Photographer: Romeo Gacad/AFP via Getty Images

Cheap Cigarettes Are Winning in World's Second-Biggest Market

  • Gudang Garam shares rise; premium brand Sampoerna’s fall
  • Taxes have pushed up prices, prompting smokers to trade down

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In Indonesia, the world’s second-largest cigarette market, higher sin taxes have prompted cost-conscious smokers to move from premium brands to cheaper ones. That’s hurting Philip Morris International Inc.’s unit there more than rivals who offer a wider range of lower-priced products, analysts say.

The country’s top two cigarette manufacturers -- PT Hanjaya Mandala Sampoerna, the Philip Morris unit, and PT Gudang Garam -- are both seeing their market shares decline. But the stock performance of both companies -- among the world’s ten largest manufacturers by volume -- has diverged.

Market leader Sampoerna, which posted a 1.6-percent fall in first-half net income on Thursday, has seen its stock decline 4 percent this year while Gudang Garam has risen 22 percent.

Both companies sell standard white cigarettes, as well as a local clove variety known as "kretek", but Sampoerna’s products are positioned as more premium.

According to data from Kresna Securities, a packet of Gudang Garam cigarettes costs 15,800 rupiah ($1.19) on average while a Sampoerna-branded one averages 17,000 rupiah.

"People still prefer the lower-end products because prices keep increasing," said Wilbert, a Jakarta-based analyst at PT Sinarmas Sekuritas. "We see that prices of cigarettes are always going up. The cigarette prices in Indonesia can go up at least 7-8 percent per year, more than inflation."

Sampoerna and Gudang Garam did not immediately respond to requests for comment about their declining market share and relative performance.

Here are four charts that show what’s happening in the Indonesian cigarette market.

Though still dominant, Sampoerna’s share of Indonesian retail cigarette volumes has fallen four straight years from 36 percent in 2012 to 34 percent last year, according to Euromonitor International. Gudang Garam’s dipped to 23 percent in 2016 from 24 percent two years earlier, after rising for a number of years before that.

Revenue from cigarette sales in Indonesia, behind only China in terms of volume consumed, grew in 2016 and Euromonitor expects it to rise again in 2017, driven by double-digit cigarette excise tax increases imposed by the government this year and last. 

This year’s anticipated revenue gain comes even with cigarette sales volume forecast to fall for a second consecutive year to 311 billion sticks, Euromonitor says.

Indonesia’s excise tax increases have hurt Sampoerna more than rival Gudang Garam as the latter has a wider portfolio of cheaper tobacco products, analysts say.

Revenue growth at Gudang Garam, controlled by Indonesia’s third-richest person Tan Siok Tjien, has outstripped that of Sampoerna’s in five of the last seven quarters.

Shares of Gudang Garam have kept pace with those of global peers, amid the 22-percent surge in the Bloomberg Intelligence Global Tobacco Competitive Peers index this year.

Sampoerna’s revenue for the first half of 2017 fell 1.6 percent from a year earlier to 46.6 trillion rupiah. Gudang Garam is due to release second-quarter earnings in the coming days that analysts forecast will similarly reflect seasonally weak sales due to the Muslim fasting month of Ramadan in June.

Indonesia is the world’s fourth-most populous country, and has the biggest number of Muslims.

— With assistance by Yudith Ho

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