2.5 billion smuggled cigarettes: The pains and future of Egypt’s tobacco sector

This is Pt. 2 of our series on Egypt’s tobacco market, the second largest contributor to government revenues. The series does not solicit or support the use of tobacco products, but rather offers an overview of the sector and its size, future and revenues. To read Pt. 1, click here

Despite slow global economic growth, the cigarette market is expected to register a 0.3% compound annual growth rate (CAGR) in terms of revenue within the upcoming five years. By 2024, the global market size is expected to reach $105.2 million compared with the current $103.4 million, according to a report released by Orbis Research.

Although the Egyptian cabinet confirmed in April that it will not impose tax increases on tobacco products in its 2019/2020 state budget, other challenges beyond high pack prices continue to startle the industry in Egypt.

The challenges of Egypt’s tobacco market
One of the challenges that continue to halt industry growth to this day is vendor “greed”. Vendors would typically stockpile their supply of cigarettes once the government hints at a new price hike. They would either sell them once the price increases – hence buying low, selling high – or sell cigarettes at higher prices in the black market, Ahram Online previously reported.

Egypt’s Consumer Protection Agency (CPA) previously announced that it was coordinating with the government to prevent traders from exploiting new applied taxes and pricing violations.

Selling illegal cigarettes is another challenge in the market. Head of the Tobacco Division at the Federation of Egyptian Chambers of Commerce Ibrahim Embaby tells Business Forward that there are around 2.5 billion cigarettes smuggled into Egypt annually, “entering the country without customs or taxes to be sold at cheaper prices than other cigarettes.”

Eastern Company media spokesman Morsy Abu Amer explains: “The smuggling of cigarettes is one of the Eastern Company’s main challenges. Those make up 3.5% to 4% of the cigarette market; however, we try to report on such incidents including markets and companies that replicate our products.”

He adds that the market loses LE3 billion annually due to smuggling illicit cigarettes in the black market which is mainly attributed to a lack of security. Abu Amer mentions that illicit cigarettes caused the market to lose around LE7 billion in 2017.

Although the rise of smuggling illicit cigarettes into the market continues to threaten local and foreign manufacturers in the country, some companies began to take caution against the phenomenon.

On May 29, chairman of Japan Tobacco International Egypt Ayman Abbasy told local media outlets that the company signed a protocol with Egypt’s Customs Authority to combat the smuggling of illegal cigarettes and tobacco into the country.

Abbasy cited the annual rising tax rates on cigarettes as a main reason for the increase in smuggled products in the black market, leading to a sharp decline in companies’ sale volumes.

Another challenge is the widespread illegal access to imported tobacco held in customs. Some manufacturers smuggle these products out of customs and use them to create replicas of foreign brands, according to Embaby. These are then sold at cheaper prices.

“All raw tobacco is imported. Hence, the Eastern Company is looking into locally manufacturing tobacco under the supervision of the Armed Forces to help mitigate input cost pressure in the long-term,” consumer and healthcare analyst at EFG Hermes Nada Amin tells Business Forward.

She adds that the company is planning to capture a bigger portion of the Hookah market, as this segment represents only 7% of the company’s revenues.

The market trends and expansion plans
The Eastern Company has ambitious expansion plans to produce cigars and different flavors of molasses-based tobacco products in 2019/2020, eyeing profits worth LE3.8 billion.

“There are a number of ways in which we plan to secure those revenues, including reducing annual production costs by 14% to reach LE6.6 billion compared to the current LE7.6 billion,” Abu Amer elaborates.

The company forecasts that it will increase exports in 2019 to a total of LE357 million compared to LE75 million in 2018, through tapping into new and diversified products.

“Export plans are halted by the current regional instability. We are unable to secure exports to Libya, Syria and Yemen; those were markets in which we were active,” Embaby explains.

With different challenges and opportunities on the horizon for the tobacco sector, the industry will remain a cornerstone revenue generator for the government, Amin concludes.

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