Entries from December 2008 ↓

A recent conversation with executives from Souza Cruz mentioned contraband entering Brazil from Paraguay had decreased slightly and was now 14-17 billion – no more than this.

We thought this number a significant under-estimation.

Recent news is cigarette FET (Federal Excise Tax) is rumored to increase by a dollar – not just go to a dollar!

This will make FET $13.95 a carton – surely a bit steep; given you still need to add state taxes, tobacco buyout, MSA payments (or escrow)  and in some cases city taxes. And you thought that in 1776 taxes were a thing of the past? Oh yeah, and another thing – there’s no cost for manufacture in there yet!

This taxation level will inevitably increase contraband and citizens everywhere will attempt to avoid these aggressive tax rates.

Is this the right solution? Comments please

Filtrona PLC issued a press release recently announcing that Filtrona Paraguay – located close to Ciudad Del Este – will re-commence supplying local customers with cigarette filters.

Filtrona bowed to pressure from BAT and PM some three years ago and withdrew from the local market – which is considered to be the source of most of the no-tax-paid cigarettes entering Brazil. This left the plant with excess capacity and neither BAT nor PMI reciprocated with sufficient replacement business to warrant continuing the strategy. Both multi-nationals have been informed it said.

What next? Will the multi-nationals renew their efforts to discourage participation and supply in this market?

Was Filtrona singled out?

Will Filtrona continue? They re-entered once before and quickly withdrew again?

Can they effectively compete against their new local competitor Global Filter – which established itself from the void created by Filtrona’s initial withdrawal?

Will local customers embrace Filtrona’s about turn?

Comments appreciated.

To all of you who have visited the site over the last year – thank-you.

If you came back – a big thank-you. And if you posted a note or comment – my hat’s off to you.

Thanks to you the monthly number of unique vistors has increased about 16-fold this year

Let us have some feedback on things you’d like to see us add – or improve?

We look forward to you comments.

Another sign, or is it a symptom, of the deteriorating US economy are reports from several sources of cautious volume increases in the discount cigarette sector. Several producers have confirmed increased volumes recently.

While good news for independent producers – who can always do with some help, it may not be quite such stellar news for the full-price segment.

Any opinions or news anybody?

I recently had a one-sided conversation with a senior executive on the supply side of the industry. His premise was Reynolds (American) was readying itself to buy Lorillard. I disagreed.

Further incensed by my lack of clarity he pushed on declaring it “was obvious / inevitable” – not to me it seems!

It had all been thought out. Reynolds buys Lorillard – relocating it to Whitaker Park in Winston-Salem, consolidating it into existing premises with all the staff reductions and cost savings imaginable.

This was further evidenced on the market side by the recent announcement from Reynolds to de-emphasize Kool. The conclusion was in favor of the soon-to-be Reynolds brand – Newport!

Good theory – I still don’t buy it.

What’s your thought?

It probably wouldn’t have made a difference which presidential candidate was elected to the outcome of the proposed Schip legislation, which Congress is expected to resurrect soon in 2009.

For those who are unfamiliar, Schip is a Federal government program aimed at providing health care for children below the poverty line. A worthy cause and one well deserving of a solution - but is funding Schip by increasing the federal excise tax on cigarettes the right (solution) fiscal policy?

Federal Excise tax (FET) is $0.395 cents a pack and the proposal will increase it to $1 – adding $0.605 – making it $10 a carton. Estimates vary, but the net effect will be a decrease in cigarette consumption of about 10% – or 35 billion cigarettes a year for a couple of years as consumers become re-accustomed to the new price level. At 350 billion cigarettes, FET could rise to $350 billion (from $138.25) although the net increase is $176.75 billion ($315 – $138.25 billion - assuming US smoking levels decline as expected.) This is by no means certain and makes Schip funding uncertain.

Smoking prevalence is directly related to price and real disposable income; higher prices / lower consumption. Future State and local tax increases will undermine Schip funding as will the adverse economy – eroding disposable incomes. Remember too the volume decline is only an estimate.

There are better ways to fund Schip. Perhaps more pertinent is the entire question of health care reform and if the federal government should be removed from the obligation – while still solving health care for all children?