Australia’s long-term, multi-level government commitment to competition policy in combination with broad-reaching reforms in the taxation system have, over the past decade, dramatically transformed the tobacco industry in this country.
Key factors affecting the industry in recent times have included: the phasing out of quotas on local crop production from the late 1980s; the August 1997 abolition of State licence fees on tobacco; the September 1999 merger of Rothmans and W.D & H.O. Wills and the subsequent entry of Imperial Tobacco Australia (resulting from a 16 per cent divestment of market share by sale of trademarks required of BATA by the Australian Competition and Consumer Commission to facilitate the merger); and, finally, the November 1999 changes to the tobacco excise regime1.
This paper describes recent developments in tobacco growing, manufacturing and retailing, and some of the major effects associated with changes in cigarette packaging and pricing.
Australia is a relatively minor producer of tobacco leaf (and getting smaller)3. All Australian leaf is sold locally and, historically, Australian production is about one half of the tobacco leaf required for manufacturers located in Australia, and proportionally trending smaller. Australian manufacturers have the option of sourcing tobacco leaf from a wide range of countries, but mainly source from the USA with some leaf also being imported from the Netherlands, China, Zimbabwe and the United Kingdom4.
Tobacco growing was largely concentrated into two major growing regions, the Ovens/Murray region of northern Victoria and the Mareeba district of Northern Queensland, with a small producing region in south-east Queensland. Around four per cent of tobacco leaf cultivation occurred in New South Wales but this has fallen to zero since the introduction of a NSW government scheme to buy out growers.
The number of growers in northern Queensland has also declined significantly. The Queensland government funded structural adjustment scheme has accelerated the rate of exits from tobacco farming. At the end of May 2002 there were 115 commercial growers in northern Queensland, at Mareeba, and six in southern Queensland, near Maroochydore.
The downward trend in Australian leaf output during the 1990s, see Table 1, follows on from declines in previous decades. Australian tobacco leaf production peaked in 1969-70 at a level of 17.2 million kilograms. Throughout the 1970s annual production was 15 million kilograms but had declined to around 13 million kilograms by the mid 1980s. This decline has been attributed to various factors including the downward trend in consumption of tobacco products, the effects of regulation (in particular, the removal of the high levels of assistance for tobacco growing as a result of the 1987 Industry Assistance Commission Review finding that tobacco was the most assisted agricultural crop in Australia) and the illegal growing and trading in tobacco leaf. An Australian National Audit Office analysis estimates that if illegal tobacco had been legally grown it would increase commercial output of Australian leaf by between 10-20 per cent a year.
The Tobacco Research & Development Corporation lists the following major factors as affecting trends:
- A continuing decline in Australian tobacco consumption coupled with manufacturing companies’ reductions in local sourcing. The effects have been to consolidate tobacco leaf production in northern Victoria, and to bring about a substantial reduction in north Queensland production.
- The deregulated tobacco leaf market place allows manufacturers to source leaf globally with the consequence that domestic leaf prices are strongly influenced by world global price trends, subject to grade differentials. The extent to which full exposure to international competition impacts on short term purchasing decisions is influenced by such variables as global prices, exchange rate movements, leaf quality and stock holdings in Australia. The level of the Australian dollar and the improvement in leaf quality has assisted the competitive position of Australian growers in recent years. However, recent increases in the value of the Australian dollar may partly reverse these gains.
- Rationalisation is occurring at an accelerated rate in the growing industry, and has occurred among manufacturers. There are now only two Australian manufacturers operating in Australia, Philip Morris and British American Tobacco Australasia.
- Ongoing need to provide manufacturers with high quality tobacco. Manufacturers continue to require growers to ensure tobacco leaf meets exacting quality requirements to avoid any problems with potential contaminants.
At the commencement of last year, BAT announced plans to substantially scale back domestic leaf purchases, withdrawing from the Mareeba district. Philip Morris had committed to longer-term contract purchases from northern Queensland but in the previous fortnight, it has been announced, via local ABC media, that the current harvest at Mareeba will be the last from this region. Discussion with the Commonwealth Department of Agriculture, Fisheries & Forestry confirmed that this harvest from Mareeba, estimated at one million kilos, would be the last brought by the manufacturers. Local industry representatives attribute the demise of their industry to international free trade arrangements. Tobacco production is expected to continue at normal levels in southern Queensland.
This leaves northern Victoria as the major production region for tobacco in Australia. Victorian growers continue to have a medium term contract, with both manufacturers, to grow around four million kilos a year.
Tobacco is considered to be an important crop in Victoria with 130 growers producing an average of four million kilograms each season equating to a farm gate value of $27 million. This tobacco is produced on approximately 1400 hectares. As this tobacco is manufactured domestically there is a consequent multiplier effect on employment and manufacturing investment8.
In Victoria, tobacco is grown along the river valleys of the Ovens, King and Kiewa Rivers and their tributaries in North East Victoria. Very specific conditions are needed to grow the high quality tobacco which is now required by manufacturers. The soil type, mild climate with hot summers and ample access to water make production of high quality tobacco possible in these areas.
The price of tobacco is based on a grade and price schedule which is negotiated with manufacturers at the start of each season. Each grade is defined according to the plant position, color and quality. In 2001 there were 62 different prices and approximately 85 grades ranging from $7.35 to $1.80 per kilogram of tobacco9.
Research and development (R&D) on behalf of the tobacco industry has been undertaken by the Tobacco Research & Development Corporation (TRDC), established under the Primary Industries and Energy Research and Development Act 1989. Industry and the Commonwealth Government jointly funded it. This body is currently being wound up and its tobacco research program, and assets, transferred to Horticulture Australian Ltd (HAL). Ongoing R&D is also sourced from the Ovens Research Station an arm of the Victorian Government. One of the last research projects funded by TRDC, and which has received ongoing funding for the 2002/03 financial year, is a study evaluating the potential non-smoking uses of tobacco leaf grown in Northern Queensland. This project has the potential to deliver long-term markets for these growers.
Tobacco product manufacturing and marketing
There are currently 11 manufacturers or importers of cigarettes or tobacco registered in Australia and considerably more importers of cigars10.
The three largest tobacco companies are the two manufacturers, British American Tobacco Australasia and Philip Morris, and Imperial Tobacco which does not have a manufacturing plant. Aside from importing tobacco products, Imperial contracts BATA to produce its cigarettes in Australia.
British American Tobacco Australasia
British American Tobacco Limited was formed as part of a merger in 1999 between Rothmans Holdings Limited and W.D. & H.O. Wills Holdings Limited. It is part of British American Tobacco (BAT) and now trades in Australia as British American Tobacco Australasia (BATA), combining its operations in Australia, New Zealand and the Pacific Islands. BATA is Australia’s leading tobacco company, accounting for approximately 43.5 per cent of the cigarette market and employing 1,200 people in Australia11. It also employs a further 1,200 people across the Pacific region, the largest numbers in New Zealand and Papua New Guinea. Factories producing cigarettes, and managed by operating companies within the BAT group, are located in Australia, New Zealand, Papua New Guinea, Fiji, the Solomon Islands and Western Samoa. Estimated market share of BATA for New Zealand is 78 per cent and for the Pacific Islands 80 per cent placing it clearly as the dominant market leader for the Pacific region.
On May 1, 2001 BATA ceased to be listed on the Australian Stock Exchange following the acquisition of all minority shares by subsidiary companies of BAT plc. Therefore it has no obligation to produce an Annual Report in Australia. It remains registered with Australian Securities and Investments Commission (ASIC) as an Australian Public Company, Limited by Shares. BAT is listed on the London Stock Exchange. The company manufacturers and distributes cigarettes and roll-your-own tobaccos and distributes pipe tobaccos and cigars. Its brands include Winfield, Benson & Hedges, Dunhill, Lucky Strike and Holiday. It reported that it produced a total of 18.0 billion cigarettes across the Pacific region of which 11.209 billion cigarettes were produced in Australia in 2001-200212.
Philip Morris Limited (Australia) was a publicly listed Australian company until 1986, but it de-listed on becoming a wholly owned subsidiary of its parent Philip Morris Inc. Philip Morris Inc was listed on the Australian Stock Exchange in 1992 but has also since de-listed. Similar to BATA, it remains an Australian Public Company registered with ASIC. Effective January 17, 2003, the name of the parent company, Philip Morris Companies Inc, changed to Altria Group Inc. Altria Group Inc is registered on the New York Stock Exchange and also includes Kraft Foods within the consumer packing group. (In addition Altria owns Nabisco, making it the largest food group in the world.) Altria is also the largest shareholder in SAB Miller plc, the second largest brewing company in the world.
International is an operating company of Altria Group Inc responsible for the manufacturer and distribution of tobacco products.
Philip Morris International in Australia has its head office at Moorabbin and employs 950 people. Recently it has established e-Orders Pty Limited, an industry portal for business-to-business transactions and communication between convenience retailers (including petrol stations and independent grocery outlets) and suppliers (manufacturers and wholesalers) of fast moving consumer goods. In addition, it owns State-wide Tobacco Services which distributes its products to more than 35,000 retail outlets country-wide.
Australia is the base for the Asia Pacific Region of Philip Morris Information Services (PMIS): a shared services company with over 120 permanent staff and 60 independent contractors providing systems development, data processing and communications network facilities for Philip Morris operations throughout Japan, Australia and Asia
In Australia, the manufacturing arm of the company produces cigarettes and roll-your-own tobacco and pipe tobacco. Its major brands are Alpine, Longbeach, Marlboro, Peter Jackson and Superlights.
Imperial Tobacco Australia (ITA) was established in September 1999, following the merger of W.D. & H.O. Wills and Rothmans. Its parent company is the UK-based Imperial Tobacco Group (ITG). Its portfolio consists of brands including Horizon, Escort, Peter. The Imperial Group recently acquired Reemstma, a major global tobacco company. Noteworthy brands acquired are West cigarettes and Davidoff, considered to be a super premium product. Similar to the other tobacco companies, ITA is registered with ASIC as an Australian public company, limited by shares.Cigarette manufacturers provide now tobacco available on the online cigarettes shop without paying "convenience" store prices. Cigarettes like other tobacco products do carry health effects with them. Most modern manufactured cigarettes are filtered and include tobacco.