BAT selling tricks

BAT selling tricks

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Published on Friday, 07 June 2013 00:00

Written by AMADO P. MACASAET

By A Web design Company

‘The bigger problem that will prevent Purisima from collecting the incremental amounts from the new tax law is smuggling.’

I have confirmed with documents that British American Tobacco is selling its Lucky Strike cigarette brand at 10.90 ringgit in a 7-Eleven store in Kuala Lumpur. That price is more than P140 in Philippine currency. 

In the 7-Eleven chain in the Philippines the brand is retailed at P29. BAT is left with a gross margin of about P4 after paying excise tax of P25. The margin does not include the value added tax of 12 percent. At that price, BAT can hardly make a profit. In fact it could incur a loss. The spread is too thin to cover cost of manufacturing, distribution, trade and producers margin.  

The price of one pack of Lucky Strike in Kuala Lumpur can buy four packs in the Philippines. Why does BAT appear to be deliberately losing money from Lucky Strike in the Philippines? It has its own reasons. 

To begin with the supply of Lucky Strike in the Philippines is small. It is sold largely in 7-Eleven stores. Small supply means small losses. They may well be recovered from sales in Malaysia. 

We remember James Lafferty, manager of BAT in the Philippines, saying after the passage of the new excise tax law that his company will double its sales. The company will sell at least one million sticks. 

That is not possible by limiting supply to the outlets and periodically denying the 7-Eleven chain adequate inventory. This is a business decision that tends to prove the foreign player in the cigarette game is not making money.

And to think that it packed up and went home because it said it could not compete under the old law. It wanted and got a new law that Lafferty says levels the playing field.   

Strangely, BAT does not want to fill rising demand for Lucky Strike. Instead it cuts supply to its outlets.  That’s how Lafferty takes advantage of the level playing field he sought and got with ease.

The reason may well be it is cutting losses.  But why should BAT, reported in a study commissioned by US health authorities as the world’s biggest trader of illicit cigarettes, deliberately incur a loss in the Philippines? 

To begin with, the loss cannot make that much dent in the profit and loss statement of BAT’s world-wide operation. 

The supply of Lucky Strike in the Philippines is short. Therefore the loss is small. 

It is important to recall that the Bureau of Internal Revenue did not include Lucky Strike in its long list of brands where the net retail price for each is clearly indicated. 

The BIR could very well do a new survey but did not. It used a 2010 survey. In that year, BAT was not operating in the Philippines. We heard that the survey that included Lucky Strike was made in 2003. The net retail price of the brand in 2003 should not have been used in the 2010 survey. 

That should explain why the BIR did not include Lucky Strike among the brands with a net retail price. 

Under the law, the BIR reclassifies cigarette brands every two years. We suspect that the foreign player sells Lucky Strike at a loss or with negligible gain in the hope that it may well find itself under the low category, which accounts for around 60 percent of demand. When that happens Lucky Strike’s excise tax will be cut down to P12 per pack. The law allows downward reclassification. The possible reduction of tariff rate is more than 50 percent of its present liability of P25 per pack similar to the tax of Philippine-made cigarettes like Marlboro and Hope of Philip Morris Fortune Tobacco. 

Without a net retail price suggested, in fact dictated by the BIR based on a survey, BAT can continue selling the brand at P29 per pack if it is lumped together with the “low” brands that pay a rate of P12 per pack. That would be the time to make a profit. 

The possible reclassification to “low” is criminal considering that the tax of imported cigarettes under the old law was P28.30 under the “premium” category which was deleted in the new law. 

Consequently, the tax on Lucky Strike was cut to P25 while the burden of local cigarettes in the “high” category was raised to an identical level from less than P5 in the old law. 

The possible downward reclassification of Lucky Strike, the second time under the present law, to the “low” category will make the brand appear as the “poor” man’s cigarette as far as the tax it pays is concerned. 

Without including Lucky Strike in the list of brands with net retail prices, BAT can continue selling it a P29 per pack. The brands in the “low” category retail at an average of about P15 to the pack.  This is about 50 percent cheaper than Lucky Strike.

It is entirely possible, however, that the price of Lucky will be pushed down further during the survey to qualify for the “low” category. That would leave the foreign company with a gross margin of P17 per pack. 

When that happens BAT may be expected to flood the market with its brand and drive out of business the local cigarette manufacturers. 

The foreign company will rake it in. The local players will lose their share of the market. A slowdown in demand is already felt among the local makers. If the tax on Lucky Strike is cut further to P12 to the pack as a function of reclassification required under the law, the brand becomes the king of cigarettes in the Philippines. 

Is it the hope or expectation of Finance Secretary Cesar Purisima that what may be lost to the local brands can be covered by higher collections from BAT? That hope is pie in the sky. 

It ignores the fact that at the start of the implementation of the new law, huge volumes of illicit cigarette started infiltrating the market. The law is so lopsided in favor of BAT that some unscrupulous businessmen—shall we call them thieves?—have started bringing in fake cigarettes from China. 

There have been two apprehensions so far. How about those who got away? Certainly their volumes are far bigger than that brought by those who were apprehended. 

That is just part of the downside. The bigger problem that will prevent Purisima from collecting the incremental amounts from the new tax law is smuggling.

In the end, BAT will prosper with the smugglers for the simple reason that the price of its brand is lower if not the same as illicit cigarettes. 

Purisima says smuggling is a question of law enforcement. It is. But there is hardly any law enforcement at all. If there is, not just a semblance of confiscating small volumes worth so very little, why do the American Chamber of Commerce and other groups complain that 36 percent of fuel oil supply enters the country through the backdoor and therefore does not pay a tax? 

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