Philip Morris to challenge local cigarette giants

Rendi A. Witular, The Jakarta Post, Jakarta

The acquisition of PT Hanjaya Mandala Sampoerna, the nation's second-largest cigarette producer by volume, by U.S.-based Philip Morris International Inc. is set to make the competition in local cigarette industry stronger.

With kretek (clove) cigarettes accounting for 92 percent of the market, Philip Morris -- the producer of non-clove cigarettes such as Marlboro -- says it is well aware it cannot lead the market here without also producing cloves.

"Kretek is part of a tradition in Indonesia. It will be difficult for us to change that. Our partnership with Sampoerna is aimed at strengthening our presence in the kretek cigarette industry," said Philip Morris Asia Pacific President Matteo Pellegrini in an interview recently.

Philip Morris, an international tobacco unit of U.S. consumer- goods giant Altria Group Inc., announced it had offered a total of Rp 48 trillion (US$5.2 billion) to buy out Sampoerna.

Last year, publicly listed Sampoerna controlled 19.9 percent of the market share, with its top-selling brands the hand-rolled Dji Sam Soe and the machined-rolled low tar A Mild.

The brands are aimed at the middle and upper-income markets.

With little health regulations or taxes on cigarettes, unlike those in more health-conscious countries, there is promising growth in the cigarette market here. Pellegrini said Sampoerna, under Philip Morris, would now have the capability to expand its market share towards middle and low-income smokers.

"We are looking for all opportunities here, and definitely we will expand our market share to all market segments," he said.

The middle- and lower-end market segment is the largest base for cigarette giants like East Java-based PT Gudang Garam and Central-Java based PT Djarum -- the country's largest and third largest cigarette producers, respectively.

Last year, cigarette consumption here reached 213 billion sticks with Gudang Garam, Sampoerna and Djarum accounting for 68 percent of the market share.

Sampoerna took over the rank of the second-largest cigarette producer from Djarum last year, with an increase in market share to 19.9 percent from 18.3 percent in 2003, while Djarum ranked third with its share dropping to 18.2 percent from 18.7 percent.

As for Gudang Garam, although it remains at the top of the list last year, its growth volume was lower compared to Sampoerna. Gudang Garam recorded an increase of only 1.44 billion sticks, compared to 7.03 billion sticks booked by Sampoerna.

"With a vast global experience in the cigarette industry, Sampoerna under Philip Morris will definitely become a tough challenger for Gudang Garam, especially if they also engage in the lower-end market," said an analyst with BNI Securities.

The analyst said, however, that it would be difficult for Gudang Garam and Djarum to topple Sampoerna in the middle and upper-end of the market.

"Middle and upper-end markets are more sophisticated than those at the lower end. Aside from that, as the country's economy is growing and those who used to smoke cheap cigarettes will eventually turn to more expensive ones," the analyst said.

Indonesia is the world's fifth-largest cigarette market after China, the United States, Japan and Russia, with 141 million smokers.

Analysts have projected that the number of smokers are likely to grow by at least 5 percent this year.

"The decision to acquire Sampoerna is in part attributable to limited smokers in the developed countries amid rising production costs due to higher excise tariffs imposed on the product," said the analyst.

The decline in the number of smokers in the U.S., Western Europe and Japan are primarily driven by health concerns, government regulations in anti-smoking drives, and serious litigation from non-governmental organizations over the negative impact of cigarettes.

Top cigarette producers (in million sticks)

2003 2004

1. Gudang Garam 63,290 64,731

2. HM Sampoerna 35,558 42,594

3. Djarum 36,285 39,066

4. Bentoel 3,865 4,138

5. Noyorono 3,775 5,974

6. Philip Morris 9,103 8,370

7. BAT Indonesia 5,553 5,426

8. Other non-clove 3,406 4,000

cigarette producers

9. Other clove 33,127 39,673

cigarette producers

Total 193,962 213,972

Source: The Association of Indonesian Cigarette Producers (GAAPRI)