British American Tobacco increases its market share in Indonesia

The second largest cigarette producer in the world, British American Tobacco (BAT), has purchased controlling interest of Bentoel International Investama, the fourth-largest cigarette company in Indonesia for £302 million ($494 million). After the purchase of the majority of shares, BAT spokesman declared they want to obtain complete stock of shares of the Indonesian company.

British American Tobacco logo

The acquisition handles BAT the access to kretek market, a special type of cigarettes produced from tobacco and cloves. In Indonesia, kretek cigarettes account for 90 percent of the whole volume of cigarette sales, since they are taxed less in comparison with traditional cigarettes.

Indonesia cigarette market is considered as the world’s fastest developing market, with 30 percent of 248 million adult population smokes, what makes Indonesia the fifth-largest cigarette market in the world.

Another reason for BAT’s hasty and expensive purchase is the constant growth of Indonesian tobacco market, as it has added 13 percent in sales volumes within the last two fiscal years, and, at the same time, lacks strict tobacco policies in comparison to neighboring countries of ASEAN region.

BAT, world-famous for such brands like Lucky Strike, Pall Mall and Dunhill, considers obtaining full control of Bentoel within two months for an aggregate of around £356 million. At the same time BAT becomes liable for Bentoel’s debts of more than £100 million.

July Nguen, the spokesperson for the head of BAT Asia-Pacific branch stated that they considered the deal as a magnificent occasion to gain access to the enormously large and constantly growing Indonesian market of kretek cigarette and as well, would be a base for future development.

Bentoel is the owner of the Star Mild brand, popular kretek cigarettes and accounts for a 8 percent share of the Indonesian tobacco market. BAT’s Indonesian branch has a 3 percent market shares, and is the sales leader in traditional cigarette class, which are however, much more expensive and considered an upscale market segment.

BAT’s major rival in Indonesian market is Philip Morris International, the leading tobacco company in the country with a market share of almost 30 percent. Last year, Philip Morris’s Indonesian unit Sampoerna sold approximately 230 billion of kretek cigarettes. Sampoerna is followed by two local tobacco manufacturers Gudang Garam and Djarum, with 21.1 and 19.4 percent market share respectively.

The clove cigarettes or Kretek got this name from a genuine sound produced by cloves while burning. According to scientists such cigarettes contain twice as more nicotine and tar as in the traditional cigarettes. The clove cigarettes even were prohibited in several countries including Denmark, Sweden and partially United States.

The cigarette industry has faced dropping revenues in many counties due to numerous strict anti-smoking policies, constantly growing prices and public health concerns. As well as it principal rivals BAT turned their heads to promising and constantly growing Asian markets since the sales in European countries keep dropping.

Indonesia is a recognized tobacco-friendly market as there are no smoking bans and other restrictions and regulations in contrast to neighbor ASEAN countries; moreover it has not signed the WHO Convention on Tobacco Control.

Indonesian authorities admit that health care costs are likely to be greater than tobacco tax revenues, but are concerned with the fact that toughening the anti-smoking laws would inevitably hurt millions of Indonesians hired by tobacco companies, what could undermine their status.

BAT, experienced £3.1 billion in before-tax profits last fiscal year, from which £924 million were collected in Asia. During the previous years, BAT had switched its interests to emerging market of developing countries like Turkey, Indonesia, Russia, Egypt, Vietnam and Nigeria.

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