About 57 per cent of adult males smoke, but only five per cent of females. These figures, sourced from Euromonitor, also reveal Indonesians’ overwhelming rejection of milds and lights (three per cent of combined sales) in favour of high-tar cigarettes (97 per cent).
Furthermore, nine out of 10 sticks smoked in Indonesia are kreteks, an indigenous clove cigarette. Lightly taxed relative to other countries, kreteks are priced within reach of the poorest Indonesians, and sold for as little as Rp 2,500 (US$0.27) for a 12-pack. Even more attainable are single cigarettes sold by street vendors, the sales of which are thought to account for 30 per cent of the market .
Indonesia is the only East Asian country to resist signing the World Health Organisation’s Framework Convention on Tobacco Control, which provides guidelines on tar and nicotine levels, on minimum prices and advertising. Times change, however. On 30 June, the Finance Ministry announced, effective immediately, a sliding-scale cap on ‘promotional and distribution costs’ that can be deducted for tax purposes from gross revenues of cigarette and pharmaceutical companies. All Indonesia’s major cigarette companies have sales upwards of Rp 5 trillion, putting them in the most restricted group of advertisers under the scheme. The cap for them is a stringent one per cent of sales, up to a maximum of Rp 100 billion.
“All the big companies have already spent close to Rp 100 billion in the first half,” says Robby Susatyo, managing director, Synovate Indonesia. As a result, the second half of this year could see a drop in promotion.
Until now, the unregulated environment has made tobacco one of Indonesia’s biggest-spending advertiser categories.
Promotion is a major expense for the industry, which racked up legal sales of Rp 85 trillion last year, according to Euromonitor. Of this, Nielsen tallied Rp 1.4 trillion last year for Indonesia’s tobacco advertising in press, magazines and TV, with TV contributing 87 per cent. Total promotion is many times higher when outdoor, cinema, events and point-of-sale are added in.
Eventually, all will be restricted. “In the end, everything televised will be banned,” said Susatyo. “For now, the companies are switching to trade promotion.”
Pressure is mounting, with anti-smoking fatwas issued by the Board of Muslim Leaders’ Ulama Council. By 2015, smoking is expected to peak at 260 billion sticks annually - which is equivalent to the market today when pirated sales are added in - and, although premature, the term ‘sunset industry’ is being bandied about.
The major operators are Gudang Garam, which commanded 28.3 per cent of volume share in 2008; Philip Morris, which had 22.6 per cent following its recent purchase of Sampoerna; Djarum (13.8 per cent); Nojorono Tobacco (5.5 per cent); and British American Tobacco, which last month acquired Bentoel Internasional (combined 8.6 per cent).
Domesitc firms have demonstrated a remarkable willingness to sell their companies to multinational rivals. Philip Morris paid $5 billion in 2005 to take over Sampoerna, and BAT will control Bentoel by taking over its debt liabilities for around $585 million.
The background to this is that Philip Morris and BAT had both launched kreteks with limited success. But Philip Morris’ purchase of Sampoerna gave it a dozen brands including A Mild, Indonesia’s second best-selling cigarette. A Mild is an iconic brand, as it transformed the industry. Raghavan Srinivasan, MD, TNS Indonesia, says: “The launch of A Mild in the 90s made kreteks aspirational and trendy, challenging the international ‘white’ brands. This, along with image-led advertising by brands like Dji Sam Soe, made kreteks acceptable among the populace.”
Having lost out to Indonesia’s indigenous smoke, Philip Morris and BAT are buying up homegrown brands and going local.
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This article was originally published in 13 August 2009 issue of Media.