clearly state the tar and nicotine content on the pack.
This is part of the reason why illicit trade in cigarettes is increasing in Saudi Arabia and reached about 20 per cent in 2010.
The same demographic strength is to be found in Saudi Arabia where cigarette volumes continued to grow strongly in 2010, also helped by rising disposable income unaffected by the global economic slowdown, as witness growth in the cigar and premium cigarettes categories. However, pipe tobacco remains the leader in the non cigarette sector in terms of volume, mainly due to shisha. A cultural pass time deeply embedded across the Middle Eastern culture.

PMI’s Jordan Acquisition
The attractiveness of the region is demonstrated in PMI’s announcement in April 2011 of an agreement to acquire International Tobacco & Cigarettes Co. Ltd. (ITCC) in Jordan. Elsewhere, Imperial sees its ownership of Altadis Maroc as a springboard to the region while there have been reports of a delegation from China’s Hongta Group visiting the Iran state company with a view to introducing Hongta cigarette brands. Elsewhere in the region international brands have increased share either through manufacturing agreements or imports.
The state-owned tobacco company RNTA, leads the cigarette market in Tunisia with approaching 90 per cent of sales through its local brands 20 Mars and Cristal.
Though there has been a trend towards international brands, these are not available in all outlets, distribution being government controlled. Volumes fell in 2010 and the market could be further disrupted by the political turmoil of the Arab Spring. However this remains a significant opportunity for the international companies should any government decide that privatisation of tobacco is a good way of generating cash.