In face of the harsh situation of decline in both tax payment and profit making and increase of production costs, the tobacco industry has urged enterprises to further promote their management to higher levels, cut costs and increase efficiency by means of lean management.
The tobacco industry in China may have entered unprecedented hard times in operation and business development, characterized by sales decline, excessive inventories, low tax generation, low profits, and hasty adoption of regulatory measures.
By Tobacco China Online
The beginning of each year is generally a “hot” period for the Chinese tobacco industry as sales surge. But, in early 2016, no such trend was observed. On the contrary, the market for tobacco products and even competitive cigarette brands were in a state of depression and experienced weak sales. In January and February 2016, the cigarette sales volume in China dropped significantly year-on-year, with inventories held the industry remaining excessively high, and with both taxes and profits generated from tobacco products falling noticeably from the same period in 2015. These factors have raised a red flag for the Chinese tobacco industry.
In the past, all Chinese tobacco manufacturers were optimistic and confident in setting targets for annual business development. As long as they worked hard enough, they would definitely fulfill or overshoot their annual cigarette production and sales quotas issued by the State Tobacco Monopoly Administration (STMA) – the regulator of the tobacco industry in China. Some tobacco manufacturers even managed to limit cigarette production or restrict sales of their own accord at the end of the year, in order to leave room for development in the following year.
But in early 2016, many tobacco manufacturers in the country found themselves in a dilemma: if they set a low annual development target, it would mean that they were dragging down the entire tobacco industry. But if they set a high target, it would mean that they would be unable to meet these targets.
If the current slowdown in growth is an irreversible trend and will become “business as usual”, then it is even more worrisome that both markets and brands, which make up the basis for the tobacco industry, are clearly in a state of depression and weak sales.
When talking to various manufacturers in China, the mood is somber and you hear no reason for optimism. Some of the most common things you hear from Chinese producers are: “In the past, we would never worry about sales. But today, it is difficult to increase sales even by a single case (50,000 cigarettes).”; “We are experiencing the winter of the tobacco industry, and this winter could be a long one.” Such statements are a clear indication that both tobacco markets and cigarette brands in China are facing severe challenges.
Sales Decline
As the backbone that supports the development of the Chinese tobacco industry, many competitive cigarette brands witnessed some fluctuations in sales between the end of 2015 and early 2016, which undoubtedly dealt a serious blow to the confidence of those tobacco manufacturers. In January and February 2016, the tobacco industry in China saw the sales volume of its Grade One, Grade Two, and Grade Three cigarette products (from a total of five grades) sharply decline when compared to the same period in 2015, while the sales volume of its Grade Four and Grade Five cigarette products went up slightly year-on-year, which contributed to creating enormous pressure on improving the structure of cigarette products and increasing tax payment and profits.
In January and February 2016, the tobacco industry domestic sales were a total of 441.85 billion cigarettes (8.837 million cases), down 7.34% year-on-year, and sold a total of 473.975 billion cigarettes (9.4795 million cases), down 9.43% year-on-year, with the sales volume of Grade One, Grade Two, and Grade Three cigarettes dropping 12.88%, 7.46%, and 11.92% respectively, and with the proportion of Grade One cigarettes in the total cigarette sales volume of the tobacco industry reaching 26.82%, down 1.06% year-on-year.
The big cigarette brands, which play the most important roles, are not optimistic either. In January and February 2016, the sales volume of key cigarette brands designated by STMA reached 405.56 billion cigarettes (8.1112 million cases), down 11.87% year-on-year, and accounted for 85.57% of the total cigarette sales of the entire tobacco industry in the country, with the commercial sales revenue amounting to RMB298.713 billion (US$45.95 billion), down 7.08% year-on-year. In particular, the sales volume of the Top 15 cigarette brands (Grade One to Grade Three) reached 312.3 billion cigarettes (6.246 million cases) in the first two months of the year, down 12.04% year-on-year, and accounted for 65.89% of the total cigarette sales of the tobacco industry in China. The commercial sales revenue of the Top 15 brands amounted to RMB260.958 billion (US$40.14 billion) in the two-month period, down 6.79% year-on-year, which accounted for 82.89% of the industry’s total cigarette sales.
Excessive Inventories
As cigarette sales declined, cigarette inventories held by the tobacco industry remained excessively high. By the end of February 2016, the cigarette inventories held reached 303.63 billion cigarettes (6.0726 million cases), up 82.27 billion cigarettes (1.6454 million cases), or 27% year-on-year. Specifically, the cigarette inventories held by the manufacturing sector of the tobacco industry reached 139.245 billion cigarettes (2.7849 million cases), and the cigarette inventories held by the commercial sector amounted to 164.385 billion cigarettes (3.2877 million cases). By the end of February 2016, the inventories of the tobacco manufacturing enterprises and commercial enterprises increased by 50% and 20% respectively year-on-year, and these figures don’t even take into account the inventories held by retailers.
Low Taxes, Low Profits
In early 2016, both taxes and profits generated by the tobacco industry were on the decline. In January and February 2016, the amount of taxes and profits reached RMB259.841 billion yuan (US$39.97 billion), down 8.27% year-on-year. Specifically, the manufacturing sector of industry amounted to RMB159.187 billion (US$24.49 billion), down 14.51% year-on-year, and the the commercial sector generated RMB100.613 billion (US$15.47 billion) in taxes and profits, up only 3.67% year-on-year.
Hasty Adoption of Regulatory Measures
In light of the existing problems, the tobacco industry has tried to actively adopt regulatory measures, including control over output, stabilization of sales, reduction of inventories, compliance with the red line, and increase of tax payment and profits, to ensure smooth economic operation.
Stabilization of sales and growth: In light of the real demand in the market, the tobacco industry has tried to increase effective and stable supply of best selling cigarette brands.
Effective reduction of inventories: To accommodate the realities of the cigarette markets, the tobacco industry has started closely monitoring changes in inventories held by both the manufacturing and commercial sectors in the regions, has strengthened control over the stock-to-sales ratio, and has managed to assist retailers in getting rid of inventories held by them in order to ensure that cigarette inventories held by retailers will be reduced to a rational level.
Close monitoring of key cigarette brand pricing: In light of the fluctuations of some key cigarette brand pricing, as designated by STMA, the tobacco industry has urged commercial enterprises to implement the requirement of clearly marking the prices in operating cigarette sales, in order to ensure stability of pricing in cigarette retail, enable retailers to increase profits, and improve retailer confidence.
Active cost reduction and efficiency increase: Facing the harsh realities of decline in both tax payment and profits as well as an increase of production costs, the tobacco industry has urged enterprises to further optimize their management, cut costs, and implement “lean management” practices.
On March 12, 2016, the National Bureau of Statistics (NBS) of China released data on industrial production, indicating that the added value of industries above a designated scale increased by 5.4% year on year in the first two months of 2016, a retreat from the 6.8% increase in the January-February period of 2015 and the 5.9% in December of 2015. The NBS attributed the decline to weak overseas market demand and further decline in exports, as well as a slowdown in production growth by some high energy consuming industries and traditional industries. In particular, the tobacco industry also experienced a sharp production decline in the first two months of 2016, with its added value falling 15.6% year-on-year (compared to a year-on-year increase of 16.9% in December 2015), which led to a decline of 0.7% in the overall industrial growth rate of China for January and February.
Data released by the Chinese Ministry of Finance indicated that in January and February 2016, China’s state-run enterprises earned a total of RMB6,241.55 billion yuan (US$960 billion) in gross revenue from business operations, down 5.8% year-on-year, with the amount of profits and taxes reaching RMB222.61 billion (US$34 billion), down 14.2% year-on-year. An important cause for the decline was also a relatively sharp drop in tobacco industry profits as well as other industries.
The aforementioned data on China’s macroeconomic development show that the tobacco industry was facing a harsh business climate in general in the first quarter of 2016.
With the many difficulties and challenges facing the tobacco industry, it is now under heavy pressure. Although some of the decline may be attributed to the overall external economic situation, the fundamental cause of the current harsh situation is, to a great extent, the tobacco industry itself. Whether the tobacco industry has truly paid attention to consumer demand, whether it has made painstaking efforts to develop competitive cigarette brands, and whether it will truly respect the choice of retailers are all questions that the tobacco industry needs to further consider and answer in the process of future reforms.