Philip Morris restores its share in Ukrainian cigarette market to 24%
The tobacco concern Philip Morris International (PMI), whose share of the Ukrainian market fell by half from 28.5% due to the full-scale invasion of Russia, has now been able to restore it to 24%, the Managing Director of Philip Morris in Ukraine Maksym Barabash said in an interview with Interfax-Ukraine.
"After the outbreak of the war, we sold off the remainder and could no longer produce products in Kharkiv. For about two months we were almost absent from the market while we set up imports. During this period, according to our calculations, our share dropped to almost 14%," he said, explaining the reasons for the fall in the share last year.
According to him, the situation changed after established imports from PMI factories abroad, and then the start of cooperation with an international company in Kyiv that produces products under PMI brands. This made it possible to return the most important positions in the portfolio by the end of the year, so the company's market share began to grow, but still remained much less than it was before the war, the managing director said.
"Now, we are trying to return what we had before the war. The last two months, according to our calculations, have shown an increase of approximately 24%. We still have work to do, but the dynamics are upward – and this is the most important thing," Barabash said.
He said that the company's current priority is to launch commercial production of a new factory near Lviv, planned for the end of March-beginning of April next year, and bring it to full capacity to cover 80-90% of the company's supplies to the domestic market of cigarettes by format, assortment and turnover.
The managing director said that in the industry it is very important to have control over the product, its quality, production speed, and supply chains, so local production has certain advantages over imports, including financial ones. In particular, as Barabash explained, in the case of imports, the chain is longer than the local one, by about a month, which means an additional month of frozen funds in excise stamps.
"In war conditions, it is critically important to retain the consumer: if there is a consumer who remains with the brand, then by providing his needs, you can earn money and talk about profitability and income. But if you lose a consumer, then it will be much harder to return him in a few years," he said, outlining main goals in the market.
He added that if we talk about the category of tobacco products for electric heating, this product has always been imported, so when the full-scale invasion of the Russian Federation began, PMI did not lose anything on the Ukrainian market, moving the products away from active combat zones.
In general, characterizing the dynamics of the market, Barabash recalled that the legal market before the war fell by 10-12% every year: due to the growth of illegal products, the rapid increase in excise rates, which significantly exceeded the inflation rate.
"In 2023, the legal market continues to decline, but at a significantly lower rate than in the past, due to the partial return of migrants from abroad; and, the fight against illegal trade has a small positive effect - at least, the volume of illegal products has stopped growing," the managing director of Philip Morris Ukraine said.
He also said that if we analyze price segments, the dynamics are stable, and the expected possible increase in cheaper segments due to the difficult economic situation did not happen.
"Significant changes may occur from July next year, when it will no longer be possible to sell cigarettes with capsules with flavors. We estimate that the share of these products is 10-15%, that is, after the sale of such cigarettes ceases, the consumer will begin to look for alternative products. Also this ban can increase the share of the illegal market, which attracts people not only with low prices, but also with flavors prohibited in legal products," Barabash said.
As reported in the quarterly PMI report, in the second quarter of 2023, the concern increased shipments of cigarettes and tobacco sticks to the Ukrainian market compared to the same period last year by 50.3%, with an average market growth of 13.4%, while in the first quarter it was a drop of 26.7% was recorded.
PMI in July began preparatory work on a new facility in Lviv region in western Ukraine, which will invest $30 million and is scheduled to start production in the first quarter of 2024. The plant near Kharkiv, which was shut down at the end of February 2022, remains in the same state due to existing threats, while products are supplied to the Ukrainian market from production centers outside Ukraine, and through contract manufacturing.
In 2022, PMI reduced shipments to the Ukrainian market by 30.1%, to 11.07 billion cigarettes and tobacco sticks. In particular, sales of cigarettes decreased by 38.1%, to 6.6 billion, tobacco sticks for tobacco heating systems – by 13.5%, to 4.47 billion.