MBA RESEARCH PROJECT

PAKISTAN TOBACCO COMPANY

NOOR AFTAB

MBA - 2012

LAHORE SCHOOL OF ECONOMICS

BURKI CAMPUS, LAHORE.

MBA BUSINESS RESEARCH PROJECT

PAKISTAN TOBACCO COMPANY

DO INCREASING PRICES AFFECT SALES OF KEY PLAYERS IN THE TOBACCO INDUSTRY

IN PAKISTAN

By

NOOR AFTAB

____________________ ______________________

SUPERVISOR EXAMINER

Prof. F. A. Fareedy

____________SEC. B, TA: Ms. Ayesha Karim

LAHORE SCHOOL OF ECONOMICS, 2012.

Acknowledgements

Never is a work complete without teamwork, without an environment that is supportive.

With this in mind, I would like to take this opportunity to extend my gratitude to the administration of

LSE, for creating an environment conducive for us to study and learn in.

I could not have completed this project without the most important person, who helped shape my

outlook, providing opportunities, constant support, guidance and assistance, my mentor, who was also

my worst critic, but who made me stand up to the challenge and improve upon my work with a new

vigour and enthusiasm, Professor F. Fareedy. I am deeply grateful to him for all the above and for

guiding me throughout the various stages of submitting this Research Project.

I would also like to express a special thanks to my teacher’s associates, Ms. Ayesha Karim and Mrs.

Haadiah Yasir, for their endless guidance, coordination and assistance in making it possible for me to

complete my work on time.

I would like to extend my appreciation and gratitude to my parents and sister for their intellectual

contributions to my academic project, for their firm believe in my aptitude, unwavering belief in my

capabilities, even when I would falter in self confidence, for motivating me in my all endeavours.

Thank you.

Table of Contents

1.0 Executive Summary………………………………………………………………………….....1

2.0 Introduction……………………………………………………………………………………..2

2.1 Synopsis………………………………………………………………………………..2

2.2 Introduction to Key Players in the Tobacco Industry………………………………….3

3.0 Background and Literature Review of Industry, Firm and Area of Research………………….7

3.1 Industry Briefing................................................................................................................7

3.2 Review of Industry, Firms and Area of Research…………………………………..….8

4.0 Competitor Analysis and Review....................................................................................................22

5.0 Research Methodology…………………………………………………………………….…...31

5.1 Research Objectives…………………………………………………………………...31

5.2 Research Design……………………………………………………………………….32

5.3 Justification of employing overlapping methodologies: Data Analysis...........................33

5.4 Sampling...........................................................................................................................34

5.5 Data Collection.................................................................................................................34

6.0 Interview: Data Tabulation............................................................................................................36

6.1 Interview: Analysis of Findings.......................................................................................38

7.0 Questionnaire: Brief Summary......................................................................................................40

7.1 Questionnaire: Data Tabulation and Explanation.............................................................41

7.2 Questionnaire: Analysis of Findings.................................................................................57

8.0 Overall Analysis.............................................................................................................................60

9.0 Recommendations..........................................................................................................................63

10.0 Conclusion...............................................................................................................................65

References

Executive Summary

The title of this project was, “Do increasing prices affect sales of key players in the tobacco industry

in Pakistan”. The assumptions of the paper are that increasing prices are reflected by the increasing

tax rates that the Government levies on tobacco and the key players are, in a nutshell, two within the

industry, which is explained later in the paper, that one is the predominant one out of them.

The objectives of this research are to allow the reader to get a firm grip over the tobacco industry,

major competing firms that operate within and also the area of research, which is Finance or Sales.

The introduction briefly explains the main tobacco players within the industry, their portfolios etc., in

order to establish a basis for in-depth review and analyses of the various sections and chapters within

the research conducted.

The literature review and competitive analysis attempt to be all inclusive of all the variables involved

within the tobacco industry, of course focusing more on the area of research and research problem

proposed. The articles, though are within the parameters defined by this research, are not just limited

to examples of Pakistan, but also include various trends being followed in other countries. This gives

the reader a better grasp of what is being done on foreign countries, what strategies and processes

have been adopted etc. Numerous sources have been used such as articles, publications and books

etc., all that are applicable to this research.

Multiple methodologies/methodological pluralism have been employed for carrying out this research

to achieve a higher degree of both, reliability and validity. It allows the research to attain quantitative

results and at the same time to gauge, understand and analyze the reasoning behind the statistics or

data collected.

The results and findings of this project are consistent with not only proving the research problem as

correct but also with the secondary data collected and analyzed. They reveal that sales of tobacco

companies get affected from increasing prices and that demand is not inelastic. As the research delves

deeper, it is shown that whereas the prices have increased, cigarettes are more affordable now than

compared to a few years ago, especially in developing countries. Both sides of the argument have

been incorporated within the text so that the reader can get a comprehensive and all round view of the

trends within Pakistan.

At the end, from a business analyst perspective, briefly, there are certain recommendations that are

made from the analyses of the data collected from both, primary and secondary sources that should

help the companies, specifically Pakistan Tobacco Company to sustain and increase profits and sales.

1

Introduction

Synopsis:

The Tobacco industry plays a critical economic role in Pakistan by generating income and

employment in the tobacco farming, manufacturing distribution and retailing. There are

almost 350,000 people, directly and indirectly, working in the tobacco industry. Besides

being a main contributor to the Government Exchequer of nearly Rs. 50 Billion, the

industry also generates an annual income of over Rs. 30 Billion, with a source of

livelihood for 1.2 million people.1

This research project has been carried out in order to make the readers understand fully what the

tobacco industry of Pakistan is: its nature and size and also the key players operating within the

industry. In the discussions that follow, the paper proposes that increasing taxes by the Government

are a form of increasing prices and lowering sales of tobacco companies; ultimately a part of a wider

agenda relating to health benefits, regular laws and regulations imposed globally on the tobacco

industry and particularly within Pakistan. This aspect also comes within the Area of Research that is

‘Finance and Sales’ for this project which will be looked at within the literature review.

It allows the tobacco companies and also other readers of this project to comprehend the complexities

involved within the industry being researched and further briefly recommends; certain actions, from a

business analyst's perspective, for the companies to take into account which could lead to increased

profits and sales for them.

Within this tobacco industry there are 50 registered companies in Pakistan, out of those 50, 3 of them

are listed on both the Karachi Stock Exchange2 and the Lahore Stock Exchange3. The three companies

are Khyber Tobacco or KHTC4, Pakistan Tobacco Company or PAKT 5 and thirdly, Philip Morris

Pakistan or PMPK6. Other than these companies, the main competition arises from the illicit trade

involved in this industry which will be explained later in this paper.

2

Introduction to Key Players in Tobacco Industry:

A brief introduction on the Key Industry Players will be given here followed by an in-depth literature

review, in the next chapter, covering all aspects as envisioned by this project.

Pakistan Tobacco Company (PTC) is an associate of one of the world's leading tobacco

groups, British American Tobacco Company that has a legacy spreading over more than

100 years. The BATC has presence in more than 180 countries and is known for its high

quality tobacco brands. British American Tobacco Company started its operations in

Pakistan in 1947 and is the first multinational to set its foot in the country.7

Being the first ever multinational company to set foot in Pakistan, it has withstood many challenges

yet prides itself as being the largest market share holder. Another aspect that this paper will focus on

is how a multinational is able to create a market niche for its self keeping in mind the unstable

political scenario of the country.

The growth and values since its inception are outlined in this excerpt:

From being just a single factory operation to a company which is involved in every aspect

of cigarette production, from crop to consumer, we have evolved into one of the leading

corporations in Pakistan. We run two state of the art factories and employ more than

1,700 people while indirectly providing livelihoods to more than a million people who are

involved in various aspects of the business. We are market leaders and contribute more

than Rs. 30 billion in excise duties and taxes to the Government 8.

.

The Vision of the company is “First Choice for everyone”9 and their Mission Statement is to

“Transform PTC to perform responsibly with the speed, flexibility and enterprising spirit of an

innovative, consumer focused Company”10. Subsequently the Strategic Objectives lay emphasis on

“Our strategy reflects our vision of being the champions of Growth, Productivity, Responsibility and

Winning Organisation”11.

The various brands and a brief summary of the company and their impact on the business are as

outlined below:

3

1. “Dunhill: 2008 was an exceptional year for Dunhill in Pakistan as the brand witnessed

exponential growth; fuelled by its re-launch in July”.12

Dunhill is not just a local brand in Pakistan but is a global brand and has been in the market for more

than a century, since 1907. It lies within the premium segment of brands of the company.

2. “Benson & Hedges: Launched in Pakistan in March 2003 and has since been able to build

strong brand loyalty among its consumers showing excellent year on year growth”.13

Benson is not just a local brand but is a global brand and has been in the market since 1873 when

Richard Benson & William Hedges made a partnership in the United Kingdom.

3. “John Player Gold Leaf: John Player Gold Leaf has become an institution in itself, becoming

one of the most recognisable cigarette brands in the country. John Player Gold Leaf has

recently been declared the largest Urban Brand in Pakistan, beating out products across the

F.M.C.G. spectrum”.14

Golf Leaf is also not just any local brand but has presence globally and started in 1877 by its founder,

none other than John Player who later on made his business into a company known as John Player and

Sons. It now comes within the Premium Segment for the company.

4. “Capstan by Pall Mall: Capstan has a rich heritage, originating in Britain in the 19th century.

The brand was created under the auspices of W.D. & H.O. WILLS at Bristol and London”.15

The paper will later show how this brand has now gained extraordinary market share within the

country and is on the rise, making it one of the driving forces in the tobacco industry and also in a

way contributing to the large profits made in receding or unstable environments. This brand comes

within the Value for Money segment.

5. “Gold Flake: Gold Flake has grown tremendously as a brand since 2004, making it the largest

volume brand in Pakistan, and the second largest brand in British American Tobacco's Asia

Pacific region. The key to Gold Flake’s success has been its novel engagement schemes

which have fuelled growth over the years”.16

This brand was considered a premium segment brand around the end of the 19th century. Although

the constant changes in packaging and brand positioning made the brand come into the Value for

Money (VFM) segment. It was also created by W.D. & H.O. WILLS.

4

6. “Embassy: It is a leading volume brand in Pakistan, and is most popular in Punjab where it

enjoys a leading position”.17

Embassy was one of the first brands by the company and has been in existence since. It is tailor made

for the local market and lies within the Value for Money segment.

Khyber Tobacco Company is a public limited company and has been operating in Pakistan since

1954.

Khyber tobacco has achieved the heights of business with its clear and ambitious vision, high

quality and vigilant team and enjoying the status of top few companies of Pakistan in tobacco

industry. The company has extended its operations around the world with an established

distribution network in parts of Eastern Europe, South and West Africa, Central and South Asia

and the Middle East.18

The website further describes the company’s Mission and Vision Statement in the “About Us”

Section:

With internationally recognized brands, a fully integrated production facility, and a

wealth of experience and expertise KTC is in an ideal position to provide leaf and

blended tobaccos......Our team of industry experts aim to introduce well researched

brands after rigorous testing and blending of tobaccos from around the world to give the

customer distinctively valuable experience.19

The various brands that are offered by the Company are:

“Gold Street (Premium, International), Classic (Special Flavour, Full Flavour, Menthol), Hero

(International, Lights, Menthol), Chance No 1 (Virginia Blend, Special Blend, Menthol), Virtue

(Super Slims, Lights – Super Slims)”20

In March 2007, Lakson Tobacco Company Limited was bought over by Philip Morris International

which had acquired a majority stake in the company. The name of the company changed to Phillip

Morris International (PMI) in 2011.

5

The principal activity of Philip Morris (Pakistan) Limited is the manufacture and sale of

cigarettes for Pakistan's domestic market. The Company currently operates three cigarette

factories with primary and secondary facilities and one tobacco leaf threshing plant, all

located in various parts of the country. It also runs an extensive tobacco leaf agronomy

program in the tobacco growing areas of Khyber Pakhtunkhwa.21

The Company provides direct permanent employment to over 2,500 individuals at its registered office

in Karachi and various manufacturing facilities and sales offices across Pakistan. The vision and

Mission Statement explained is as follows:

Philip Morris (Pakistan) Limited aims to:

meet the expectations of adult smokers by offering innovative tobacco products of the

highest quality available in their preferred price category;

generate superior returns to our stockholders;

Be a responsible corporate citizen and to conduct our business with the highest degree

of integrity.

We are committed towards the continuous betterment of our employees by providing

professional training emphasizing teamwork, a clean and safe working environment and

leadership imbued with humility.22

The main brands of the company are Morven Gold, Red & White, Marlboro, K-2 and Diplomat.

Basically, the introduction has set a direction for this project, outlining the key players within the

industry, mainly Pakistan Tobacco Company (PTC) and Philip Morris Pakistan (PMP) or Philip

Morris International (PMI). The discussions that follow will delve deeper into the research problem

that has been proposed, will aim to prove it and then give various recommendations and ways of

tackling the said problem – from a business analyst’s perspective.

6

Background and Literature Review of Industry, Firm and Area of Research

Industry Synopsis:

Approximately 100,000 tonnes of tobacco is grown annually on more than 50,000

hectares of land. There are about 50 cigarette manufacturing companies registered in

Pakistan and more than 500,000 outlets sell tobacco products at retail level in Pakistan.23

The excerpt clearly indicates the large scale of the tobacco industry and its subsequent affect, over the

whole economy, whilst impacting some sectors directly and some indirectly. The supply chain itself is

very diverse incorporating farmers, manufacturers, wholesalers (company owned usually), distributors

and finally retailers. As we delve further into the literature review more facts and processes that are

relevant to this project will be highlighted.

Out of the 50 Registered Tobacco Companies, two of them have pioneered the tobacco Industry with

Pakistan Tobacco Company (PTC) at No. 1 and Philip Morris International (PMI) at No. 2 24,

however, these are not the only companies/entities involved in the sale of cigarettes or tobacco. There

is a segment referred commonly as “Illicit Trade”25 and that constitutes a large market share as well.

In this project, the two aforementioned companies would be considered as the key players and PTC

with its superior market share, higher sales and profits, making it the industry leader would be

discussed more in detail in this section and the sections that follow.

The paragraph that follows is interesting as it adds to our understanding of why prices of cigarettes

increase drastically, not just within Pakistan but all over the world as well.

Nearly 1 out 5 cigarettes sold in Pakistan have either been manufactured or smuggled

without paying the appropriate taxes resulting in an estimated annual loss of Rs. 8.5

Billion to the Government. This results in the tax compliant section of the industry, to be

pressed with higher tax rates leading to higher prices that further reduce the

competitiveness of the tax paid cigarettes vis-à-vis illicit cigarettes. Both regulators and

tax compliant tobacco industry have a common interest to reduce the level of illicit

cigarettes from the current 18% of the market share.26

7

(Source of 2008*2009- Pakistan Tobacco Industry, Overview and Economic Contribution, 2010, P7)27

Since the last survey carried out in early 2010, this 18% Illicit Trade has increased to 18.5% of the

market share28. Illicit trade includes local Duty Not Paid (DNP), Smuggled and Counterfeit Cigarettes.

Each has their own impact on the industry as a whole and also the Government of Pakistan. As of

2011, the market share has increased to 19.2%.29 (an alarming increase since the 18% from 2009-

2010). This trend has also been witnessed by government authorities as well:

Cabinet Secretary Nargis Sethi wrote a letter to Chairman FBR asking him to take

stringent measures to check the rising tide of illicit tobacco trade. The letter also referred

to Pakistan’s commitment under Article- 15 of Framework Convention on Tobacco

Control (FCTC), the first global public health treaty, according to which Pakistan has to

take effective legislative, executive, administrative or other measures to eliminate the

illicit trade in tobacco products.30

Review of Industry, Firms and Area of Research:

The main focus and primary concern of this project is to highlight the industry that Pakistan Tobacco

Company and its major competitors operate in and more specifically how the increase in prices affect

the sales of the companies which is the main area of research. Consequently, the study of the Illicit

Trade Sector would have more relevance in the competitor analysis, however, bears mentioning in the

literature review in order for it to be understood and accurately portrayed.

8

Before we move on to explaining the various taxes involved within the tobacco industry, it is

important to understand their relevance with regards to demand and supply.

Taxes like for example a sales tax is typically collected from retail businesses. To what

extent will this tax burden be passed on to the consumer depends upon the elasticities of

supply and demand for the product or service.

The more elastic demand is, the lesser the effective incidence on the purchaser and more

on seller and for a more elastic supply, more the effective incidence on the customer and

lesser on seller.31

As discussed previously, taxes are on the rise, to what degree the tax incidence shall be passed on to

the consumer demands upon the elasticities of demand and supply. We shall find out when we delve

further into the literature review that the demand for smoking is not as inelastic and neither is supply.

This also highlights the area of research, that sales are not purely dependent upon what the prices are,

but the elasticities of demand and supply.

First and foremost, a review is needed of the taxes that are levied upon the cigarette manufacturers.

Other than profit or corporate tax, tobacco manufacturing has various taxes involved. It is important to

differentiate here between the total price and retail price of cigarette packs as that is how the multiple

taxes are levied. For example, a pack of Gold Leaf costs Rs. 73. From that Rs. 62.93 is the retail price

and 10.07 is Sales Tax.

Other than the Sales Tax, many taxes are imposed upon the retail price of the cigarettes, six to be

precise: Federal Excise Duty (FED), Sales Tax (addition), Special Excise Duty, Customs Duty,

Federal Tobacco Cess (FTC) and NWFP Tobacco Development Cess (TDC), which shall be

explained in detail below:

1. Federal Excise Duty (FED): It is charged and collected on locally manufactured and

imported cigarettes on the basis of Retail Price. For imported cigarettes, FED is applied at

9

a maximum rate of 64% of the Retail Price and for locally manufactured cigarettes the

FED incidence goes up-to 64%.

2. Sales Tax: in addition, Sales Tax (at a rate of 16%) on the Retail Price is also imposed

on imported and locally manufactured cigarettes.

3. Special Excise Duty: A Special ad valorem Excise Duty is collected and levied at the

rate of 1% on retail price less FED.

4. Customs Duty: 35% ad valorem Customs Duty plus 15% Luxury Duty (total duty:

50%) is levied on the import of finished tobacco products.

5. Federal Tobacco Cess (FTC): FTC (at a rate of 3%) is levied by the Pakistan Tobacco

Board on unmanufactured tobacco.

6. NWFP Tobacco Development Cess (TDC): NWFP Government collects a levy at the

rate of Rs. 2 per kg for Flue-cured Virginia, Burley and Dark Air Cured varieties and Rs.

1 per Kg for White Patta.

Excise and Sales Tax incidence on cigarettes ranges from 64% to 81%. In Financial Year

2008-09, nearly Rs. 50 billion was contributed to national treasury by the taxpaying

cigarette industry in Pakistan out of which Rs. 46.7 billion was Excise and Sales Tax

contribution.32

Note here that almost all these taxes are included within the retail price and so taking the

aforementioned example, out of the Rs. 62.93, almost 81% is tax and the remainder amount is revenue

for the company. The 1st tax, FED and the 5th tax, FTC, can be further explained as:

For locally manufactured cigarettes, there exists a 3-tier FED structure based on retail

price. It is a combination of fixed duty on the low segment, ad valorem on the high

segment and a mixture of both in the middle segment. Federal Tobacco Cess (FTC) is

levied under Section 9 of Pakistan Tobacco Board Ordinance 1968 and collected under

S.R.O. No.8/98 of 7th January 1998.33

The margin keeps getting smaller, if the volume is not increased. Over the years, Excise and Sales

Tax Incidence on cigarettes has increased and now ranges from 69.5% to 81% of the retail price.

10

Federal Excise Duty on the low segment has increased from 42.6% of the retail price to 52.5% in the

last two years, while the sales tax has also increased by 1% to 17% and during the same period 1%

Special Excise Duty was imposed. Despite these price/tax increases and the intended purposes behind

them, an interesting article sheds light on the matter giving us a different perspective:

Trends between 1990 and 2000 in real prices and minutes of labour indicate, with some

exceptions, that cigarettes have become more expensive in most developed countries but

more affordable in many developing countries. However, in the UK, despite recent

increases in price, cigarettes are still more affordable than they were in the 1960s.34

Above is another example of a longitudinal study of the various factors involved within the area of

research – finance for this project. These factors are price, purchasing power parity, minutes of labour

required to purchase packs of cigarettes. It adds another dimension within this area of research and

within the whole project as well – affordability. Whether the prices have increased or not would not

make a difference if the purchasing power of consumers has correspondingly increased as well over

the years. There is as complex mixture of high taxation, low compliance/enforcement and in light of

the above argument affordability as well. The following diagram shows the taxation trend in Pakistan

more concisely:

(Source- Pakistan Tobacco Industry, Overview and Economic Contribution, 2010, P9)35

The above diagram shows how over the 5 years the tax amount has increased. As of 2012, the amount

is approximately more than Rs. 60 Billion. The following article elucidates more comprehensibly on

how these taxes eventually affect the industry.

11

The government has announced significant increase in taxes on tobacco products in the

budget for the fiscal year 2012-13, but according to health experts, it alone cannot serve a

lot on the subject of tobacco control in the country.36

True enough, however, in contrast another statement goes on to say that, “Consumers in Pakistan are

very price sensitive. Any price increase leads to proportionate volume losses”37 .This was found to be

true also in another place where it is mentioned that “It is also a common fallacy that cigarettes are

price inelastic. In global study on elasticity of demand for cigarettes, Pakistan was found to be in the

Moderate Elasticity’ segment”38.. In contrast, taking the same article published in The News, we can

further conclude and keep this perspective in mind.

Health experts say that taxes must be increased manifold on tobacco products as evidence

shows that price rise of 10% decreases consumption of tobacco products by up to 8%

particularly in low and middle-income countries.39

It is a common misconception to believe that the demand for cigarettes is inelastic, i.e. any changes in

price would lead to changes in demand. However, this is not true, the demand is very much elastic and

can be affected by many factors, most importantly price. The direct way on increasing the price is by

increasing the taxes that are levied to the product. Such increases need not necessarily serve the

purpose of reducing tobacco sales within the industry as a whole it might affect certain legitimate

tobacco companies. As explained the lines below:

Experts believe subjecting legitimate cigarette manufacturers to a higher tax regime will

not reduce tobacco consumption in the country as smaller players will come forward to

fill the void but the government will be the biggest loser in terms of legitimate taxes that

it earns from legitimate companies.40

This can be quantitatively explained by the following paragraph:

The details portray a gloomy scenario for the cigarette industry and make a poignant

reading for 2011 as the sale of smuggled cigarettes increased by 65%, going from 1,018

million to 1,685 million alone in this year while the overall share of illicit trade increased

by 10% in terms of cigarette sticks going from 18.7% to 20.6% in terms of revenues and

the sale of one smuggled Korean cigarette brand alone increased by 90%.41

12

The discussions below are in-depth explaining how increases in taxes can lead to reduced demand and

hence reduced sales.

The cigarette companies have opposed tobacco tax increases by arguing that raising

cigarette prices would not reduce adult or youth smoking. But the companies’ internal

documents, disclosed in the tobacco lawsuits, show that they know very well that

raising cigarette prices is one of the most effective ways to prevent and reduce smoking,

especially among kids.42

Both, prevention and reduction ultimately have relevance to this research project as these declining

demand patterns would lead to fall in sales directly. Below are various excerpts from tobacco

documents etc and quotes that are indicative of proving this:

Philip Morris: of all the concerns, there is one - taxation - that alarms us the most.

While marketing restrictions and public and passive smoking [restrictions] do depress

volume, in our experience taxation depresses it much more severely. Our concern for

taxation is, therefore, central to our thinking.43

Philip Morris: When the tax goes up, industry loses volume and profits as many

smokers cut back.44

RJ Reynolds: If prices were 10% higher, 12-17 incidences [youth smoking] would be

11.9% lower.45

Philip Morris: It is clear that price has a pronounced effect on the smoking prevalence

of teenagers, and that the goals of reducing teenage smoking and balancing the budget

would both be served by increasing the Federal excise tax on cigarettes.46

Philip Morris: Jeffrey Harris of MIT calculated…that the 1982-83 round of price

increases caused two million adults to quit smoking and prevented 600,000 teenagers

from starting to smoke…We don’t need to have that happen again.47

13

Philip Morris: A high cigarette price, more than any other cigarette attribute, has the

most dramatic impact on the share of the quitting population…price, not tar level, is the

main driving force for quitting.48

The above excerpts from the tobacco companies reveal how proportionate the increase of taxes is to

the increase in prices of the tobacco product, which eventually reduces the demand drastically. What

is interesting about these excerpts is that the tobacco companies themselves admit that increasing

prices have a damaging effect on the volume and ultimately on the subsequent profits . In a broader

spectrum, the reasons for conducting this research project would be to highlight, the capital invested;

human and financial resources in particular, the annual income; both acquired and lost and the

intricacies of the tax structure that inherently and essentially affect the tobacco industry.

(Source of 2008*2009, Pakistan Tobacco Industry, Overview and Economic Contribution, 2010,

P10).49

The diagram shows how involved the key players of the industry are in the tax net of Pakistan. Both

Lakson Tobacco Company (now known as Philip Morris International) and Pakistan Tobacco

Company together make up 99.3% of the Tax Paying Industry, whereas the total market share of these

two is 82% and now 80.8% as of 2012 as mentioned in the above paragraphs.

As mentioned previously in the quoted texts and discussion, the tax contribution is far greater than the

market share of these companies, in total they contribute more than Rs. 60 Billion to the National

14

Exchequer, which means, ‘that any increases in the tax rates would drastically affect their costs, the

prices of their products and so the sales also’. These concepts will further unfold as the literature

review delves deeper into the relationship of taxes and sales.

Taking into consideration that these companies are profit making organizations, this research will

only help if it clearly identifies those important decisions that ultimately derive profit for these firms.

One of those important decisions as already identified is taxation. Increasing taxes and their impact is

always taken into consideration and strategies mainly revolve around this predominant factor.

However there are other means by which the Government regulates and monitors tobacco

manufacturing and selling in the country. These include the graphic and textual health warning, bans

on smoking in various public places, restrictions and limitations in terms of advertising or promoting

their products etc.

Various efforts have been made from time to time for protection of non-smokers health

and prohibition of smoking. These include anti-smoking laws like such as Railways Act

189014, Juvenile Smoking Act 1918, Bahawalpur State15, West Pakistan Juvenile

Smoking Ordinance16, and Cigarettes (Printing of Warning) Ordinance, ‘Prohibition of

Smoking and Protection of Non- smokers Health Ordinance No. LXXIV’. 50

The following article shows how impactful one of these variables, Graphical Health Warning, really

is:

Smokers are not fully informed about the risks of smoking. Warnings that are graphic,

larger, and more comprehensive in content are more effective in communicating the

health risks of smoking.51

Further discussion will be done below in the primary research – how these health warnings affect the

perceptions of consumers. (Results are consistent with the statements above). It is a matter of deep

concern that companies stay abreast of the ever changing policies with regards taxation and so the

importance and relevance of this project is manifolds as it could be useful for these companies to

exactly gauge how impactful these taxes and increasing prices are in the perceptions of customers.

15

Increasing cigarette and other tobacco taxes will lead to significant reductions in the use

of these products, resulting from reductions in the frequency of use by continuing users,

as well as reductions in the prevalence of use. The empirical evidence clearly indicates

that higher tobacco taxes will significantly reduce cigarette smoking and other tobacco

use.52

The excerpt above shows how consumption would reduce overall if taxes were implemented

effectively.

The concept explained before is reinforced by the paragraph below which uses a number of references

while explaining, making it all the more reliable in nature and a good source for this project.

Using US survey data, Ohsfeldt, et al. (1998), found that higher taxes on smokeless

tobacco products significantly reduced the prevalence of smokeless tobacco use among

adult males. Chaloupka, et al. (1997), found similar evidence for young males.53

The article quoted above mentions the which was carried out outside of Pakistan; it shows that such

tax increases have a similar affect on other markets or countries as well, making the affect of

increasing taxes or increasing prices negatively affecting demand or sales a generalize able statement.

It further states:

In addition, several studies have found evidence of substitution among tobacco products

in response to changes in relative prices for example Ohsfeldt, et al., 1998; Thompson

and McLeod, 1976; Pekurinen 1989.54

This was done in order to make the reader understand that this tax incidence on all tobacco products

would have the similar affects changing demand or for the sake of this project affecting sales/profits.

How these taxes affect sales can also further be explained below. The campaign for “tobacco free

kids”55 is one that advocates on talking about facts.

The cigarette companies have even publicly admitted the effectiveness of tax increases to

deter smoking in their required filings with the U.S. Securities and Exchange

Commission.56

16

Philip Morris: Tax increases are expected to continue to have an adverse impact on sales

of tobacco products by our tobacco subsidiaries, due to lower consumption levels.57

Lorillard Tobacco: We believe that increases in excise and similar taxes have had an

adverse impact on sales of cigarettes. In addition, we believe that future increases, the

extent of which cannot be predicted, could result in further volume declines for the

cigarette industry, including Lorillard Tobacco.58

R.J. Reynolds: Together with manufacturers’ price increases in recent years and

substantial increases in state and federal taxes on tobacco products, these developments

have had and will likely continue to have an adverse effect on the sale of tobacco

products.59

To expand and look at a more holistic perspective, taking into account surveys that are not only

longitudinal, but also reliable and valid and therefore can be generalized: this project will further

delve into this Organization and find out that Economic Research reaffirms that tobacco/cigarette tax

increases (price increases) in turn reduce smoking or affect sales.

Numerous economic studies in peer-reviewed journals have documented that cigarette tax

or price increases reduce both adult and underage smoking. The general consensus is that

every 10 percent increase in the real price of cigarettes reduces overall cigarette

consumption by approximately three to five percent, reduces the number of young-adult

smokers by 3.5 percent, and reduces the number of kids who smoke by six or seven

percent.60

In their ‘Recent State Experiences’61 section the campaign claims that in every country or state where

the cigarette tax rate has been increased significantly, the packet sales have witnessed a sharp decline.

They prove or authenticate this by relating to the data/results of an in depth nationwide survey. It not

only shows the legitimate market of the tobacco industry but takes into account the “vast majority of

packs purchased through cross-border, Internet, or smuggled sales” and the results indicate that

overall the packet sales decrease as federal cigarette tax increase pushing up the average nationwide

price.62

17

In-state evidence shows that state cigarette tax increases are prompting many smokers to

quit or cutback. For example, the Wisconsin Quit Line received a record-breaking 20,000

calls in the first two months after its $1.00 per cigarette pack increase (it typically

receives 9,000 calls per year).63

The extract above shows how the campaign uses examples of various States, Wisconsin, Texas, Iowa

and Washington and links how tax increases and quit lines can be used to show the falling

consumption levels. The research paper delves into other markets as well, expanding the parameters

in order to make the results of the interview and questionnaire carried out later and literature review

more reliable and valid.

It then quotes examples of other States and explains further how such price increases affect consumer

behaviour.

Likewise, in Texas and Iowa, that each increased their cigarette taxes by $1.00 in 2007,

the number of calls to the state quit-lines have been much higher compared to the

previous year. It is also clear that these efforts to quit by smokers after tax increases

translate directly into lower future smoking rates. In Washington State, for example, adult

smoking from the year before its 60-cent cigarette tax increase in 2002 to the year

afterwards declined from 22.6 to 19.7 percent, reducing the number of adult smokers in

the state by more than 100,000, despite overall population increases.64

Increasing U.S. Cigarette Prices and Declining Consumption

18

(Source: www.tobaccofreekids.org).65

The Campaign explains with help of these various national surveys and explains the above diagram as

follows:

Although there are many other factors involved, comparing the trends in cigarette prices

and overall U.S. cigarette consumption from 1970 to 2007 shows that there is a strong

correlation between increasing prices and decreasing consumption.

The federal tax on cigarettes also increased from eight cents to 39 cents per pack and the

average state cigarette tax increased from 10 cents to $1.07 per pack during that time

period. Without these federal and state tax increases, U.S. cigarette prices would be much

lower and U.S. smoking levels would be much higher.66

19

(Source: The political economy of tobacco taxation, Chapter 4, P86,

http://www.who.int/tobacco/publications /en_tfi_tob_tax_chapter4.pdf).67

The table above gives a different perspective by showing how much percentage is derived from

tobacco companies in these countries from the total excise revenue. The percentage share as is the

case in all three countries is most in the mid price segment. The table establishes a link between the

higher end brands – premium and the middle segment too, Mid Price.

The above table shows that as taxes increase, premium and high-price brands are expected to generate

more stable revenue than the other price bands due to their less price sensitive consumption base.

High income smokers are more likely to smoke premium, high price brands and are less responsive to

price than are smokers in lower income groups68. So the article creates a difference also between the

types of brands smoked and how such consumers respond to price changes i.e. price elasticity of

demand.

As a business that operates in a controversial industry, we have an increased impetus to

demonstrate to our stakeholders that we run our business in a sustainable manner.69

Though the implementation of tax laws is enforced at a larger scale abroad, these tax rates and laws

have to be observed by these registered companies in particular, given the complex environment in

which they operate.

20

(Source: Pakistan Tobacco Industry, Overview and Economic Contribution, 2010, P4)70

The law is from the Martial Law Order-487 of 1985 in respect of NWFP (where 75% of tobacco is

grown)71 and it shows that it is not just the companies that push prices up to save profit margins or due

to the tax rates increasing, but the law requires that each years’ tobacco crop will be more expensive

from the previous year. Thus indicating the price increase as being mandatory for companies to pay

the farmers and eventually end up passing the annual increase in cost to the consumer.

Studies have shown that tobacco taxes are the most cost effective way to reduce tobacco

consumption. Implementation of a package of price and non-price policies (e.g. banning

smoking in public places, banning advertising etc.) is also highly cost-effective.72

Not just such efforts regarding taxation and pricing are made, but the reason why this project took into

account foreign market patterns as well was because such policies and regulations are also monitored

by various global initiatives such as the World Health Organization’s Framework Convention of

Tobacco Control (FCTC)73. The industry and how it operates with so many restrictions becomes all

the more complex and important to study and since both the micro and macro economic variables

keeps changing; research then in this industry, particularly in developing countries such as Pakistan,

becomes all the more valuable.

The literature above of the tobacco industry as a whole and within Pakistan; the various complexities

involved in the tax structures regarding tobacco and their relationship to prices and sales of these

tobacco companies i.e. area of research, all aim to prove that these increasing taxes ultimately impact

the sales negatively.

Competitor Analysis and Review

21

Pakistan Tobacco Company and Philip Morris International, both dominate the market according to

their reports, surveys and according to various economists and influential and authentic papers such as

the Business Recorder. Together they take up around 80-81.5% of the market share, the remainder as

explained in the literature review is taken up by the illicit trade sector. Local Duty Non-Paid sold

around 13.5 Billion Sticks from 2009-2010, taking up 17% of total market share and resulting in a net

loss of Rs. 7.5 Billion to the Government Revenues.

Smuggled Trade sold around 1 Billion Sticks from 2009-2010, taking up 1% of the total

market share, resulting in a net loss of Rs. 1.5 Billion to the Government Revenues.

Counterfeit Trade is still smaller than the other two types of illicit trade as the risk here is

much higher. Still this trade manages to sell up to 500 Million Sticks from 2009-2010,

taking up a total of 0.5% of the total market share, resulting in a net loss of 0.5 Billion to

the Government Revenues. The Market Share of this sector stands currently at 19.2% of

the domestic market.74

The financial year of 2011 was not a very good year for Philip Morris International (PMI). The gross

turnover decreased by 4.8% while the gross profit decreased by 28.4% which led to a loss of 455

million after tax. “This loss was primarily associated to the falling sales by 4.0 billion cigarettes”.75

Completely contrasting views were witnessed for the predominant market leader, Pakistan Tobacco

Company:

Despite all the aforesaid challenges, our company has outperformed the competition and

strengthened its market leadership. Our sales have grown by 3 billion versus SPLY,

reaching 39.8 billion sticks and our market share has increased from 47.8% in 2010 to

48.6% in 2011. This growth has been led by an unprecedented performance by Capstan

by Pall Mall Original (CbPMO), launched in July 2010. This brand has now grown to

14.4% of the market”.76

Further reinforced by the statement: “Capstan has become a key driver for growth in the company”.77

22

Coming back to the falling sales of PMI which reflected a 14.6% decline in market share, these

damage the company and the industry as a whole, as excise tax driven increases provide non-tax paid

products with an increasingly unfair competitive advantage. The company claims to have increased

operations from 2010 by a whopping 27% to a total of Rs. 769 million in order to expansion to take

place and for modernizing manufacturing projects, however, remains unclear regarding its Mandra

Factory which they have significantly reduced in operations, owing to an increasing cost of

production.78

An article shows us how not only PMI but PTC and the overall industry are being affected in the

recent past. It says,

Philip Morris Pakistan is beginning to feel a financial pinch, and is already reducing the

scale and scope of some of its manufacturing operations inside the country.79

The article goes on to say how the one of the factories of Philip Morris might close down:

It, however, declined to say whether the factory would be completely shut down. Mandra

is the company’s smallest factory, and that its main product is now illegal, the operational

costs per cigarette at the plant would effectively become too high to be sustainable. Philip

Morris did not disclose how many of its 2,363 employees in Pakistan work in Mandra and

how many of them would be laid off.80

It reinforces the arguments posed in the introduction section of this research paper which stated that

out of the two key players, one is more dominant and has a much larger market share and profit

margin. The statement that follows further establishes the same concept.

The acquisition by PMI also did not prove to be profitable for the company. Profits have

gone from Rs1.5 billion in 2007 to Rs573 million in 2010, a nearly 62% drop.81

23

Furthermore the article explicates on the competition between PTC and PMI also, giving us a

different perspective on what the competition is really like. It states,

Philip Morris got into a cut-through price war with Pakistan Tobacco over the lower-end

brands, said one person familiar with the matter. And Pakistan Tobacco has an

unassailable advantage on the higher-end segment of the market because of their Benson

& Hedges and Gold Leaf brands. Philip Morris appears to have come out the worst of that

price war, with revenues declining by 3.9% to Rs24.7 billion during the first nine months

of 2011. By contrast, Pakistan Tobacco’s revenues went up by 12.3% to Rs49.9 billion

during the same period.82

However, the Net Income for PTC for the year ended, 2011, fell from 2010 from Rs 925,100,000 to

Rs. 363,785,000, still a profit and after in-depth loss adjustments, the amount stands at Rs.

268,385,000.

PMI contributed Rs. 20.8 Billion to the national exchequer in the form of federal Excise Duties,

Custom Duties, Special Excise Duties, Sales Tax and Income Tax, representing a 4.6 % decrease

compared to 201083. On the other hand, during 2011, PTC contributed over Rs. 45 billion to

Government Revenues, in the form of Excise, Sales Tax, Income Tax and Custom duties which was

12.8% higher than 2010.84

As a forward looking tobacco company, we are known for our responsible business

conduct and practices. We are one of the country's largest excise revenue generators and

have played a significant role in the development of Pakistan's industrial sector.85

The diagrams below indicates the Gross turnover of PTC for the last 5 years and the Government

levies, for the same period and how the two has increased, the levies at a faster rate:

24

(Source: Annual Report, 2011, PTC, P17)86

(Source: Annual Report, 2011, PTC, P17)87

Two very interesting articles published in the Business Recorder analyze separately both the

competing companies. Both articles were published in 2012 and provide an updated in-depth analysis

of the competition that is inherent in the Tobacco Industry.

CY11 has been a challenging year for Philip Morris and the tobacco industry due to the

weakening economic situation fuelled by power crisis and rising inflation. The company

faces stiff competition from its Competitor Pakistan Tobacco Company which has a

market share of almost 60 percent. Moreover, the illicit market is a serious concern for

the company as it accounts for almost a 20 percent market share.88

25

The excerpt shows that PTC still stands at Number 1 although, the prevailing economic concerns for

the tobacco industry is not only damaging but worsening.

This article further goes on to say that:

The company faces high taxes and duties expenditure as it is a cigarette manufacturer and

an importer. The company's sales tax and excise duty as a percentage of its gross turnover

for the CY11 stood at a little above 61 percent, and this share has remained fairly constant

over years.89

This paper has mentioned before that the sales of PMI were greatly impacted in 2011 and declined by

4 billion cigarettes90 out of a total of approximately “29 Billion Sticks”91. The contribution toward the

national exchequer especially after a 4.6% fall since the previous year takes up to 61% is a very large

amount/share from the gross turnover of PMI; it significantly affects the company’s net profits and

sales.

The paper further reinforces the concept of the key driver for PTC in the ‘Revenues and Profitability’

section by saying the:

Gross turnover experienced a decline of five percent from Rs 34 billion for CY10 to

RS32.3 billion in CY11. The decline in gross revenue (for PMI) is not only due to the

tough economic environment, high government taxes and illicit trade but also due to the

successful launch by PTC of its brand, Capstan which alone has a market share of 14

percent.92

Falling sales, profits and revenues affected the overall operations of the company also, no matter what

the Directors Review would state. The Gross margins fell to 24.8 percent during 2011 compared to

32.7% for the previous comparable period. This further affected the marketing and distribution

activities also as explained below.

In its ‘Liquidity Position and Operations and Issues section’, the article states:

Compared to the current ratio of 0.81 of PTC, Philip Morris Pakistan had a ratio of 1.51

for CY11.

26

However, a current ratio of higher than one and the industry average suggests that the

company is not investing excess assets....PTC outshines its rival Philip Morris Pakistan

Limited in its efficiency at using its assets in generating sales revenue. The fixed asset

turnover in CY11 for Philip Morris Pakistan stood at 3.19 compared to 11.08 of PTC.93

The article by the Business Recorder above clearly demonstrates the growing concerns in the tobacco

industry and especially the two key players, PTC and PMI and which of the two stands out in terms of

market share, profitability etc. Whereas that analyzes both the companies financially for the

comparable period of 9 months in 2011, in quite some detail, the analysis below is from the

Highlights Section of the other article in the Business Recorder and it delves deeper into PTC and

gives a reinforcing perspective to the whole discussion for the whole year/year ended 2011.

Before we move onto reading the other article, a few graphs of PTC and its financial performance

would help us understand more clearly the trends that are enveloping the Industry Giant and hence the

other players involved.

(Source: Annual Report, 2011, PTC, P17)94

27

This diagram shows the falling trend over the years for all three: Gross Profit, Operating Profit and

Profit after Tax for Pakistan Tobacco Company, especially after 2009, whereby various laws were

imposed, taxes rose exponentially, etc. Overall the Gross Profit has increased from 2006 to 2011,

currently at Rs. 6,241 Million, however the Operating Profit and Profit after Tax has decreased,

drastically. This same concept can be further elaborated upon and explained in detail by the table

below:

(Source: Annual Report, 2011, P34, PTC).95

The table above indicates the same figures as the diagram before, exemplifying the falling Operating

Profit and Profit before and after tax. There is a large change from the Gross Turnover the company

gets and the Profit after Tax, more than almost Rs. 67,100 Million. Whereas the Gross Turnover, Net

Turnover and Gross Profit increased from 2010 to 2011 by 12%, 10% and 1% respectively, the

Operating Profit, Profit before tax and Profit after Tax fell drastically by 57%, 61% and 61%

respectively.

Coming to the ‘highlights section’96 of the second article it gives a detailed analysis of the financials

of PTC and how the Company has been fairing in the overall competitive environment. It elaborates

how the company beat the market by its growth in only one particular brand. It goes on to say that:

Overall in CY11, Company was able to sell 3 billion cigarette sticks, increasing the

Company's market share from 47.8 percent in CY10 to 48.6 percent during CY11. This

28

growth was triggered by the unprecedented performance by Capstan by Pall Mall

Original (CbPMO), launched in July CY10. It owns 14.4 percent of the market. The

situation for PTC is not different from other FMCGs'.

The Company enjoyed reasonable top line growth in CY11 but this couldn't be carried

down as the increase in cost of sales and other expenditures trimmed returns and power

outages and inflation also further fuelled the costs of sales.97

The second article, from the Business Recorder, in its highlights section shows an interesting trend

that whereas there might have been profits made and unprecedented growth rates in certain brands at

the same time costs increased as well and macro economic factors had a negative impact as well.

Elaborated below:

Adding to the agony, the Company also had to increase product prices due to increase in

excise duty. The unfavourable economic environment had already eaten away the

purchasing power of consumers hence the excise duty hike led to increase in prices and

forced them to switch to cheaper illicit sector brands which evade taxes and hence have

become highly price competitive.98

The extract above explains clearly that in this highly competitive industry, cost of sales are pushed

higher and so companies need to come up with various strategies to tackle these expected and

unexpected changes and risks.

Overall, the financial year, 2011, was not a good year for the two companies. The article states in their

‘Profitability Section’ for PTC that:

The trend of falling margins continued in CY11. The gross profit margin fell to 27.2

percent in CY11 from 29.6 percent in the same period of last year. This trend of lower

margins despite reasonable revenues is owed to power shortages and inflation. The

Company was badly hit by the increase in prices of its brands led by the increase in excise

duty; which is imposed as a penalty on items that are discouraged.99

It sheds light on various ratios. The Operating margins fell from 21.2% in 2009 to 7.3% in 2010 to

finally 2.8% in 2011, an alarming decline. These falling margins and affected sales drastically affect

29

the costs of the company and need to be efficiently and effectively managed. PTC, according to the

article “managed to reduce its selling, distribution and an administrative expense by 5%”.100

After analyzing the annual reports as well, many financial ratios for PTC came forward. Overall the

net margins fell to 1.6% from 4.4 percent in 2010101. The debt to equity ratio improved in 2011, it

decreased as compared to 2010 when the ratio was 0.63. The decline in this ratio, according to the

article is mainly due to an approximate 40 - 45 percent decline in the short-term running finance 102.

The current ratio also was below 1 which does not reflect a good solvency position for the

company103.

Turnover ratios such as the total asset turnover and the fixed asset turnover both increased

in 2011 mainly due to the increase in sales showing better utilisation of its machinery.104

However, the coverage ratio could be a cause of concern for the company as it has “fallen from

10.23 in 2010 to 4.7 in 2011”.105

In conclusion, the aforementioned arguments and detailed discussions suffice to say establish the

preliminary stance that this project has taken, in order to move on to the research method and

subsequent analyses. The competitor analysis shows the various complexities involved within the

tobacco industry and also how tobacco companies are tackling factors such as increasing tax rates,

illicit trade and costs. Keeping all the articles, reports and quoted material we can still see clearly how

despite the increasing challenges there are still two key players within the industry, namely, Pakistan

Tobacco Company Limited (PTC) and Philip Morris Pakistan (PMI) and that PTC has the larger

market share, is faring well compared to its rival, PMI, that is facing falling profits and even higher

costs. At the same time, the above articles also clarify the factors previously ignored by the tobacco

companies, especially in Pakistan, and which may adversely affect them by worsening over the years.

30

Research Methodology

Research Objectives:

(From Most Important to Important)

The size and contribution of the tobacco industry and major firms.

Understanding the Area of Research comprehensively.

Identify the Changing Macro-economic variables related to Tobacco Industry and key players

i.e. PTC and PMI.

Regulations and Limitations tobacco companies are exposed to.

The complex structure of taxes levied on the tobacco industry.

An increase in tax rates lead to an increase in prices of those products the taxes have been

levied upon.

Cigarette smoking is not price inelastic and changes to price lead to changes in demand.

These changes in demand are a downward trend i.e. falling demand and falling sales.

Gathering information about the tobacco industry which would lead to increased awareness.

The above mentioned objectives will help give clarity to the purpose of this project. They will

also set a direction in terms of what methodologies would be incorporated and at what level.

Why the basics, such as size and contribution of the tobacco industry or the various macro

economic variables involved, are classified as being most important, some would ask, is

because they need to be understood by the reader before the project actually starts analyzing the

basic problem proposed and the various recommendations as well.

“A theory is a conceptualization, or description, of a phenomenon that attempts to

integrate all that we know about the phenomenon into a concise statement or question”.106

The possible research question/problem/theory made then is: “Do increasing prices affect sales of key

players in the tobacco industry in Pakistan”.

31

Research Design:

The basic research design employed for this research is that it has overlapping methodologies that are

followed i.e. both qualitative and quantitative tools used. Location or parameters are defined as

Lahore being the area studied, more specifically Gulberg and Defence locations. A random

probability sampling method is employed with a sample size of 50 respondents for the Questionnaire.

One major distributor/retailer of cigarettes was interviewed. Increasing taxes means increasing prices,

one of the parameters within the study, though distinctions within the text have been made. Key

Players specifically mean PTC and PMI, more so, PTC as clearly it has the largest market share

within the tobacco industry, as highlighted within the text of this research. The justifications and

detailed explanations are given below as to why such a design has been used, specifically with regards

to the tobacco industry which is to say the least, a controversial industry.

With each data collection technique i.e. secondary sources (introduction, literature review and

competitor analysis), interview and questionnaire, there is an independent analysis that goes along the

text and subsequently is at the end of each chapter. Once independent analyses are done of each of the

sections/chapters, an in-depth overall analysis has been included to give the project its final shape and

furthermore reinforce the concepts highlighted before.

The text below starts off by defining independent and dependant variables, then states what those

variables are within this project. It goes on to explain what qualitative and quantitative data is and

why methodological pluralism should be incorporated within a research, what sampling is and what

sort is used here and finally mentions the various sources of primary and secondary data.

The independent variable is called “independent” because it is independent of the

outcome being measured. More specifically, the independent variable is what causes or

influences the outcome.

The dependent variable is called “dependent” because it is influenced by the independent

variable.

32

For example, in our hypothetical study examining the effects of medication on symptoms

of depression, the measure of depression is the dependent variable because it is

influenced by (i.e., is dependent on) the independent variable (i.e., the medication).107

From the objectives above and the literature review gathered, the independent variable was considered

to be ‘increasing prices of cigarettes’ and the dependant variable, ‘sales of tobacco companies’.

Justification of employing overlapping methodologies – Data Analysis:

Quantitative research – addresses research objectives through empirical assessments that

involve numerical measurement and analysis. Qualitative research – addresses business

objectives through techniques that allow the researcher to provide elaborate

interpretations of phenomena without depending on numerical measurement: its focus is

on discovering true inner meanings and new insights.108

Research methods have seen an evolutionary phase over the years.

In a nutshell, they started off from the first experimental laboratory set up in Leipzig in

1879 by Wilhelm Wundt. Over the years psychologists and various researchers realized

that such lab methods presented more quantitative and reliable data or statistical data but

lacked the reasoning or the logic which was left for the researcher to interpret.109

However, It was not long before when researchers realized that the quantitative data they gathered,

though might be statistically correct giving them answers of the who, what, where, when, how, but the

question of why was still unanswered: “it is crucial to get the insights of the sample respondents and

gauge why they have answered the way they have”.110 Over time methods developed into being more

qualitative in nature, giving respondents the chance to say what they think in let’s say focus group

discussions, unstructured interviews or open ended questionnaires etc, or now these methods

increasingly do not take place in labs but in real life situations, with companies trying to sell colas to

their consumers or even banks trying to analyze their financial statements and that of their

competitors, etc.

The best research method, in order to ensure a relative amount of both reliability and validity, will

have to be one which uses a method called “triangulation”111. It uses both qualitative and quantitative

33

data within the primary and secondary data, a combination of data collection and analyzing

techniques. Or as explained by in this paragraph below:

Mixed Method approach is one in which the researcher collects analyzes and integrates

both quantitative (quant) and qualitative (qual) data in a single study or in multiple

studies in a sustained program of inquiry.112

This project will aim to do just that, to bring in as much empirically statistically correct data and also

the insights and interpretations of various scholars, professionals etc i.e. using overlapping

methodologies or both qualitative and quantitative analysis techniques. Aptly explained in the excerpt

that follows:

The application of the scientific method is searching for the truth about business

phenomena. These activities include defining business opportunities and problems,

generating and evaluating ideas, monitoring performance, and understanding the business

process.113

Sampling:

The sampling of this project is random probability sampling, 50 respondents were chosen for the

Questionnaire, living in Lahore. For the interview, there was one large retailer/distributor of

cigarettes/tobacco products in Lahore.

The population is all individuals of interest to the researcher. For example, a researcher

may be interested in studying anxiety among lawyers; in this example, the population is

all lawyers. For obvious reasons, researchers are typically unable to study the entire

population. In this case it would be difficult, if not impossible, to study anxiety among all

lawyers. Therefore, researchers typically study a subset of the population, and that subset

is called a sample.114

Data Collection:

The data collection or how the research will be carried out will be in two ways:

1. Primary data2. Secondary data

34

Primary Data will consist of:

1. Previous observations by the researcher from Internship at PTC.2. Interviews with retailers.3. Questionnaire Survey carried out on smokers.

Ultimately, measurement is critical in research because it allows researchers to quantify

abstract constructs and variables. This is an essential step in exploring the relationship

between various independent and dependent variables.115

Secondary Data will consist of:

1. Information from:- a) Internet.b) Book, Journals, Articles, Cases. c) Projects carried out by A.C Nielson and LSE.d) Lectures given at Lahore School of Economics and Lahore College of Arts and Sciences.

This data will be reflected in the literature review and the basic purpose will be to fully understand the

industry and the environment in which it operates and to enhance the quality of questions asked

within the primary survey and interview and eventually to have a better grip over the analysis

conducted on all the material. The following guidelines were used:

Define the topic, together with your reason for selecting the topic. Identify overall trends,

gaps trends, and particular themes. The literature review should present an overview of

the subject, issue or theory under consideration, along with the objectives of the literature

review. The literature review should discover the areas of controversy in the literature.

The literature review should be directly linked to the research question being

developed.116

These helped to give the project a guideline, a basis for why the literature review is needed and how

can it really add value to this project.

In summary, a researcher’s basic curiosity about an observed phenomenon typically

provides sufficient motivation for choosing a research topic.117

35

Interview

Data Tabulation:

**This interview was carried out in English for which reason the retailer interviewed was a large distributor in

Lahore for the key tobacco companies and could speak the language.

Tabulations are as follows, excluding the introduction and briefing regarding general idea/question of

study:-

(Question 1) Interviewer: What are the timings of your shop?

Interviewee: 9am-10pm, Sunday off.

(Question 2) Interviewer: How many brands of cigarettes do you keep at your section?

Interviewee: 40

(Question 3) Interviewer: On average how many cigarette packs do you sell in a day?

Interviewee: More than a hundred. Certain months in multiples of hundreds as shops also buy from

my store.

(Question 4) Interviewer: Which brand/brands would you say sell the most from your shop or

otherwise?

Interviewee: Dunhill, Marlboro, Capstan, Gold Leaf, Benson, Pine etc. I can't really tell you 'the

most' but these generally sell more.

(Question 5) Interviewer: Why such a variety of brands?

Interviewee: A variety of people come, sometimes the same people get different brands and when

shops come they take a big variety of brands.

(Question 6) Interviewer: Do you have brand loyal customers also?

Interviewee: Yes, some have been buying the same brand for more than 10 years now.

(Question 7) Interviewer: Over the years, have prices of cigarettes increased?

Interviewee: (With raised eyebrows, enthusiasm). Obviously yes, a lot.

(Question 8) Interviewer: Do you feel these impacts your sales at this store?

36

Interviewee: It’s difficult to answer, (long pause) but yes I think it has, my expensive cigarettes don't

sell that much now but overall I get more money than my sales before.

(Question 9) Interviewer: What do you mean, could you explain this please?

Interviewee: Other brands start to sell more and then certain buyers still buy the same and also shops

keep buying in large amounts from me.

(Question 10) Interviewer: Have you witnessed any other change in buying behaviour? How does the

buyer respond?

Interviewee: (Hand on chin) Hmm. Prices keep increasing but in 5 years they have increased a lot.

The picture on the pack was a fast change that really upset a lot of customers.Also finishing the pack

of ten was in the beginning taken badly by people.

(Question 11) Interviewer: Do you smoke?

Interviewee: Yes

(Question 12)Interviewer: I won't ask which one, but have you always smoked the same brand?

Interviewee: No

(Question 13) Interviewer: Why did you switch?

Interviewee: Because I have smoked so long want to smoke something lighter.

(Question 14) Interviewer: Was the increasing price a factor?

Interviewee: (Laughing) Of course it is for everyone. (Yahan kee nahi toh ghar ke kharchoun kee hee

mehangayi dekh lein).

Interviewer: Thank you so much for your time. It was a pleasure talking to you.

Interviewee: Thank you. It was good talking about my experiences.

(Complete anonymity shall be kept of the interviewee, except gender, and was also told the general

idea/question of this study to the extent that it would not affect his responses while at the same time

letting the research and interview violate no research ethics).

Analysis of Findings:

37

The questions asked were sequenced in an order so as to engage the interviewee and also gain

maximum information from him relating to this project.

Questions 1 – 3 have been asked in order to see how popular the store is in order to determine how

large the sample is that comes to the store. The questions reveal that the shop is open for more than 12

hours; it has a sufficient variety of brands and sells a more than adequate amount to fulfil the

parameters within this research. These parameters would simply be to increase the reliability and

validity of this project as much as possible.

Questions 4 and 5 gauge the interviewees’ responses regarding which brands are sold the most.

Though not really precise, he managed to name a few brands upon which greater discussion will be

done as the paper delves into the Survey which was carried out. Out of the brands, 4 were of PTC, 1

was of PMI and 1 was of another company. It shows that according to the interviewee, PTC has the

largest market share or its brands are sold the most.

The questions that follow (Q6 – Q14) ask the interviewee about consumer behaviour vis-à-vis the

price increases in cigarette packs.

Question 6 and those that follow are linked in a different way. They were inserted to see whether

people have smoked the same brand over the years (brand loyal), despite price increases. Question 6

is answered (in the tabulation above) right below the question its self but the reasoning and logic or

intent of the question is answered in questions 8 and 9. A way of improving the content validity of the

interview and to gauge whether the answers correspond or not – whether there is reliability or not in

the data produced.

Where in question 8 the interviewee says that expensive cigarettes do not sell as much, implying that

maybe those brand loyal customers, buying the same brand for more than ten years, now might be

switching, if they smoke those expensive brands, to other cheaper brands.

38

However in question 9, a contradictory phrase is said by him, whereby he says that some people still

buy the same brands, implying that maybe he is referring to those people in question 6. It would be

further explained in questions 7, 10 – 14 and in the analysis of the survey carried out.

Questions 7 – 10, 12 - 14 were inserted so as to gather any other opinions of the interviewee regarding

the buying behaviour or sales of the store and in turn the tobacco companies.

To sum up the obvious indication that the interviewee has confirmed for us, is that the increase in

prices do affect sales and not just that, the perceptions of the consumers as well, at times leading them

to switch brands. These answers and their explanations will be linked with the questionnaire and

explained question by question, in more detail, in the chapter below.

39

Questionnaire

Brief Summary about Questionnaire:

The premise and the actual purpose of the questions within the questionnaire are as follows.

(Explained in detail in the tabulation and Analysis):

At the top, “Name, Age, and Gender” were general demographics regarding the sample and

were optional.

Question 1 and 2 were General knowledge questions asked about the industry: In order to

gauge whether the respondents knew the industry well or not.

Question 3 -9 were inserted to find out the various brands smoked by the respondents and

frequency of smoking over time: In order to determine brand loyalty, familiarity to firm etc.

(Question 3,5 and 6 also check which company has the larger share, also indicating the

validity of the Q1 data as true or false

Question 10 – 12 were inserted to find out whether the respondents had knowledge of

government involvement in tobacco sales: Government Involvement.

Question 13 – 18 were inserted to find out the relationship between the increase in prices and

impact on sales. (Question 14 – 18 are inserted to reconfirm and check whether the questions

answered have consistency and whether price changes do really affect).

40

Data Tabulation and Explanation:

Question 1: According to you, which tobacco company in Pakistan has the largest Market Share?

PTC= 35Respondents.

PMI=15 Respondents.

LARGEST MARKET SHARE?

PTC (70%)PMI (30%)

Out of the 50 respondents, 35 said that PTC had the largest market share, which is 70% of the chosen

sample. The remainder 30% chose PMI as having the largest market share. Khyber Tobacco Company

which was option 3, none of the respondents chose that company.

Question 2: Which cigarette brand would you say is the most successful? (=Number of respondents)

MARLBORO=12

DUNHILL=3

CAPSTAN=9

MORVEN=7

GOLD LEAF=14

BENSON=2

PINE=2

DAVIDOFF=1

41

MOST SUCCESSFUL BRAND

MARLBORODUNHILLCAPSTANMORVENGOLDLEAFBENSON HARDPINEDAVIDOFF

Question 2 estimates the respondents’ beliefs about which brands are the most successful in their

opinion. Out of the 8 brands that were named by the respondents, the 4 most successful were: Gold

Leaf (14), Marlboro (12), Capstan (9) and Morven (7). The percentages/probabilities of just these four

brands from the total number of brands (8) that were mentioned by the respondents are: 28%, 24%,

18% and 14%, respectively, making a total of 84%, which shows a lot of concentration among these

four brands.

Note: The respondents were told that ‘success’ can be defined by them in whatever way they want, in

terms of: market share, profitability, brand value etc.

Question 3: Which brand of cigarettes do you smoke?

BENSON HARD=8

GOLD LEAF LIGHTS=1

GOLD LEAF HARD=14

MARLBORO HARD=7

MARLBORO LIGHTS=10

DUNHILL LIGHTS=3

DUNHILL HARD=2

DAVIDOFF HARD=4

42

DAVIDOFF LIGHTS=1

CAPSTAN=1

BENSH

ON HARD

GOLD LE

AF LIGHTS

GOLD LE

AF HARD

MARLBORO HARD

MARLBORO LIG

HTS

DUNHILL LIG

HTS

DUNHILL HARD

DAVIDOFF HARD

DAVIDOFF LIG

HT

CAPSTAN

02468

10121416

WHICH BRAND DO YOU SMOKE?

BRAND PREFERENCE

The third question regarding which brand the respondents smoked, 4 brands were more popular,

namely: Gold leaf hard (14), Marlboro Lights (10), Benson Hard (8) and Marlboro Hard (7). The

remaining brands as you can see were not smoked as much by the respondents.

Note: Some respondents chose more than one brand that they smoke currently.

Question 4: How many a day?

Cigarettes smoked in day= by number of respondents (50 total).

4=1

5=2

6=2

7=3

8=1

10=9

12=2

15=11

43

20=6

25=6

30=4

35=2

40=1

Respondents0

5

10

15

20

25

30

35

40

45

1 Resp.2 Resp.2 Resp..3 Resp.1 Resp..9 Resp.2 Resp11 Resp.6 Resp.6 Resp4 Resp.2 Resp...1 Resp

This question tested the frequency of brands being smoked in a day. The tabulation above simply

shows: Cigarettes (sticks) smoked in day = by number of respondents (50 total). At the left, y axis, are

the numbers of cigarettes smoked in a day. And on the right there is a list given showing the colours

which represent how many respondents chose what frequency.

The first bar (starting from the left, navy blue) indicates that 1 Respondent said he/she smoked 4 times

in a day while the second bar (starting from the left, maroon) shows that 2 respondents said they

smoked 5 times in a day. 11 respondents said that they smoked 15 cigarettes in a day, 9 said they

smoked 10 cigarettes a day and 6 respondents said they smoked 20 and another 6 said they smoked 25

in a day.

44

The least number of times smoked and the highest recorded number of cigarettes smoked were both

recorded on individual cases. The least is on one respondent saying 4 times, and the maximum is on

one respondent claiming 40 times a day. The data reveals the baseline of the cigarettes consumed by

smokers, and sets a trend for future questions to determine why it has increased/decreased over time

and why.

Question 5: Have you always smoked this brand? (= Number of Respondents)

YES=18

NO=32

ALWAYS SMOKED SAME BRAND?

YES (36%)NO (34%)

Question 5 reinforces the baseline being established by the previous question while at the same time

creating a base/platform for the question to follow. Those respondents that answered Yes (18) will

skip questions 6 and 7 and go straight to question 8, whereas those who said ‘No’ (32), they will

answer in sequence of numbering.

Question 6: If no, then name the previous brand/s you smoked? (=Number of respondents/chosen

brands).

BENSON HARD=16

GOLD LEAF LIGHTS=1

GOLD LEAF HARD=10

MARLBORO HARD=12

DUNHILL HARD=9

45

CAMEL=1

DAVIDOFF HARD=1

CAPSTAN=1

MELBOURN=1

NUMBER OF TIMES PREVIOUS BRANDS WERE CHOSEN/SMOKED

0

2

4

6

8

10

12

14

16

18

BENSON HARDGOLD LEAF LIGHTGOLD LEAF HARDMARLBORO HARDDUNHILL HARDCAMELDAVIDOFF HARDCAPSTANMELBOURN

Previous brands that were smoked, the most chosen as you can see were of PTC and by Question 3 we

see that they are still of PTC. Most people switched from Benson Hard, Gold Leaf Hard, Marlboro

hard and Dunhill hard.

Note: Respondents chose more than one brand that was previously smoked.

Question 7: State the reasons why you switched the brand? (=Number of respondents)

TASTE=6

QUALITY (& NOT FRESH, FAKE, STALE) =6

PRICE INCREASE (& PRICE DIFF, TOO EXPENSIVE) =13

NICOTINE LESSER (& SUITS BETTER, LESSER HARM IN LIGHTS) =7

PACKAGING =3

GOT MORE MONEY =3

TOO (& HARD) =3

Question 7’s answers shed light as to some of the reasons why they switched their existing brands. It

was an open ended question and the results have been qualitatively analysed as:

46

Quality would entail freshness of the brand, stale flavour, or fake (responses verbatim used by

respondents). In this instance 6 respondents switched brands due to the quality i.e. 14.6% of the total

sample.

Note: All the headings and the words within are the words of the respondents. They have just been put

into similar categories for purposes of analysis and ability to read for the reader. More than one reason

was given by certain respondents.

Question 8: Over the years have you increased/decreased smoking?

INCREASE=30

DECREASE=12

NEUTRAL=8

OVER THE YEARS, HAVE YOU IN-CREASED OR DECREASED SMOKING?

INCREASE (60%)DECREASE (24%)NEUTRAL (16%)

As you can see in the diagram above, 30 respondents from the sample answered that they had

increased smoking, more than double who decreased it. 60% increased smoking which is

representative of the sample that overall there has been a general increase in smoking, only 24% they

had decreased smoking and 16 % remained neutral.

Question 9: State reasons why?

HABIT (& ADDICTION, LIKE SMOKING, TASTE, BRAND) =17

STRESS (& STUDIES, PROBLEMS TENSION) =11

47

AFTER FOOD=1

HEALTH (& AWARENESS, HARMFUL) =7

PRICE INC=5

LESS IS MORE (& DIDNT NEED TO INCREASE) =6

AGE=2

HAVE LIGHTS NOW =1

SAD STATE OF THE WORLD=1

SOCIAL ACTIVITY=1

This was an open ended question in the questionnaire and after the results had been analyzed; their

responses have been grouped in such a way in the aforementioned heads. For example, the heading

habit includes how many people increased smoking due to habit or addiction or that they simply like

smoking, the taste or the brand (or all of the these reasons or just a few of them under this heading).

Most people increased smoking due to habit (17 respondents), next was due to stress which could also

mean stress general or due to studies or problems, tensions generally they faced (11 respondents). Due

to health related reasons that they became aware of the health related issues that would come etc 7

people said they decreased due to this reason. The remainder 5 who decreased smoking (total 12 who

decreased as seen from Question 8), did so because of the price increase.

Note: All the headings and the words within are the words of the respondents. They have just been put

into similar categories for simplicity for the reader. Also the respondents could write more than one

reason.

Question 10: In your opinion, does the Government regulate tobacco smoking?

Y=27

N=10

M=13

48

DOES GOVERMENT REGULATE TOBACCO SMOKING?

YES (54%)NO (20%)MAYBE (26%)

This question will try and prove that the secondary data researched is valid. It will try to establish,

along with the questions that follow, that an increase in taxes directly lead to increase in prices which

ultimately affect the demand and reduce sales. 27 respondents said that the government does regulate

tobacco smoking, whereas only 10 and 13 said No and Maybe, respectively.

Question 11: If YES/MAYBE, then state how, in order of most important/impactful?

(=Number of respondents/chosen response)

PICTORIAL HEALTH WARNING ON PACK=20

NEGATIVE ADS, WARNINGS ON TV CHANNELS AND MOVIES=8

INCREASE IN TAXES (& PRICES, INFLATION) =17

NO PICTORIAL WARNING BEFORE=2

RESTAURANTS (& AIRPORTS BAN) =2

LAWS (& ANTI TOBACCO) =7

DONT KNOW=4

NO BRAND ADS=2

AGE LIMITS=2

SMUGGLED=1

INDIFFERENT=1

49

In continuation to question 10, this question asks the respondents that if their answer was yes or

maybe then they should state how, in order of most impactful or important does the government

regulate. This was an open ended question in the questionnaire and after the results had been

analyzed; their responses have been grouped in such a way in the aforementioned heads. For example,

restaurant bans would also include the response of airport bans i.e. public ban of smoking by

government.

As to their responses, 20 respondents said that the government regulates via the pictorial health

warning on packs, 17 said via increase in taxes or prices or also inflation and 8 said via negative ads

warnings on TV and 7 said via laws (anti tobacco).

The remainder options were not chosen to the extent as the 4 specifically mentioned above.

Note: All the headings and the words within are the words of the respondents. They have just been put

into similar categories for simplicity for the reader. The respondents could choose to give more than

one reason.

Question 12: Why, in your opinion, is that the most important/impactful? (= Number of respondents)

Harsher laws (constant change) = 4

Negative Advertisement (Pictorial, disgusting, disagreeable) = 9

Newspaper=1

Impact on consumer=7

Increased price (& affordability) = 3

Reduced demand =4

Advertisement power =1

Airport =1

Age =2

Awareness = 25

Change in preference=1

Health=3

50

The aforementioned data shows that basically three heading, awareness, impact on consumer and

negative advertisement were the three reasons why. Respondents reacted to this question in an

interesting way. They gave multitude of responses. They said they understood more now and were

aware of their surroundings, of the increasing inflation at such an increasing rate, the health related

issues, the fact that with such laws etc being introduced to curb tobacco consumption were actually

affecting the respondents in some way or another.

Note: Respondents chose to give more than one reason.

Question 13: Since the last two years, have prices of cigarettes increased?

YES =46

NO =1

MAYBE =3

SINCE LAST TWO YEARS HAVE PRICES OF CIGAREETES INCREASED

YESNOMAYBE

As mentioned in the beginning of this project, increase in taxes is to be taken as an increase in prices.

After establishing that fact also by this survey that government increases the prices to reduce the sales

or affect, negatively, the tobacco consumption, we come to question 13 where the respondents were

asked whether the prices of cigarettes had increased over the past two years or not. 92% chose to

respond with a ‘Yes’. Only 2% chose ‘No’ and the remainder were unsure.

51

Other than seeing how knowledgeable the sample is and generally establishing the fact that prices

really have increased (as proven by the results); this question tests their knowledge to see whether the

questions that they will answer later would be valid or not.

Question 14: The average price of a pack of 20 Cigarettes (middle segment brand) was Rs. 55-60 two

years ago and now Rs. 70-80. Do you feel people would have switched brands because of this?

YES =18

NO =27

MAYBE =5

DOES PRICE INCREASE LEAD TO PEOPLE SWITCHING BRANDS

YESNOMAYBE

When talking about brands, smokers are usually sensitive, as seen by this research survey. When

asked whether the price increases would lead to people switching brands 27 respondents said No,

whereas 18 said yes and 5 were unsure. 36% chose to respond with a ‘Yes’, whereas 54% and 10%

responded with a ‘No’ and ‘Maybe’.

Few want to admit people would switch ‘brands’ due to an increase in price whereas question 9 shows

us that 5 respondents themselves decreased smoking due to an increase in prices in ‘cigarettes’.

Wording within the questionnaire then and the sequencing becomes extremely important, for which

reason, the remainder questions, 14 – 18, all test and recheck this relationship between an increase in

price and impact on sales/people switching.

52

It is important to mention that out of 50 respondents, 18 said that people would switch brands due to

the price increase and so they believe that this does in fact affect their perception of eventually which

brands to buy.

Note: Those who said yes skip the next question. Those chose No will answer in sequence. Those who

said maybe, it is optional to answer the next question (Question 15).

Question 15: If NO, then if the prices were increased further, would people still remain brand loyal?

YES =12

NO=10

MAYBE =6

IF PRICE INCREASED FURTHER, WOULD PEOPLE STILL REMAIN

BRAND LOYAL?

YESNOMAYBE

Out of the 27 respondents that said people would not switch brands due to the price increase of about

Rs. 10-25, when asked if there was a further increase in price, 12 (46.1%) still said that people would

remain brand loyal i.e. not switch brands. 9 (32%) changed their response to ‘No’ and said that people

would switch brands if prices would increase more, this change is enlightening and will be explained

in the paragraph below as well. And 6 were unsure now as to how it would affect the demand.

Only one who said ‘Maybe’ in the last question, chose ‘No’ this time which meant that now from

being uncertain he/she was certain that people would switch brands now.

53

This makes it a total of 28 respondents who answered this question: 27 who said ‘No’ and 1 who said

‘Maybe’ in question 14 answered this question then. It shows, according to the respondents’ results,

that now a total of 28 people would switch brands, keeping in mind the responses in question 14 (18

respondents answered they would switch brands) and question 15 (ten more said they would also after

a further increase) combined responses after the overall price increase.

This is a change of 55.6% in the respondents’ answers, the 28 respondents who previously chose no

and said people would not switch brands. It provides proof that people do eventually switch to other

brands if prices increase, thus affecting profits of companies, sales etc.

Question 16: The average price of a pack of 20 Cigarettes (middle segment brand) was Rs. 55-60 two

years ago and now Rs. 70-80. In your opinion, does this affect the sales of these tobacco companies?

(= Number of respondents)

YES =26

NO =24

MAYBE =0

DOES PRICE INCREASE AFFECT SALES OF TOBACCO COMPANIES?

YESNOMAYBE

Simply, 26 respondents said that an increase in prices would affect the sales of tobacco companies

whereas 24 respondents said that they do not. The probability of sales being affected is higher as

shown by the fact that 52% said that sales would be affected and 48% said they would not. The next

question will just show to what extent and also verify the responses in this question.

54

Note: Those who said yes skip the next question. Those who chose No as a response would follow the

sequence. Those who said maybe, it is optional to answer the next question.

Question 17: If NO, then if the prices were increased further, would sales still be unaffected?

(= Number of respondents)

YES =10

NO =10

MAYBE =4

IF PRICE INCREASED FURTHER, ARE SALES STILL UNAFFECTED?

YESNOMAYBE

For those respondents who answered the previous question with a ‘No’ i.e. that with a price increase

sales would not be affected, their response was basically being gauged here, in question 17. Out of the

24 respondents, 10 said sales would still be unaffected, 10 said with a further increase in price, sales

would be affected and 4 were uncertain now. So ‘keeping in view the previous questions responses’,

now a total or aggregate of both questions combined: 36 respondents said that sales would be affected

(72% probability), 10 only said now that sales would not be affected (20% probability) and 4 were

unsure now (8% probability)

Question 18: According to certain officials, the brand value of Gold Leaf Cigarettes and Marlboro

Cigarettes is Rs. 100, would you agree?

YES =18

55

NO =16

MAYBE =16

BRAND VALUE OF GOLD LEAF AND MARLBORO RS. 100?

YES (36%)NO (32%)MAYBE (32%)

Like all the other questions had a key variable, the word, ‘brands’ was the key variable in question 18.

The purpose was that by the end of the questionnaire, this project wanted to check whether two of the

most sought after brands: Golf Leaf and Marlboro were really that strong in the perception of the

respondents, especially after the series of questions previously asked. 18 respondents agreed that the

brand value of the two brands could be estimated at that amount.

56

Analysis of Findings:

The first question asks the respondents which company out of the three (PTC, PMI and KTC) has the

largest market share. It shows that in the view of the respondents, PTC has the larger market share.

The results stand true as the secondary data collected and analyzed shows the same results. From the

second question we can say that, 50 respondents chose 8 brands as being the most successful, out of

which four were ‘the’ more successful brands (2 of PTC: Gold Leaf and Capstan and 2 of PMI:

Morven and Marlboro). Also reflected in Question 3, brands by PTC, again in the perception of the

respondents are the most successful. 4 brands are by PTC, 2 by PMI and 2 by other companies, this

again shows that the number of brands selected were exactly double than those of PMI – reinforcing

the results of question 1 (bringing in an element of reliability).

From question 3, it is noteworthy to mention that out of the respondents, 5 were big retailers/shops

that were also interviewed and these questionnaires were asked from them as well. In their opinion as

well, the aforementioned brands were the ones that were widely sold and consequently smoked by the

respondents. Out of the ten brands named by all the respondents, 6 are products by PTC/BAT and 2

are of PMI, once again showing that the results Questions 1 and 2 are consistent with each other and

are indicative to the positive result findings of the research. Question 4 simply gauges how many

cigarettes the respondents smoke in day, each bar is indicative of the frequency and on the right in the

chart above; there are the number of respondents who opted for the corresponding colour frequency. It

helps in establishing a baseline as to whether the frequency has increased or decreased over a period

of time.

Question 5 asks the respondents whether they have always smoked the same brand, correlating the

frequency and brands switched or not over time. It also sets a benchmark for questions 6 and 7, those

respondents who said ‘No’, will answer in sequence and those who chose ‘Yes’ will skip the next two

questions. Almost double the amount chose the ‘No’ option (64%) and so it allows the research to

delve deeper not only to get into a qualitative perspective but also a quantitative one. Question 6 and 7

will establish a relation for those who said that they had smoked previous brands before and the

questions that follow will delve into the reasons as to why these changes occur i.e. what this research

will prove.

57

Question 6 is again a conditional question i.e. if previous question answered ‘No’ then answer

question 6, which is basically asking the respondents the names of the previous brands smoked. From

this question it is also important to mention here that only one respondent shifted from smoking a

‘lights’ brand, that to from Gold Leaf Lights to Marlboro Lights (as shown in question 3 in excel

sheet in annexure). The rest of the respondents (31), who had answered in question 4 that they had

smoked other brands before: all smoked ‘hard’ brands and shifted to other brands hard/lights. This

question could have been misleading showing that most people switched PTC brands, however the

previous questions show that still the most smoked brands are of PTC.

From Question 7 onwards the real juice of the analysis begins. It shows the reasoning of why the

respondents switched brands. The results show that most respondents switched brands due an increase

in price or price comparativeness or that the cigarettes had become too expensive (31.7% of the

sample). This is interesting as this is exactly what this research project is trying to prove and show

how such problems can be tackled. People might have switched brands but ultimately have they

increased or decreased or are have they remained the same (neutral) over the years is what will lead us

to question further and find out the reasons why (Question 9 and onwards): Question 8 aims to find

out just that, and the results show that more than double have increased (60%) smoking over the

years, reflecting an increasing smoking incidence over the years. When asked the respondents as to

why this smoking had increased/decreased (Question 9), most responded due to habit (17

respondents). The questions that will follow will show more reasoning for this particular question.

Though its importance here too is clear, it indirectly tests the maturity of the sample, how valid their

responses would be and how reliable the results would be also.

The questionnaire also shows that 54% of the respondents believed that the government does regulate

tobacco manufacture, distribution and sale etc. 20% said it does not, whereas, 26% were unsure or

maybe believed that it did regulate but did not know how. For those who answered yes/maybe the

government does regulate then went on to answer the corresponding Question 11, as to how the

government regulates in order of being most impactful to least impactful. Most chose that it regulates

via the Graphical Health Warning and then chose increase in taxes/prices of the products. Again

showing correlation to the fact that increasing prices have and affect on the consumers mindset and

perceptions. It not only shows that the sample is well aware, but also shows the level of involvement

of government regulation is so many ways and more so via increase in prices or taxes, second most

chosen response by the respondents.

58

Questions 13 – 18 are all linked in an intertwined way, they test the reliability of the answers of the

respondents as they answer the questions and also the content validity of the overall questionnaire.

Simply put, most of the respondents believed that the prices of cigarettes have increased over the

years and that ‘ultimately increases in prices’ will affect, making them switch brands and also that

these increases affect the sales of tobacco companies.

Question 18 asked the respondents whether they believed that the brand value of Gold Leaf Cigarettes

and Marlboro Cigarettes is Rs. 100. Interestingly 36% answered yes and 32% answered no and 32%

answered maybe. In this case, the option, No does not mean that the brand value is lesser; it could

mean that the respondents feel that the brand value is more. However, in most of the cases they felt it

should be lesser. Maybe is the key option that should be observed here, the uncertainty in the

respondents, after being certain in most cases. When put a number, Rs. 100, they are unsure whether

the price/brand value could be that much, considering the fact that they believe (can be generalized

now) that if prices increased people would switch brands.

Finally, the questionnaire, consisting of 18 questions is consistent with what the literature tells us,

which is that price increases will affect their behaviour and in retrospect the sales of tobacco

companies. It allows us to really comprehend the reasoning and logic of why consumers behave the

way they do and at the same time giving us quantitative data as well to gain a better understanding of

the recent trend within the tobacco industry and market as a whole.

59

Overall Analysis

This section is an analysis of the previous analyses done on the interview and questionnaire relating it

to the literature review and competitor analysis. Out rightly, we can state that the research question of

this project has been answered by stating that yes tax increases or price increases do affect the sales of

the key players within the tobacco industry, or any industry as a matter of fact as well, though that

would be making a way too holistic argument.

After careful analysis it can be seen that both primary and secondary data reveal that prices have a

pivotal role in determining consumer behaviour. This has not only been accepted by tobacco

companies, as stated in the literature review, but also by consumers when the surveys were carried

out: interview and questionnaire.

The analyses of the secondary data and primary data show many interesting facets that are involved

within the tobacco industry, not just in Pakistan but on a global scale as well. These mandatory tax

increases or changing regulations are part of a wider agenda as directed by the World Health

Organization (WHO) and the treaty signed by Pakistan, among 100 plus more countries, known as the

Framework Convention on Tobacco Control (FCTC).

Interestingly, data gathered from the primary sources, more so the questionnaire, shows that the

general public or more specifically the chosen sample, representing the general public smoked for

many years and belonged to different ages, genders and educational backgrounds, yet, were unaware

of the role of the Government of Pakistan (GOP) for tobacco regulation or what the various bodies

were that are in place for keeping a track or check on tobacco manufacture, distribution and

consumption within the country.

FCTC and WHO suffice to say were things that people were completely unaware of. This project

should also serve as a basis for readers who want to know more with regards to these factors and that

the GOP makes concerted efforts within this regards, not just the GOP, but also the compliant,

legitimate tobacco companies as well.

60

The treaty requires the countries that are a part of it to go according to certain guidelines in order to

control and regulate tobacco usage, both within and among countries. The project furthermore found

out that the increase in taxes i.e. prices of tobacco products i.e. cigarettes, coupled with the fact that

these tobacco companies can neither advertise nor promote their products, in fact have negative

advertisements i.e. health warnings on their products, all the more affect how they operate within such

hostile environments.

It is important to mention that a research project would be biased if it were only one sided. The data

gathered both primary and secondary, presents’ arguments that are two sided, not just taking the view

that increases in prices affect sales negatively but also that they do not affect the sales at all. It

discusses at length within the overall text that price increases might not affect the sales of tobacco

companies because consumers might switch to lower segment brands i.e. cheaper brands of the same

company ultimately not affecting their sales; profits is another discussion altogether, however the

articles and discussions also highlight how profits have been affected for some i.e. PMI and at other

instances, despite the rising prices and costs, PTC continues to make profits.

At certain instances, it has also been mentioned that price increases do not affect the smoking

incidence at all or simply put, these increases do not affect consumer’s buying behaviour. At other

instances these price increases do not affect the smoking incidence because people switch to cheaper

illicit brands and so demand of tobacco remains the same.

We can then assume that the wider agenda adopted by Government is not being fulfilled, that tobacco

usage has not been monitored and regulated or reduced in a manner of speaking. This then leaves

room for more research to be carried out, that why are not increasing prices deterring consumers from

smoking? Whether this is the right tool, or should there be a set of tools to regulate? The facts that

have been analysed in this research open up other avenues in which research can be carried out.

This project, as mentioned before focuses on one particular research area that is “Finance”. Other

areas or departments such as supply chain, marketing, production, sales, legal all have pivotal roles to

play but in the end it all boils down to money i.e. whether the company is sustaining and growing its

profits.

61

Marketing within the company is not as aggressive within the industry as a whole that tobacco comes

in – Fast Moving Consumer Goods Industry (FMCG). Other FMCG’s like UniLever, Procter and

Gamble, Coca Cola, Pepsi etc are promoting their products much more aggressively, have larger

marketing budgets naturally then and can promote their products freely, this is not the case with

Tobacco FMCG’s, these companies are not allowed by law to advertise, promote etc and are

monitored closely by the government, not the case with other companies.

Also within this research, there are examples of not just other companies or government bodies, but

also of other countries and what the trends are there. This has been done to give the research some

more validity, to enhance its parameters, though only to the context the examples have been used in.

Pakistan can understand what the trends are globally and can use these government tools or company

strategies and can benefit from them, not just the public but the private sector as well.

In conclusion, stating the obvious the analyses of all the sources not only help us to better understand

the tobacco industry and how firms operate within, but also equip us to understand the propose

various recommendations to the tobacco companies which they can adopt and modify and use to their

own advantages. This aspect will be discussed in the chapter below. The project explains the research

area of finance and subsequently sales also at great length, from the very beginning to the end,

especially with in the competitive analysis, although it discusses in ways that the readers can easily

comprehend what exactly is happening and can get a better grip and understanding over the research

area as well.

62

Recommendations

Making recommendations with regards to the research objectives and subsequent results that have

been analyzed is not a simple task. However, they allow companies that should find this project useful

to further delve into the various complexities that are involved in running their operations or the

modus operands’ and how to deal with a diverse set of both macro and micro economic factors.118

There are a set of four recommendations that have been made bearing in mind the increasing taxes

and prices of tobacco products and the negative impact they have on the sales of these companies.

From the data gathered and analyzed above, it is clear that Pakistan Tobacco Company is the

Company that this project focuses on as it is the key player within the industry. Given the fact that

PTC has the most muscle as a tobacco company in Pakistan, the recommendations or suggestions that

follow will then be most applicable to this Company, however in some ways they are generic as well

and can followed by the other 49 registered companies also.

1. Increase volumes to tackle the reducing profit margins due to increasing cost. The law of

economies of scale is simple, mass production and sales allows for costs to reduce relative to

the profits achieved.119

2. The retail price for a cigarette pack for example for Dunhill Switch Pakistan is Rs. 128.

Retailers, however, sell it for Rs. 130, keeping a profit of Rs. 2 per pack. Various deals can be

made with the retailers or large distributors to share that profit margin with the companies and

in turn the retailers can get maybe concessions on large orders or other monetary benefits.

This allows the companies to increase their profits regardless of tax increases. Tax increases

will keep pushing prices for cigarette packs up, however, the margin that the retailer keeps for

himself has more or less remained the same (of course investment has increased). For

example if even .50 paisas is given to the company per pack, then if approximately 10 Million

packs are sold, an added Rs. 5 Million is achieved by the company.

63

3. Monitor, review and proactively approach various law making and implementing agencies

and work with them collaboratively in order to anticipate major changes vis-à-vis the

regulations that will or might come into effect.120

4. Do more consistent research to evaluate and analyze the changing perceptions of the masses

so as to gauge what more the company can do to increase their market share and in turn their

sales and profits. This is a factor that is constantly done by many companies, multi nationals

within the country and as globally as well. As the world flattens121, it is becoming even more

accessible to all the nation states; this makes research all the more valuable and seen as a

necessity by companies worldwide.

5. It is inevitable that the laws and regulations that exist will keep changing, becoming harsher

and more stringent for companies, but their enforcement in Pakistan is not as strong. This

gives companies some wriggle room, though it is not advised by this project research to

exploit that factor.

It is however, recommended that the companies proactively adopt and implement the laws to

their utmost capability so that the affects of them can be seen and in turn harsher laws and

regulations don't crop up every year or within a year and the Government waits to effectively

enforce one law at a time, giving some temporary relief to companies or spreading out the

negative consequences over a period of time.Removing or reducing illicit trade would also

allow companies to increase prices as people would not switch to cheaper brands thereby

increasing both companies revenues as well as the revenues for the Government in form of

taxes paid by the legitimate sector.

64

Conclusion

This project has made a strong basis for further research to be carried out in many areas but more

specifically with regards to the affects of increasing prices and sales of tobacco companies, consumer

behaviour and demand. It has opened perhaps other areas that were previously untouched to be

researched upon as well.

The results have shown that these increases in prices do actually affect sales of tobacco companies

negatively and by definition, demand is not inelastic. Furthermore the results also reflect that not just

increases in price, but changing and harsher regulations that are imposed on the tobacco industries

globally have a great affect on how tobacco companies operate. The findings reflect how little people

know, what and how governments regulate tobacco consumption within countries and cross borders

as well.

Many interesting facts came to light after carrying out this research, like how these companies were

affected when the pack of 10 cigarettes were stopped, how their costs would have naturally increased,

what the consumers perception was, how illicit trade is rampant with in the country and the companies

that are involved in it are making huge profits and are a threat to major legitimate companies namely

Pakistan Tobacco and Philip Morris, that have already been affected by this illicit sector and will

continue to be affected negatively as time passes by.

The findings are also indicative of the fact that despite people are becoming more aware of the health

risks associated with smoking, the smoking prevalence has remained the same in Pakistan, more or

less, and in some cases they have increased smoking after having switched many brands over the

years. Most of the respondents within the sample increased smoking due to stress, depression, tension

and some simply liked smoking.

Agreed, there is a lot of literature available on the tobacco industry, even with in Pakistan, but very

limited to what the consumers’ perceptions and buying patterns are within it. This is most crucial for

any company, not just tobacco companies, to know what their customers want, to know what they are

thinking and more importantly, why they think or perceive things that way.

65

Since these companies cannot openly market or promote their products like other Fast Moving

Consumer Goods’ (FMCG’s) companies, research will allow them to know what the customers really

want and whether these companies should adopt different approaches of marketing techniques (what

little they have) or strategies on how to deal with the media portraying negative images of tobacco or

engagement with Government officials and to keep tabs on various global initiatives that are being

incorporated within Pakistan as well.

The methodologies adopted for this research, suffice to say have been employed so as to get an

increased degree of both, reliability and validity. Furthermore, both approaches allow questions such

as what, where, how and when to be answered as well as the question - why. The project allows the

readers not only to understand the overall trends or complexities involved but also the reasoning as to

why these trends are taking place and how they can be tackled by these companies.

The analyses, as mentioned before, have been done within the text of each chapter and at the end of

each chapter as well, and ultimately just before the recommendations an overall analysis was done of

all the previous analyses. It increases the content validity of the research being carried out and that

which has been previously done as well i.e. secondary data, ultimately increasing the reliability as

well of the findings and analyses done of the data. Analysis is both qualitative based and quantitative

based, the aim was to make the readers understand the facts and trends and not just know them.

Considering the age old philosophy that nothing is permanent except change, not just this research

gives merit but also that one absolute of change being inevitable, which makes further research into

the tobacco industry, or mentioned research problem all the more viable, significant and necessary.

Laws and regulations at a global level keep changing and Pakistan, being a signatory to some of these

regulatory bodies needs to subsequently amend its stance as well. Not just at a global level, but within

the country as well laws are changed or added and so research into this industry, like this one, will

always add value.

66

The recommendations aim to tackle these harsh changes and given the data collected and analyzed,

recommend to the companies that further research should be done as a principle. The project proposes

solutions, briefly, for the companies to employ and incorporate within their strategies in order to

sustain and maybe increase their profits and sales. These may be as simple as engagement with

retailers or Government Agencies but they have a significant impact on their businesses and

operations.

Finally, it has been a true journey, an illuminating experience carrying out this research in one of the

largest industries in the country and major contributors towards Government revenues. As a student of

Finance I can only hope that this knowledge is passed on and is useful to other students, companies

and the general public as well. More importantly the aim of this research was also to make it an

interesting read so that the readers may enjoy and consequently learn from it as well.

67

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56. Ibid.

57. Ibid, November 3, 2008

58. Ibid, November 4, 2008

59. Ibid, October 24, 2008

60. www.tobaccofreekids.org

61. Ibid.

62. Ibid.

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64. Ibid.

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68. Ibid.

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71. Ibid, End Notes, p. 11.

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77. Ibid, Chairman’s Message, p. 25.

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80. Ibid.

81. Ibid.

82. Ibid.

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84. Pakistan Tobacco Company. 2011. Director’s Review. Annual Report Pakistan Tobacco

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85. Deputy Managing Director/Director Finance of Pakistan Tobacco Company Raza M. 2012.

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87. Ibid.

88. Philip Morris Pakistan (limited). April 12, 2012. Copyright Business Recorder.

89. Ibid.

90. Ibid.

91. Pakistan Tobacco Industry, Overview and Economic Contribution. 2010. Manufacturing

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92. Copyright Business Recorder. April 12, 2012. Philip Morris Pakistan (limited).

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93. Ibid.

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95. Pakistan Tobacco Company. 2011. Director’s Review. Annual Report Pakistan Tobacco

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96. Copyright Business Recorder. April, 26 2012. Pakistan Tobacco Company Highlights,

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97. Ibid.

98. Ibid.

99. Ibid.

100. Ibid.

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102. Ibid.

103. Ibid.

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