complied report.pdf

Application of Economics Theories and Practices in the Tobacco Industry of Bangladesh

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Contents A. Introduction ................................................................................................................................ 6

A.1. Origin of the Report .......................................................................................................... 7

A.2. Rationale of the Study ......................................................................................................... 7

A.3 Objectives ........................................................................................................................... 7

A.3.1. Broad Objective ......................................................................................................... 7

A.3.2. Specific Objectives ..................................................................................................... 7

A.4. Scope of the Study ............................................................................................................ 8

A.5. Methodology ..................................................................................................................... 8

A.5.1. Sources of Data .......................................................................................................... 8

A.5.2. Research Design ......................................................................................................... 9

A.5.3. Instruments of Data Collection .................................................................................. 9

A.5.4. Sample Design ........................................................................................................... 9

A.5.5. Sampling Technique ................................................................................................... 9

A.5.6. Sample Size ................................................................................................................ 9

A.6. Criticalities and Limitations .............................................................................................. 9

B. Literature Review ..................................................................................................................... 10

B.1. Industry Segmentation: ...................................................................................................... 11

B.1.1. Biri Market: ................................................................................................................ 11

B.1.2. Competitive Scenarios in the Cigarette Market: ........................................................ 12

B.2. Segment wise Market Growth of Tobacco Industry ......................................................... 13

B.3. GDP Share of Tobacco Industry ....................................................................................... 13

B.4. Government Tax and Other Regulations: .......................................................................... 13

B.4.1. Tobacco Tax Structure in Bangladesh ........................................................................ 13


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B.4.2. Lopsided Tobacco Taxation Policy ............................................................................ 14

B.4.3. Administrative Issues in Tobacco Taxation ............................................................... 14

B.4.4. Political Dimensions of Tobacco Taxation ................................................................ 15

B.4.5. NBR-WHO Collaboration on Tobacco Taxation ....................................................... 16

B.5. Demand for Tobacco in Bangladesh ................................................................................. 17

B.5.1 Existing Evidences of Demand for Tobacco in Bangladesh ....................................... 18

B.5.2. New Estimates for Tobacco Demand in Bangladesh ................................................. 19

C. Trends in Tobacco Production and Market Share .................................................................... 20

C.1. Tobacco products market shares ....................................................................................... 20

C.2. Tobacco Agriculture .......................................................................................................... 21

C.3. Production of Manufactured Tobacco Products ................................................................ 22

C.4. Current Pattern of Tobacco Consumption ......................................................................... 23

C.4.1. Age-specific and Sex-specific smoking rates: ............................................................ 24

C.4.2 Socio-economic differentials in male smoking ........................................................... 25

D. Circular Flow Diagram ............................................................................................................ 27

E. Relative Market Share in the Tobacco Industry ....................................................................... 30

E.1. Competitive Landscape ..................................................................................................... 32

F. Company Profile of BATB ....................................................................................................... 33

F.1. Vision and Mission of the Company ................................................................................. 34

F.1.1. Vision .......................................................................................................................... 34

F.1.2. Mission ........................................................................................................................ 34

F.2. Product Portfolio ................................................................................................................ 34

F.3. Sales Trend over Last 10 years .......................................................................................... 36

F.4. Countrywide Sales (By Region) ........................................................................................ 37

F.5. Contribution to the Industry ............................................................................................... 38


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G. SWOT Analysis ....................................................................................................................... 39

Strengths ................................................................................................................................ 39

Weakness .............................................................................................................................. 42

Opportunities ......................................................................................................................... 43

Threats ................................................................................................................................... 44

H. Company Profile of Dhaka Tobacco industries ....................................................................... 46

H.1. Product Portfolio ............................................................................................................... 46

H.2. Sales Trend for Last 10 years ............................................................................................ 49

H.3. Country wide sales of DTI ................................................................................................ 50

I. Company Profile of Abul Khair Tobacco Company (AKTC) ................................................... 51

I.1. Organization Culture .......................................................................................................... 52

I.2. Products Mix ....................................................................................................................... 52

I.3. Company Performance Overview ....................................................................................... 55

I.4.Sales Trend for last years: .................................................................................................... 56

I.5. Countrywide Sales (By Region) ......................................................................................... 56

I.6. Contribution to the Industry: .............................................................................................. 58

J. Company Profile of Nasir Tobacco Limited ............................................................................. 58

J.1. Products .............................................................................................................................. 60

K. PESTEL Analysis ..................................................................................................................... 60

K.1. Macro Environmental Factors ........................................................................................... 60

K.2. Political/ Legal .................................................................................................................. 61

k.3. Economic ........................................................................................................................... 61

K.4.Social and Culture .............................................................................................................. 61

K.5. Technology ........................................................................................................................ 61

k.6. Environment ....................................................................................................................... 62


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K.7. Micro Environmental Factors ........................................................................................... 63

L. Value Chain Management ........................................................................................................ 63

L. 1. Inbound logistics of Tobacco Industry ............................................................................. 63

L.3. Raw materials cigarette ..................................................................................................... 64

L.4. Operation of a Typical Cigarette ....................................................................................... 65

L.4.1. The Primary Manufacturing Department ................................................................... 65

L.4.2. The Secondary Manufacturing Department ............................................................... 66

L.5. Outbound Logistics Typical Cigarette ............................................................................... 69

L.6. Channel of Distribution ..................................................................................................... 70

L.7. Departmental Overview (Sales &Marketing) .................................................................... 73

L.7.1. Marketing .................................................................................................................... 73

L.8. Six Critical Factors to Achieve TM&D Mission ............................................................... 81

L.9. Human Resource Management .......................................................................................... 86

L.9.1. Technology Development ........................................................................................... 88

M. Porters Five Forces Industry Analysis ................................................................................... 89

M.1. Threat of Rivalry .............................................................................................................. 89

M.2. Threats of Substitute ......................................................................................................... 90

M.3. Threats of Potential New Entrants .................................................................................... 90

M.4. Bargaining Power of Suppliers ......................................................................................... 90

M.5. Bargaining Power of Buyers ............................................................................................ 91

N. Analysis and Applications of Economic Principles and Theories .......................................... 91

N.1. Principles of Economics (Relating to the Ten Principles of Economics .......................... 91

N.1.1. Effect of Invisible Hand in the Tobacco Market ........................................................ 95

N.2. Demand and Supply Function ......................................................................................... 95

N.2.1. Price Elasticity of Demand ....................................................................................... 97


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N.3. Price Ceiling and Price Floor ........................................................................................ 104

N.4. Market Structure .............................................................................................................. 104

N.5. Effects of Tobacco Control Policies ............................................................................. 106

N.5.1. Taxes on Cigarettes in Bangladesh and Strategies in encountering Government

interventions ........................................................................................................................ 107

N.5.2. Impact of Taxation on Smoking Behavior ............................................................... 107

N.5.3. Anti-tobacco Campaign ........................................................................................... 108

N.6. Private Goods, Public Goods and Tragedy of the Commons .......................................... 109

N.7. Production Function ........................................................................................................ 110

N.7.1. The Law of Diminishing Return to a Factor ............................................................ 110

N.8. Game Theory and Cigarettes ........................................................................................... 114

N.9. Price War ......................................................................................................................... 115

N.10. Price Discrimination ...................................................................................................... 117

N.11. Externalities ................................................................................................................... 118

HEALTH CONSEQUENCES AND COSTS OF TOBACCO USE ..................................... 118

Data on tobacco-related diseases in Bangladesh ................................................................ 120

Direct medical costs .............................................................................................................. 121

Indirect costs .......................................................................................................................... 123

Gross or net costs? ................................................................................................................ 123

RECOMMENDATIONS .......................................................................................................... 123

O. Recommendations .................................................................................................................. 126

P. Conclusion .............................................................................................................................. 126

Q. Bibliography ........................................................................................................................... 128


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A. Introduction

Tobacco-consumption is a widespread scenario in Bangladesh. More than half of all men and

nearly one in three women use tobacco in Bangladesh, according to a latest study on tobacco

consumption. Conducted by Human Development Research Centre (HDRC) and Campaign for

Tobacco-Free Kids, the study looked at tobacco consumption trends among people aged 15 and

older, estimating that 46 million people out of 107 million consume tobacco.

About 58% of men and 29% of women smoke or chew tobacco in one of the cheapest tobacco

countries across the globe making up 43% of its total adult population. Bangladesh ranked among

top tobacco consuming countries where 57,000 people over the age of 30 die each year from

tobacco-related illness. Though Bangladesh signed WHO Framework Convention on Tobacco

Control (FCTC) in 2003 to control tobacco use by all means, it is yet to form a national agency

that experts think a key to fight tobacco. The survey revealed that tobacco consumption in

Bangladesh sharply rose in recent years, with cigarette sales going up by 40% and tobacco use in

the form of bidi increased by 80% between 1997 and 2013. Compared to 50.9 billion cigarettes

bought in 1997, the consumption was 76 billion pieces in 2013, while bidi sales climbed from 43

billion in 1997 to over 82 billion in 2013. Excise taxes on cigarettes account for half of the retail

cigarette price in the country while total taxes are two-thirds of the retail price. Anti-tobacco

campaigners allege that the policy is at odds with countries having comprehensive tobacco

reduction approach where excise taxes typically account for 70% of retail price with total taxes

claim 75% of it. Different tax rates on different price slabs only benefit tobacco manufacturers,

they argued.

The Tobacco Industry of Bangladesh is comprised of 84,091 million sticks. Amongst the tobacco

manufacturers, British American Tobacco Bangladesh has grown to be the premier multinational

company in Bangladesh, and has witnessed a robust growth and development in the tobacco sector.

It is esteemed as one of the largest multinational companies in the country and has been operating

for over 100 years. Among the competitors of BATB Dhaka Tobacco Industries (DTI), Abul Khair

Tobacco Company (AKTC), Jamil Tobacco Limited are notable. This paper, from the perspective

of Economics, is an attempt to observe how the tobacco organizations are practicing economics

theories and principles in their business.


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A.1. Origin of the Report

The report titled Application of Economics Theories and Practices in the Tobacco Industry

of Bangladesh has been prepared for Dr. A. K. M. Saiful Majid, Professor & Senior Fulbright

Scholar, as a partial requirement for completion of the course Managerial Economics (E501).

A.2. Rationale of the Study

The study, conducted by group ventured forth into various applications of different concepts of

Managerial Economics in the tobacco sector of Bangladesh. In an effort to do so, we have

scrutinized the demand and supply scenario of tobacco products, identified the major players in

the industry, the market structure, cost behavior, and also government control in terms of price

control and tax imposition and their effect on the consumers.

A.3 Objectives

A.3.1. Broad Objective

The broad objective of this paper was to carry out an intensive study on Tobacco industry of

Bangladesh (mostly concentrated in Dhaka) and the recent development in this sector. To do this

we will gather and combine all relevant data regarding the tobacco industry in order to relate the

industry with the concepts of Economics learned in classroom sessions till date. It will provide

better understanding of real world application of economic concepts and an in depth knowledge

about the rapidly growing Tobacco Industry of Bangladesh.

A.3.2. Specific Objectives

1. Understanding the principles of economics and their application in respect of Tobacco

industry of Bangladesh.

2. Absolute and competitive advantage of individual Tobacco companies.

3. Understanding the demand and supply function, market equilibrium, income and

substitution effects on cigarettes.

4. How price elasticity of demand and supply works in the tobacco industry


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5. Price ceiling and price floor existing in the tobacco sector, impacts of government control

in the city.

6. Consequences of Govt.s regulation and taxation in Tobacco industry of Bangladesh.

7. Effects of Inflation on the tobacco sector.

8. Recommendations for enhancement and growth of the tobacco sector in Bangladesh.

A.4. Scope of the Study

The geographic scope of this research is confined within Dhaka city. For the demand side of the

study, information was drawn from BATB, DTI, AKTC, JTL officials, and existing and potential

buyers within Dhaka city. For the information on supply side, executives of BATB, DTI, AKTC,

JTL and employees of the organization were interviewed.

A.5. Methodology

The study was conducted on two sets of population, one representing the demand side and the

other the supply side of the tobacco sector. On the demand side, the population consists of existing

and potential consumers, and the supply side consists of interview with employees of the

organization. Interviews consisted much of the way through which information was gathered for

this study.

A.5.1. Sources of Data

This study was conducted based on both primary and secondary data. The secondary study was

mainly required for the background study on this sector. For the supply side, secondary sources

and interviews are the primary sources of data.

For the demand side, primary sources will be from existing and potential clientele. Besides, some

secondary sources like small scale research reports conducted will also be used. Primary source of

information came from the interview conducted for the purpose of the study.


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A.5.2. Research Design

This study is a combination of both Exploratory and Descriptive research methods.

A.5.3. Instruments of Data Collection

Various articles, websites and newspapers were taken into account to get the necessary secondary

information. Interviews enabled specific information relating to supply and demand, price ceiling

and price floor, govt. regulations and taxation, and inflationary effects.

A.5.4. Sample Design

As mentioned above, this study was conducted on two sets of population, one representing the

demand side and the other the supply side of the tobacco sector.

A.5.5. Sampling Technique

Non-probabilistic sampling methods was selected because the complete sampling frame for the

target population was not available that is necessary to conduct the usual probabilistic sampling

techniques. Besides, limited time and budget would guide the researchers to go for nonprobabilistic

methods.

A.5.6. Sample Size

The sample size of the interviews was small. The interview sessions provided much in depth

knowledge and information required for the fulfillment of the study.

A.6. Criticalities and Limitations

While conducting the study there were few obstacles that constrained the effectiveness and

comprehensiveness of the study. Certain limitations hampered the accuracy of this study. First of

all, employees were reluctant to give out company information. The accuracy of information

provided by the company hampered the overall quality or success of the study. Bangladesh does

not have organized secondary data of this sector unlike most developed countries. Thus the

information generated from primary research may not reflect the precise scenario of current needs


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and our limited sample size may not be large enough to make accurate generalizations about the

entire population.

B. Literature Review

According to Research Study on British American Tobacco Bangladesh, British AmericaTobacco

Bangladesh (BATB) is a subsidiary of British American Tobacco Group. It has been incorporated

in 1972 as Bangladesh Tobacco Company (BTC).Since 1972 BATB has been operating in

Bangladesh as one of the leading multinational organization. Since 1972 BATB is operating as the

market leader in the tobacco industry by providing some of the most powerful global and local

brands. At present BATB is the highest tax paying company, contributing around 7% of the total

revenue of the Government of Bangladesh. BATB is renowned as one of the most prominent

socially responsible and ethical company in the minds of the citizen.

The tobacco industry of Bangladesh is an age old industry. There a distinct monopoly in this

industry where British American Tobacco Bangladesh (BATB) leads the market with more than

50% market share.

The main cigarette manufacturers today are:

British American Tobacco Bangladesh

Dhaka Tobacco Industries

Abul Khair Tobacco

Nasir Tobacco

Azizudin Industries and

New Age Tobacco.

The main biri manufacturers are:

Akij Biri

Abul Biri

Nasir Biri

Karikar Biri

Aziz Biri and


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Hundreds of local biri manufacturers.

The industry is very price sensitive in nature. It is also a stick selling market, which means that

most of the tobacco consumers normally buy tobacco in sticks, not in packs. These two features-

price sensitive and stick selling-influences the business philosophies of the companies.

At the moment, there are two main tobacco industry associations i.e. Bangladesh Cigarette

Manufacturers Association (BCMA) and Bangladesh Biri Manufacturers Association (BBMA)

representing the industry.

B.1. Industry Segmentation:

The tobacco industry can be divided into two markets-Biri market and Cigarette market.

B.1.1. Biri Market:

It is basically the non-filter cigarette market with a very low pricing. So biri is by far the

dominating segment in the tobacco industry. Recent trend has shown that biri market is

experiencing decline which is a favorable sign for the cigarette market. BATB does not operate

in this market. The major brand in this market is Akiz Biri, product of Dhaka Tobacco

Industries. This is by far the most popular Biri in the country.

Cigarette Market:

Cigarette market is where BATB has all its focus. The market covers the rest 28% of the industry.

But the value of this market is lot higher than the biri market. The market can be divided into

four segments on the basis of price. They are:

Premium

Medium

Low

Very Low

BATB operates in the top three segments of the industry. It does not operate in the very low

segment. Along with BATB, DTI and Alpha Tobacco is also a major player in the low segment.

Today, the market is estimated to be 64.2 billion sticks of biri and 51.8 billion sticks of machine

manufactured cigarettes. Biri overtook cigarettes as the more popular smoked product in 1979.

However, the market for biri has been on a declining volume trend since 2003. This reflects the


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switch by consumers due to social pressure, urbanization, literacy rate, economic growth and

awareness by consumers. The market has a high International Brand share (18.2%).

B.1.2. Competitive Scenarios in the Cigarette Market:

In May 2008, Philip Morris International launched both full flavored and light variants of

Marlboro brand cigarettes in different markets of Dhaka. Dhaka Tobacco Industries is

manufacturing and distributing the brand.

BAT Bangladesh and Dhaka Tobacco Industries together hold more than 80% of the cigarette

market share.

Tobacco products are distributed either by manufacturers themselves, third party distributors or

wholesalers. The sales and distribution effort requires a large number of field employees and

agents because they have to serve about 880,000 individual retail outlets throughout Bangladesh

with a growth of 10% per annum.

The number of retail outlets is estimated to be growing by about 8% a year. The proliferation of

retail outlets is mainly due to the ease of entry and the low capital requirement. Many of these

outlets operate on limited capital and are unable to purchase quantities beyond their immediate

daily sales. The high number of retail outlets has created a stick market and consequently

imposed more frequent sales visits compared to other similar businesses.

The competition in the cigarette market is based on the price segment. There are individual

competitive brands in each price segment. There was no competition in the premium and medium

segment where the top International Brands of BATB dominate the market. But when Dhaka

Tobacco Industry (DTI) launched the brand Marlboro and Thames in the both Premium and Middle

segment the competition is raised. But still in the Segment of premium and Medium BATB is the

leader still. Only in the low segment there is a competition where mainly three companies have

their individual stakes and trying to take the segment leadership. In the very low segment, there is

also competition among brands like Sun Moon, Five Star, Wilson, Gold Hill etc.


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B.2. Segment wise Market Growth of Tobacco Industry

The tobacco industry in Bangladesh has an annual market size of about 135 billion. Market

penetration in Bangladesh is about 40% .Tobacco sales consists of 52% of filtered cigarettes

and 48% of unfiltered varieties, that is, bidi.

British American Tobacco (BATBC) is the only listed tobacco manufacturer with 99% market

share in the high end. BATBCs shareholding structure is as follows:

11% by Investment Corporation of Bangladesh (majority government - owned NBFI) and 16%

free float. Other players in the tobacco industry are domestic conglomerates of significant size:

Dhaka Tobacco and AbulKhair Tobacco.

BATBCs low segment market share increased from 20% in 2006 to 60% in 2010. Net profits

grew at double digit rates in 2006 -2011. Excises are high and constitute 11% of the

Government Tax Revenue. Future profitability is expected to be driven by consumers

upgrading to higher segments. (Huq).

B.3. GDP Share of Tobacco Industry

On the global scale, Bangladesh ranks 21st in tobacco cultivation, with the largest being China,

followed by the US and India. With a total production of more than 38,000 metric ton of leaf,

Bangladesh accounts for about 0.4 % of the total volume of tobacco produced in the world.

Tobacco contributes less than 0.01% to the GDP of Bangladesh. (Placeholder1) (Fuad, 2012)

(Fuad, 2012).

B.4. Government Tax and Other Regulations:

B.4.1. Tobacco Tax Structure in Bangladesh

Historically, price bands were created to recognize different quality and price bands of cigarettes

that range from low to high end. When VAT was first introduced on cigarettes in FY 1992- 93,

there were four price bands. However, in FY 1994-1995 and FY 1995-96, this number was

increased to 5 under pressure of the cigarette industry. Increasing the number of price bands led


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to massive switching to lower bands when tax rates were increased. To prevent this, the number

of bands was reduced to 4 in FY 1996-97. This continued up to the middle of FY 1998- 99.

In January 1999, the number of price bands was increased to 6 as a result of collective bargaining

of the cigarette industry. This continued up to June 2000. Again the number of price bands was

reduced to 4 in FY 2000-01 through FY 2001-02. In FY 2002-02, the government took the

initiative to reduce the number of price slabs to 3 to augment revenue. This continued through

FY 2003-04. Finally, the number of bands was raised to 4 in FY 2004-05 and since then the

number of price bands remained at 4.

B.4.2. Lopsided Tobacco Taxation Policy

Although cigarettes have been slapped with across-the-board tax hike, bidi, the indigenous

smoking stick, is left out of the new tax burden. Although price slabs increase substantially, SD

increased marginally during FY 2011-12 over FY 2010-11.

Table 1: Percentage Change in prices and SD during the fiscal years 2010 -2011 and 2011 - 2012

FY 2010 - 2011 FY 2011 2012 Change (%)

Category of

Cigarettes

Price per pack

of 10 (In Taka)

SD (%) Price per pack of

10 (In Taka)

SD (%) Changes in

Price (%)

Changes in

SD (%)

Low 8.40 - 9.15 33 11.00 11.50 36 30.95 9.09

Medium 18.40 - 19.00 53 22.50 23.00 55 22.28 3.77

High 27.00 32.00 56 32.00 36.00 58 18.52 3.57

Premium 52 and above 58 60 and above 60 15.38 3.45

NB: In all cases, Value Added Tax (VAT) is imposed at the rate of 15%. The provision of deferred

payment (tax payment after 14 days) for cigarette manufacturers was repealed.

B.4.3. Administrative Issues in Tobacco Taxation

Tobacco taxation in Bangladesh is governed by Value Added Tax Act, 1991. Out of the three

wings of the NBR namely, income tax, VAT and customs wings, VAT Wing is responsible for

enforcing the law. The organizational structure of the NBR is shown in Figure 2


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Figure 1: Organizational Dimensions of NBR

The enforcement of tobacco tax is done by a VAT Commissionerate (headed by a Commissioner)

and its field offices namely, Divisions and Circles. Several problems persist in the NBRs tax

administration. These are:

Most of the NBRs tax processes are manual and there is little in the nature of taxpayer education

and taxpayer services.

The NBR faces the acute shortage of trained tax officials as well as physical infrastructure. It

also faces problems in its functioning due to lack of distribution of tax work by function and size.

There is little research-policy linkage.

B.4.4. Political Dimensions of Tobacco Taxation

According to the Constitution of Bangladesh, levy or collection of any tax requires the approval

of the Parliament. Stakeholder consultation for new tax proposals commences from March every

year. During the pre-budget period, the NBR holds consultation with the members of business

associations, different levels of government, Members of Parliament (MPs), media and NGOs

and proposes tax measures. A tax proposal is placed before the Council of Ministers for its

National Board of Revenue

Income Tax wing

VAT Wing

VAT Comissionerate

s

VAT Divisions

VAT Circles

Customs Wing


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concurrence and then it is introduced in the form of Finance Bill as budget document to the

Parliament in the second week of June every year.

Enhancing consumer price of bidi through tax measures appears more challenging for the NBR

for political reasons.

Firstly, several MPs are involved in tobacco business.

Secondly, it is claimed that about 2.5 million workers are engaged in bidi industry, many of

whom are poor women and children. Controlling bidi consumption will force bidi manufacturers

to downsize their production, which will in cause unemployment of bidi workers.

Thirdly, bidi consumers belong to the poorest segment of the society. Raising tax and price of

bidi will, therefore, result in loss of popularity of the government among this population.

The pressure of bidi manufacturers is evident from the fact that since FY 2005-06 there is no

change in SD rate in bidi. Moreover, the tariff value for a pack of 25 sticks non-filtered bidi

remained at Tk 3.1579 since FY 2008-09.

During FY 2011-12 budget cycle, more than 120 MPs made written representation to the NBR

not to increase bidi price. Rather they demanded complete withdrawal of tax from bidi. Bidi

manufacturers association created substantial pressure to split the tariff value (bidi tax base) into

three price bands namely, 12 sticks per pack, 10 sticks per pack and 8 sticks per pack and they

succeeded. Splitting of tariff value in FY 2011-12 may have three effects on revenue and health.

Firstly, there may be huge substitution effect from medium and low bands of cigarettes to bidi.

Secondly, the scope of revenue evasion may increase because of opportunity for swapping

banderols between different price slabs. Thirdly, this may also have negative impact on health

because of likely increased consumption of bidi.

B.4.5. NBR-WHO Collaboration on Tobacco Taxation

The main objective of the NBR-WHO collaboration is to strengthen the policy development

process and tobacco tax administration at the NBR. In May 2010, WHO provided technical

assistance for developing Tax Simulation Model to be used by the NBR.WHO helped to establish

a Tobacco Tax Cell at the NBR:

To develop tobacco database


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To conduct research on tobacco market trends

To analyze the impact of tobacco tax on health and revenue

To formulate evidence based policy on tobacco taxation.

WHO supported several training programs for NBR officials to strengthen their capacity.

(Ahmed, 2012)

B.5. Demand for Tobacco in Bangladesh

Over the past decade, a growing number of studies have examined the impact of taxes and prices

on tobacco use in low and middle-income countries. These studies have estimated a wide range

of price elasticities, with some, but not all, indicating that demand for tobacco products is more

responsive to price in low and middle-income countries than it is in high income countries. For

example, Hu and Mao (2002) estimate that the price elasticity of cigarette demand in China

ranges from 0.50 to 0.64, while Karki and colleagues (2003) estimate an overall price elasticity

of cigarette demand of 0.88 in Nepal. 27,28 John (2008) examined demand for multiple tobacco

products in India, estimating price elasticities of 0.35, 0.91, and 0.88 for cigarettes, bidis, and

leaf tobacco, respectively. 29 More recently, Guindon and colleagues (2011) updated and

extended Johns analysis, estimating cigarette and bidi price elasticites of 1.03 and 0.94,

respectively. 30 As in studies for high-income countries, studies from low and middleincome

countries that account for the addictive nature of tobacco use find that demand responds more to

price in the long run. For example, Aloui (2003) estimates short run price elasticities for tobacco

use in Morocco in the range from 0.51 to 0.73, and estimates long run elasticities that range

from 1.36 to 1.54. 31 Findings from studies bas ed on individual-level survey data on adult

tobacco use indicate that taxes and prices influence both tobacco use decisions (prevalence) and

the frequency and amount of tobacco consumption. In general, the estimates from highincome

countries suggest that about half of the impact of price on tobacco use results from its effect on

prevalence. Given that relatively little initiation occurs during adulthood, these changes largely

result from cessation among adult users. This is confirmed by a small number of studies which

find that increases in price lead a number of current users to try to quit, with many users successful

in doing so in the long run.


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B.5.1 Existing Evidences of Demand for Tobacco in Bangladesh

To date, a few studies have estimated the price elasticity of demand for tobacco products in

Bangladesh. Ali and colleagues (2003) estimated tobacco demand for Bangladesh using annual

time series data from 1983 through 1999 to estimate a relatively parsimonious model that

included prices and per capita GDP as the only explanatory variables. They obtained a negative

but statistically insignificant price elasticity of 0.27, and a positive and significant income

elasticity of 0.62. They did not estimate bidi demand given the lack of data on bidi prices and

consumption over time. Guindon and colleagues (2003) estimated cigarette demand for

Bangladesh as part of a larger study that also estimated demand in Indonesia, Nepal, Sri Lanka,

Thailand, Maldives, and Myanmar. 36 Using annual time series data from 1970 through 2000,

they too estimated a relatively parsimonious model that included only price and income as

determinants of demand. In addition to estimating a conventional demand model, they also

estimated a myopic addiction model. Like Ali and colleagues, they found no significant effect of

prices on cigarette demand in either model. In their country-specific models for the other

countries they examined, they generally found negative and often significant price effects, with

shortrun price elasticity estimates for cigarette demand clustered around 0.5 and long-run

elasticity estimates clustered around 0.7. More recently, Nargis and colleagues (2010, 2011)

have used the individual level data from the ITCBangladesh survey to estimate the price elasticity

of cigarette and bidi demand in Bangladesh. 37,24 Given the low prevalence rates of cigarette

smoking among women, cigarette demand models were estimated for adult males only; bidi

demand models were estimated for both men and women. In addition to price and income, Nargis

and colleagues controlled for a variety of other factors in their demand models, including age,

marital status, educational attainment, employment status, household size, urban/rural location,

the number of years since initiation, and survey year (in the 2011 analysis that used both the 2009

and 2010 survey data)


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Table 2: Estimated Price Elasticities of Cigarette and Bidi Demand from International Tobacco Control

Policy Evaluation Project (ITC) Bangladesh Surveys, 2009 & 2010

2009 Pooled 2009 & 2010

Cigarettes Bidi Cigarettes Bidi

Prevalence -0.29*** -0.46* -0.44*** 0.03

Conditional

Demand

-0.14*** -0.18 -0.22*** -0.22**

Total -0.43 -0.64 -0.66 -0.22

Source: Nargis et al.(2010, 2011)

Note:***,** and * represents estimates statistically significant at 1%, 5% and 10%

significance levels respectively.

B.5.2. New Estimates for Tobacco Demand in Bangladesh

Annual time series data on aggregate cigarette consumption from 1981 through 2004 to generate

new estimates of price elasticity was used. In contrast to the earlier time-series analyses by Ali

and colleagues (2003) and Guindon and colleagues (2003), we apply an econometric

methodology that accounts for the time series properties of the data. 34,35, * Given available

data, our model is similarly parsimonious and includes only price and income as determinants of

cigarette demand. Aggregate cigarette consumption data were obtained from the Bangladesh

Bureau of Statistics and were divided by population to obtain a measure of per capita

consumption. Cigarette price data reflect the inflation adjusted price of Star brand cigarettes, the

most popular brand of cigarettes consumed in Bangladesh over this time period.

Cigarette price is found to have a negative and statistically significant impact on cigarette demand

in Bangladesh, while income is found to have a positive and statistically significant impact.

Estimated short run price and income elasticities are 0.41 and 1.14 respectively, with long run

estimates of 0.57 and 1.46. Together, the estimates imply that the past decades general trend

towards increasingly affordable cigarettes, plus the combined effect of reductions in cigarette

prices and increases in household income, have led to significantly higher cigarette smoking in

Bangladesh than would have been the case had cigarettes remained less affordable. (Barkat A,

2012)


20 | Page

C. Trends in Tobacco Production and Market Share

Despite a significant improvement in awareness about the deleterious effects of tobacco use in

recent years, tobacco product production and trade have remained largely unchanged, if not

increased. Although there has been a lot of campaigning against tobacco, it appears to have been

ineffective in reducing demand. This section discusses recent trends in tobacco production and

trade. Both agricultural and industrial productions in recent years are analyzed. Aspects of imports

and exports are also discussed in order to get an idea of recent trends in the tobacco industry.

C.1. Tobacco products market shares The tobacco products available on the domestic market are tobacco leaf and other chewing tobacco,

cigarettes and bidi. WHO estimates that cigarettes and bidi account for about 70% of all tobacco used

in Bangladesh; chewing tobacco for 20%; and the remaining 10% is consumed in the form of

cigars, snuff and pipe tobacco. The smoking market is clearly divided into two categories:

machine- made cigarettes and hand- made bidi. Although bidi outsell cigarettes by about three to

one in volume, cigarettes far outstrip bidi in total sales value.

Manufactured cigarettes account for an estimated 85% in value, but only 28% in volume of all

manufactured tobacco products sold in Bangladesh. Conversely, bidi account for 15% in value and

28% in volume. Imported cigarettes account for 18.2% in value and less than 7% in volume of

manufactured tobacco products sold. So biri is by far the dominating segment in the tobacco

industry. Recent trend has shown that biri market is experiencing decline which is a favorable sign

for the cigarette market. Some smokers are reported to be switching from bidi to cigarettes as

cheaper cigarettes become available on the market, however, production data suggest that in

volume terms, bidi market share is growing. Future profitability is expected to be driven by

consumers upgrading to higher segments. Today, the market is estimated to be 98.5 billion sticks

of biri and 84.1 billion sticks of machine manufactured cigarettes. Information on market share is

not available for tobacco leaf or other forms of chewing tobacco.


21 | Page

C.2. Tobacco Agriculture

While widely grown, tobacco is a relatively minor crop in overall agriculture in Bangladesh. In

2012, the acreage devoted to tobacco growing accounted for only 0.25% of acreage for all crop

production and, in 2011, the value of the tobacco grown was only 0.22% of the value of all

agricultural production. The acreage devoted to tobacco growing in Bangladesh has been falling

steadily for most of the past three decades, before rising sharply in 2009 (chart 1). In 2009, tobacco

was grown on just under 73,000 acres, down 20% from 1995, before rising to over 95,000 acres

in 2010. In many years, imports and exports of unmanufactured tobacco were similar. Much of the

recent rise in the quantity of tobacco grown in Bangladesh is accounted for by these increased

exports, with the share of tobacco exported rising from about 2.5% in 2000 to nearly 34% in 2009.

In 2008, the export incentive was eliminated. In the 2010/11 budget, the government imposed a

10% duty on tobacco leaf exports in an effort to discourage tobacco growing.

1 Source : Agriculture Wing, BBS

The Bangladesh Bureau of Statistics estimated that, in 2008/09, 115,533 persons were employed

in tobacco growing, about 0.3% of the agricultural labor force. While the recent rise in tobacco

1 Statistical year book 2012

0

20000

40000

60000

80000

100000

120000

140000

pro

du

ctio

n a

s p

er

acre

age

year

Chart 1: Yearwise production as per acreage

Acreage Production(million)


22 | Page

growing in Bangladesh is likely to have increased the number of tobacco farmers in the country,

the overall share of agricultural employment in tobacco growing is likely to be less than0.5%.

C.3. Production of Manufactured Tobacco Products

In May 2008, Philip Morris International launched both full flavored and light variants of

Marlboro brand cigarettes in different markets of Dhaka. Dhaka Tobacco Industries is

manufacturing and distributing the brand.

BAT Bangladesh and Dhaka Tobacco Industries together hold more than 80% of the cigarette

market share.

Tobacco products are distributed either by manufacturers themselves, third party distributors or

wholesalers. The sales and distribution effort requires a large number of field employees and

agents because they have to serve about 880,000 individual retail outlets throughout Bangladesh

with a growth of 10% per annum.

The number of retail outlets is estimated to be growing by about 8% a year. The proliferation

of retail outlets is mainly due to the ease of entry and the low capital requirement. Many of

these outlets operate on limited capital and are unable to purchase quantities beyond their

immediate daily sales. The high number of retail outlets has created a stick market and

consequently imposed more frequent sales visits compared to other similar businesses.

The competition in the cigarette market is based on the price segment. There are individual

competitive brands in each price segment. There was no competition in the premium and

medium segment where the top International Brands of BATB dominate the market. But when

Dhaka Tobacco Industry (DTI) launched the brand Marlboro and Thames in the both Premium

and Middle segment the competition is raised. But still in the Segment of premium and Medium

BATB is the leader still. Only in the low segment there is a competition where mainly three

companies have their individual stakes and trying to take the segment leadership. In the very

low segment, there is also competition among brands like Sun Moon, Five Star, Wilson, and

Gold Hill etc.


23 | Page

Table 3: The Competition of Cigarette Industry of Bangladesh in Different price segment

Segments Brand Company

Premium B&H, switch, State Express 555,

Marlboro

BATB

DTI

Aspirational Premium JPGL, Pall-mall, Capstan Filter Kings

Thames

BATB

DTI

Value for Money Star Filter King, Scissors Filter King,

Navy, Summon Filter King

Senor Gold

Marine

BATB

DTI

Alpha Tobacco

Abul Khair Tobacco

Very Low Pilot, Bristol, Hollywood

Five Star, Rally, Sheikh, Maris

Wilson

Gold hill

BATB

DTI

Azizuddin Tobacco

C.4. Current Pattern of Tobacco Consumption

Bangladesh is one of the largest tobacco consuming countries in the world. Tobacco is consumed

in many forms in Bangladesh, including smoking of cigarettes, bidis, waterpipe (hookah), and

chewing (often with betel leaves and nuts, as jarda). Cigarettes and bidis account for most of

smoked tobacco consumption. Data from various surveys suggest that smoking prevalence has

been relatively flat or rising in Bangladesh since the mid-1990s. Initiation of tobacco use occurs

at relatively older ages in Bangladesh, but a large number of Bangladeshi youth have tried smoking

and many consume other tobacco products.


24 | Page

Table 4: Annual Cigarette Consumption

C.4.1. Age-specific and Sex-specific smoking rates:

It is clear from the table that as age increases so does prevalence of smokingboth for males and

females. The highest rates of smoking are found in people aged 35 years and above. These rates

refer to the smoking of both cigarettes and bidi.

0

10

20

30

40

50

60

70

80

10-14yrs 15-19yrs 20-34yrs 35-49yrs 50+ all ages

AGE

smo

kin

g r

ate

(Per

cen

tag

e)

Chart 2: Smoking rates by age and sex in Bangladesh , 2012

both sex Male Female

Years Per Capita

Consumption

(Cigarette Sticks)

Total Consumption

(Millions of Cigarette

Sticks)

1980 492 17787

1990 294 14007

1995 194 12373

2000 239 17449

2010 234 19717


25 | Page

The BBS surveys show a small fall in smoking rates between 2005 and 2006, for males and

females. However, surveys in two districts of Bangladesh in 2010 and 2011 found the opposite, a

large increase in smoking prevalence for both males and females. The study found prevalence rates

for males of 41.1% in 2010 and 48.3% in 2011 and for females, 4.0% in 2010, and 20.9% in 2011.

The same study reports differentials between rural and urban respondents, especially for older

respondents. Tobacco prevalence reached 80% for older rural male respondents; the highest age

specific rate among urban men was 69% (35-49 age groups). Prevalence was systematically lower

among urban female respondents than among rural women across all age groups.

C.4.2 Socio-economic differentials in male smoking

There are significant variations in male smoking among households from different socioeconomic

groups. Differences are found with respect to educational status, household income and other

socioeconomic variables. Chart 3 presents smoking rates among males by household income

groups. The lower the income of the household, the greater the prevalence of smoking of its male

members. Smoking prevalence among men appears to have declined between 2009 and 2011 for

almost all income groups. The decline is significantly bigger among the lower income groups.

.

0

10

20

30

40

50

60

70


26 | Page

Education is strongly correlated with smoking: the higher the level of education, the lower the rate

of smoking. The BBS surveys show a fall in smoking rates between 2009 and 2011 for all except

for the most educated men. The same relationship between education and smoking prevalence is

found in India and many other countries.

C.4.3. Smoking among poor people

Clearly, smoking rates are highest among the poor. Table 3.5 and 3.6 present an estimate of the

number of poor smokers (male and female). The smoking rate among adult males living below the

poverty line is 54.8% and the corresponding rate for adult females is 3.6%. It is estimated that

9,872,181 poor adult men (15+) and 612,060 poor adult women smoke, making a total of nearly

10.5 million poor people spending scarce income on cigarettes and bidi. Given the increases in

population and 2009-10 data on smoking, this number has almost certainly been increasing

0 10 20 30 40 50 60 70

No education

Class IV

Class VIIX

SSC and Above

Smoking Rate

Ed

uca

tio

n L

evel

No education Class IV Class VIIX SSC and Above

Smoking rates in 2011 59.5 34.9 28.5 31.6

Smoking rates in 2009 61.4 40.7 31.3 25

Chart 4:Male Smoking Rates by Education Level, Bangladesh

Smoking rates in 2011 Smoking rates in 2009

27 | Page

Table 5: Estimated number of poor male smokers, Bangladesh

D. Circular Flow Diagram

Figure 2: Circular Flow Diagram

Age

Male

population(000s)

Number below poverty

line (000s)

Smoking rate

(%)

Number of poor

smokers (000s)

1519 5979 2810 18.1 508

20-34 14695 6907 57.3 3959

3549 9620 4521 72.4 3274

50+ 8028 3773 56.5 2131

Total 38322 1811 54.81 9872

Product Market

Companies Sell

Consumers Buy

BATB

- Buys factors of production

- Sells Cigarette

Households

- Sells Factors of production

- Buys Cigarette

Government

Taxes Taxes

Govt. S pending

Govt. Spending

Cigarette Cigarette

Factors of Production

Facto rs of ction Produ

Cost

Income

Revenue

Consumption/Expenditure

Factor Market [Land, Labor, Capital]

- Household Sells

- Firms buy

28 | Page

The model that helps explain how a market economy works is a circular-flow diagram. A

circular-flow diagram is a visual model of the economy that illustrates how households and

businesses interact through markets for products and markets for resources. The circular-flow

diagram with reference to the Tobacco industry of Bangladesh is illustrated in Figure 2.

The two types of economic agents in a simple market economy are households and business

firms. A household is a social unit comprised of those living together in the same dwelling.

Here the tobacco manufacturer company as a representative of business firm is producing

goods i.e. cigarettes that cater to different segments of customers in an effort to make profit.

The profits they are generating are the revenues minus expenses. Revenues are the monetary

income received from the sales of cigarettes and expenses are the total costs of the production

that encompasses raw materials purchase, labor expenses, employee salary, utility,

miscellaneous expenses, taxes, interest expense, administrative expenses, maintenance and so

forth.

The household part in this particular diagram interacts with business firm i.e. BATB in two

distinct ways:

(1) Households supply economic resources, such as labor to businesses in exchange for

income, and

(2) They use their incomes to buy goods produced and sold by business firm. The first type of

interaction occurs in markets for resources. The second type of interaction occurs in markets

for products.

The bottom half of the circular-flow diagram, which represents product markets, shows those

households give money to businesses in exchange for goods and services. Money flows

clockwise, while the goods and services flow counter-clockwise. In the context of BATB, the

households or the cigarette consumers buy cigarettes in exchange of money and in turn inject

the amount to the companys coffer. In markets for products, the companies are usually the

29 | Page

suppliers and households usually are the demanders being no exception to the case of British

American Tobacco here. The money that flows from cigarette consumer to BATB is

consumption spending from the perspective of households and is revenue from the perspective

of producer firm. The products that flow from business firms to households are sales by the

business firms and purchases by household consumers.

The top half of the circular-flow diagram, which represents resource markets, shows those

businesses provide money to households in exchange for economic resources used as factors

of production. For example, Labor is an economic resource that every adult household can

potentially supply in the markets for resources. Wages are the payments made to workers in

exchange for labor, typically based upon the amount of time worked or amount of output

produced. A salary is a fixed payment made regularly to a worker in exchange for labor. Blue

collar workers typically receive wages in exchange of their physical labor. White collar

workers are typically paid salaries. In the diagram, this process is illustrated by the

counterclockwise flow of money and the clockwise flow of economic resources. Besides, if

households own natural resources, such as land, they can supply them to businesses in

exchange for rent payments. The company has set up distribution houses at different locations

all over the country owned by households and thereby attributing them for another factor of

production, Land. Hence we can clearly observe that, in markets for economic resources,

households are usually the suppliers and the firms are usually are the demanders. The money

that is flowing from the company to households are expenditures from the perspective of

BATB and incomes from the perspective of workers, employees, managers and land owners.

Conversely, the labor, capital, and natural resources that are flowing from households to the

business are sources of income from the perspective of households and inputs from the

perspective of businesses.

When workers receive more income than they spend on the purchases of goods and services,

they are able to create savings. Savings are the portion of a persons income that is retained or

invested for use in the future. Household savings can become financial capital if the money is

borrowed by a business firm. For example, money that is deposited by households in a bank

savings account might be lent by the bank to the company in order to purchase machinery,

30 | Page

equipment or to meet short term liabilities. When this occurs, the business firm pays interest to

the bank for the borrowed funds. Interest is a rate of return that represents compensation from

the borrower or receiver of funds to the lender or depositor of the funds. The bank, in turn, pays

interest to the householders for the funds deposited in the savings accounts. Consequently, other

transactions that occur in resource markets are the supply of financial capital by households in

exchange for interest income.

E. Relative Market Share in the Tobacco Industry

Cigarette manufacturing is highly concentrated in Bangladesh, while bidi manufacturing is much

more fragmented. As Table 4 indicates, cigarette markets are dominated by two firmsBritish

American Tobacco Bangladesh (BATB) and the domestic Dhaka Tobacco Industries (DTI), a part

of the Akij Group. BATB is one of the oldest tobacco product manufacturers in Bangladesh, in

operation for over 100 years. BATB brands account for almost 46.8% of cigarette consumption in

2014, down somewhat from the 54% half of the market the company had controlled as recently as

2010.

Table 6: Cigarette Brand Shares: (Based on a Household Survey)

Brand Company Year -2012

Star BATB 25.6%

Sheikh DTI 18.3%

Navy DTI 13.7%

Gold Leaf BATB 10.3%

Marise AKTC 8.9%

Others --- 23.2%

31 | Page

DTI is part of the Akij Group, a large domestic conglomerate that includes a variety of subsidiaries

involved in cement, computers, foods & beverages, jute, textiles, pharmaceuticals, and much more.

DTI has historically focused on the lower priced segment of the market. DTIs key brands include

lower priced brands Sheikh, K-2, Five Star, Red & White, Real, and Surma; other major brands

are Navy (mid-priced) and Caste (premium). In addition, in 2007 DTI entered into an agreement

with Philip Morris International (PMI) to market PMIs brands, most notably Marlboro, in the

Bangladeshi cigarette market. DTIs share of the cigarette market is around 40% in recent years.

There are a number of other smaller domestic cigarette companies operating in Bangladesh,

including Abul Khair Tobacco Company (AKTC), Alpha Tobacco Manufacturing Company,

Azizuddin Industries Ltd., Sonali Tobacco Company Ltd., National Tobacco, and Nasir Tobacco.

Together, they account for 15-20% of the Bangladeshi cigarette market. To date Imperial

Tobacco/Altadis, the worlds other leading multinational tobacco companies, has not established

a significant presence in Bangladesh, with imports of their brands and other multinational brands

accounting for a very small share of the Bangladeshi market. . Recently DTI has signed a contract

with Japan Tobacco International to run manufacturing plant for them.

The dominance of BATB and DTI is reflected in brand shares in the Bangladeshi cigarette market,

as shown in Table 4, derived from household survey questions on brands used in the GATS (2009).

Star (BATB) and Sheikh (DTI) are the two most popular brands, followed by Navy (DTI), Gold

Leaf (BATB), and Marise (AKTC). Together, the top 4 brands account for over two-thirds of

cigarette consumption. To date, DTIs agreement with PMI has not generated much interest in

Marlboro, which had less than 1% market share in 2010.

Most cigarettes produced and sold in Bangladesh are filter-tipped, with market share stable at

around 86% for the past decade, after rising sharply in the 1997. Nearly all cigarettes consumed in

Bangladesh are high-tar cigarettes, although lower tar brands are starting to emerge. Most premium

brand cigarettes are sold in packs of 20, while less expensive cigarette brands are more often sold

in packs of 10. The smaller packs appear to be targeted at keeping pack prices affordable for lower

32 | Page

income smokers. Over half of cigarette consumption is of inexpensive brands and about 30% is of

mid-priced brands.

In contrast, bidi production is much more fragmented than cigarette manufacturing. The top 4 firms

account for a little less than 50% of the market, and, according to the 2001/03 Economic Census,

there were a total of 9,624 bidi manufacturers, with over 96% of these household based. Among

bidi manufacturing companies, Akij Bidi Factory Ltd, another subsidiary of the Akij Group, is the

largest with an estimated market share of 29.1% in 2009 (GTSS, 2009). Akij Groups ownership

of both Dhaka Tobacco Industries and Akij Bidi Factory could result in shared distribution

channels and marketing practices. Aziz Bidi Factory is the only other company with more than

10% of the market, while the remainder account for shares of around 5% or less. Most bidis are

sold in packs of 25.

E.1. Competitive Landscape

Cigarette markets are dominated by two firmsBritish American Tobacco Bangladesh

(BATB) and the domestic Dhaka Tobacco Industries (DTI), a part of the Akij Group. BATB

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Mar

ket

Shar

e(P

erce

nta

ge)

Year

Chart 5: Tobacco Industry Market Share

BATB

DTI

AKTC

Others

33 | Page

is one of the oldest tobacco product manufacturers in Bangladesh, in operation for over 100

years. BATB brands account for almost 46.8% of cigarette consumption in 2014, down

somewhat from the 54% half of the market the company had controlled as recently as 2010.

DTIs share of the cigarette market is around 40% in recent years. They are experiencing a

decreasing pattern in its market share which is 35% in 2014 from 45% in 2007. There are a

number of other smaller domestic cigarette companies operating in Bangladesh. Together, they

account for 15-20% of the Bangladeshi cigarette market.

F. Company Profile of BATB

British American Tobacco Bangladesh (BATB) is a pioneer and leading multinational cigarette

manufacturer. Based in England, British American Tobacco was formed at the turn of the 20th

century with the objective of establishing a worldwide business. British American Tobacco is

recognized as one of UK's largest companies and the World's most global tobacco company.

Today British American Tobacco sells the leading brands in over 30 markets covering 102

countries, has more than 200 brands worldwide, employs more than 55,000 people and

produces some 2 billion cigarettes every day. More than a billion people across the globe enjoy

smoking tobacco. One in every eight chooses a British American Tobacco brand. In order to

support the company's business goals the merger of British American Tobacco with Rothmans

International had been announced on 11 January 1999. This global merger was completed on

7thJune 1999. This brings together the number 2 and 4 players which together will boast a

combined volume exceeding 900 billion cigarettes around the world with some 120,000

employees and a worldwide market share of 16 percent (Phillip Morris has a 17 percent share).

British American Tobacco Bangladesh (BATB) was previously known as Bangladesh Tobacco

Company (BTC). On March 22, 1998 the company changed its identification and established

commitment to the highest international standards. The Companys main business is tobacco,

which involves growing, processing, manufacturing and marketing of tobacco leaf, cigarettes

and pipe tobacco. The company also exports processed tobacco leaf in the international market,

mainly in the European Countries with its effort to create an international market of its

34 | Page

products. Based in Dhaka the company has one packaging factory in Dhaka and one leaf-

processing factory in Kushtia. The companys current employees are more than 200 managers

and 1300 employees. In its effort to create an international market for Bangladeshi leaf tobacco

the company has been exporting tobacco to markets in developed countries like UK, Germany,

Poland, Russia and New Zealand. BAT Group holds 72.91% of BATB shares; 12.86% is

owned by Investment Corporation of Bangladesh and a further 14.23% is owned by other

shareholders. BATB contributes approximately two-thirds of the revenue derived from the

cigarette industry.

F.1. Vision and Mission of the Company F.1.1. Vision

Companys vision is to achieve leadership of the global tobacco industry in order to create

shareholders value.

F.1.2. Mission

Double the net revenue by 2014

Growing companys share of the total tobacco market

Dominating key identified segment

F.2. Product Portfolio

BATBs product offerings can be categorized in Four Segments which are in alignment with

the Local Government Tobacco Control Guideline

Premium

Benson and Hedges or B&H is regarded as a premium segment product of this company.

Launched in 1997, B & H maintains BATBs dominance in its respective segment and drives

the growth in Bangladesh market. Within a short time Bangladesh became a leading B& H

market across the BAT world. After a price increase in 2004, B&H still remains a Successful

35 | Page

and happening muscle in our portfolio. British American Tobacco Bangladesh was the first

market to launch the new pack of E&1-1 at the beginning of September 2005.

Aspirational Premium

JPGL is the prominent aspirational premium segment brand that was launched in 1980 and is

one of the highest selling brands of BATB in this segment. Apart from Johon Player Gold

Leaf, there are also two other brands in aspirational premium segment which are Pallmal and

Capstan.

Figure 3: BATB Product Portfolio

Premium Segment

Value for Mon ey Segment

BATB

PRODUCT

PORTFOLIO

36 | Page

Value for Money

Star, launched 40 years ago is still a dominating brand in this segment for BATB. Recently,

BATB has introduced a new variant in the Star Family named as Star Next.

Low

BATB low segment consists of three brands namely Pilot, Hollywood and Derby. Among these

three, Derby makes out the most volume per year from the low segment

F.3. Sales Trend over Last 10 years

The tobacco business had a very slow growth rate in the first decade. The industry grew in

a moderate pace till 2006 but between 2008 and 2012 the growth rate happened to be

fluctuating. From 2008 to 2014, BATB has experienced a remarkable growth in its sales

volume (both in billion sticks & in Tk.) The following figure self-explains the trend in

BATB sales volume over the past years.

Low Segment

37 | Page

F.4. Countrywide Sales (By Region) Over the past two decades BATB marked significant growth in terms of volumes sold

amongst the regions. The statistics have been furnished herewith:

Table 7: Countrywide Sales of BATB (By Region)

Volume (in Bln sticks)

Years Dhaka Chittagong Sylhet Rajshahi Khulna Total BATB

2005 0.5 2.3 5.1 2.8 1.8 18.5

2006 0.5 2.6 5.8 3.3 2.1 21.4

2007 0.1 2.5 5.5 3.1 2 20.2

2008 0.1 2.5 5.5 3 2 20

2009 0.1 2.8 6.3 3.5 2.3 23

2006 2007 2008 2009 2010 2011 2012 2013 20142015(Estimated)

bln sticks 21.4 20.2 20 23 25 29 31 34.8 37 40.87

0

5

10

15

20

25

30

35

40

45

Sale

s V

olu

me

Year

Chart 6: Sales trend of BATB over last decade

38 | Page

2010 0.8 3.1 6.8 3.8 2.5 25

2011 0.2 3.6 7.9 4.4 2.9 29

2012 0.9 3.8 8.5 4.7 3.1 31

2013 2.3 4.3 9.5 5.3 3.4 34.8

2014 3.8 4.5 10.1 5.6 3.7 37

F.5. Contribution to the Industry

6%

12%

24%58%

Chart 7: BATBs Contribution to the Industry

Premium Aspirational Premium Value for Money Low

39 | Page

G. SWOT Analysis

Strengths

1. Wide recognition BATB is widely recognized as good corporate company for its corporate

value and ethics. The good deeds are in terms of highest tax payment, community services,

afforestation programs and helping some social organizations like Shandahni and others.

2. International brand Image BATBs manufactured premium and medium segment brands

Benson & Hedges, State Express 555 and John Player Gold Leaf are internationally recognized

& valued by its loyal customers. This is because these brands are manufactured in different

BAT operating companies and dominating in the world market. Quality of these brands is

legendary and consistent, when it is compared. In order to ensure the quality product BATB

use global sourcing of all the raw material, which is common for all the operating companies

in BAT.

3. Strong brand portfolio: BATB offers product in all price segments in the market. All their

products are the market leaders, having the majority of market share in term of value and

volume.

4. Talented workforce - People are BATBs fundamental advantage-the sources of all their

strength. This include management, workforces and all other business partners, who are

directly involved in the value chain process. People are highly trained and motivated,

productive and team-oriented. Some important aspects are listed below:

Planning

Long term orientation

Many people involved in preparing and making decision

40 | Page

Decision making takes long time but implementation is fast

Employees share power and responsibility

Organizing

Common organization culture

Organizational change by changing goals Staffing

Rapid advancement highly desired and demanded

Reward for individual achievements

Training and development undertaken

Leading

Directive style, strong, firm and determined

Leaders are decision maker is heading the group Controlling

Control by supervisor

Control focus on individual performance

5. Superior technology Technology used in BATB is superior from the competition in

Bangladesh. Their state of art manufacturing plant in Dhaka is not only sophisticated but

also benchmark facility within the operating companies of BAT in their AMESCA (Africa,

Middle East, and Sub-Continent & Asia) region. In this industry technology is the key for

superior quality product. Technology revolutionizes the product and production process and

BATB always uses latest technology which smoothing out the production process.

Process Technology: It is used for tobacco processing and its conversion to cigarettes. It

encompasses extrusion technology, aspects of packing and painting, cutting and dying

technology, and application of instrumentation, control system and process automation and

separation of tobacco and non-tobacco materials.

41 | Page

Material Technology: The Company has been using latest material technology to the design

and develops the cigarettes and packing. These area covers paper technology, combustible

smoking material etc.

Information technology: BATBs computer section is very much updated and well oriented.

All the external and internal information is being controlled through a network.

MRP II: BATB is the only company in Bangladesh who uses MRP II (Manufacturing Resource

Planning II) in their production and operation. This is the latest technology and only a few

companies in the world have the capability to implement MRP II. This is a very distinctive

competitive advantage of BATB over other companies.

6. Better product quality relative to the rivals: As mentioned earlier BAT maintains its

consistent quality with good blend of tobacco through superior technology, thus BATB is

always in an advantages position compare to its competitor. BAT grows tobacco for their own

consumption in Bangladesh and they have completely separate function responsible for

tobacco growing and processing, which their competitors do not have.

7. High financial strength: BATB has a huge financial back up. The company can devote a

large fund to R&D, advertisements, quality control, and training and also in other areas, which

its competitor cant match.

8. Absorbing economies of scale in producing BAT products: BAT product has a higher

demand in Bangladesh. As the company produces in a large scale, it possesses economies of

scale and hence per unit of cost is comparatively lower in Bangladesh. On the other hand

production sources land, labor and raw materials are also low in this country.

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9. BATB is the largest tax payer in Bangladesh: BAT is the largest tax payer in our country.

It paid more than Tk. 300 million tax in the last year. As a result of this huge amount BATB

enjoys a cordial relationship with the government of Bangladesh.

10. Low manufacturing cost: There are many reasons for low manufacturing costs of BATB.

First, it can hire labor at a cheaper rate, which is not possible in developed countries. Secondly,

the company has been using the latest technology in production by which it is able to minimize

its production cost by producing bulk of cigarettes. Thirdly, transportation cost is also

comparatively lower in our country.

Weakness

1. Strong Trade Union: Trade union is one of the weakness for BATB. They are resistant to

any changes. It takes lot of management effort and time to make the union leaders to motivate

for any minor changes in the entire process. Management in BATB is working hard to change

the culture and practice through different projects and program.

2. Missing a large number of consumers due to high price: BATB is losing a large number of

consumers in Bangladesh due to high price of its products. It does not have a product for very

low income consumers and Biri consumers. Evidence shows that 74.5% of the total volume of

market share of smokers (Cigarette and Biri combined) belongs to local company where BATB

has no access. Hence we may suggest that BATB may capture a large portion of the local

smokers market, if it produces a low priced product for the low income consumers.

3. Wholesalers and retailers are not getting enough attention: Distributors of BATB do not

provide adequate attention to wholesalers and retailers. Enough merchandizing materials are

also not provided to them. On the basis of the above in depth external analysis the following

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opportunities and threats have been identified for BATB that need to be considered with due

care.

Opportunities

1. Global Merger with Rothmans: Global merger of BAT with Rothmans Industries and

closer of all Rothmans facilities in South Asia gave BATB opportunity to become regional

source of John Player Gold Leaf & Benson & Hedges for Middle-East market. BATB already

sent samples of these two brands for physical & sensory test in R&D Center in the head quarter.

2. The increased number of smokers in Bangladesh: The number of professional smokers is

gradually declining in the western countries where as the same is increasing in Bangladesh.

BATB can grab this opportunity and can make a consumer forecast for the future. At present,

the cigarette market in Bangladesh is growing at a rate of 10%. It is indeed a very good

opportunity for BATB to grow.

3. Augmenting GDP: GDP of Bangladesh is increasing due to economic expansion, open

market policy, industrialization and educational development. Its a great opportunity for

BATB to expand its market and product line.

4. Increasing number of population: The number of population is increasing at a higher rate

in Bangladesh. And at the same time the number of smokers are increasing. So it is an

opportunity for the company.

5. 80% people smoke Biri: In our country a large section of urban and rural people smoke

Biri. This means that the market potential of BATB is very high. If the Biri consumers can be

persuaded to smoke cigarettes instead, the company will have a very big market for its products

in this country.

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Threats

1. Anti-smoking lobbies activities: Anti-Smoking lobbies are now getting very strong in

Bangladesh. Recent demonstration against Voyages of Discovery (VOD), a global campaign

of John Player Gold Leaf and government legislation against ban in cigarette advertisement in

all media reflects clear threat for cigarette industries.

2. High Excise rate: Excise is another threat for BATB. In the recent past there was several

increases in tax structure specific to BATB to get more revenue for the government. If this

continue BATBs strategy for price leadership will be at stake.

3. Smuggled/ Transit cigarettes: Smuggled cigarettes are available in Bangladesh. These are

companies same brand or other international brands. These transit cigarettes are decreasing

locally produced international brands. This is one of the greatest threats for BATB. BATB

cannot lower the price of its products, as the company has to pay a huge tax for those.

But the same brands of smuggled cigarettes are sold in Bangladesh at a lower price. As a result

consumer is purchasing the transit one.

4. Violation of patent: It is very common in Bangladesh, even though the government is

taking legal action against it. Many companies are copying the brand names of BATB

products. For example: there is a cigarette called Five Five which resembles to the BATBs

popular international brand SE 555.

5. Social pressure on the company is increasing: At present people are becoming more a

complied report.pdf

Documents

Transcript of complied report.pdf