[Intl-tobacco] Czech R: Philip Morris may benefit from ad ban

[Robert Weissman]

Philip Morris may benefit from ad ban
Ban could hurt smaller companies
by Petra Breyerova
Source: Prague Business Journal (cz), 2002-06-07, via tobacco.org
http://www.pbj.cz/common/article.asp?id=152420&amsearch=&site=1


Photo: Jakub Stadler

Date: June 3, 2002

The proposed tobacco ad ban could have the unintended effect of
bolstering the No. 1 market-leading position of Philip Morris CR.

The recent surge in the company's share price has partly been
sparked by the millions of crowns the company could save on
advertising as a result of a ban, and some industry experts suggest
the company could be playing a double game appearing to attack the
ad ban in public but lobbying for it in private.

The publisher of specialist tobacco industry Web site Tobacco.cz,
Jarek Jesensky, said in an article on his site that there are
suggestions that, unlike its rivals, Philip Morris is lobbying
behind the scenes for the ban because of the amount of money it
could save in advertising.

However, KDU-CSL deputy Josef Janecek, sponsor of the parliamentary
bill to ban tobacco advertising, includes Philip Morris alongside
other domestic tobacco companies lobbying for the ad ban to be
dropped and the current free spending on products to continue.

Philip Morris CR refused to comment on its stance on the bill. The
lower house is scheduled to vote on Senate amendments to the
advertising ban on June 13. On May 24, the Senate called for
amendments that would relax the total ban and allow press
advertising of tobacco products and sponsorship of events aimed at
adults to continue.

Smoking gun

The company currently sells its products to nearly eight out of
every 10 smokers in the Czech Republic. An ad ban could actually
strengthen its dominant position. "Philip Morris would definitely
not lose its market share," said Jan Slaby, an analyst with Wood &
Company. "Rather it would gain 1 or 2 percent over two or three
years if the ban is passed."

"The impact [of the ban on tobacco ads] would certainly have a
positive impact on Philip Morris' shares as the company would save
on the operating costs of advertising," said Dan Karpisek, an
analyst with Komercni Banka." With its dominant position on the
market Philip Morris does not need a great deal of marketing
support."

Philip Morris CR's shares have strengthened in recent weeks,
hitting an all-time high of Kc 10,171 per share last Wednesday.
Karpisek said the prospect of the company saving on ad spending if
the ban is passed was most likely responsible for about 40 percent
of the recent rise. Other technical factors such as the traditional
high dividend paid on shares also contributed, he said.

If the bill is passed with the proposed Senate amendments, it would
not have as positive an impact on Philip Morris' shares as a near
total ban, Karpisek said.

In order to defeat the Senate amendments, an absolute majority of
lower house deputies will have to vote in favor of their original
version and send it to President Vaclav Havel for final approval.

Small companies' fears

Other tobacco firms, representing the remaining 20 percent of the
market, are afraid that their market share will be eroded by Philip
Morris if there is an ad ban. The proposed ban mainly affects
market share, not overall consumer consumption, they argue. "Thanks
to advertising, consumers change cigarette brands," said Richard
Vavrik, CFO of Reemtsma International, which is the second largest
producer of cigarettes in the Czech Republic with almost 10 percent
of the market.

Jan Hajek, an analyst with Patria Finance, said that advertising
helps such companies gain a bigger share of the market. If
advertising becomes less effective (either through a complete or
partial ban) then it will be harder for smaller companies to gain
market share or for a new company to enter the market, he added.

Both Philip Morris and Reemtsma increased their profits last year.

Philip Morris' heavily promoted brands, like Petra, Sparta, Start,
Marlboro or L&M, are among the most popular on the market. The
company's sales revenues increased by 10.7 percent to Kc 13.6
billion in 2001. Income from operations increased by 10.9 percent
to 4.9 billion, reflecting higher unit volume and improved pricing.
Net income increased by 5.8 percent to Kc 3.4 billion.

Reemtsma, with 45 tobacco products including cigarette brands like
Davidoff, West and Mars, is a limited liability company
distributing products imported from Slovakia and Germany. Last year
net income reached Kc 98.2 million and sales increased from Kc 2.33
billion to Kc 2.38 billion.

There are other four players with over 1 percent at the domestic
market. British American Tobacco (BAT) owns some 5 percent of the
market, helped by lead brand Lucky Strike. Camel, Winston, Monte
Carlo and Slavia cigarette brands have helped JT International grab
3 percent of the market. House of Prince (brands Prince and Caines)
and DanCzech Czech Republic, with Karelia, each have around 1
percent of the market.

"In this country there are around 3 million smokers and every year
23,000 people die as a result of smoking," Janecek said. "Up to 60
percent of smokers start before they are 13 years old and nine out
of 10 smokers begin before they are 18. In countries where tobacco
advertising has been banned, its consumption has decreased by 30
percent," Janecek added.