economic tool and techniques used in bat.pdf

Application of Economics Theories and Practices in the Tobacco Industry of Bangladesh with

reference to British American Tobacco Bangladesh

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Introduction Tobacco-use is a widespread phenomenon in Bangladesh. More than half of all men and nearly

one in three women use tobacco in Bangladesh, according to a latest study on tobacco

consumption. Conducted by Human Development Research Centre (HDRC) and Campaign for

Tobacco-Free Kids, the study looked at tobacco consumption trends among people aged 15 and

older, estimating that 46.3 million people out of 107 million consume tobacco.

About 58% of men and 28.7% of women smoke or chew tobacco in one of the cheapest tobacco

countries across the globe making up 43% of its total adult population. Bangladesh ranked

among top tobacco consuming countries where 57,000 people over the age of 30 die each year

from tobacco-related illness. Though Bangladesh signed WHO Framework Convention on

Tobacco Control (FCTC) in 2003 to control tobacco use by all means, it is yet to form a national

agency that experts think a key to fight tobacco. The survey revealed that tobacco consumption

in Bangladesh sharply rose in recent years, with cigarette sales going up by 40% and tobacco use

in the form of bidi increased by 80% between 1997 and 2013. Compared to 50.9 billion

cigarettes bought in 1997, the consumption was 76 billion pieces in 2013, while bidi sales

climbed from 43 billion in 1997 to over 82 billion in 2013. Excise taxes on cigarettes account for

half of the retail cigarette price in the country while total taxes are two-thirds of the retail price.

Anti-tobacco campaigners allege that the policy is at odds with countries having comprehensive

tobacco reduction approach where excise taxes typically account for 70% of retail price with

total taxes claim 75% of it. Different tax rates on different price slabs only benefit tobacco

manufacturers, they argued.

Amongst the tobacco manufacturers, British American Tobacco Bangladesh has grown to be the

premier multinational company in Bangladesh, and has witnessed a robust growth and

development in the tobacco sector. It is esteemed as one of the largest multinational

companies in the country and has been operating for over 100 years. This paper, from the

perspective of Economics, and with reference to British American Tobacco Bangladesh is an

attempt to observe how the organization is fueling the development in this sector.



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A.1 Origin of the Report

The report titled Application of Economics Theories and Practices in the Tobacco Industry

of Bangladesh with reference to British American Tobacco Bangladesh has been prepared

for Dr. A. K. M. Saiful Majid, Professor & Senior Fulbright Scholar, as a partial requirement

for completion of the course Managerial Economics (E501).

A.2 Rationale of the Study The study, conducted by group-2 in the context of British American Tobacco Bangladesh

ventured forth into various applications of different concepts of Managerial Economics in the

tobacco sector of Bangladesh. In an effort to do so, we have scrutinized the demand and supply

scenario of tobacco products, identified the major players in the industry, the market structure,

cost behavior, and also government control in terms of price control and tax imposition and their

effect on the consumers.

A.3 Objectives

A.3.1 Broad Objective

The broad objective of this paper was to carry out an intensive study on British American

Tobacco Bangladesh (mostly concentrated in Dhaka), i.e. gather and compile all possible

relevant data regarding the tobacco industry in Dhaka and provide an accurate depiction of the

recent development in this sector relating to the concepts of Economics learned in classroom

sessions till date.

A.3.2 Specific Objectives

1. Understanding the principles of economics and their application in respect of British

American Tobacco Bangladesh and the relevant industry.

2. Absolute and competitive advantage of British American Tobacco Bangladesh in the

sector.



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3. Understanding the demand and supply function, market equilibrium, income and

substitution effects on cigarettes developed by British American Tobacco Bangladesh.

4. How price elasticity of demand and supply works in the tobacco industry, and computing

both for British American Tobacco Bangladesh.

5. Price ceiling and price floor existing in the tobacco sector, impacts of government control

in the city.

6. Consequences of Govt.s regulation and taxation in relation to British American Tobacco

Bangladesh.

7. Effects of Inflation of the tobacco sector.

8. Recommendations for enhancement and growth for the tobacco sector in Bangladesh.

A.4 Scope of the Study

The geographic scope of this research is confined within Dhaka city. For the demand side of the

study, information was drawn from British American Tobacco Bangladesh officials, and existing

and potential buyers within Dhaka city. For the information on supply side, executives of British

American Tobacco Bangladesh and employees of the organization were interviewed.

A.5 Methodology

The study was conducted on two sets of population, one representing the demand side and the

other the supply side of the tobacco sector. On the demand side, the population consists of

existing and potential consumers, and the supply side consists of interview with employees of the



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organization. Interviews consisted much of the way through which information was gathered for

this study.

A.5.1 Sources of Data

This study was conducted based on both primary and secondary data. The secondary study was

mainly required for the background study on this sector. For the supply side, secondary sources

and interviews are the primary sources of data.

For the demand side, primary sources will be from existing and potential clientele. Besides, some

secondary sources like small scale research reports conducted will also be used. Primary source

of information came from the interview conducted for the purpose of the study.

A.5.2 Research Design

This study is a combination of both Exploratory and Descriptive research methods.

A.5.3 Instruments of Data Collection

Various articles, websites and newspapers were taken into account to get the necessary

secondary information. Interviews enabled specific information relating to supply and demand,

price ceiling and price floor, govt. regulations and taxation, and inflationary effects.

A.5.4 Sample Design

As mentioned above, this study was conducted on two sets of population, one representing the

demand side and the other the supply side of the tobacco sector.

A.5.5 Sampling Technique

Non-probabilistic sampling methods was selected because the complete sampling frame for the

target population was not available that is necessary to conduct the usual probabilistic sampling

techniques. Besides, limited time and budget would guide the researchers to go for non-

probabilistic methods.



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A.5.6 Sample Size

The sample size of the interviews was small. The interview sessions provided much in depth

knowledge and information required for the fulfillment of the study.

A.6 Criticalities and Limitations While conducting the study there were few obstacles that constrained the effectiveness and

comprehensiveness of the study. Certain limitations hampered the accuracy of this study. First

of all, employees were reluctant to give out company information. The accuracy of information

provided by the company hampered the overall quality or success of the study. Bangladesh does

not have organized secondary data of this sector unlike most developed countries. Thus the

information generated from primary research may not reflect the precise scenario of current

needs and our limited sample size may not be large enough to make accurate generalizations

about the entire population.

B. Trends in Tobacco Production and Market Share

Despite a significant improvement in awareness about the deleterious effects of tobacco use in

recent years, tobacco product production and trade have remained largely unchanged, if not

increased. Although there has been a lot of campaigning against tobacco, it appears to have been

ineffective in reducing demand. This section discusses recent trends in tobacco production and

trade. Both agricultural and industrial productions in recent years are analyzed. Aspects of

imports and exports are also discussed in order to get an idea of recent trends in the tobacco

industry.

B.1 Tobacco products market shares

The tobacco products available on the domestic market are tobacco leaf and other chewing tobacco,

cigarettes and bidi. WHO estimates that cigarettes and bidi account for about 70% of all tobacco

used in Bangladesh; chewing tobacco for 20%; and the remaining 10% is consumed in the form

of cigars, snuff and pipe tobacco. The smoking market is clearly divided into two categories:

machine- made cigarettes and hand- made bidi. Although bidi outsell cigarettes by about three to



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one in volume, cigarettes far outstrip bidi in total sales value.

Manufactured cigarettes account for an estimated 80% in value, but only 25% in volume of all

manufactured tobacco products sold in Bangladesh. Conversely, bidi account for 20% in value

and 75% in volume. Imported cigarettes account for 9% in value and less than 3% in volume of

manufactured tobacco products sold. Some smokers are reported to be switching from bidi to

cigarettes as cheaper cigarettes become available on the market, however, production data

suggest that in volume terms, bidi market share is growing. Information on market share is not

available for tobacco leaf or other forms of chewing tobacco.

B.2 Tobacco Agriculture

While widely grown, tobacco is a relatively minor crop in overall agriculture in Bangladesh. In

2010, the acreage devoted to tobacco growing accounted for only 0.25% of acreage for all crop

production and, in 2009, the value of the tobacco grown was only 0.22% of the value of all

agricultural production. The acreage devoted to tobacco growing in Bangladesh has been falling

steadily for most of the past three decades, before rising sharply in 2010 (Graph 3.1). In 2009,

tobacco was grown on just under 30,000 hectares, down 46% from 1982, before rising to over

38,270 hectares in 2010. In many years, imports and exports of unmanufactured tobacco were

similar. Much of the recent rise in the quantity of tobacco grown in Bangladesh is accounted for

by these increased exports, with the share of tobacco exported rising from about 2.5% in 2000 to

nearly 34% in 2009. In 2008, the export incentive was eliminated. In the 2010/11 budget, the

government imposed a 10% duty on tobacco leaf exports in an effort to discourage tobacco

growing.

The Bangladesh Bureau of Statistics estimated that, in 2008/09, 115,500 persons were employed

in tobacco growing, about 0.3% of the agricultural labor force. While the recent rise in tobacco

growing in Bangladesh is likely to have increased the number of tobacco farmers in the country,

the overall share of agricultural employment in tobacco growing is likely to be less than0.5%.



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B.3 Production of Manufactured Tobacco Products

Cigarette manufacturing is highly concentrated in Bangladesh, while bidi manufacturing is much

more fragmented. As Table 1 indicates, cigarette markets are dominated by two firmsBritish

American Tobacco Bangladesh (BATB) and the domestic Dhaka Tobacco Industries (DTI), a

part of the Akij Group. BATB is one of the oldest tobacco product manufacturers in Bangladesh,

in operation for over 100 years. BATB brands account for almost 46% of cigarette consumption

in 2010, down somewhat from the 54% half of the market the company had controlled as

recently as 2006.

DTI is part of the Akij Group, a large domestic conglomerate that includes a variety of

subsidiaries involved in cement, computers, foods & beverages, jute, textiles, pharmaceuticals,

and much more. DTI has historically focused on the lower priced segment of the market.7 DTIs

key brands include lower priced brands Sheikh, K-2, Five Star, Red & White, Real, and Surma;

other major brands are Navy (mid-priced) and Caste (premium). In addition, in 2007 DTI entered

into an agreement with Philip Morris International (PMI) to market PMIs brands, most notably

Figure 1: Tobacco production



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Marlboro, in the Bangladeshi cigarette market. DTIs share of the cigarette market is around 40%

in recent years.

There are a number of other smaller domestic cigarette companies operating in Bangladesh,

including Abul Khair Tobacco Company (AKTC), Alpha Tobacco Manufacturing Company,

Azizuddin Industries Ltd., Sonali Tobacco Company Ltd., National Tobacco, and Nasir Tobacco.

Together, they account for 10-15% of the Bangladeshi cigarette market. To date, Japan Tobacco

International and Imperial Tobacco/Altadis, the worlds other leading multinational tobacco

companies, have not established a significant presence in Bangladesh, with imports of their

brands and other multinational brands accounting for a very small share of the Bangladeshi

market.

The dominance of BATB and DTI is reflected in brand shares in the Bangladeshi cigarette

market, as shown in Table 2, derived from household survey questions on brands used in the

GATS (2009). Star (BATB) and Sheikh (DTI) are the two most popular brands, followed by

Navy (DTI), Gold Leaf (BATB), and Marise (AKTC). Together, the top 4 brands account for

over two-thirds of cigarette consumption. To date, DTIs agreement with PMI has not generated

much interest in Marlboro, which had less than 1% market share in 2010.

Most cigarettes produced and sold in Bangladesh are filter-tipped, with market share stable at

around 86% for the past decade, after rising sharply in the 1997. Nearly all cigarettes consumed

in Bangladesh are high-tar cigarettes, although lower tar brands are starting to emerge. Most

premium brand cigarettes are sold in packs of 20, while less expensive cigarette brands are more

often sold in packs of 10. The smaller packs appear to be targeted at keeping pack prices

affordable for lower income smokers. Over half of cigarette consumption is of inexpensive

brands and about 30% is of mid-priced brands.

In contrast, bidi production is much more fragmented than cigarette manufacturing. The top 4

firms account for a little less than 50% of the market, and, according to the 2001/03 Economic

Census, there were a total of 9,624 bidi manufacturers, with over 96% of these household based.

Among bidi manufacturing companies, Akij Bidi Factory, Ltd, another subsidiary of the Akij

Group, is the largest, with an estimated market share of 29.1% in 2009 (GTSS, 2009). Akij

Groups ownership of both Dhaka Tobacco Industries and Akij Bidi Factory could result in



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shared distribution channels and marketing practices. Aziz Bidi Factory is the only other

company with more than 10% of the market, while the remainder account for shares of around

5% or less. Most bidis are sold in packs of 25.

C. Current Pattern of Tobacco Consumption Bangladesh is one of the largest tobacco consuming countries in the world. Tobacco is

consumed in many forms in Bangladesh, including smoking of cigarettes, bidis, waterpipe

(hookah), and chewing (often with betel leaves and nuts, as jarda). Cigarettes and bidis account

for most of smoked tobacco consumption. Data from various surveys suggest that smoking

prevalence has been relatively flat or rising in Bangladesh since the mid-1990s. Initiation of

tobacco use occurs at relatively older ages in Bangladesh, but a large number of Bangladeshi

youth have tried smoking and many consume other tobacco products.

Table 1: Annual Cigarette Consumption

C.1 Age-specific and Sex-specific smoking rates

It is clear from the table that as age increases so does prevalence of smokingboth for males

and females. The highest rates of smoking are found in people aged 35 years and above. These

rates refer to the smoking of both cigarettes and bidi.

Years Per Capita

Consumption

(Cigarette Sticks)

Total Consumption

(Millions of Cigarette

Sticks)

1980 492 17787

1990 294 14007

1995 194 12373

2000 239 17449

2010 234 19717



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The BBS surveys show a small fall in smoking rates between 2005 and 2006, for males and

females. However, surveys in two districts of Bangladesh in 2009 and 2010 found the opposite

a large increase in smoking prevalence for both males and females. The study found prevalence

rates for males of 41.1% in 2009 and 48.3% in 2010 and for females, 4.0% in 2009, and 20.9%

in 2010.

The same study reports differentials between rural and urban respondents, especially for older

respondents. Tobacco prevalence reached 80% for older rural male respondents; the highest age-

specific rate among urban men was 69% (35-49 age groups). Prevalence was systematically

lower among urban female respondents than among rural women across all age groups.

C.2 Socio-economic differentials in male smoking

There are significant variations in male smoking among households from different socio-

economic groups. Differences are found with respect to educational status, household income

and other socioeconomic variables. Table 3.2 presents smoking rates among males by household

income groups. The lower the income of the household, the greater the prevalence of smoking of

its male members. Smoking prevalence among men appears to have declined between 1995 and

1997 for almost all income groups. The decline is significantly bigger among the lower income

groups.

Education is strongly correlated with smoking: the higher the level of education, the lower the

rate of smoking. The BBS surveys show a fall in smoking rates between 2009 and 2010 for all

except for the most educated men. The same relationship between education and smoking

prevalence is found in India and many other countries.



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C.3 Smoking among poor people

Clearly, smoking rates are highest among the poor. Table 3.5 and 3.6 present an estimate of the

number of poor smokers (male and female). The smoking rate among adult males living below

the poverty line is 54.8% and the corresponding rate for adult females is 3.6%. It is estimated

that 9,872,181 poor adult men (15+) and 612,060 poor adult women smoke, making a total of

nearly 10.5 million poor people spending scarce income on cigarettes and bidi. Given the

increases in population and 2009-10 data on smoking, this number has almost certainly been

increasing.

D. Circular Flow Diagram

The model that helps explain how a market economy works is a circular-flow diagram. A

circular-flow diagram is a visual model of the economy that illustrates how households and

businesses interact through markets for products and markets for resources. The circular-flow

diagram with reference to BATB is illustrated in Figure 2.



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Product Market

-Companies Sell

-Consumers Buy

BATB

-Buys factors of production

-Sells Cigarette

Households

-Sells Factors of production

-Buys Cigarette

Government

Taxes Taxes

Govt.

Spending Govt.

Spending

Cigarette Cigarette

Factors of

Production

Factors of

Production

Cost

Income

Revenue

Consumption/Expenditure

Factor Market [Land,

Labor, Capital]

-Household Sells

-Firms buy

Figure: 2 Circular Flow Diagram



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The two types of economic agents in a simple market economy are households and business

firms. A household is a social unit comprised of those living together in the same dwelling. Here

the tobacco manufacturer company as a representative of business firm is producing goods i.e

cigarettes that cater to different segments of customers in an effort to make profit. The profits they

are generating are the revenues minus expenses. Revenues are the monetary income received from

the sales of cigarettes and expenses are the total costs of the production that encompasses raw

materials purchase, labor expenses, employee salary, utility, miscellaneous expenses, taxes,

interest expense, administrative expenses, maintenance and so forth.

The household part in this particular diagram interacts with business firm i.e. BATB in two

distinct ways:

(1) Households supply economic resources, such as labor to businesses in exchange for income,

and

(2) They use their incomes to buy goods produced and sold by business firm. The first type of

interaction occurs in markets for resources. The second type of interaction occurs in markets for

products.

The bottom half of the circular-flow diagram, which represents product markets, shows those

households give money to businesses in exchange for goods and services. Money flows

clockwise, while the goods and services flow counter-clockwise. In the context of BATB, the

households or the cigarette consumers buy cigarettes in exchange of money and in turn inject the

amount to the companys coffer. In markets for products, the companies are usually the suppliers

and households usually are the demanders being no exception to the case of British American

Tobacco here. The money that flows from cigarette consumer to BATB is consumption spending

from the perspective of households and is revenue from the perspective of producer firm. The



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products that flow from business firms to households are sales by the business firms and

purchases by household consumers.

The top half of the circular-flow diagram, which represents resource markets, shows those

businesses provide money to households in exchange for economic resources used as factors of

production. For example, Labor is an economic resource that every adult household can

potentially supply in the markets for resources. Wages are the payments made to workers in

exchange for labor, typically based upon the amount of time worked or amount of output

produced. A salary is a fixed payment made regularly to a worker in exchange for labor. Blue-

collar workers typically receive wages in exchange of their physical labor. White collar workers

are typically paid salaries. In the diagram, this process is illustrated by the counterclockwise flow

of money and the clockwise flow of economic resources. Besides, if households own natural

resources, such as land, they can supply them to businesses in exchange for rent payments.

The company has set up distribution houses at different locations all over the country owned by

households and thereby attributing them for another factor of production, Land. Hence we can

clearly observe that, in markets for economic resources, households are usually the suppliers and

the firms are usually are the demanders. The money that is flowing from the company to

households are expenditures from the perspective of BATB and incomes from the perspective of

workers, employees, managers and land owners. Conversely, the labor, capital, and natural

resources that are flowing from households to the business are sources of income from the

perspective of households and inputs from the perspective of businesses.

When workers receive more income than they spend on the purchases of goods and services, they

are able to create savings. Savings are the portion of a persons income that is retained or invested

for use in the future. Household savings can become financial capital if the money is borrowed by

a business firm. For example, money that is deposited by households in a bank savings account

might be lent by the bank to the company in order to purchase machinery, equipment or to meet

short term liabilities. When this occurs, the business firm pays interest to the bank for the

borrowed funds. Interest is a rate of return that represents compensation from the borrower or



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receiver of funds to the lender or depositor of the funds. The bank, in turn, pays interest to the

householders for the funds deposited in the savings accounts. Consequently, other transactions

that occur in resource markets are the supply of financial capital by households in exchange for

interest income.

E. Relative Market Share in the Tobacco Industry

Cigarette manufacturing is highly concentrated in Bangladesh, while bidi manufacturing is

much more fragmented. As Table 3.1 indicates, cigarette markets are dominated by two

firmsBritish American Tobacco Bangladesh (BATB) and the domestic Dhaka Tobacco

Industries (DTI), a part of the Akij Group. BATB is one of the oldest tobacco product

manufacturers in Bangladesh, in operation for over 100 years. BATB brands account for

almost 46% of cigarette consumption in 2010, down somewhat from the 54% half of the

market the company had controlled as recently as 2006. BATB largely focuses on the premium

segment of the market, but in 2009 entered the lower priced segment of the market in an

apparent effort to regain market share. BATBs leading premium brands include John Player

Gold Leaf, Benson & Hedges, Pall Mall, and Capstan. Mid-priced brands include Star and

Scissors, while Pilot and Bristol are BATBs recently introduced low-priced brands.

DTI is part of the Akij Group, a large domestic conglomerate that includes a variety of

subsidiaries involved in cement, computers, foods & beverages, jute, textiles, pharmaceuticals,

and much more. DTI has historically focused on the lower priced segment of the market. DTIs

key brands include lower priced brands Sheikh, K-2, Five Star, Red & White, Real, and Surma;

other major brands are Navy (mid-priced) and Caste (premium). In addition, in 2007 DTI

entered into an agreement with Philip Morris International (PMI) to market PMIs brands, most

notably Marlboro, in the Bangladeshi cigarette market. DTIs share of the cigarette market is

around 40% in recent years.

There are a number of other smaller domestic cigarette companies operating in Bangladesh,

including Abul Khair Tobacco Company (AKTC), Alpha Tobacco Manufacturing Company,

Azizuddin Industries Ltd., Sonali Tobacco Company Ltd., National Tobacco, and Nasir



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Tobacco. Together, they account for 10-15% of the Bangladeshi cigarette market. To date,

Japan Tobacco International and Imperial Tobacco/Altadis, the worlds other leading

multinational tobacco companies, have not established a significant presence in Bangladesh,

with imports of their brands and other multinational brands accounting for a very small share

of the Bangladeshi market.

The dominance of BATB and DTI is reflected in brand shares in the Bangladeshi cigarette

market, as shown in Table 3.2, derived from household survey questions on brands used in the

GATS (2009). Star (BATB) and Sheikh (DTI) are the two most popular brands, followed by

Navy (DTI), Gold Leaf (BATB), and Marise (AKTC). Together, the top 4 brands account for

over two-thirds of cigarette consumption. To date, DTIs agreement with PMI has not

generated much interest in Marlboro, which had less than 1% market share in 2010.

Most cigarettes produced and sold in Bangladesh are filter-tipped, with market share stable at

around 86% for the past decade, after rising sharply in the 1990s7. Nearly all cigarettes

consumed in Bangladesh are high-tar cigarettes, although lower tar brands are starting to

emerge. Most premium brand cigarettes are sold in packs of 20, while less expensive cigarette

brands are more often sold in packs of 10. The smaller packs appear to be targeted at keeping

pack prices affordable for lower income smokers. Over half of cigarette consumption is of

inexpensive brands and about 30% is of mid-priced brands.

In contrast, bidi production is much more fragmented than cigarette manufacturing. The top 4

firms account for a little less than 50% of the market, and, according to the 2001/03 Economic

Census, there were a total of 9,624 bidi manufacturers, with over 96% of these household

based. Among bidi manufacturing companies, Akij Bidi Factory, Ltd, another subsidiary of the

Akij Group, is the largest, with an estimated market share of 29.1% in 2009 (GTSS, 2009).

Akij Groups ownership of both Dhaka Tobacco Industries and Akij Bidi Factory could result

in shared distribution channels and marketing practices. Aziz Bidi Factory is the only other

company with more than 10% of the market, while the remainder account for shares of around

5% or less . Most bidis are sold in packs of 25.



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38% 38% 39%

42% 43% 44% 43%

41% 39% 38%

35% 35%

16% 17% 15% 14% 14% 14%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

2009 2010 2011 2012 2013 2014 (Current)

BATB

DTI

AKTC

E.1 Competitive Landscape

Figure: 3 Cigarette Company Market Share: Year 2009-2014

Table 1: Cigarette Brand Shares: (Based on a Household Survey)

Brand

Company

Year -2012

Star BATB 25.6%

Sheikh DTI 18.3%

Navy DTI 13.7%

Gold Leaf BATB 10.3%

Marise AKTC 8.9%

Others --- 23.2%



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F. Company Profile

British American Tobacco Bangladesh (BATB) is a pioneer and leading multinational cigarette

manufacturer. Based in England, British American Tobacco was formed at the turn of the 20Th

century with the objective of establishing a worldwide business. British American Tobacco is

recognized as one of UK's largest companies and the World's most global tobacco company.

Today British American Tobacco sells the leading brands in over 30 markets covering 102

countries, has more than 200 brands worldwide, employs more than 55,000 people and produces

some 2 billion cigarettes every day. More than a billion people across the globe enjoy smoking

tobacco. One in every eight chooses a British American Tobacco brand. In order to support the

company's business goals the merger of British American Tobacco with Rothmans International

had been announced on 11 January 1999. This global merger was completed on 7thJune 1999.

This brings together the number 2 and 4 players which together will boast a combined volume

exceeding 900 billion cigarettes around the world with some 120,000 employees and a

worldwide market share of 16 percent (Phillip Morris has a 17 percent share).

British American Tobacco Bangladesh (BATB) was previously known as Bangladesh Tobacco

Company (BTC). On March 22, 1998 the company changed its identification and established

commitment to the highest international standards. The Companys main business is tobacco,

which involves growing, processing, manufacturing and marketing of tobacco leaf, cigarettes and

pipe tobacco. The company also exports processed tobacco leaf in the international market,

mainly in the European Countries with its effort to create an international market of its products.

Based in Dhaka the company has one packaging factory in Dhaka and one leaf-processing

factory in Kushtia. The companys current employees are more than 200 managers and 1300

employees. In its effort to create an international market for Bangladeshi leaf tobacco the

company has been exporting tobacco to markets in developed countries like UK, Germany,

Poland, Russia and New Zealand.



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F.1 Vision and Mission of the Company

F.1.1 Vision

Companys vision is to achieve leadership of the global tobacco industry in order to create

shareholders value.

F.1.2 Mission

Double the net revenue by 2014

Growing companys share of the total tobacco market

Dominating key identified segment

F.2 Product Portfolio

BATBs product offerings can be categorized in Four Segments which are in alignment with the

Local Government Tobacco Control Guideline

Premium

Benson and Hedges or B&H is regarded as a premium segment product of this company.

Launched in 1997, B & H maintains BATBs dominance in its respective segment and drives the

growth in Bangladesh market. Within a short time Bangladesh became a leading B& H market

across the BAT world. After a price increase 2004, B&H still remains a Successful and

happening muscle in our portfolio. British American Tobacco Bangladesh was the first market to

launch the new pack of E&1-1 at the beginning of September 2005.

Aspirational Premium

JPGL is the prominent aspirational premium segment brand that was Launched in 1980 and is

one of the highest selling brands of BATB in this segment. Apart from Johon Player Gold Leaf,

there are also two other brands in aspirational premium segment which are Pallmal and Capstan.



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Value for Money

Star, launched 40 years ago is still a dominating brand in this segment for BATB. Recently,

BATB has introduced a new variant in the Star Family named as Star Next.

Low

BATB low segment consists of three brands namely Pilot, Hollywood and Derby. Among these

three, Derby makes out the most volume per year from the low segment



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Low Segment

Premium Segment

Value for Money Segment

BATB

PRODUCT

PORTFOLIO



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0 5

10 15 20 25 30 35 40 45

2000

20

01

2002

20

03

2004

20

05

2006

20

07

2008

20

09

2010

20

11

2012

20

13

2014

(es

tim

ated

)

BATB Sales Volume (Bln sticks)

BATB Volume (Bln sticks)

F.3 Sales Trend over Last 10 years

The tobacco business had a very slow growth rate in the first decade. The industry

grew in a moderate pace till 2006 but between 2008 and 2012 the growth rate happened to be

fluctuatiing. The following figure self-explains the trend in BATB sales volume over the past

years.

Figure 4:

Sales trend of BATB over last decade



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F.4 Countrywide Sales (By Region)

Over the past two decades BATB marked significant growth in terms of volumes sold

amongst the regions. The statistics have been furnished herewith:

Volume (in Bln sticks)

Years Dhaka Chittagong Sylhet Rajshahi Khulna Total

BATB

2000 3

.5 1.2 2.7 1.5 1.0 9.8

2001 3

.5 1.2 2.7 1.5 1.0 10.0

2002 4

.6 1.6 3.6 2.0 1.3 13.0

2003 4

.9 1.7 3.8 2.1 1.4 13.8

2004 5

.4 1.9 4.2 2.3 1.5 15.4

2005 6

.5 2.3 5.1 2.8 1.8 18.5

2006 7

.5 2.6 5.8 3.3 2.1 21.4

2007 7

.1 2.5 5.5 3.1 2.0 20.2

2008 7

.1 2.5 5.5 3.0 2.0 20.0

2009 8

.1 2.8 6.3 3.5 2.3 23.0

2010 8

.8 3.1 6.8 3.8 2.5 25.0



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Premium 6%

Aspirational Premium

12%

Value For Money

24%

Low 58%

BATB's Contribution to the Industry

2011 1

0.2 3.6 7.9 4.4 2.9 29.0

2012 1

0.9 3.8 8.5 4.7 3.1 31.0

2013 1

2.3 4.3 9.5 5.3 3.4 34.8

2014

(estimated)

1

4.1 4.9 10.9 6.1 4.0 40.0

Table 2: BATBs region-wide Sales

F.5 Contribution to the Industry

Figure 5: BATBs Contribution to the Industry



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G. SWOT Analysis

Strengths

1. Wide recognition BATB is widely recognized as good corporate company for its corporate

value and ethics. The good deeds are in terms of highest tax payment, community services,

afforestation programs and helping some social organizations like Shandahni and others.

2. International brand Image BATBs manufactured premium and medium segment brands

Benson & Hedges, State Express 555 and John Player Gold Leaf are internationally recognized

& valued by its loyal customers. This is because these brands are manufactured in different BAT

operating companies and dominating in the world market. Quality of these brands is legendary

and consistent, when it is compared. In order to ensure the quality product BATB use global

sourcing of all the raw material, which is common for all the operating companies in BAT.

3. Strong brand portfolio: BATB offers product in all price segments in the market. All their

products are the market leaders, having the majority of market share in term of value and

volume.

4. Talented workforce - People are BATBs fundamental advantage-the sources of all their

strength. This include management, workforces and all other business partners, who are directly

involved in the value chain process. People are highly trained and motivated, productive and

team-oriented. Some important aspects are listed below:

Planning

Long term orientation

Many people involved in preparing and making decision

Decision making takes long time but implementation is fast

Employees share power and responsibility

Organizing



26 | P a g e

Common organization culture

Organizational change by changing goals

Staffing

Rapid advancement highly desired and demanded

Reward for individual achievements

Training and development undertaken

Leading

Directive style, strong, firm and determined

Leaders are decision maker is heading the group

Controlling

Control by supervisor

Control focus on individual performance

5. Superior technology Technology used in BATB is superior from the competition in

Bangladesh. Their state of art manufacturing plant in Dhaka is not only sophisticated but also

benchmark facility within the operating companies of BAT in their AMESCA (Africa, Middle

East, Sub-Continent & Asia) region. In this industry technology is the key for superior quality

product. Technology revolutionizes the product and production process and BATB always uses

latest technology which smoothing out the production process.

Process Technology: It is used for tobacco processing and its conversion to cigarettes. It

encompasses extrusion technology, aspects of packing and painting, cutting and dying

technology, application of instrumentation, control system and process automation and

separation of tobacco and non tobacco materials.

Material Technology: The Company has been using latest material technology to the design and

develops the cigarettes and packing. These area covers paper technology, combustible smoking

material etc.



27 | P a g e

Information technology: BATBs computer section is very much updated and well oriented. All

the external and internal information is being controlled through a network.

MRP II: BATB is the only company in Bangladesh who uses MRP II (Manufacturing Resource

Planning II) in their production and operation. This is the latest technology and only a few

companies in the world have the capability to implement MRP II. This is a very distinctive

competitive advantage of BATB over other companies.

6. Better product quality relative to the rivals: As mentioned earlier BAT maintains its consistent

quality with good blend of tobacco through superior technology, thus BATB is always in an

advantages position compare to its competitor. BAT grows tobacco for their own consumption in

Bangladesh and they have completely separate function responsible for tobacco growing and

processing, which their competitors do not have.

7. High financial strength: BATB has a huge financial back up. The company can devote a large

fund to R&D, advertisements, quality control, and training and also in other areas, which its

competitor cant match.

8. Absorbing economies of scale in producing BAT products: BAT product has a higher demand

in Bangladesh. As the company produces in a large scale, it possesses economies of scale and

hence per unit of cost is comparatively lower in Bangladesh. On the other hand production

sources land, labor and raw materials are also low in this country.

9. BATB is the largest tax payer in Bangladesh: BAT is the largest tax payer in our country. It

paid more than Tk. 300 million tax in the last year. As a result of this huge amount BATB enjoys

a cordial relationship with the government of Bangladesh.

10. Low manufacturing cost: There are many reasons for low manufacturing costs of BATB.

First, it can hire labor at a cheaper rate, which is not possible in developed countries. Secondly,

the company has been using the latest technology in production by which it is able to minimize



28 | P a g e

its production cost by producing bulk of cigarettes. Thirdly, transportation cost is also

comparatively lower in our country.

Weakness

1. Strong Trade Union: Trade union is one of the weakness for BATB. They are resistant to any

changes. It takes lot of management effort and time to make the union leaders to motivate for any

minor changes in the entire process. Management in BATB is working hard to change the culture

and practice through different projects and program.

2. Missing a large number of consumers due to high price: BATB is loosing a large number of

consumers in Bangladesh due to high price of its products. It does not have a product for very

low income consumers and Biri consumers. Evidence shows that 74.5% of the total volume of

market share of smokers (Cigarette and Biri combined) belongs to local company where BATB

has no access. Hence we may suggest that BATB may capture a large portion of the local

smokers market, if it produces a low priced product for the low income consumers.

3. Wholesalers and retailers are not getting enough attention: Distributors of BATB do not

provide adequate attention to wholesalers and retailers. Enough merchandizing materials are also

not provided to them. On the basis of the above in depth external analysis the following

opportunities and threats have been identified for BATB that need to be considered with due

care.

Opportunities

1. Global Merger with Rothmans: Global merger of BAT with Rothmans Industries and closer of

all Rothmans facilities in South Asia gave BATB opportunity to become regional source of John

Player Gold Leaf & Benson & Hedges for Middle-East market. BATB already sent samples of

these two brands for physical & sensory test in R&D Center in the head quarter.



29 | P a g e

2. The increased number of smokers in Bangladesh: The number of professional smokers is

gradually declining in the western countries where as the same is increasing in Bangladesh.

BATB can grab this opportunity and can make a consumer forecast for the future. At present, the

cigarette market in Bangladesh is growing at a rate of 10%. It is indeed a very good opportunity

for BATB to grow.

3. Augmenting GDP: GDP of Bangladesh is increasing due to economic expansion, open market

policy, industrialization and educational development. Its a great opportunity for BATB to

expand its market and product line.

4. Increasing number of population: The number of population is increasing at a higher rate in

Bangladesh. And at the same time the number of smokers are increasing. So it is an opportunity

for the company.

5. 80% people smoke Biri: In our country a large section of urban and rural people smoke Biri.

This means that the market potential of BATB is very high. If the Biri consumers can be

persuaded to smoke cigarettes instead, the company will have a very big market for its products

in this country.

Threats

1. Anti smoking lobbies activities: Anti-Smoking lobbies are now getting very strong in

Bangladesh. Recent demonstration against Voyages of Discovery (VOD), a global campaign of

John Player Gold Leaf and government legislation against ban in cigarette advertisement in all

media reflects clear threat for cigarette industries.

2. High Excise rate: Excise is another threat for BATB. In the recent past there was several

increases in tax structure specific to BATB to get more revenue for the government. If this

continue BATBs strategy for price leadership will be at stake.



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3. Smuggled/ Transit cigarettes: Smuggled cigarettes are available in Bangladesh. These are

companies same brand or other international brands. These transit cigarettes are decreasing

locally produced international brands. This is one of the greatest threats for BATB. BATB

cannot lower the price of its products, as the company has to pay a huge tax for those.

But the same brands of smuggled cigarettes are sold in Bangladesh at a lower price. As a result

consumer is purchasing the transit one.

4. Violation of patent: It is very common in Bangladesh, even though the government is taking

legal action against it. Many companies are copying the brand names of BATB products. For

example: there is a cigarette called Five Five which resembles to the BATBs popular

international brand SE 555.

5. Social pressure on the company is increasing: At present people are becoming more and more

health conscious and a strong social pressure is being created on the cigarette companies

worldwide. BATB is not free from this pressure.

6. International competitors are coming to Bangladesh: Phillip Morris Incorporation has already

started its operation in Bangladesh. This is a significant threat for BAT Bangladesh.

7. Political instability and violation: Political instability, hartal, public demonstration, anti social

activities are the most common phenomenon in Bangladesh. These external forces hamper sound

business environment. So these factors are big threats for the company.

8. Natural disasters: Natural disasters like flood, cyclone, and tornadoes are very common in

Bangladesh. These natural disasters cause a huge loss of crops, production and property, which

directly reduces the purchasing power of the consumers. This in turn reduces demand for

cigarettes including BATB products. As BAT cultivates a considerable amount of tobacco in the

Country to use them as raw materials in cigarette production, sometimes natural disaster greatly

hampers leaf cultivation.



31 | P a g e

9. Implementation of Existing Laws: If the following laws are implemented in will be great

threat to tobacco industry.

Railway Act, 1890, section 110 prohibits smoking without the consent of the fellow

passengers.

Juvenile Smoking Act, 1919 prohibits smoking by a person under 16 years of age. Also,

no tobacco products can be sold to such a person.

Prohibition of Smoking in Show Houses Act, 1952 prohibits smoking in cinemas,

theaters etc. during demonstration or show. Offenders are liable to be arrested without

any warrant.

H. PESTEL Analysis

H.1 Macro Environmental Factors With the framework of PEST/PESTEL/PESTLE analysis, BATs threats and opportunities are

defined, and help to visualize external aspects, which usually cannot be controlled and have

potential to affect objectives.

H.2 Political/ Legal

Generally, tobacco industries are enforced regulatory control by imposing taxes and duty

charges. Also restrictions on marketing, advertisement, and exhibition of the product, avoid

descriptions like, light and mild, nicotine, carbon monoxide smoke yields and tobacco

ingredients, prohibition of smoking in public places - BAT is aware of these aspects and employ

lawyers to have legal advice on these social responsibilities, marketing and stakeholders issues.



32 | P a g e

H.3 Economic

Tobacco duty was raised in line with inflation. The impact of high taxation in the UK cigarette

market resulted in high prices, which led to reduced annual industry volumes, greater price

competition and trading down by consumers to lower-price cigarette brands. Imposing taxes on

tobacco causes major revenue for government around the world. Such industry, like BAT

contributes considerably to the financial system of more than 150 countries. About 100 million

of people worldwide do have job opportunities from the industry.

H.4 Social and Culture

Due to risks to health number of smokers has decreased over the years as people are becoming

educated. BAT is aware and manages operations responsibly. They are working through dialogue

in advertisement objectives, alarming about health hazardousness on packets, prohibition of

smoking in public places and bans on displaying at POS.

H.5 Technology

Due to advancement in technology making of cigarette is fully automated into machines, from

processing of tobacco to cutting cigarette paper and filters. Packaging are also automated,

cigarettes are filled into respective brand packs, wrap in protective film and placed in cartons.

Factory machines at each location are contemporary and those cannot be redeployed are

destroyed. BAT itself participate in technological progress by carrying their own researches

either into their department or other institutions for innovating new and fresh ideas and

production. They believe in testing and adapting new available technology for their production.

BATB has also developed and promoted new cultivation methods that to replenish soil by using

organic substance for better fertility structure as well as having environmental benefit. They

work with BAT Biodiversity Partnership and Bangladesh Agriculture University.



33 | P a g e

H.6 Environment

BATB should work to protect the long term security of the tobacco leaf supply by encouraging

sustainable agriculture based on multi-stakeholder partnerships and held two stakeholder

dialogues on the issue. There is biodiversity risk and opportunity assessments should be done to

inform about their approach to sustainable agriculture. Commissioned independent research

undertaken, considering the impact of tobacco farming on communities and the environment.

Human rights of suppliers, contracted farmers and local communities should be protected. BATB

has a considerable impact upon the environment in both through their direct operations and in

tobacco growing areas and for several years they have put in place various initiatives to help

mitigate their impact on biodiversity, to limit and reduce deforestation in the leaf growing

operations and to improve efficiencies relating to energy and water use. In the supply chain its

important to ensure that the rights of tobacco farmers are respected and that the industry and

stakeholders work together to tackle child labour. Initiatives such as Social Responsibility in

Tobacco Production Program and participation in the Eliminating Child Labour in Tobacco

Growing Foundation are taken. Sustainable agriculture is important too tobacco farming makes

an important contribution to rural development by improving both landscape and livelihoods and

through providing agronomy support to the contracted farmers help share best practice.

H.7 Micro Environmental Factors

The microenvironment factors determine BATs internal entities that can be controlled and

manipulated to collect information for marketing strategies.

Product: BAT manufactures Cigarettes, Smokeless Snus, Cigars, Roll-your-own and Pipe

tobacco.

Price: Products are sold at Gross Price with proper VAT. Wholesalers are allowed discounted

prices for orders exceeding 6,000 outers or more of cigarettes, cigars and / or tobacco for a single

delivery.



34 | P a g e

Promotion: To aware target customer, advertisements are done through TV and newspapers

with compliance to the legal and regulatory environments.

Place: BAT delivers product directly to the appropriate premises or any other secure addresses

as agreement, i.e. to valued consumers.

I. Porters Five Forces Industry Analysis

For this part, five competitive forces model developed by Professor Michael Porter has been

used.

I.1 Threat of Rivalry

Rivalry depends on mostly in terms of price and quality. International brand image, major

competitors consists of domestic manufacturers are accounted for the rivalry. The industry is still

growing opening the door of opportunity for augmented business as consumers are up coming

from Biri to cigarette. Rivalry in this particular segment is very intensive in terms of price rather

than quality (Market share of BATB and its competitors). Moreover, there are also some foreign

brands, which are either smuggled or imported illegally, which have been termed as transit

brands. The most important brands in this category are Dunhill, Benson & Hedges, Marlboro,

London etc. It is notable that recently Marlboro has started operating seriously in Bangladesh.

Though BATB is holding the major market share in the Dhaka City as well as whole country,

there are also other companies that are operating in the market. Although none of these

companies have become a major threat to BATB, except perhaps Dhaka Tobacco, yet the

presence of these companies signals that other companies can also join in this market.



35 | P a g e

I.2 Threats of Substitute

Price, quality, performance, perceived value of the product and brand image are the key factors

for brand substitution. In the low price segment readily available and attractive priced substitute

creates competitive pressure. But in the mid-price segment the key for the substitution is the cost

as well as price. Product with more and new attributes can create product substitution in this

segment. In the premium price segment quality and product image is key for the substitution.

Customers in this segment are brand loyal. BATB has no threat for the substitute products as

there are no substitutes in terms of cigarette quality with other product in the industry.

I.3 Threats of Potential New Entrants

Industry is safeguarded from the potential entrants due to government lawful barrier for setting

up new tobacco industry, high capital investment, economies of scale, brand Image, and

specialized know-how, existence of learning and experience curve effect, brand preference and

customer loyalty. But the introduction of the operation of an international tobacco company like

Marlboro in Bangladesh is really a big threat for BATB. This is an external threat over which

BATB has no control. However, the company should take steps to increase its market share to

combat Marlboro.

I.4 Bargaining Power of Suppliers

As the products are classified as Fast Moving Consumable Goods and produced in all over the

world, all the firms have the leverage to choose the wrapping materials from anywhere in the

world. These materials are cigarette paper, aluminium foils, boards, filter papers, cellophane

paper etc. Tobacco for medium and low price segment cigarette is grown in Bangladesh and is

capable of fulfilling the entire industry demand. Tobacco for premium priced cigarette are also



36 | P a g e

grown in Bangladesh and around 18 20% high quality tobacco is imported from different

tobacco growing countries, where tobacco is surplus compared to its consumption. Therefore,

suppliers tend to have less leverage to bargain over price and quality.

I.5 Bargaining Power of Buyers

Low substitutes and a very close pricing of the competitors in the industry leave very low

bargaining power for the buyers, especially in the low priced segment. But in the medium priced

segment, quality and price are factors key for substitution and therefore, different brand

preferences are available in the market and the market share of each competing rivals tend to

shift in very significant margin. But it is not very relevant scenario for the premium segment

where most of the customers are loyal to their brands.

J. Analysis and Applications of Economic Principles and Theories

J.1 Principles of Economics (Relating to the Ten Principles of Economics)

How People Make Decisions

1. People Face Tradeoffs: In order to get something, we must always give up

something else. As a society, we need to make similar types of choices: there is always a tradeoff

between efficiency and equity. For example, we can choose to enact regulations that protect the

environment from industrial waste. It is, however, important to understand that these tradeoffs

are real, and that policy makers must try to choose the most appropriate balance between

efficiency and equity. Similarly, while investing and consuming products such as cigarettes of

the tobacco sector people face tradeoffs between the risks of investing the money in that area or

in some other area that will give out positive externalities, such as increasing their consumption

on fruits and vegetables. (Mankiw, Principles of Economics).

2. The Cost of Something is what You Give up to Get It: Because of the above-

mentioned tradeoffs, people get in a situation of deciding whether to spend money on cigarettes



37 | P a g e

need some sort of method to determine which course of action produces the most beneficial

tradeoff. The cost of one action versus another may not be immediately clear. A good example

would be a consumer trying to decide on his consumption of cigarettes. When he thinks about

the total costs and benefits from the consumption of tobacco, he might consider the fact that the

cigarette will give him a sense of satisfaction in his life and also let him socialize with other

smokers but it will cost him money in terms and consumption and healthcare. One thing he may

not even take into account is that with time the effect of consuming cigarettes is harmful.

3. Rational People Always Think at Margin: A marginal change simply means an

incremental change to a pre-planned action. Similarly, in the case of buying cigarettes, some

choices actually are made based on marginal changes or what economists describe as small,

incremental adjustments to existing plans of action. For instance, when one is deciding whether

to purchase a pack of cigarettes, the person must compare the marginal cost of this purchase with

the marginal benefits (satisfaction) associated with consuming a pack of cigarettes. By doing

this, one can evaluate whether the purchase is worth the attendant costs.

4. People Respond to Incentives: Most decisions in life are based in some way on a

cost and benefit analysis of available courses of action. Because people make decisions by

comparing costs and benefits, their behavior may change when the costs or benefits change.

Public policymakers should never forget about incentives, for many policies change the costs or

benefits that people face and, therefore, alter behavior. A lower tax on cigarettes, for instance,

encourages people to consume more cigarettes. On the contrary, if govt. hikes the tax rate on

cigarettes, people will consume cigarettes a bit less and their consumption would be hampered.

Therefore, the consumption of cigarettes will be hindered.

How People Interact

5. Trade Can Make Everyone Better-off: Trade allows people to focus on serving a

specialized purpose in the economy, such as food production, textile production, tobacco

production, computer engineering, etc. By trading with other people, people get access to a much

wider variety of goods than you would be able to produce ourselves, and at a better opportunity



38 | P a g e

cost (price). The reason why someone would prefer buying a cigarette from a manufacturer is

simply because that person does not have the time and skills in manufacturing cigarettes for

himself. The trade between a manufacturer and a buyer thus benefits both. The manufacturer

receives a reasonable profit for managing the entire activity of manufacturing cigarettes, and the

buyer gets the satisfaction from consuming the production of cigarettes.

6. Markets are usually a Good Way to Organize Economic Activity: The

disadvantages of decentralized decision making were identified several centuries ago. Free

markets are the ultimate democratic tool, where every time a market participant decides to

purchase a product or service, he or she is casting a vote for it over its competitors. This principle

clearly predicted how and why communism would never succeed - central planners interfere

with the natural forces of the market, distorting prices - they achieve sub-optimal results and

eventually, systemic failure. Central planners failed because they tried to run the economy with

one hand tied behind their back - the invisible hand of the marketplace

7. Government Can Sometimes Improve Market Outcomes: Governments need to be

there to protect market participants from fraud or other dangerous business practices, and to

enforce contracts. Without any rules, we do not have a free market system, but rather anarchy. In

order to allow markets to perform their function properly, governments must be on the lookout

for two main causes of market failures - externalities and market power. In the tobacco sector of

Bangladesh, several government policies and set standards play a vital role as they provide a tool

for monitoring the activities of manufacturers.

8. A Countrys Standard of Living Is Determined by Its Ability to Produce Goods

and Services: In today's world, it is absolutely staggering how standards of living vary from

country to country. People in advanced economies, on average, live far longer and more

comfortably than their counterparts in less advanced economies. These vast differences are

attributable mainly to one variable - productivity. A country's productivity is defined as the

amount of goods and services produced by an average worker in an hour. The correlation

between a country's productivity and the standard of living enjoyed by its citizens, is striking.

However, tobacco contribution to GDP is increasing each year; productivity remains high

enabling the country towards a better standard of living.



39 | P a g e

9. Prices Rise When Government Prints Too Much Money: There have been a

number of spectacular cases of inflation throughout history. The cause, each time, was not some

mysterious force that robs money of its purchasing power. The culprit, always, is the

government's aggressive increase in the supply of money. The reason governments inflate the

money supply can differ somewhat from case to case, but generally they happen because of war

or other large expenditure that the government cannot afford, so it devalues the currency in order

to lessen the debt burden. Due to inflation, the price of cigarettes has increased comparatively

throughout the years (as with inflation the purchasing power of people has declined).

10. Society Faces a Short-term Tradeoff between Inflation and Unemployment: The

explanation for this effect is that prices do not adjust immediately to an increase in the supply of

money. Nominal prices of tobacco products have increased over the past decades, but real

cigarette prices (adjusted for inflation) have fallen over the past ten years, fuelling an increase in

demand. Moreover, increasing incomes are also associated with rising tobacco product

consumption. The positive (and significant) income elasticity of demand for cigarettes implies

that if no anti-tobacco measures are taken, economic growth and rising incomes will lead to an

increase in cigarette consumption.

J.1.1 Effect of Invisible Hand in the Tobacco Market

A free market arguably provides numerous opportunities for maximizing ones own profit at the

expense (rather than for the benefit) of others. The tobacco industry is often cited as an example

of this: the sale of cigarettes and other tobacco products certainly brings very good revenue, but

the industrys critics deny that the social benefits (the pleasures associated with smoking, the

camaraderie, the feeling of doing something cool) can possibly outbalance the social costs. An

invisible hand works here, that promotes the societys well being from the sale of cigarettes, not

in terms of satisfaction but also in terms of revenue it provides to the government (BATB, one of

the largest taxpayers in Bangladesh) which can be put to use in specific government projects that

depicts social welfare. As a result there is a presence of invisible hand in the tobacco market.



40 | P a g e

J.2 Demand and Supply Function

Supply and demand is perhaps one of the most fundamental concepts of economics and it is the

backbone of a market economy. Demand refers to how much (quantity) of a product or service is

desired by buyers. The quantity demanded is the amount of a product people are willing to buy at

a certain price; the relationship between price and quantity demanded is known as the demand

relationship. Supply represents how much the market can offer. The quantity supplied refers to

the amount of a certain good producers are willing to supply when receiving a certain price. The

correlation between price and how much of a good or service is supplied to the market is known

as the supply relationship. Price, therefore, is a reflection of supply and demand. The relationship

between demand and supply underlie the forces behind the allocation of resources. In market

economy theories, demand and supply theory will allocate resources in the most efficient way

possible.

Today, in the tobacco industry in Dhaka, both price and demand for cigarettes have gone up

exponentially. Though the price of cigarettes has increased on an average, the demand for

cigarettes has not declined as well. It is estimated that the demand for cigarettes will further

increase in the next few years. This is primarily due to the income and inflationary effects which

we cannot assume to be constant in the long run.

Unlike the demand relationship, however, the supply relationship is a factor of time. Time is

important to supply because suppliers must, but cannot always, react quickly to a change in

demand or price. So it is important to try and determine whether a price change that is caused by

demand will be temporary or permanent.

When supply and demand are equal (i.e. when the supply function and demand function

intersect) the economy is said to be at equilibrium. At this point, the allocation of goods is at its

most efficient because the amount of goods being supplied is exactly the same as the amount of

goods being demanded. Thus, everyone (individuals, firms, or countries) is satisfied with the



41 | P a g e

current economic condition. At the given price, suppliers are selling all the goods that they have

produced and consumers are getting all the goods that they are demanding. In the real market

place equilibrium can only ever be reached in theory, so the prices of goods and services are

constantly changing in relation to fluctuations in demand and supply.

When technological progress occurs, the supply curve shifts. For example, assume that someone

invents a better way of growing tobacco so that the cost of growing a given quantity of tobacco

decreases. As a result of a supply curve shift, the price and the quantity move in opposite

directions. If the quantity supplied decreases, the opposite happens. The movement of the supply

curve in response to a change in a non-price determinant of supply is caused by a change in the

y-intercept, the constant term of the supply equation. The supply curve shifts up and down the y

axis as non-price determinants of demand change.

J.2.1 Price Elasticity of Demand

There was not enough information available or gathered that could be used to calculate the Price

Elasticity of Demand for the tobacco sector. However, from the information that was available it

was seen that the demand for BATBs cigarettes is fairly inelastic.

J.2.2 Price Elasticity of Supply

Due to non availability and lack of information provided by the company officials, the price

elasticity of supply could not be calculated. However, the interviews provided some depth and

insight about the price elasticity of supply. According to the company officials and the analysis

of the information the price elasticity of supply is observed to be elastic. Usually the supply of

cigarettes is supposed to be more elastic, i.e. the supply is more sensitive to change in the price

of cigarettes. Assuming the pattern of demand for cigarettes remains unchanged, the more the

price rise in the market the producer will be willing to supply more. As a consequence, the rate at

which the price of cigarette rises, rate of increase in supply will be more than that.

However this will not happen if there is a restriction on the part of the government on the supply

of cigarettes .If it is considered to be a socially undesirable product then the supply may remain

inelastic due to government intervention in the market.



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J.3 Price Ceiling and Price Floor

Price ceilings are limits on the amount that can be charged for a specific product or service. In

many cases, a price ceiling is imposed by a government, in an effort to correct some issue with

the general economy while also protecting the interests of consumers in general. The imposition

of a price ceiling can help stabilize a particular market, as well as have a beneficial impact on the

economy in general. The strategy often prompts suppliers that were charging exorbitant rates for

their products to either cut back on production or possibly abandon the market altogether.

However, a price ceiling can cause problems if imposed for a long period without controlled

rationing. Price ceilings can produce negative results when the correct solution would have been

to increase supply. Misuse occurs when a government misdiagnoses a price as too high when the

real problem is that the supply is too low. In an unregulated market economy price ceilings do

not exist.

On the other hand, a price floor is a government limit on the lowest sales price of a good. Such

limits are usually part of a program to protect a given industry and keep the domestic economy

strong, but they can have unintended consequences. Not all goods and commodities have a price

floor, as many governments prefer to let the market determine prices, rather than controlling

them through regulations. Markets tend to be self-correcting, and problems with pricing often

resolve on their own before the government needs to intervene.

In the tobacco sector there are no price ceilings or price floors, but there is tax imposed by

the government on tobacco products.

J.4 Market Structure

The tobacco sector highlighted in this study is essentially cigarette manufacturing. The tobacco

industry is small in Bangladesh, yet there are significant group of producers in the Bangladeshi



43 | P a g e

economy. Tobacco production remains an industry with high value addition and high production

per worker, relative to the rest of the manufacturing sector. The demand for tobacco is in large

part determined by the demand for cigarettes. The volume of tobacco sold can be expected to

closely follow increases (or decreases) in the demand for cigarettes. However, demand for

tobacco leaves does not necessarily increase at the same pace as that for cigarettes. Product

demand is fairly inelastic but is in a long-run downward trend as a result of health concerns and

legislation. There are 10 firms engaged in the manufacturing of cigarettes in Bangladesh.

British American Tobacco Bangladesh is the dominant player in this sector. It manufactures and

markets major international cigarette brands like Benson & Hedges, State Express 555, John

Player Gold Leaf and London, which are complemented by local brands such as Capstan, Star

and Scissors. By its own estimate BAT controls around 50 percent of the Bangladesh cigarette

market. The tobacco industry in Bangladesh has an oligopoly market structure. An oligopoly is

a market structure in which a few firms dominate. When a market is shared between a few

firms, it is said to be highly concentrated. Although only a few firms dominate, it is possible that

many small firms may also operate in the market. For example, major producers like British

American Tobacco Bangladesh and AKIJ operate their organization with only a few close

competitors, but there are also other producers catering or offering cigarettes as well.

Oligopoly is a market structure in which the number of sellers is small. Oligopoly requires

strategic thinking, unlike perfect competition, monopoly, and monopolistic competition. Under

oligopoly, a seller is big enough to affect the market. Producers must respond to their rivals

choices, but rivals are responding to their choices as well. In oligopoly markets, there is a tension

between cooperation and self-interest. If all the firms limit their output, the price is high, but then

firms have an incentive to expand output. The techniques of game theory are used to solve for

the equilibrium of an oligopoly market.

J.5 Effects of Tobacco Control Policies

There are different impacts of tobacco controlled policies. The policies are ordered in terms of

their likely importance. A large increase in cigarette taxes and the passage of comprehensive



44 | P a g e

clean air laws are the cornerstone of strategies that have been successful in reducing smoking

rates. Each has reduced smoking prevalence by 10% or more. A substantial tax has a larger and

relatively immediate effect on the young and on lower income smokers. Work-site restriction

shave a more pronounced effect on male, middle age, and higher income workers, unless those

workers are already working in firms covered by voluntarily imposed smoking restrictions. Tax

revenues are earmarked for other tobacco control policies. A mass media campaign provides the

third prong in successful tobacco control strategies. A campaign of large enough scale and

duration further reduced smoking prevalence by 5% to 10%. Media campaigns also publicize

other programs, such as cessation or youth policies, or target to those groups which have the

highest smoking rates.

Government cessation policies, such as financial coverage of treatment or quit lines, may also

play an integral role in an effective strategy. These policies, initially, may have relatively small

effects on smoking prevalence, but the effects grow over time and help heavier smokers who

have the most difficulty in quitting smoking.

Evidence on the effects of advertising bans and warning labels is mixed, but a recent study

indicates that comprehensive advertising reduced smoking rates by 6%. In addition, strict

advertising bans and warning labels have been adopted, have been successful in their tobacco

control efforts and may be important in low- and middle-income nations with growing smoking

rates.

J.5.1 Taxes on Cigarettes in Bangladesh and Strategies in encountering Government

interventions

The government of Bangladesh enters and alters the tobacco market through taxes. The

government discourages the sale and use of tobacco; they charge tobacco sellers a tax on tobacco

products. In Bangladesh, sellers pass as much of the added cost on to buyers as possible. Because

the sellers don't want to lose any profits, they increase their selling price in order to maintain the

same profit margin, since they had to pay an extra tax when obtaining the products for resale. In

such cases, the supply curve will shift vertically by the exact amount of the tax.



45 | P a g e

Furthermore, taxing all bidis at a specific tax rate of 4.95 taka per pack (40% of average prices)

could lead 3.4 million adult bidi smokers to quit and prevent 3.5 million youth from initiating

bidi smoking, preventing 2.5 million premature deaths and raising additional excise revenues of

7.2 billion taka (US$ 87.5 million).

J.5.2 Impact of Taxation on Smoking Behavior

Tobacco taxation, passed on to consumers in the form of higher cigarette prices, has been

recognized as one of the most effective population-based strategies for decreasing smoking and

its adverse health consequences. On average, a price increase of 10% on a pack of cigarettes

would reduce demand for cigarettes by about 4% for the general adult population. Tobacco taxes

can benefit smokers who quit, reduce the overall consumption of tobacco, and put smoking

cessation on the radar of those who continue to smoke. Increased taxes also have a positive

impact on non-smokers by reducing their exposure to second-hand smoke. However, much less

is known about the impact of taxation on specific subgroups.

Taxing all cigarette brands at a specific tax rate of 34 taka per 10 sticks (70% of retail price)

could lead nearly 7 million current smokers to quit and prevent 7 million youth from initiating

smoking, preventing 6 million premature deaths and raising additional excise revenues of 15.1

billion taka (US$ 200 million). A un

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