Cigarettes in the GCC

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Features

By James George, Senior Research Analyst, Euromonitor International

The Cooperation Council for the Arab States of the Gulf, also known as the Gulf Cooperation Council (GCC), is an economic and political union of the Arab states in the Persian Gulf except for Iraq. Its members include Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and United Arab Emirates. GCC recently ratified and implemented a 100% excise tax on tobacco in Saudi Arabia and United Arab Emirates, to be followed by the other member countries. The following is a brief commentary on the cigarette landscape in GCC.

Pre excise tax

The GCC coalition has long recognized that the addiction of most long-term smokers could not be solved by low impact legislation alone, as prices were relatively low in the region anyway, or by way of health warnings. There were different initiatives that were implemented but a more broad-based policy centered on tax was needed across the board in GCC. A large part of the population in GCC was and still is accounted for by foreign expatriate workers wherein smoking habits are mainly brought from their respective countries of origin. The majority of residents are expatriate workers from south and southeastern Asia, where awareness of the dangers of tobacco consumption is still relatively low when compared with more developed countries. For many Arabs however, shisha is more socially ingrained and accepted than cigarettes, where partaking in shisha along with coffee is looked at as a communal activity and intrinsic to the local culture. In many Arab and Asian societies, smoking cigarettes is not socially acceptable for women. Nevertheless, Arab women usually smoke shisha, which is not perceived as smoking and is therefore not regarded as harmful.

Smoking prevalence as a percentage of the adult population is the highest in Saudi Arabia among GCC states, accounting for 30.3% as of 2016. Tunisia and Egypt have high prevalence levels even when compared globally. It is little wonder, due to the growing younger demographic and smoking being portrayed as a stylish lifestyle through satellite television channels and magazines. The sale of dokha (Arabian shredded tobacco mixed with leaves and herbs) was also largely unregulated and saw good growth as it was cheap and readily available. Dokha grew in popularity among the expat community, where it was considered less risky than cigarettes, despite the lack of concrete scientific evidence. There are several flavors available and few warning notices. Equally, smoking habits were becoming more difficult to maintain with uncertain economic conditions especially in Saudi Arabia and with the general price increases on basic necessities. Low-income consumers have no choice but to cut down with some levels of down-trading that has already been happening

Consumer awareness of nicotine replacement therapy (NRT) products also remained low across the region with the exception perhaps in Saudi Arabia and UAE. These products saw low uptake not only due to awareness but also relatively lower smoking cessation support. There was recognition of the fact that if implemented, the execution of taxes had to be uniform to mitigate illegal contraband. Cigarette companies facing a contraction in more established Western markets were increasingly looking to the Middle East and the Asia-Pacific market.

Taxation

October 2017 saw the implementation of the excise tax in the United Arab Emirates at a 100% rate following Saudi Arabia which announced the same earlier during the year. Budget deficits in GCC countries, in many cases being double digits of GDP, became a reality after the drop of oil prices since mid-2014. The need for diversifying the base of non-oil based revenue had been gathering momentum and was never more apparent since the drop in oil prices.

In late 2015, ministers of finance in GCC agreed on excise tax to be levied at 100% across member countries. However, Saudi Arabia and Bahrain implemented additional import fees as a percentage of CIF to counteract the impact of inflation as well as to mitigate the loss to customs due to underreported CIF prices. This had an immediate impact of increasing prices of cigarettes by around 40% even before the implementation of the excise taxes. The impending execution of the new excise tax was well received by the international community, which have long deplored the low prices and lax legislation in the region. GCC countries on their part were well aware that imposed taxes and steep increases would have an impact on revenue generation, like what happened in other countries such as Turkey, Greece, and Singapore.

In addition, existing bilateral trade agreements meant that no revenue could be generated with an increase in external tariffs. Budget deficits due to decline in oil prices and a policy of diversification culminated in the imposing of excise taxes. This is in addition to the CIF cost along with the more important minimum specific component of the tariff which ensures that there is an increasing revenue base for the government over the next few years. The broad-based impact that the industry expects is an increase in illicit trade in a part of the world where it is already rampant. Brand substitution will occur and those companies that do not have a broad portfolio of price bands will have to readjust strategy or see a drop in the bottom line. 

Post excise tax

The immediate predictable impact is that consumers will think twice before purchasing a pack of cigarettes. [The new excise tax] would be more keenly felt by consumers in the lower income segment. To mitigate the impact of price hikes, companies are readjusting their portfolios and focusing on economy products as well as perhaps looking at having more shisha offerings within their portfolios. Smoking of shisha is ingrained in the Middle Eastern culture. It is therefore reasonable to assume or expect that the imposing of additional taxes will not veer people away from shisha as it would with cigarettes. A younger population, social acceptability, and versatility in flavor are some of the reasons why smoking shisha might still buck the downward trend of late in the market and the region.

The Middle East and Asia Pacific are growth regions unlike more mature Western markets which have seen contraction in the last few years. Philip Morris International (PMI) for example, have the best global positioning and account for a large proportion of the market in Western Europe and Latin America, however both markets are declining. Therefore, it is expected that the company will refocus its attentions on Asia Pacific in which there is much potential based on its presence.

Possible future outlook

There is a question of ‘what next?’ to consider as legislation could go towards banning of flavors, more control on variants, as well as perhaps further regulation on filter types. Packaging, or rather marketing of cigarettes through its packaging, is already being challenged with more of an onus on stricter labeling already in place. Display of cigarettes in major hypermarkets in UAE are controlled and kept away from the main point of sale.

Plain packaging could also be enforced in the region over the coming years. However, the jury is still out on the impact of plain packaging laws already in force in the United Kingdom and Australia. There is also the question of brand equity and the marketing of a company’s core proposition through these offerings. While the ban on pack marketing might have an impact, it is also arguable that the rise in illicit trade and trading down to cheaper brands offsets these gains. The future of new product development as it were might lie in repositioning or squeezing unit prices, but it in all probability will center on cost focused innovation.

On the other hand, tobacco companies have already started investing in reduced risk products that will become increasingly important in the coming years. It was announced mid-2017 that PMI was in talks to introduce smoke-free products in GCC which were ‘potentially less harmful’ than its cigarettes. IQOS uses tobacco sticks which can be heated but not burnt. There might be future challenges, of course, because regulation and taxations are not far away, but far too few studies currently exist to either promote or deride reduced risk products. This has in turn led to a less than clear public health messaging on the products. However, reduced risk products will see investment in the years ahead and will take a greater share of manufacturer’s product portfolio.