Iran in Focus

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Features

Iran is by far the largest cigarette market in the entire Middle East. Following the former state tobacco monopoly’s privatization, the ongoing economic liberalization has increasingly attracted foreign investment. Tobacco Asia takes a closer look.

By Thomas Schmid

The Islamic Republic of Iran certainly has come a long way since its early days, when it was basically deemed a “pariah state” by pretty much everyone except a small handful of countries. International trade sanctions cut off the nation economically while the Iranian government itself likewise pursued a course of self-isolation, severely restricting foreign companies from setting up shop in the nation. But, things have become increasingly relaxed in recent years as more and more sanctions were lifted, giving the government the opportunity to finally invite much-needed foreign investment.

Foreign Capital Welcome

In terms of Iran’s tobacco industry, this still ongoing turnabout has resulted in rather remarkable developments. The former state-owned monopoly Iranian Tobacco Company* - until a few years ago the sole legal entity in the country permitted to purchase tobacco and manufacture cigarettes and other tobacco products - was privatized in 2012 as part of a market liberalization drive spearheaded by the government. A few years prior to that, some multinational outfits like BAT, JTI, and KT&G already had established their own subsidiaries in Iran, leading to a gradual influx of foreign cigarette brands that previously had only been available as smuggled contraband, if at all. Local private entrepreneurship in the tobacco sector likewise was encouraged around that same time window and thereafter.

ALSO: Cigarette Smuggling in Iran

This gave birth to a number of domestic companies, including joint ventures and partnerships utilizing foreign capital, which were allowed to directly purchase tobaccos from local farmers, import merchandise on their own accord, as well as manufacture and market tobacco products. In other words, these new enterprises could now engage in a business that hitherto was the exclusive domain of the former state tobacco monopoly. And while the latter still commands a sizeable market share (some sources say it’s hovering around 15-20%) mostly supported by its primary brand Bahman, it has steadily lost more ground to the increasing competition, the current undisputed market leader being JTI. 

A Few Stumbling Blocks

But market liberalization also brought to light the woeful undersupply of tobacco persisting in Iran as far as domestic production is concerned. Some 80% of all tobacco must be imported, mainly from Latin America, Africa, and India, as local farmers simply are unable to meet demand. However, Iran has already announced a plan to boost annual domestic tobacco cultivation to reach 40,000 tons within the next five years. While this still hardly will be enough to eliminate expensive imports by any meaningful degree, it is a step in the right direction.

An All-Powerful Regulator

The industry is regulated by the State Center for Tobacco Planning and Supervision, a department under the Ministry of Industries, Mining, and Trade. Established on October 2, 2012, the center governs literally every aspect of the industry. That includes the issuing of operating, manufacturing, import, tobacco trading, and brand licenses; determining the regions and allocating agricultural land use for tobacco-growing; as well as supervising and regulating all tobacco purchases supplied by local growers. But perhaps its most crucial task is the fight against rampant cigarette smuggling (see side box). And, of course, the center is also responsible for collecting taxes and customs duties related to tobacco products.

PTC: Embracing the Prevailing Climate

A paradigm of the new crop of local companies that is enthusiastically embracing the luring opportunities in a business sector previously completely closed-off to them is Parsian Tobacco Company (PTC). And when we say “new”, we mean “brand new” in this case. So brand new, in fact, that the privately owned enterprise has not even gone into production yet – although it is fully operational, with an administrative office in Tehran and a modern factory compound near the city of Zanjan, some 300 kilometers northwest of the capital.

Preparing for the Boom

“Seeing a wave of international cigarette manufacturers racing each other to take up cigarette production inside Iran, our investors decided it was high time to participate and they purchased the already existing Zanjan Cigarette Factory at our present location in 2016,” PTC’s general manager, Sarah Heydar, told Tobacco Asia. With 80% of company capital coming from foreign sources and the other 20% apparently having been contributed by local investors, the factory premises were subjected to thorough renovation and modernization.

“We installed new cigarette making machinery to supplement and upgrade the facilities and enable the manufacturing of all common cigarette formats,” said Heydar. “After many months of hard work, PTC is now ready to begin production and all required licenses have been obtained.” However, she admitted that at this point the premises were still lacking primary processing capabilities. But, she made it understood that PTC planned to install a primary processing line “as part of a future stage of factory development”.

Ready for Contract Business

But why is the facility still sitting idle? After all, besides having the whole ream of necessary operating licenses and permits under its belt, the 7,000 square meter plant comprises a large warehouse, a lab, as well as three modern production lines with an annual maximum capacity of not-so-shabby eight billion sticks. Well, Heydar asserted that this was the intent from the beginning. “PTC has positioned itself foremost as a contract manufacturer at the beginning of its production activity, and it will only be our second step to eventually also start making our own cigarette brands,” she explained. “But initially, we only want to attract brand holders who would like to entrust us with their production needs to manufacture quality premium cigarettes for both the domestic and international markets.” She added that the company is presently engaged “in negotiations with three brand owners, and as soon as we reach agreement [with them] the factory will go into production.” While these negotiations apparently are near conclusion, Heydar declined to disclose the identities of the brand holders in question.

Own Brands are “the Second Step”

Only after contract manufacturing had kicked off to a satisfactory level could PTC then also take a closer look at launching its own brands, Heydar said. But how and when that is going to happen, largely depended on a number of factors. “For example, it would require us to apply for brand licenses, which is a comparatively complex process. And we also would have to take into careful consideration the financial and time investment required to put our available marketing and distribution network to efficient use.”

The Right Connections

“Our facility is situated ideally for domestic and regional distribution because it is not only close to Tehran but also to the Caspian Sea ports of Anzali and Nowshahr,” Heydar said, reiterating the advantages the factory location offers. The plant is well connected by road, rail, and air to the rest of Iran and to neighboring countries including Russia, Azerbaijan, Kazakhstan, Turkmenistan, Turkey, Armenia, Pakistan, Iraq, Afghanistan, and GCC countries such as Kuwait, Bahrain, Oman, UAE, and Qatar. “Iran is neighbors with 15 countries and has access to open waters and good overland international road connections,” Heydar assured.

JTI: The Undisputed Market Leader

Besides BAT and KT&G, the third multinational firm currently represented in Iran is JTI. The company established its local subsidiary, JTI Pars, in 2002, opening a factory in the northern Gilan province, where a selection of brands including Winston, LD, Silk Cut, Monte Carlo, and Magna are manufactured and then distributed across the country. This strong brand presence has helped JTI to achieve market dominance within a rather short period of time. In its “MENEAT at a Glance” informational leaflet published in February 2018, the company states that it is currently holding a very cushy market share in Iran of just slightly over 50%. Only one other country in the entire region, Jordan, can aspire to those lofty heights, where JTI claims a market share of currently 51.3%.

Securing the Leadership Position

To further solidify its market leader position, JTI in October 2017 acquired for an undisclosed amount the privately-owned enterprise Arian Tobacco Industries (ATI), including its cigarette factory located in Zanjan province. In a press statement released at the time the company said that “a growing number of major companies from various countries are now investing or reinvesting in Iran” and that its Iranian subsidiary had “just finalized” the acquisition of ATI. The statement added that “ATI has some strong brands in the growing-value premium segment… and a state-of-the-art local production facility very similar to JTI standards.” JTI was “confident that [the acquisition] will enhance our business in Iran from next year onwards,” the statement said. But there also had been some media speculation that the ATI purchase was likely a direct response to hedge JTI’s interests against the soon-expected market entrance of Philip Morris International (PMI), makers of the iconic Marlboro brand, which currently can only be obtained in Iran as smuggled contraband (see our side box).

The Middle East’s Largest Domestic Market

Iran is without any doubt by far the largest cigarette market in the entire Middle East. Official statistics published by the Ministry of Health indicate that domestic cigarette consumption is amounting to some 55 billion sticks per year. However, the Ministry of Industries, Mining, and Trade claims an annual figure of 70 billion. And even that is yet superseded by unofficial data, showing that Iranians smoke in excess of 90 billion cigarettes every year. Whichever figure one wants to lend credence to, they are staggering all the same. In terms of demographics, it is estimated that around ten million Iranians are active smokers, equivalent to 12.5% of the nation’s total population of around 80 million. While there is no official data available regarding the sex distribution among consumers, the vast majority are males. This assumption was affirmed by PTC’s Sarah Heydar, who said the field studies conducted by her own company suggested that “a mere 4% of cigarette smokers in Iran” were females.

Editor's Note: While the Iranian Tobacco Company initially displayed eager interest to share information in this article, it later apparently had a change of mind and no longer reacted to our inquiries.