Nepal Tobacco Company (P) Ltd.

Staying Steady in Declining Market

Atma Ram Pokharel

Cigarette companies in the country are bringing out newer brands in the market, but the market volume has been declining every year. If one of the oldest players in this industry is to be believed, it is not because of anti tobacco awareness, but because of unhealthy competition among the companies and, to some extent, the Maoist insurgency.

According to Atmaram Pokharel, Marketing Manager of Nepal Tobacco Company (NTC), the industry volume declined 1% last year and the trend is continuing this year. Sales volume of NTC itself serves the example to prove the point. While the company sold Rs. 375.5 million worth of cigarettes in 1997/98, it declined to Rs. 333.9 million in 1998/99. TV Ramaswamy, the President and Managing Director of Surya Tobacco Company (STC), a joint venture with ITC Ltd. of India, also agrees with the fact that the industry volume declined last year and whatever growth has been achieved this year in the industry, it has not yet touched the pre-decline level.

NTC was established some 35 years ago and has no foreign collaboration. Its ownership was changed some 12 years back. "And the company has been progressing steadily ever since," claims Pokharel.

Despite the downward trend in the total sales, the companies are however expanding their capacity and improving the technology. Just recently, NTC expanded its capacity from 920 million sticks per annum to 3000 million sticks per annum. The logic is to improve the quality of the product. Still, Pokharel says, it is difficult for any new brand to establish itself in the already saturated and declining market. For this he blames the unethical practice among the players to spread negative rumours about the competitor’s brands. He cites last year’s incident when his company’s brand of cigarettes were filled with chilli powder, repackaged and released for sale by a distributor of rival brands. Pokhrel claims that his company is, however, not involved in such practices. "We have tried to protect ourselves from unethical measures of our rivals targeted at us. But we have not involved ourselves in such practices. No company has complained against NTC on this count", says he. "So, however good quality brand one may offer, the consumers are reluctant to switch over to the new brand," he adds. But this worked in favour of the established brands. That is why Pokharel claims that sales of his company have not been affected by the recent entry of new companies in the market.

Another reason is the decline in cigarette sales in areas where the Maoist movement has its stronghold. In some places the insurgents have stopped cigarette sales. Moreover, the wholesalers and distributors in the region have stopped credit to the retailers. And this has been resulting into reduced total sales of cigarettes.

Still the companies have been coming up with new brands, and the tendency is to go for better quality product. But as the volume in the premium segment is very low, everybody is coming up with products in the medium segment. And Pokharel says, this segment is already crowded. Producers see higher margins in regular segment over plain segment, and still higher in king size over regular size. Secondly, according to him, it is also a question of image. NTC itself names Nepal Gold Flake, a plain segment brand, as its flagship, because it is the major contributor to the company’s sales revenue. But the company also has Winner and Yeti in filter segment for several years, and only last year it has added Shangrila in the premium segment.

Though Pokharel says that none of the brands introduced by any company over the last five years have been successful due to the reluctance of the consumers to switch brands, he claims that brands introduced by his company in the recent years have been doing pretty well. But, he declines to divulge the figure.

It is said that only 50% of Nepal’s total tobacco consumption is in the form of cigarettes, the other 50% being in the less hygienic forms like chewing tobacco and Pan Parag. And the decline in cigarette sales in attributed to increase in the sale of the substitutes. "Cigarette prices have been growing while the purchasing power of the people, especially in places outside Kathmandu valley has not", Pokharel explains. While a packet of cigarettes costs Rs. 7.50 at the minimum, the substitutes are available for as low as Rs. 2 or 3 to last a day. Hence the sales of the substitutes are growing at the cost of cigarettes.

Government policy has hamstrung the cigarette companies from making any effort to attract consumers from raw tobacco to cigarettes. Consumer schemes are not allowed in cigarettes. This coupled with the ban in cigarette ads in electronic media, has on the one hand restricted the companies from expanding the market, and on the other, the government also has been losing revenue. Of the total government revenue from tobacco, cigarette companies contribute 99%. This gives a logic in favour of expanding cigarette consumption.

Looking at some indicators, interesting finding can be noted. While the domestic production of cigarettes in declining, so is the import volume of tobacco and cigarette paper. Domestic production of tobacco also has been declining over the years since 1994/95. But volume of cigarette imports has been increasing.

In this background, NTC is contemplating to go into tobacco cultivation also, says Pokharel. This and the company's recent capacity expansion foretell that something new is coming out from NTC in the near future. But the company sources are not opening their mouth about it at present.

Cigarette Imports (Value in Rs.)

Source: Nepal Overseas Trade Statistics, TPC

Cigarette Paper Imports (Value in Rs.)

Source: Nepal Overseas Trade Statistics, TPC

Tobacco Imports

Source: Nepal Overseas Trade Statistics, TPC

Cigarette Production (in million sticks)

* Estimates based on first nine months data

Source: Economic Survey 1998/99