The Forces of Competition in Zambia’s Tobacco Industry
British American Tobacco, Strategy

When the announcements came from Roland Imperial Tobacco (RIT) and British America Tobacco (BAT) of their USD80 million and USD15 million (respectively) investments in setting up their local cigarette manufacturing plants in Lusaka South Multi-Facility Zone, we could not help but wonder about some of the competitive forces in Zambia’s tobacco industry.

Recap. In 2016 and 2017, BATs annual reports specified illicit cigarettes as the main threat to earnings. In addition, the excess excise duty continued to reduce turnover which led the company to consider opening a local manufacturing plant to avoid the discriminative tax. Both annual reports however, never mentioned the threat of incumbent player Roland Imperial Tobacco. We wondered why?

Conversations with the distribution team at RIT indicated that known extant players did not want to acknowledge the prowess of the local outfit. Established in 2001 by civil engineer Dr. Ephraim Mwenda, RIT has actually been producing the “light sticks” locally. According to Africa Outlook magazine, RIT was the first to industry to establish an USD8 million manufacturing plant in 2013 whilst BAT depended on already packaged sticks from Kenya and South Africa.

Earlier in the year, Aliport Ngoma, RIT’s General Manager, indicated to the Daily Mail that the industry was losing approximately 15% of market share to illicit sticks. Furthermore, he identified discriminative practices from retailers who refused to take up locally produced sticks. It will be ironic though when BAT also starts to roll out locally produced sticks as the buyer power will be diminished.

With 85% of the legitimate cigarette market at stake, it is clear that the two extant players BAT and RIT will be fighting for equilibrium. The battle will be won through distribution challenges and brand identity. BAT possesses a stronger brand and a plethora of cigarette options. RIT has first mover advantage in the manufacturing segment of the value chain. With a ratio of 8 to 1.5 in terms of investment capital, RIT has the upper hand in terms of investment into resources and capabilities. They may be looking at improving quality of their offering or increasing the scope of offerings from the current two: LIFE Full Flavor and Life Menthol.

Whatever efforts that will be made, consumers who know that switching costs are very low, will have to be convinced and this battle of the souls of smokers will be won through brand appeal and product visibility. When switching costs are low, product ubiquity plays a key role in the success of increase revenues.

As for the external force of the environment, ZRA’s continued efforts of curbing illicit trade will be factor in reducing the 15% strangle hold that ‘illicits’ have on this volume based market. However, we believe that once the two new higher capacity factories start producing, it’s only a matter of time before a new equilibrium is reached.

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