The Tobacco value chain in Zambia is in peril. Last week, the CEO of BAT Zambia Godfrey Machanzi stated that the company had recorded a K100m loss in what has now becoming a downward trend in their performance. He indicates that the continued existence of the competitive force of illicit cigarettes has continuously and consistently stolen market share. Furthermore, the tax imposed on the imported finished brands has also contributed to the continued outlay of value.
However, both ends of the tobacco value chain appear to be in peril. In June this year, Minister of Agriculture Dora Siliya indicated that the country would lose over $100 million in export earnings from tobacco experts that had fallen sharply by slightly over 50% from 2013 to 2017.
Conspiracy theorists believe there have been games being played by various players in the market. On the one hand, there is a player that has shown signals that I can match BAT’s supply chain. We see this through their non-public marketing budget that shows its prowess through the high visibility of its commercial presence (adverts: billboards and events). On the other hand, there is the argument of product visibility in outlets. Theorist’s arguments are that the visibility of the tobacco product highly influences consumer preference. For example, if a player in the game wanted to influence smokers towards a particular brand (call it brand B), they would starve the market of the incumbent brand A which would lead to an uncomfortable drought that would push consumers to brand B. When Brand A comes back onto the market, it would have a much more difficult task of ousting the new king in town brand B.
BAT Zambia’s half year results for 2017 showed a 25.6% reduction in revenue and operating profit that went further south by 102.1% from the previous period. Profit fell by 101.1% making it a cold winter for the tobacco company. The downward slump in revenue indicates that there are strong competitive forces that BAT has failed to beat. Over time, there will be new equilibrium that will indicate what percentage of the market that BAT will be able to hold on to if this continues. Currently, the market share that illicit products holds is at 30% which is huge for an industry that depends on economies of scale (making money one pack at a time).
BATs Godfrey insists that government should do more to bring about legislation that can protect the industry. However, we had earlier reported that government would be considering a sin tax for all things detrimental to public health. If cigarettes make it to that list (Minister Mutati announces the 2018 budget on 29 Sep 2017), there may be conflict imposing legislation hence the best will be to continue to lobbying their key stakeholder Zambia Revenue Authority to continuously improve measures that will restrict the inflow of ‘illicits’ into the country. It is in ZRA’s interests to purse this if they intend to seal the hole that is being created.
Investors in BAT Zambia shares will have to keep a close eye on the statements coming out of the company. Also, they will need to keep close watch of the company’s project in the Lusaka South Multi Economic Zone. The Company is currently constructing a local manufacturing plant which they believe will bring a fundamental change in the long term financial position of the company. Locally produced products attract less excise tax which will mean a reduction in cost of sales for the company.