[Intl-tobacco] Joint Venture in Egypt with BAT]

[Robert Weissman]

http://www.businesstodayegypt.com/article.aspx?ArticleID=1468

July 2004
A Joint Effort
A venture between Eastern Company and British American Tobacco targets
smokers sick of Cleopatras and too broke for Marlboros

By Joseph Krauss

Eastern Company (EC), the state-owned cigarette-maker monopoly, made
history last month when it entered into a $10 million agreement with
British American Tobacco (BAT) to launch a joint-brand cigarette aimed at
Egypts mid-range market. Combining the rustic woodchip flavor thats made
ECs flagship Cleopatra a national pastime with the smooth finish of BATs
sought-after premium brands, the latest tobacco treats to hit the Egyptian
market called Viceroy may offer a timely compromise to premium-brand
consumers who are partial to high-end cigarettes but struggle to keep up
with rising prices.

Agreements of this caliber are usually concluded in smoke-filled rooms by
big-time power brokers, and this signing was no exception, drawing
prominent tobacco executives and ministers alike to the Nile Hilton for an
elaborate signing ceremony. There is no doubt that [this] agreement shall
reflect positively on all stakeholders, said Sadek Ragab, chairman and
managing director of EC. Both companies are major players.

Actually, Ragabs company dominates the market not only by virtue of its
monopoly status, but also because it manufactures the Cleopatra brand, the
most popular in Egypt. EC has long manufactured and distributed
international brands under license for both BAT and Phillip Morris, the
America-based producer of Marlboros, but officials from both EC and BAT
insist that the latest arrangement is different.

Whats very different about this one is that both parties are bringing
something to the table, says Graham Gibbons, general manager of BAT. EC
still owns Viceroy packaging designs from the 1950s, when the state bought
out British American Tobacco and nationalized the industry, but with the
latest agreement it will be able to reproduce the image of Viceroys
marketed the world over.

By law, EC is the only company allowed to produce cigarettes in Egypt, and
because tobacco is considered a strategic commodity the government enforces
strict price controls on mainstay domestic brands. EC has been able to
expand into the luxury market by manufacturing international brands under
license, but dirt-cheap Cleopatras remain dominant, accounting for over 60
percent of total consumption. Its monopoly notwithstanding, the company was
hit hard by the falling pound, which forced it to raise prices on premium
brands in order to cover the increasing cost of tobacco, which must be
imported because of a ban on local growing.

By launching an internationally recognized brand that has already sold well
throughout the Middle East, both EC and BAT hope to open up a new mid-price
sector in a local market that has long been dominated by the extremes of
the price spectrum, running from the immensely popular Cleopatras all the
way up to Marlboros, the best-selling premium cigarette in Egypt. Both
companies are optimistic that such a market exists and is likely to grow,
especially in the wake of the falling pound, which drove the price of
Marlboros up to nearly twice their previous value and forced scores of
smokers to switch to cheaper brands.

The premium sector is dominated by Phillip Morris and, because of the price
increases, PM has suffered. Theres been dropout in premium brands in
general, probably directly into the Cleopatras and the Mondials of this
world, Gibbons said, adding that BATs two luxury brands, which are priced
slightly lower than Marlboros, were largely unaffected by last years price
swings. Gibbons hopes that by releasing a lower-priced international
product, a virgin market will be captured.

Clearly we feel there is an opportunity in the mid-price sector, and we
have to give consumers a choice of brands at different prices across the
market, says Gibbons. Its a brand new sector [in Egypt] that we think will
be developing. The cigarettes will sell for an estimated LE 4 a pack,
roughly equal to the price of a pack of Marlboros before the recent price
hikes.

Although BAT has been present in Egypt since 1905, it only re-entered the
market in 2001, when it signed manufacturing license agreements with EC to
sell Rothmans, Kent and Lucky Strike cigarettes, the last of which has been
recently discontinued.

Egyptians suck down an estimated 50 billion cigarettes a year, which
according to the World Bank makes it the largest tobacco consumer in the
Middle East and North Africa, accounting for nearly one fourth of total
consumption in the region.

Egypt is the 17th-biggest tobacco market in the world its huge, Gibbons
says. It would be very remiss of international companies not to consider
Egypt very seriously. bt