Dr. Iqbal Lambat
Dr. Iqbal Lambat
Dr. Iqbal Lambat is one of the tobacco industry’s most legendary figures. The founder and c.e.o. of Star Agritech International, Dr. Lambat has enjoyed a long-spanning career with some of the world’s leading blue-chip companies, such as Piaget/Baume & Mercier, Dow Chemical Europe, as well as large companies like Philip Morris International, R.J. Reynolds International, and Japan Tobacco International, to name but a few, before establishing Star Tobacco International, which was rebranded Star Agritech International in 2018. Holder of a triple master’s degree in finance, marketing, and economics from Webster University Geneva and a doctorate in international finance from Business School Lausanne, Dr. Lambat’s keen observations consistently demonstrate his in-depth understanding of the industry and are articulate and thought-provoking. Here Dr. Lambat shares some of his insight with Tobacco Asia.
Tobacco Asia: As an industry veteran with over 30 years’ experience, you’ve seen many of the big and small changes the tobacco industry has gone through. What are some of the more “monumental” changes that come to mind?
Dr. Iqbal Lambat: I will comment on four broad themes that come to mind.
Tobacco Attitude. I started my career in tobacco with Philip Morris International in Lausanne, Switzerland in 1987. The tobacco to be used in their products had to be the very best and no compromises would be acceptable. The tobacco being the “holy grail” of the cigarette was an attitude also practiced by the other major players. That is why tobaccos were bought three to four years in advance and kept in inventory to always be able to offer a consistent taste. Also, a cigarette was manufactured with one gram of high-quality leaf which means a mastercase of 10,000 cigarettes used 10 kgs of tobacco.
Fast forward to today and we live in a different world. Leaf quality has decreased in order to save on costs. In addition, more tobacco derivatives are used in the blend such as reconstituted tobacco, cut rolled expanded stems (CRES), expanded shredded stems (ESS), dry ice expanded tobacco (DIET), and tobacco fines.
Your typical cigarette today will comprise 50% tobacco leaf and 50% derivatives, all heavily cased and flavored to mask the poor quality of the blend. Also, the quantity of the blend in the cigarette has been reduced from 1 gram to 0.75 gram, due to the high filing power of the derivatives. As a result, the natural sensory impact of the cigarette has been lost and significantly modified, generating a more chemical taste. Finally, the cigarette burns faster generating a much lower puff count compared to 20 years ago.
Market Noise. In the 1980s, the tobacco world was simple. At least 95% of the tobacco universe was composed of mainstream international cigarettes (mostly American blend) with the balance being made up of pipe tobacco and cigar products. Initially driven by fast rising excise tax, roll-your-own (RYO), and make-your-own (MYO) fast grew to become a major category in the US, most of the EU, and Australia. Over the past decade vape products have entered the industry accompanied by various forms of heat-not-burn (HNB) products. When one looks at the inside of a tobacco retailer today, there are so many products on the shelf causing confusion. The explosive growth of the shisha category has also added to this broadened consumer offering and increased consumer confusion.
Smokers’ Rights. Well in the 1980s, smoking was still possible on most airlines and in virtually all public spaces (excluding hospitals for logical reasons). Today one has to look around very carefully outside to make sure that one is smoking in a designated outdoor area. Almost all indoor (with some country exceptions) are now fully banned and outdoor is increasingly being regulated (parks, beaches, balconies, etc). Have the captains of the tobacco industry abandoned the fight for smoker freedoms by enthusiastically agreeing with regulators to accept and implement all restrictive legislation? Twenty years ago, the stance was “We’re right and we fight for our freedoms!” That’s definitely changed to “Thank you for allowing us to smoke in designated areas only!”.
Counterfeit and Contraband (C&C). To a large extent, these are driven by high excise tax. The higher the excise tax, the higher the rate of smuggling with the United Kingdom as the perfect example. Actual reported consumption of cigarettes in the UK is in the region of 40 billion sticks but real consumption is at least double. Products are fully smuggled in from outside the European Union and accompanied by semi-legal smuggling by purchasing tax-paid products in a low-cost EU country and transporting these to the UK under duty free allowances. Up to 10% of the EU is C&C, 50% of South Africa is C&C, and about 30% of South America is C&C. Asia and Australasia have high double-digit C&C with Malaysia now the highest as a percentage country in the world at 70% C&C. This has become a major problem for the industry and government regulators with no clear solution is sight. This phenomenon has categorized the cigarette industry as tainted with criminal activity. As a tobacco company, it is almost impossible to open new bank accounts (one of the reasons why Star Tobacco rebranded to Star Agritech).
Tobacco Asia: It would seem that tighter anti-smoking regulations and a shift in consumer preferences have led to a drop in the number of smokers and a shift towards new generation products from conventional cigarettes. Some, however, feel that there is still a large market for traditional tobacco products and that market is not going away. What is your opinion? What direction do you see the industry taking (or should be taking) next?
Dr. Iqbal Lambat: The global market for combustion cigarettes has declined significantly from the all-time highs in the past three decades of 6.2-6.4 trillion sticks to today’s level of 5.3 to 5.4 trillion sticks. Sharp declines have occurred in “old world EU”, the US, Japan, and, more recently, China, which is now on annual negative growth.
Fueling the declines are high excise tax affecting affordability, restrictive areas where smoking is allowed, and, in the developed world, a move towards cleaner living by younger consumers practicing X-GEN characteristics – no alcohol, no tobacco, and no drugs. On the Middle East and African fronts, consumption of factory manufactured cigarettes (FMC) are on the rise as disposable incomes increase, and this region is projected to experience explosive growth in the decades ahead. However, this will not be sufficient to offset global cigarette declines projected at 2-3 % negative per annum till 2030.
Vape (especially JUUL) has had an impact in the US taking out some 10% of the traditional cigarette market. And, vape has had some success in a number of countries in Europe but overall has not made a major dent to traditional volumes. On the HNB side, only IQOS from PMI has shown success. Launched in over 40 countries, of the total sales, an estimated 90% are consumed in Japan – which would suggest that the product is a flop (!) in the rest of the world. Japan has always been an early adopter of new technology and in the absence of vape, banned in Japan, IQOS has succeeded. JTI’s Ploom and BAT’s Glo have hardly got onto the train despite several years of marketing. In conclusion, it would appear that the HNB category does not have strong appeal other than “the novelty appeal followed by disappointing smoking characteristics”.
Tobacco Asia: What do you think is currently the largest challenge for tobacco producers and suppliers? How would you advise they overcome this challenge?
Dr. Iqbal Lambat: I think that for the entire tobacco industry the key challenge for all participants is how to deal with a declining market:
• For cigarette manufacturers, this means rationalizing supply footprints and downsizing considerably as BAT and JTI have announced recently with the combined job reductions of over 6,000 headcounts.
• For tobacco farmers and processors – dealing with declining offtake and avoiding winding up with uncommitted inventory.
• For OEM manufacturers, dealing with almost no new sales or orders booked as multinational manufacturers avoid the “replace philosophy” with “renovate and upgrade,” thereby saving critical cash flow.
• And all the peripheral related industries like spare parts suppliers, non-tobacco material suppliers, etc., will suffer the same fate.
The tobacco industry has always been described as “A cloud with a silver lining”, the silver lining implying the highly profitable nature of the Industry. The top four MNCs plus China generate around US$35 billion in annual profits. The cloud representing the overly excessive regulation of the industry in general and more specifically on advertising, health warnings and packaging, declining smoker rights, and constantly increasing excise taxes. Has the cloud now reached the tipping point to offset the benefits of the silver lining?
Tobacco Asia: Sustainability is a key focus for businesses now, including those in the tobacco industry. What would be some ways in which tobacco companies could adapt their business models to support and promote sustainability?
Dr. Iqbal Lambat: Sustainability can best be implemented at the level of the farmers. Many companies pay lip service but very few actually engage.
Tobacco Asia: When Star Tobacco International was first established in 2008, it largely focused on supplying tobacco to small and medium-sized companies. After 10 successful years, the company rebranded as Star Agritech International and is now an established, respected agricultural supplier of not only tobacco, but also coffee beans, soybeans, olive oil, sugar, and wines. Where do you see Star Agritech 10 years from now?
Dr. Iqbal Lambat: Now in our 11th year, Star Agritech is well established on all five continents with a client base of 130 accounts and operations in 40 countries. The group has been promoting derivatives and now owns two reconstituted factories with a third under evaluation. It is also heavily promoting CRES and DIET through third party plants. Over the next 10 years, the group will migrate towards a strategy where:
a. Star Agritech will become a leading provider of derivatives with its own CRES plants (currently under finalization) to be located in Brazil, South Africa, and Indonesia. Expanded shredded stems (ESS) and microwave puffed stems (MPS) production will also be added to these plants. CRES offers 40% expansion, ESS 60% expansion, and MPS 100% expansion. In addition, additional reconstituted plants will be added to our supply footprint as well as DIET if that technology becomes more affordable. At least 30% of group income must be derived from the derivatives division and this division should be the number one player in the world in terms of tobacco derivatives supply.
b. Group income from leaf will decline as a percentage but Star Agritech will continue its focus on supplying small and medium-sized manufacturers with leaf, blending expertise, and other assistance that they can benefit from. The recently initiated supply of cigar leaf types currently from Cameroon, Indonesia, and India will be further broadened to allow Star Agritech to become a strong number three player in the world in terms of cigar leaf supply. At least 50% of group income will be derived from this division.
c. The agro commodity (non-tobacco business) will progressively be built, mostly in the leaf countries we currently deal with to provide at least 20% of group income.
d. The group will build on its people power by hiring the best talent sourced from the countries that we operate in and celebrating our cultural differences to make “diversity our key enabler”.
Star Agritech will become a large agro commodity company progressively replacing its trader status to that on manufacturer or grower. This transformation will be a full 100% from where we are positioned today.