Rules Affect Cigarette Consumption in Southeast Asia

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By Jarred Neubronner, Research Analyst at Euromonitor International

The cigarette industry in Southeast Asia continues a decline in combined cigarette volumes sales from Indonesia, Philippines, Thailand, Vietnam, Malaysia, and Singapore going down by nearly 3% to 500 billion sticks in 2017. Strong government regulations contributed to this declining trend and is also a key reason for the reduced outlook of Southeast Asia’s cigarette industry, with a forecasted negative volume CAGR of 2% to 2023.

Government taxation has led to shifting consumption patterns among cigarette smokers in the region towards premium and economy brands, while legislation on the legal smoking age and cigarette packaging has altered the landscape for cigarette sales.

Here is a closer look at recent legislation as well as its impact on the cigarette industry in Southeast Asia.

Excise tax increases create polarizing trend in cigarette bands

Much of the excise tax increases have been passed on to consumers in the form of higher cigarette prices. This price increase surprisingly created divergent consumption trends of premiumization and downtrading taking place in different Southeast Asian markets.

Countries like Indonesia and the Philippines have seen a premiumization trend due to regulations and excise tax increases that have made the premium segment more lucrative to target. In Indonesia, the merging of excise tariff layers in 2019 is expected to hit economy and kretek cigarettes hardest. This has led to companies focusing product development on premium kretek cigarettes (SKM) and white cigarettes (SPM). For example, Djarum introduced Forte, its first SPM portfolio in Indonesia. HM Sampoerna Tbk PT launched Sampoerna A Platinum, rebranded Marlboro Ice Blast to Marlboro Ice Burst, and introduced a new packaging design for Marlboro Gold Lights. Meanwhile, Bentoel Internasional Investama Tbk PT launched Dunhill Fine Cut Mild which comes with novel “reduced smell technology”. These product launches focused on premium cigarettes allowed players in Indonesia to pre-emptively target the premium segment even before the new tax structure is implemented in 2019. Similarly, in the Philippines, the implementation of a unitary tax for cigarettes in 2017 encouraged more consumers to trade up to premium brands like Marlboro due to the narrowing price gap of different bands. This has resulted in overall volume declines due to higher prices.

However, an increase in taxes also had the reverse effect of downtrading in Malaysia and Singapore. In Malaysia, the economy cigarette segment saw the most product innovation. Two new economy brands, Liggett Ducat and Rothmans, were launched in the second half of 2017 and quickly gained substantial market share. This reflects the international players’ strategy to mitigate declining sales in premium brands, as well as the eagerness of consumers to down-trade to economy brands. The 10% excise tax hike for cigarette products in Singapore also saw a comparable trend of consumers switching downwards, leading to the strong performance of economy brands like Japan Tobacco International’s LD brand. Philip Morris International even embarked on a brand consolidation process which saw its mid-priced brand Next phased out in all retail channels by early 2018. This was done to refocus its effort on battling in the economy cigarette segment through its fast-growing brand L&M, as it sought to target price-conscious consumers.

Surprisingly, countries like Thailand and Vietnam experienced divergent trends involving a combination of both downtrading and premiumization due to increased taxes. In Thailand, the cigarettes tax hike in the first half of 2016 saw cigarettes price go up by an average of 20%. This resulted in some smokers from the price-sensitive low-income segment trading down from mid-priced to economy brands. Furthermore, the more price-conscious ones cut down on smoking or even traded down to fine cut tobacco or illicit cigarettes. Vietnam witnessed similar downtrading by its cost-conscious consumers towards more budget-friendly economy brands following the 2016 special consumption tax hike on tobacco products. Despite the downtrading, Thailand and Vietnam also experienced premiumization, as some consumers with increasing disposable income switched from mid-priced to premium brands. The consumer switch to premium and economy brands has led to a decline in the mid-priced cigarette segment for both countries.

Minimum age regulations produce mixed results

While most countries in Southeast Asia have 18 as the minimum age for cigarette purchase and consumption, Thailand increased its minimum age to 20 in 2017 while Singapore will progressively increase it to 21 by 2021. The increase of the minimum age “may” reduce the smoking rate in the young adult age group, contributing to both current and future decline in cigarette volume sales The full impact of the minimum legal smoking age increases is still considered low due to problems with enforcement. In countries like Vietnam, lax enforcement with cigarette retailers rarely validating the age of buyers makes it easy for underage smokers to buy cigarettes. However, enforcement on the minimum smoker age has proved to be a challenge even for countries like Singapore, which has a reputation for tough enforcement. Stringent enforcement legislation and implementation will see cigarette retailers lose their tobacco selling license if they are caught selling to underage smokers. Nevertheless, underage smokers in Singapore managed to find ways to circumvent the measures through tactics like third-party purchase. This is evident from results of a 2013 National Health Surveillance Survey, which showed that the average smoker in Singapore took their first puff at 16; way below the current legal age of 18.

Outlook for the cigarette industry in Southeast Asia

The frequent excise tax increases across most countries in Southeast Asia will continue influencing consumer preferences towards premiumization and/or downtrading. With few common trends among all countries in post-tax increase consumer behavior, this makes it even more vital for cigarette players to have in-depth understanding of the competitive environments in their respective local cigarette industries since each country reacts uniquely to tax changes. Nevertheless, a common similarity projected in most countries is the retreat of the mid-priced cigarette segment. Consumers have spoken through their shifting preferences, and this sends a strong message to cigarette players in terms of resource allocation and product development – focus on the premium and economy brands.

With Singapore and Thailand taking the lead to increase minimum legal smoking ages to 21 and 20, respectively, will 21 be the new 18 for the rest of the region? Globally as well as in the rest of Asia, most countries still have 18 as the legal age. While the Malaysian government is considering raising the minimum age limit for buying cigarettes to 21, most other countries in Southeast Asia do not have explicit plans to increase the minimum legal smoking age. Enforcement on minimum smoking ages is known to be difficult, as evidenced from underage smokers in Singapore having decent success in getting their hands on cigarettes despite strong enforcement. There is therefore only low chances of governments in the region raising the minimum smoking age, and even if done, would be done to complement other anti-smoking regulations rather than being the key legislation in itself for curbing smoking.

Going forward, cigarette packaging will play a decreased role in product differentiation, as more stringent government legislation, such as larger graphic warnings and even plain packaging are implemented. Reduced differentiation in packaging will contribute to the downtrading trend, as premium brands find it tougher to justify their premium pricing, leading to value-conscious consumers turning to economy brands. The implications of tougher packaging regulations on cigarette companies will mean a shift from packaging to other forms of product differentiation such as flavoring, cigarette lengths, and pack sizes. Strengthening outreach and shelf space at retail channels will also take on a more prominent role, as players strive to maintain brand credibility and customer loyalty amidst the regulations. However, at the end of the day, cigarette players in Southeast Asia remain at the mercy of governments, as no cigarette product, packaging or retail channel is immune to increasingly stringent government regulations.

For queries relating to the tobacco industry in Asia, feel free to contact Jarred at jarred.neubronner@euromonitor.com