PMCR: Tobacco producers expect intensified pre-stocking effect

According to HN daily article several tobacco companies operating in Czech Republic expect intensified pre-stocking effect ahead of planned excise tax hike on 1 January 2007. PMCR’s CEO Mr. Davidson calls for gradual tax hikes as one extreme could deform tobacco market where there is in addition increased price competition. He requires the pre-stocking to be regulated by the law in particularly if government plans to raise additional sources to finance budget deficit. Representative of Imperial Tobacco assumes that foreigners who buy approximately 5m pieces of cigarettes per year will switch to other markets like Poland or Slovakia where the cigarettes will be cheaper.

Our view:
We agree with the tobacco producers that excise tax hike will hurt the market and pre-stocking activities towards the end of the year will be intense. Pre-stocking usually postpones the materialization of tax hike by 5 to 7 months depending on the brands. We assume that smaller producers are able to build up inventories for longer period than larger ones like PMCR. This is exactly what hurts PMCR’s market share as the cigarette consumers in Czech Republic are extremely price sensitive and once the first producer starts to introduce cigarettes with higher price there is a danger they will loose customers, which will turn to cheaper competition. Thus we see the tax hike without pre-stocking regulation as negative for PMCR.