Cigarettes are sold less frequently – tobacco manufacturers remain highly profitable

Dusseldorf Although fewer cigarettes are sold in Germany, the tobacco industry is still highly profitable. Cigarette sales fell by 8.3 percent in 2022, more significantly than in previous years: 65.8 billion cigarettes were taxed in Germany, according to tobacco statistics published on Wednesday.

Compared to the 1990s, sales have fallen by more than half. At that time, 130 to 140 billion cigarettes per year were taxed. This did not harm the business: sales values ​​rose by almost 40 percent to 21.9 billion euros in the same period.

Increasing sales with falling sales can be explained by tobacco tax and price increases. The tax on cigarettes has been increased 17 times since 1989, most recently at the beginning of the year and before that at the beginning of 2022 by ten cents per pack.

Despite the crises, the industry is doing much better than many others. “The cigarette industry is a money printing machine. Only financial market speculation is likely to be even more lucrative,” says Marcel Mansouri, an expert on the cigarette industry at the Food, Enjoyment and Restaurants Union (NGG). In fact, the big tobacco manufacturers achieve margins of 40 to 45 percent.

“The profitability still comes very strongly from the sale of classic cigarettes,” says Rolf Pensky, consumer goods and tobacco expert at the strategy consultancy EY-Parthenon. “But the pressure is increasing on companies to transform their business.”

The industry is undergoing the greatest transformation in its history because it has to reckon with the fact that classic fags will disappear in the long run due to regulations. New Zealand recently passed a law banning anyone born after 2008 from buying cigarettes.

Iqos, Glo, Pulze: Cigarette alternatives are booming

The great hope of the industry are ten centimeter small devices called Iqos, Glo or Pulze. The tobacco heaters heat interchangeable sticks to create a tobacco flavor.

The alternatives are booming: In the first nine months of 2022, for example, Iqos manufacturer Philip Morris sold a little more than a quarter more tobacco heaters in Germany, while sales of cigarettes from its Marlboro and L&M brands fell by five percent. Competitor British American Tobacco made almost three percent less sales in Europe with its cigarettes such as Lucky Strike or Pall Mall in the first half of 2022, while new categories grew by more than 46 percent. Both companies will present new figures on Thursday.

The extent to which tobacco heaters have increased in Germany was not recorded due to a methodological adjustment by the Federal Statistical Office. In 2021, sales of pipe tobacco, which at that time still included tobacco heaters, grew by over 70 percent, mainly driven by the heaters.

The rapid growth is also due to the fact that more Germans are smoking again – despite all the warnings about the health consequences. 34.5 percent do this regularly. That’s a quarter more than before the pandemic, the long-term study Debra shows. The smoking rate among 14 to 17 year olds has almost doubled within a year, although this age group is not allowed to buy tobacco. Experts say that younger smokers in particular are no longer turning to cigarettes, but to alternatives.

Business with tobacco heaters is still a subsidy business

Cigarette alternatives have so far only had a market share of three percent in this country. Philip Morris generates 30 percent of its sales with it, British American Tobacco only ten percent. With the alternatives, he made losses of the equivalent of 222 million euros in the first half of 2022, but was able to reduce them by 50 percent. The company plans to be profitable in this area by 2025. By then, Philip Morris wants to make more sales with alternatives than with cigarettes.

“The business with cigarette alternatives is slowly starting to become lucrative,” says EY consultant Pensky. With the high-margin sale of cigarettes, corporations can finance their multi-billion dollar investments in alternatives. In the long run, these are considered to have similar high margins.

iqos

The Philip Morris tobacco heater is selling better and better.

(Photo: Reuters)

Philip Morris drove the trend towards tobacco heaters. The group launched the Iqos in 2014. British American Tobacco followed up with Glo in 2016. The Imperial Brands company has recently started selling the Pulze product, which is not yet available in Germany.

The British group initially relied on Blu e-cigarettes. Such devices contain liquid nicotine that is vaporized and inhaled. Many manufacturers offer both alternatives. According to experts, however, the tobacco heaters should prevail in the long term.

Germany: Important market, but fewer and fewer employees

In Germany, three companies dominate 80 percent of the tobacco market: The industry leader with a market share of over 35 percent is Philip Morris. Imperial Brands and brands such as Gauloises or West account for a good quarter. British American Tobacco accounts for a fifth of sales. Japan Tobacco International (Winston, Camel) follows at a distance.

Germany is one of the most important sales regions for industry. There are many consumers who don’t shy away from package prices of now almost eight euros, the business is less strictly regulated by bans than elsewhere and the black market is comparatively small. “Germany is an A market for tobacco manufacturers,” says consultant Pensky.

Cigarette

The demand for classic cigarettes is declining in this country.

However, Germany as a location is the big loser. While 12,000 people were still employed in the tobacco industry at the turn of the millennium, there are now only half as many – mainly in sales and marketing. “Companies are controlled from the headquarters with an ever-increasing focus on profit,” says NGG tobacco expert Mansouri.

Philip Morris and British American Tobacco have shifted their production to low-wage countries in Eastern Europe. According to industry experts, it is only a matter of time before the remaining factory buildings will be closed. Only the family company Reemtsma, which operates on behalf of the British parent company Imperial Brands, and Japan Tobacco International still maintain noteworthy factories in this country.

Taxes on tobacco continue to rise, and the state benefits

The fact that the industry needs fewer employees is also due to the fact that consumers are buying fewer cigarettes. The statisticians also explain the recent decline with the increase in tobacco tax at the beginning of 2022 – the first in seven years.

number of the day

14

billion euro

was collected by the federal government in 2022 through the tobacco tax.

Despite the price increases, sales have remained comparatively stable over the past decade, which is also thanks to the lobby. They were able to ensure that the tax was not suddenly increased as it used to be, but only increased by cent amounts year after year. There will be further increases of 15 cents per pack by 2026.

The industry also uses these rounds to push through its own price increases. Because of the gentle increase, many customers hardly notice it. Tobacco tax has also been due for heaters for the first time since July. It is now 1.60 euros and is to be gradually increased to 3.20 euros per pack by 2026.

The state earns a lot from this: last year it took in more than 14 billion euros from the tobacco tax. After the mineral oil tax, it is the second most important consumer tax for the federal government. The addiction business is lucrative for many.

More: Away from cigarettes: Philip Morris buys Swedish Match for 16 billion dollars

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