Cigarette Price Wars: Intense Competition in Bulgaria
The new year started grimly for smokers in Bulgaria as the excise tax for cigarettes was increased in January 2016.
While local tobacco players suddenly became less competitive, the international companies used the situation as a chance to strengthen their positions on the market. Bulgaria remains one of the last frontiers for cigarette manufacturers in the EU, as the local adult smoking prevalence still reaches one-third of the total population and is expected to remain stable in the near future.
As Bulgarian consumers are still very price sensitive due to their relatively low incomes, the price change was viewed as a big challenge by all cigarette manufacturers. The taxation system was changed so that premium cigarettes would have to increase in price more than economy products. That led to the impression that multinational companies would suffer more than the local players, which produce mainly mid-priced and economy cigarettes. The reality was different, however, as multinational companies adopted innovative strategies to keep their market shares intact or growing.
Companies sacrifice their own margins
The first step taken by the majority of the companies operating in the Bulgarian cigarettes market was to postpone the price increase to the maximum term allowed. Most of the new prices were introduced only in late winter and early spring of 2016, allowing customers to acclimatise to the changes at a slower pace. Consequently, the companies that increased prices before the start of 2016 lost some market share. No matter that the excise tax was set up to be unfavourable for international companies selling premium brands – they decided to face down the threat and to seize the initiative instead. The largest foreign companies offered their brands with smaller price increases than the local companies, at the expense of their own profits. Multinational companies with bigger budgets are in a better position to take the tax burden on their own shoulders and use it to grow their market share.
Another strategy used by the companies was to introduce cheaper extensions to their most popular brands in order to attract consumers who used to purchase cheaper brands. For example, the biggest local player, Bulgartabac Holding Group AD, launched Victory Code, which is an extension to its best-selling brand Victory. A 20-unit pack of Victory Code cigarettes is currently priced at BGN4.5, while the traditional Victory pack costs BGN4.9. A similar step was taken by Phillip Morris Bulgaria EOOD, when the cheaper version Marlboro Touch was launched. The company reshuffled its brand portfolio in general and now offers more products with mid-range prices. Back in 2014 a pack of Marlboro Gold cost BGN5.1, while, in 2016, Marlboro Touch has been selling for BGN4.8. Phillip Morris started competing actively for market share in the mid-range price segment after lowering prices to the level of the most popular brands on the market like Karelia and Victory.
Shorter and longer cigarettes – both bring benefits
While focusing their attention on how to maintain the impression of stable prices, the companies also played more with cigarette lengths. The Bulgarian market is no exception and has recently witnessed many launches of differently sized cigarettes. Both local and international companies introduced shorter cigarette varieties while keeping prices the same. This allowed them to save on raw materials and maintain margins. One of the most notable examples of this was again the Marlboro brand, which, a couple of years ago, was mainly sold in the 88mm size, while, in 2016, the majority of the newly registered brand extensions were 85mm. Such reductions in size allowed companies to maintain the impression among consumers that their products were not becoming more expensive.
However, the opposing trend to offer smokers even longer cigarettes is also evident in Bulgaria. Superking/long cigarettes continued booming in 2015, growing by five percentage points and making up as much as 73% of the overall cigarettes market. As Bulgarian consumers are very price sensitive, superking/long cigarettes are seen as a great value-for-money option. The majority of cigarette companies currently offer 100mm and longer cigarettes in their brand portfolios. Winston by JTI Bulgaria EOOD was one of the brands that benefited the most from this trend, as it offered a large variety of long cigarettes at the same price level as the leading companies’ most popular brands or even lower prices than market leaders such as Victory. According to trade sources, Winston was seen by consumers as the brand offering the best price/quality ratio. This allowed JTI Bulgaria EOOD to increase its market share by a couple of percentage points over the last few years. The company’s share reached 7% in 2015, and growth is expected to continue in the future.
Difficult years ahead
Local companies still control a significant part of the Bulgarian cigarettes market, amounting to 43% in 2015. However, competition from the multinationals is expected to grow fiercer over the next five years. Local companies will have to launch attractive and innovative products with a good price/quality ratio if they want to maintain the loyalty of their customers. A large portion of their budgets will have to be invested in advertising and interaction with the consumer. However, the communication channels with consumers will become narrower due to the new EU Tobacco Directive restrictions, so the challenges will only multiply in the longer term. Another threat to all players will be the contraction of the legal market. The increase in excise tax will boost illicit trade during the next couple of years. Bulgaria showed great results in 2015 when increased tobacco manufacturers’ controls led to a decline in the illicit market to 10% of the total market. Euromonitor International expects that in 2016 and 2017 illicit trade will jump back to 14% and 17%, respectively, albeit, due to stricter controls, still much lower than the pre-2015 illicit trade rates in the review period.