Imperial Tobacco is facing a £100m profits hit as a result of a cigarette price war, tax increases and a smoking ban in Spain.
Imperial, which is the world’s fourth-largest tobacco company and the market leader in Spain, warned on Monday that a slump in cigarette purchases by cash-strapped smokers had led to a fierce price war in the country.
The average retail price of cigarettes in Spain has fallen 10% since the end of April and Imperial – which sells brands including Ducados Rubio, Fortuna Red Line and Nobel Style – last cut its prices on Friday.
The group has reduced the price of packets of Ducados, JPS and West from €3.40 (£3) to €3.30, following similar moves by its rivals: Philip Morris has cut the price of its L&M cigarettes brand and British American Tobacco has done the same with cigarettes Pall Mall. However, Imperial’s largest brands – Fortuna and Nobel – are unchanged at €3.40.
An Imperial spokesman said: “Spain has been a challenging market for the industry as a whole for some time. The economic environment has been particularly tough – unemployment is so high.”
Spain also introduced a ban on smoking in public places on 1 January and put up cigarette duty in December to discourage smoking and replenish state coffers. This came on top of a VAT increase last July from 16% to 18%. “When smoking bans are introduced, there tends to be a small initial dip but then normal patterns of consumption return,” the spokesman said.
Imperial reported an 18% slump in cigarette volumes in Spain for the six months to the end of March. The group’s net profits rose to £926m from £689m a year earlier, on sales up 2% to £13.7bn.
Chris Wickham, a Matrix analyst, said: “Illicit trade in Spain is rife. An underlying market volume decline of 15% probably reflects illicit trade expansion rather than [smoking] cessation.”
Toby McCullagh, an analyst at Morgan Stanley, said: “While the magnitude of these cuts is severe, it remains possible that manufacturers may reach a more moderate solution, and pricing could still start to increase again before the end of the year.”
But he said the price cuts could also trigger an excise duty increase, as Spain now faces a much-reduced take from cigarette taxes.
By Julia Kollewe