Article of Corporate and Legal Affairs Director Oleg Strekal on price wars in the tobacco market

The price war “against all” continues in the tobacco market of Ukraine. It was launched by the market leader, which decided to redress its deteriorated situation by this artless way. Cigarettes are sold at prices below cost — by what consumers and smugglers are delighted. And, at the height of a price war, “independent” experts begin to promote the idea of setting the minimum retail prices for cigarettes. The minimum retail price of UAH 17 per pack “penetrates” under the pretext of raising additional funds to the budget and struggling against artificial underpricing of cigarettes, what is an appealing idea. This situation was commented by Oleg Strekal, who is Corporate and Legal Affairs Director at Imperial Tobacco in Ukraine, Moldova and Caucasian countries.

Who, in your opinion, is behind the idea of setting the minimum retail prices for tobacco products?

Oleg Strekal: The idea to set the minimum retail prices (MinRP) belongs to Philip Morris Ukraine. The concept of MinRP is used as an anti-competitive tool — Philip Morris unfortunately fails and loses a market share in a fair competition. The official operating results of the company in Ukraine for the 3rd quarter of the current year are the following: all key brands lost ground, and Philip Morris lost a market share of 3.5 per cent as compared to the similar period of the last year.

The statistical example of the company's losses by brand Bond is illustrative. Market share of this brand decreased by 1.1 per cent in 9 months of 2015 as compared to the similar period of the last year.

How does Philip Morris want to recover its losses?

Oleg Strekal: The company, in our opinion, attempts to recover its losses in two ways. First of all, the company drastically cuts the retail prices for the whole portfolio of its brands (up to 30 per cent for the certain trademarks). Philip Morris tries to get a market share, occupied by its competitors, through galloping price-cutting.

Secondly, as part of anti-competitive efforts, it will set the minimum retail prices, as proposed. The company expects that a consumer will choose more popular international brands if there is a common minimum price.

It should be noted that the similar strategy, consisting of two steps, has been already implemented in many markets, including Ukraine. A company firstly cuts prices, provokes hysteria, and then puts forward a proposal related to MinRP, allegedly for recovery of state budget losses.

By the way, it is already the third attempt of the company to introduce the illegal concept of MinRP in the last two years. The measures were taken “behind the scenes” through introducing amendments into the regulatory acts in the nick of time. That is why we want to make the process as transparent as possible.

Let me take the opportunity to draw attention of the Anti-Monopoly Committee (restricted market competition), the Ministry of Economy (deterioration of business climate), the Ministry of Finance and the State Fiscal Service (conscious sale of products at prices below cost), the relevant parliamentary committees to the issue related to “price war” and minimum prices. The people's deputies refused to “play up to” the illegal initiatives for the first two times. We hope that the legislator will not betray the principles for the third time.

How much does the company spend for such price manipulations?

Oleg Strekal: We assume that the Philip Morris spends USD 10,000,000 of the direct grants each month for maintenance of the prices at the low level. Therefore, the amount of “infusions” into the unprofitable business will reach USD 120,000,000 on a year-on-year basis. It is no wonder that the company is in haste to promote the idea related to MinRP for the purposes of returning both a market share and profit. This is indeed a more simple way to redress a situation than fair competition and long-term development of the brand portfolio and business in the whole.

Is the concept of MinRP for tobacco products consistent with the European practice?

Oleg Strekal: The minimum retail prices for tobacco products are prohibited in the European Union as preventing economic competition. In this regard, there are 6 decisions of the European Court of Justice (against Ireland, Belgium, Luxembourg, France, Greece, Italy and Austria). By the way, the idea of MinRP contradicts the Ukrainian legislation as well (Law On Prices and Pricing, Commercial Code, Law On Protection of Economic Competition etc.). The initiators of setting MinRP, unfortunately, ignore both European integration of Ukraine and national legislation.

What measures may the state take in such case?

Oleg Strekal: The prices for cigarettes and state budget revenues shall be regulated by clear tax and excise policy, as well as by suppression of any violations of the competitive legislation by the Anti-Monopoly Committee.

Moreover, there are other effective tools to counter price wars. It is prohibited in a series of EU countries to sell tobacco products at prices below cost.

Price-cutting is considered as price promotion in other EU countries. The state shall oblige the companies to pay taxes (VAT, profit tax, excise tax) on the basis of the original prices, being valid before a “price war”. And it is absolutely clear why the state take such measures: the companies may abate the prices as they want, but they are obliged to pay taxes in full. Ukraine ought to adopt such experience, and not to discuss the still-born and anti-competitive idea related to minimum retail prices.