MBA

RESEARCH PROJECT
PAKISTAN TOBACCO COMPANY

NOOR AFTAB
MBA - 2012

LAHORE SCHOOL OF ECONOMICS

BURKI CAMPUS, LAHORE.

MBA BUSINESS RESEARCH

PROJECT
PAKISTAN TOBACCO COMPANY

DO INCREASING PRICES AFFECT SALES OF

KEY PLAYERS IN THE TOBACCO INDUSTRY
IN PAKISTAN
By
NOOR AFTAB

____________________

______________________

SUPERVISOR

EXAMINER

Prof. F. A. Fareedy

____________
SEC. B, TA: Ms. Ayesha Karim

LAHORE SCHOOL OF ECONOMICS, 2012.

Acknowledgements

Never is a work complete without teamwork, without an environment that is supportive.

With this in mind, I would like to take this opportunity to extend my gratitude to the administration of
LSE, for creating an environment conducive for us to study and learn in.
I could not have completed this project without the most important person, who helped shape my
outlook, providing opportunities, constant support, guidance and assistance, my mentor, who was also
my worst critic, but who made me stand up to the challenge and improve upon my work with a new
vigour and enthusiasm, Professor F. Fareedy. I am deeply grateful to him for all the above and for
guiding me throughout the various stages of submitting this Research Project.
I would also like to express a special thanks to my teachers associates, Ms. Ayesha Karim and Mrs.
Haadiah Yasir, for their endless guidance, coordination and assistance in making it possible for me to
complete my work on time.
I would like to extend my appreciation and gratitude to my parents and sister for their intellectual
contributions to my academic project, for their firm believe in my aptitude, unwavering belief in my
capabilities, even when I would falter in self confidence, for motivating me in my all endeavours.
Thank you.

Table of Contents

1.0 Executive Summary.....1

2.0 Introduction..2
2.1 Synopsis..2
2.2 Introduction to Key Players in the Tobacco Industry.3
3.0 Background and Literature Review of Industry, Firm and Area of Research.7
3.1 Industry Briefing................................................................................................................7
3.2 Review of Industry, Firms and Area of Research...8
4.0 Competitor Analysis and Review....................................................................................................22
5.0 Research Methodology....31
5.1 Research Objectives...31
5.2 Research Design.32
5.3 Justification of employing overlapping methodologies: Data Analysis...........................33
5.4 Sampling...........................................................................................................................34
5.5 Data Collection.................................................................................................................34
6.0 Interview: Data Tabulation............................................................................................................36
6.1 Interview: Analysis of Findings.......................................................................................38
7.0 Questionnaire: Brief Summary......................................................................................................40
7.1 Questionnaire: Data Tabulation and Explanation.............................................................41
7.2 Questionnaire: Analysis of Findings.................................................................................57
8.0 Overall Analysis.............................................................................................................................60
9.0 Recommendations..........................................................................................................................63
10.0
Conclusion...............................................................................................................................65
References

Executive Summary

The title of this project was, Do increasing prices affect sales of key players in the tobacco industry
in Pakistan. The assumptions of the paper are that increasing prices are reflected by the increasing
tax rates that the Government levies on tobacco and the key players are, in a nutshell, two within the
industry, which is explained later in the paper, that one is the predominant one out of them.
The objectives of this research are to allow the reader to get a firm grip over the tobacco industry,
major competing firms that operate within and also the area of research, which is Finance or Sales.
The introduction briefly explains the main tobacco players within the industry, their portfolios etc., in
order to establish a basis for in-depth review and analyses of the various sections and chapters within
the research conducted.
The literature review and competitive analysis attempt to be all inclusive of all the variables involved
within the tobacco industry, of course focusing more on the area of research and research problem
proposed. The articles, though are within the parameters defined by this research, are not just limited
to examples of Pakistan, but also include various trends being followed in other countries. This gives
the reader a better grasp of what is being done on foreign countries, what strategies and processes
have been adopted etc. Numerous sources have been used such as articles, publications and books
etc., all that are applicable to this research.
Multiple methodologies/methodological pluralism have been employed for carrying out this research
to achieve a higher degree of both, reliability and validity. It allows the research to attain quantitative
results and at the same time to gauge, understand and analyze the reasoning behind the statistics or
data collected.
The results and findings of this project are consistent with not only proving the research problem as
correct but also with the secondary data collected and analyzed. They reveal that sales of tobacco
companies get affected from increasing prices and that demand is not inelastic. As the research delves
deeper, it is shown that whereas the prices have increased, cigarettes are more affordable now than
compared to a few years ago, especially in developing countries. Both sides of the argument have
been incorporated within the text so that the reader can get a comprehensive and all round view of the
trends within Pakistan.
At the end, from a business analyst perspective, briefly, there are certain recommendations that are
made from the analyses of the data collected from both, primary and secondary sources that should
help the companies, specifically Pakistan Tobacco Company to sustain and increase profits and sales.

Introduction
Synopsis:

The Tobacco industry plays a critical economic role in Pakistan by generating income and
employment in the tobacco farming, manufacturing distribution and retailing. There are
almost 350,000 people, directly and indirectly, working in the tobacco industry. Besides
being a main contributor to the Government Exchequer of nearly Rs. 50 Billion, the
industry also generates an annual income of over Rs. 30 Billion, with a source of
livelihood for 1.2 million people.1

This research project has been carried out in order to make the readers understand fully what the
tobacco industry of Pakistan is: its nature and size and also the key players operating within the
industry. In the discussions that follow, the paper proposes that increasing taxes by the Government
are a form of increasing prices and lowering sales of tobacco companies; ultimately a part of a wider
agenda relating to health benefits, regular laws and regulations imposed globally on the tobacco
industry and particularly within Pakistan. This aspect also comes within the Area of Research that is
Finance and Sales for this project which will be looked at within the literature review.

It allows the tobacco companies and also other readers of this project to comprehend the complexities
involved within the industry being researched and further briefly recommends; certain actions, from a
business analyst's perspective, for the companies to take into account which could lead to increased
profits and sales for them.

Within this tobacco industry there are 50 registered companies in Pakistan, out of those 50, 3 of them
are listed on both the Karachi Stock Exchange2 and the Lahore Stock Exchange3. The three companies
are Khyber Tobacco or KHTC4, Pakistan Tobacco Company or PAKT

and thirdly, Philip Morris

Pakistan or PMPK6. Other than these companies, the main competition arises from the illicit trade
involved in this industry which will be explained later in this paper.

Introduction to Key Players in Tobacco Industry:

A brief introduction on the Key Industry Players will be given here followed by an in-depth literature
review, in the next chapter, covering all aspects as envisioned by this project.
Pakistan Tobacco Company (PTC) is an associate of one of the world's leading tobacco
groups, British American Tobacco Company that has a legacy spreading over more than
100 years. The BATC has presence in more than 180 countries and is known for its high
quality tobacco brands. British American Tobacco Company started its operations in
Pakistan in 1947 and is the first multinational to set its foot in the country.7

Being the first ever multinational company to set foot in Pakistan, it has withstood many challenges
yet prides itself as being the largest market share holder. Another aspect that this paper will focus on is
how a multinational is able to create a market niche for its self keeping in mind the unstable political
scenario of the country.

The growth and values since its inception are outlined in this excerpt:
From being just a single factory operation to a company which is involved in every aspect
of cigarette production, from crop to consumer, we have evolved into one of the leading
corporations in Pakistan. We run two state of the art factories and employ more than
1,700 people while indirectly providing livelihoods to more than a million people who are
involved in various aspects of the business. We are market leaders and contribute more
than Rs. 30 billion in excise duties and taxes to the Government 8.
.
The Vision of the company is First Choice for everyone 9 and their Mission Statement is to
Transform PTC to perform responsibly with the speed, flexibility and enterprising spirit of an
innovative, consumer focused Company 10. Subsequently the Strategic Objectives lay emphasis on
Our strategy reflects our vision of being the champions of Growth, Productivity, Responsibility and
Winning Organisation11.

The various brands and a brief summary of the company and their impact on the business are as
outlined below:

1. Dunhill: 2008 was an exceptional year for Dunhill in Pakistan as the brand witnessed
exponential growth; fuelled by its re-launch in July. 12
Dunhill is not just a local brand in Pakistan but is a global brand and has been in the market for more
than a century, since 1907. It lies within the premium segment of brands of the company.
2. Benson & Hedges: Launched in Pakistan in March 2003 and has since been able to build
strong brand loyalty among its consumers showing excellent year on year growth. 13
Benson is not just a local brand but is a global brand and has been in the market since 1873 when
Richard Benson & William Hedges made a partnership in the United Kingdom.
3. John Player Gold Leaf: John Player Gold Leaf has become an institution in itself, becoming
one of the most recognisable cigarette brands in the country. John Player Gold Leaf has
recently been declared the largest Urban Brand in Pakistan, beating out products across the
F.M.C.G. spectrum.14

Golf Leaf is also not just any local brand but has presence globally and started in 1877 by its founder,
none other than John Player who later on made his business into a company known as John Player and
Sons. It now comes within the Premium Segment for the company.
4. Capstan by Pall Mall: Capstan has a rich heritage, originating in Britain in the 19th century.
The brand was created under the auspices of W.D. & H.O. WILLS at Bristol and London. 15
The paper will later show how this brand has now gained extraordinary market share within the
country and is on the rise, making it one of the driving forces in the tobacco industry and also in a
way contributing to the large profits made in receding or unstable environments. This brand comes
within the Value for Money segment.
5. Gold Flake: Gold Flake has grown tremendously as a brand since 2004, making it the largest
volume brand in Pakistan, and the second largest brand in British American Tobacco's Asia
Pacific region. The key to Gold Flakes success has been its novel engagement schemes
which have fuelled growth over the years. 16
This brand was considered a premium segment brand around the end of the 19th century. Although the
constant changes in packaging and brand positioning made the brand come into the Value for Money
(VFM) segment. It was also created by W.D. & H.O. WILLS.

6. Embassy: It is a leading volume brand in Pakistan, and is most popular in Punjab where it
enjoys a leading position.17
Embassy was one of the first brands by the company and has been in existence since. It is tailor made
for the local market and lies within the Value for Money segment.

Khyber Tobacco Company is a public limited company and has been operating in Pakistan since 1954.
Khyber tobacco has achieved the heights of business with its clear and ambitious vision, high
quality and vigilant team and enjoying the status of top few companies of Pakistan in tobacco
industry. The company has extended its operations around the world with an established
distribution network in parts of Eastern Europe, South and West Africa, Central and South Asia
and the Middle East.18

The website further describes the companys Mission and Vision Statement in the About Us
Section:
With internationally recognized brands, a fully integrated production facility, and a wealth
of experience and expertise KTC is in an ideal position to provide leaf and blended
tobaccos......Our team of industry experts aim to introduce well researched brands after
rigorous testing and blending of tobaccos from around the world to give the customer
distinctively valuable experience.19
The various brands that are offered by the Company are:
Gold Street (Premium, International), Classic (Special Flavour, Full Flavour, Menthol), Hero
(International, Lights, Menthol), Chance No 1 (Virginia Blend, Special Blend, Menthol), Virtue
(Super Slims, Lights Super Slims)20

In March 2007, Lakson Tobacco Company Limited was bought over by Philip Morris International
which had acquired a majority stake in the company. The name of the company changed to Phillip
Morris International (PMI) in 2011.

The principal activity of Philip Morris (Pakistan) Limited is the manufacture and sale of
cigarettes for Pakistan's domestic market. The Company currently operates three cigarette
5

factories with primary and secondary facilities and one tobacco leaf threshing plant, all
located in various parts of the country. It also runs an extensive tobacco leaf agronomy
program in the tobacco growing areas of Khyber Pakhtunkhwa. 21

The Company provides direct permanent employment to over 2,500 individuals at its registered office
in Karachi and various manufacturing facilities and sales offices across Pakistan. The vision and
Mission Statement explained is as follows:
Philip Morris (Pakistan) Limited aims to:

meet the expectations of adult smokers by offering innovative tobacco products of the
highest quality available in their preferred price category;

generate superior returns to our stockholders;

Be a responsible corporate citizen and to conduct our business with the highest degree
of integrity.
We are committed towards the continuous betterment of our employees by providing
professional training emphasizing teamwork, a clean and safe working environment and
leadership imbued with humility.22

The main brands of the company are Morven Gold, Red & White, Marlboro, K-2 and Diplomat.
Basically, the introduction has set a direction for this project, outlining the key players within the
industry, mainly Pakistan Tobacco Company (PTC) and Philip Morris Pakistan (PMP) or Philip
Morris International (PMI). The discussions that follow will delve deeper into the research problem
that has been proposed, will aim to prove it and then give various recommendations and ways of
tackling the said problem from a business analysts perspective.

Background and Literature Review of Industry, Firm and Area of Research

6

Industry Synopsis:
Approximately 100,000 tonnes of tobacco is grown annually on more than 50,000
hectares of land. There are about 50 cigarette manufacturing companies registered in
Pakistan and more than 500,000 outlets sell tobacco products at retail level in Pakistan. 23

The excerpt clearly indicates the large scale of the tobacco industry and its subsequent affect, over the
whole economy, whilst impacting some sectors directly and some indirectly. The supply chain itself is
very diverse incorporating farmers, manufacturers, wholesalers (company owned usually), distributors
and finally retailers. As we delve further into the literature review more facts and processes that are
relevant to this project will be highlighted.

Out of the 50 Registered Tobacco Companies, two of them have pioneered the tobacco Industry with
Pakistan Tobacco Company (PTC) at No. 1 and Philip Morris International (PMI) at No. 2

24

however, these are not the only companies/entities involved in the sale of cigarettes or tobacco. There
is a segment referred commonly as Illicit Trade 25 and that constitutes a large market share as well.
In this project, the two aforementioned companies would be considered as the key players and PTC
with its superior market share, higher sales and profits, making it the industry leader would be
discussed more in detail in this section and the sections that follow.

The paragraph that follows is interesting as it adds to our understanding of why prices of cigarettes
increase drastically, not just within Pakistan but all over the world as well.

Nearly 1 out 5 cigarettes sold in Pakistan have either been manufactured or smuggled
without paying the appropriate taxes resulting in an estimated annual loss of Rs. 8.5
Billion to the Government. This results in the tax compliant section of the industry, to be
pressed with higher tax rates leading to higher prices that further reduce the
competitiveness of the tax paid cigarettes vis--vis illicit cigarettes. Both regulators and
tax compliant tobacco industry have a common interest to reduce the level of illicit
cigarettes from the current 18% of the market share. 26

(Source of 2008*2009- Pakistan Tobacco Industry, Overview and Economic Contribution, 2010, P7) 27
Since the last survey carried out in early 2010, this 18% Illicit Trade has increased to 18.5% of the
market share28. Illicit trade includes local Duty Not Paid (DNP), Smuggled and Counterfeit Cigarettes.
Each has their own impact on the industry as a whole and also the Government of Pakistan. As of
2011, the market share has increased to 19.2%. 29 (an alarming increase since the 18% from 20092010). This trend has also been witnessed by government authorities as well:

Cabinet Secretary Nargis Sethi wrote a letter to Chairman FBR asking him to take
stringent measures to check the rising tide of illicit tobacco trade. The letter also referred
to Pakistans commitment under Article- 15 of Framework Convention on Tobacco
Control (FCTC), the first global public health treaty, according to which Pakistan has to
take effective legislative, executive, administrative or other measures to eliminate the
illicit trade in tobacco products.30

Review of Industry, Firms and Area of Research:

The main focus and primary concern of this project is to highlight the industry that Pakistan Tobacco
Company and its major competitors operate in and more specifically how the increase in prices affect
the sales of the companies which is the main area of research. Consequently, the study of the Illicit
Trade Sector would have more relevance in the competitor analysis, however, bears mentioning in the
literature review in order for it to be understood and accurately portrayed.

Before we move on to explaining the various taxes involved within the tobacco industry, it is
important to understand their relevance with regards to demand and supply.

Taxes like for example a sales tax is typically collected from retail businesses. To what
extent will this tax burden be passed on to the consumer depends upon the elasticities of
supply and demand for the product or service.
The more elastic demand is, the lesser the effective incidence on the purchaser and more
on seller and for a more elastic supply, more the effective incidence on the customer and
lesser on seller.31

As discussed previously, taxes are on the rise, to what degree the tax incidence shall be passed on to
the consumer demands upon the elasticities of demand and supply. We shall find out when we delve
further into the literature review that the demand for smoking is not as inelastic and neither is supply.
This also highlights the area of research, that sales are not purely dependent upon what the prices are,
but the elasticities of demand and supply.

First and foremost, a review is needed of the taxes that are levied upon the cigarette manufacturers.
Other than profit or corporate tax, tobacco manufacturing has various taxes involved. It is important to
differentiate here between the total price and retail price of cigarette packs as that is how the multiple
taxes are levied. For example, a pack of Gold Leaf costs Rs. 73. From that Rs. 62.93 is the retail price
and 10.07 is Sales Tax.

Other than the Sales Tax, many taxes are imposed upon the retail price of the cigarettes, six to be
precise: Federal Excise Duty (FED), Sales Tax (addition), Special Excise Duty, Customs Duty,
Federal Tobacco Cess (FTC) and NWFP Tobacco Development Cess (TDC), which shall be explained
in detail below:

1. Federal Excise Duty (FED): It is charged and collected on locally manufactured and
imported cigarettes on the basis of Retail Price. For imported cigarettes, FED is applied at

a maximum rate of 64% of the Retail Price and for locally manufactured cigarettes the
FED incidence goes up-to 64%.
2. Sales Tax: in addition, Sales Tax (at a rate of 16%) on the Retail Price is also imposed
on imported and locally manufactured cigarettes.
3. Special Excise Duty: A Special ad valorem Excise Duty is collected and levied at the
rate of 1% on retail price less FED.
4. Customs Duty: 35% ad valorem Customs Duty plus 15% Luxury Duty (total duty:
50%) is levied on the import of finished tobacco products.
5. Federal Tobacco Cess (FTC): FTC (at a rate of 3%) is levied by the Pakistan Tobacco
Board on unmanufactured tobacco.
6. NWFP Tobacco Development Cess (TDC): NWFP Government collects a levy at the
rate of Rs. 2 per kg for Flue-cured Virginia, Burley and Dark Air Cured varieties and Rs.
1 per Kg for White Patta.
Excise and Sales Tax incidence on cigarettes ranges from 64% to 81%. In Financial Year
2008-09, nearly Rs. 50 billion was contributed to national treasury by the taxpaying
cigarette industry in Pakistan out of which Rs. 46.7 billion was Excise and Sales Tax
contribution.32
Note here that almost all these taxes are included within the retail price and so taking the
aforementioned example, out of the Rs. 62.93, almost 81% is tax and the remainder amount is revenue
for the company. The 1st tax, FED and the 5th tax, FTC, can be further explained as:

For locally manufactured cigarettes, there exists a 3-tier FED structure based on retail
price. It is a combination of fixed duty on the low segment, ad valorem on the high
segment and a mixture of both in the middle segment. Federal Tobacco Cess (FTC) is
levied under Section 9 of Pakistan Tobacco Board Ordinance 1968 and collected under
S.R.O. No.8/98 of 7th January 1998.33

The margin keeps getting smaller, if the volume is not increased. Over the years, Excise and Sales Tax
Incidence on cigarettes has increased and now ranges from 69.5% to 81% of the retail price.

10

Federal Excise Duty on the low segment has increased from 42.6% of the retail price to 52.5% in the
last two years, while the sales tax has also increased by 1% to 17% and during the same period 1%
Special Excise Duty was imposed. Despite these price/tax increases and the intended purposes behind
them, an interesting article sheds light on the matter giving us a different perspective:
Trends between 1990 and 2000 in real prices and minutes of labour indicate, with some
exceptions, that cigarettes have become more expensive in most developed countries but
more affordable in many developing countries. However, in the UK, despite recent
increases in price, cigarettes are still more affordable than they were in the 1960s. 34

Above is another example of a longitudinal study of the various factors involved within the area of
research finance for this project. These factors are price, purchasing power parity, minutes of labour
required to purchase packs of cigarettes. It adds another dimension within this area of research and
within the whole project as well affordability. Whether the prices have increased or not would not
make a difference if the purchasing power of consumers has correspondingly increased as well over
the years. There is as complex mixture of high taxation, low compliance/enforcement and in light of
the above argument affordability as well. The following diagram shows the taxation trend in Pakistan
more concisely:

(Source- Pakistan Tobacco Industry, Overview and Economic Contribution, 2010, P9) 35
The above diagram shows how over the 5 years the tax amount has increased. As of 2012, the amount
is approximately more than Rs. 60 Billion. The following article elucidates more comprehensibly on
how these taxes eventually affect the industry.

11

The government has announced significant increase in taxes on tobacco products in the
budget for the fiscal year 2012-13, but according to health experts, it alone cannot serve a
lot on the subject of tobacco control in the country.36
True enough, however, in contrast another statement goes on to say that, Consumers in Pakistan are
very price sensitive. Any price increase leads to proportionate volume losses 37 .This was found to be
true also in another place where it is mentioned that It is also a common fallacy that cigarettes are
price inelastic. In global study on elasticity of demand for cigarettes, Pakistan was found to be in the
Moderate Elasticity segment38.. In contrast, taking the same article published in The News, we can
further conclude and keep this perspective in mind.
Health experts say that taxes must be increased manifold on tobacco products as evidence
shows that price rise of 10% decreases consumption of tobacco products by up to 8%
particularly in low and middle-income countries.39

It is a common misconception to believe that the demand for cigarettes is inelastic, i.e. any changes in
price would lead to changes in demand. However, this is not true, the demand is very much elastic and
can be affected by many factors, most importantly price. The direct way on increasing the price is by
increasing the taxes that are levied to the product. Such increases need not necessarily serve the
purpose of reducing tobacco sales within the industry as a whole it might affect certain legitimate
tobacco companies. As explained the lines below:
Experts believe subjecting legitimate cigarette manufacturers to a higher tax regime will
not reduce tobacco consumption in the country as smaller players will come forward to
fill the void but the government will be the biggest loser in terms of legitimate taxes that
it earns from legitimate companies.40
This can be quantitatively explained by the following paragraph:
The details portray a gloomy scenario for the cigarette industry and make a poignant
reading for 2011 as the sale of smuggled cigarettes increased by 65%, going from 1,018
million to 1,685 million alone in this year while the overall share of illicit trade increased
by 10% in terms of cigarette sticks going from 18.7% to 20.6% in terms of revenues and
the sale of one smuggled Korean cigarette brand alone increased by 90%. 41

12

The discussions below are in-depth explaining how increases in taxes can lead to reduced demand and
hence reduced sales.

The cigarette companies have opposed tobacco tax increases by arguing that raising
cigarette prices would not reduce adult or youth smoking. But the companies internal
documents, disclosed in the tobacco lawsuits, show that they know very well that
raising cigarette prices is one of the most effective ways to prevent and reduce smoking,
especially among kids.42

Both, prevention and reduction ultimately have relevance to this research project as these declining
demand patterns would lead to fall in sales directly. Below are various excerpts from tobacco
documents etc and quotes that are indicative of proving this:

Philip Morris: of all the concerns, there is one - taxation - that alarms us the most.
While marketing restrictions and public and passive smoking [restrictions] do depress
volume, in our experience taxation depresses it much more severely. Our concern for
taxation is, therefore, central to our thinking.43
Philip Morris: When the tax goes up, industry loses volume and profits as many
smokers cut back.44
RJ Reynolds: If prices were 10% higher, 12-17 incidences [youth smoking] would be
11.9% lower.45
Philip Morris: It is clear that price has a pronounced effect on the smoking prevalence
of teenagers, and that the goals of reducing teenage smoking and balancing the budget
would both be served by increasing the Federal excise tax on cigarettes. 46
Philip Morris: Jeffrey Harris of MIT calculatedthat the 1982-83 round of price
increases caused two million adults to quit smoking and prevented 600,000 teenagers
from starting to smokeWe dont need to have that happen again.47

13

Philip Morris: A high cigarette price, more than any other cigarette attribute, has the
most dramatic impact on the share of the quitting populationprice, not tar level, is the
main driving force for quitting.48
The above excerpts from the tobacco companies reveal how proportionate the increase of taxes is to
the increase in prices of the tobacco product, which eventually reduces the demand drastically. What
is interesting about these excerpts is that the tobacco companies themselves admit that increasing
prices have a damaging effect on the volume and ultimately on the subsequent profits. In a broader
spectrum, the reasons for conducting this research project would be to highlight, the capital invested;
human and financial resources in particular, the annual income; both acquired and lost and the
intricacies of the tax structure that inherently and essentially affect the tobacco industry.

(Source of 2008*2009, Pakistan Tobacco Industry, Overview and Economic Contribution, 2010,
P10).49
The diagram shows how involved the key players of the industry are in the tax net of Pakistan. Both
Lakson Tobacco Company (now known as Philip Morris International) and Pakistan Tobacco
Company together make up 99.3% of the Tax Paying Industry, whereas the total market share of these
two is 82% and now 80.8% as of 2012 as mentioned in the above paragraphs.

As mentioned previously in the quoted texts and discussion, the tax contribution is far greater than the
market share of these companies, in total they contribute more than Rs. 60 Billion to the National
Exchequer, which means, that any increases in the tax rates would drastically affect their costs, the

14

prices of their products and so the sales also. These concepts will further unfold as the literature
review delves deeper into the relationship of taxes and sales.

Taking into consideration that these companies are profit making organizations, this research will only
help if it clearly identifies those important decisions that ultimately derive profit for these firms. One
of those important decisions as already identified is taxation. Increasing taxes and their impact is
always taken into consideration and strategies mainly revolve around this predominant factor.
However there are other means by which the Government regulates and monitors tobacco
manufacturing and selling in the country. These include the graphic and textual health warning, bans
on smoking in various public places, restrictions and limitations in terms of advertising or promoting
their products etc.
Various efforts have been made from time to time for protection of non-smokers health
and prohibition of smoking. These include anti-smoking laws like such as Railways Act
189014, Juvenile Smoking Act 1918, Bahawalpur State15, West Pakistan Juvenile
Smoking Ordinance16, and Cigarettes (Printing of Warning) Ordinance, Prohibition of
Smoking and Protection of Non- smokers Health Ordinance No. LXXIV. 50

The following article shows how impactful one of these variables, Graphical Health Warning, really
is:
Smokers are not fully informed about the risks of smoking. Warnings that are graphic,
larger, and more comprehensive in content are more effective in communicating the
health risks of smoking.51

Further discussion will be done below in the primary research how these health warnings affect the
perceptions of consumers. (Results are consistent with the statements above). It is a matter of deep
concern that companies stay abreast of the ever changing policies with regards taxation and so the
importance and relevance of this project is manifolds as it could be useful for these companies to
exactly gauge how impactful these taxes and increasing prices are in the perceptions of customers.

15

Increasing cigarette and other tobacco taxes will lead to significant reductions in the use
of these products, resulting from reductions in the frequency of use by continuing users,
as well as reductions in the prevalence of use. The empirical evidence clearly indicates
that higher tobacco taxes will significantly reduce cigarette smoking and other tobacco
use.52
The excerpt above shows how consumption would reduce overall if taxes were implemented
effectively.
The concept explained before is reinforced by the paragraph below which uses a number of references
while explaining, making it all the more reliable in nature and a good source for this project.
Using US survey data, Ohsfeldt, et al. (1998), found that higher taxes on smokeless
tobacco products significantly reduced the prevalence of smokeless tobacco use among
adult males. Chaloupka, et al. (1997), found similar evidence for young males. 53
The article quoted above mentions the which was carried out outside of Pakistan; it shows that such
tax increases have a similar affect on other markets or countries as well, making the affect of
increasing taxes or increasing prices negatively affecting demand or sales a generalize able statement.
It further states:
In addition, several studies have found evidence of substitution among tobacco products
in response to changes in relative prices for example Ohsfeldt, et al., 1998; Thompson
and McLeod, 1976; Pekurinen 1989.54
This was done in order to make the reader understand that this tax incidence on all tobacco products
would have the similar affects changing demand or for the sake of this project affecting sales/profits.

How these taxes affect sales can also further be explained below. The campaign for tobacco free
kids55 is one that advocates on talking about facts.
The cigarette companies have even publicly admitted the effectiveness of tax increases to
deter smoking in their required filings with the U.S. Securities and Exchange
Commission.56

16

Philip Morris: Tax increases are expected to continue to have an adverse impact on sales
of tobacco products by our tobacco subsidiaries, due to lower consumption levels. 57
Lorillard Tobacco: We believe that increases in excise and similar taxes have had an
adverse impact on sales of cigarettes. In addition, we believe that future increases, the
extent of which cannot be predicted, could result in further volume declines for the
cigarette industry, including Lorillard Tobacco.58

R.J. Reynolds: Together with manufacturers price increases in recent years and
substantial increases in state and federal taxes on tobacco products, these developments
have had and will likely continue to have an adverse effect on the sale of tobacco
products.59

To expand and look at a more holistic perspective, taking into account surveys that are not only
longitudinal, but also reliable and valid and therefore can be generalized: this project will further
delve into this Organization and find out that Economic Research reaffirms that tobacco/cigarette tax
increases (price increases) in turn reduce smoking or affect sales.

Numerous economic studies in peer-reviewed journals have documented that cigarette tax
or price increases reduce both adult and underage smoking. The general consensus is that
every 10 percent increase in the real price of cigarettes reduces overall cigarette
consumption by approximately three to five percent, reduces the number of young-adult
smokers by 3.5 percent, and reduces the number of kids who smoke by six or seven
percent.60

In their Recent State Experiences61 section the campaign claims that in every country or state where
the cigarette tax rate has been increased significantly, the packet sales have witnessed a sharp decline.
They prove or authenticate this by relating to the data/results of an in depth nationwide survey. It not
only shows the legitimate market of the tobacco industry but takes into account the vast majority of
packs purchased through cross-border, Internet, or smuggled sales and the results indicate that
overall the packet sales decrease as federal cigarette tax increase pushing up the average nationwide
price.62

17

In-state evidence shows that state cigarette tax increases are prompting many smokers to
quit or cutback. For example, the Wisconsin Quit Line received a record-breaking 20,000
calls in the first two months after its $1.00 per cigarette pack increase (it typically
receives 9,000 calls per year).63

The extract above shows how the campaign uses examples of various States, Wisconsin, Texas, Iowa
and Washington and links how tax increases and quit lines can be used to show the falling
consumption levels. The research paper delves into other markets as well, expanding the parameters
in order to make the results of the interview and questionnaire carried out later and literature review
more reliable and valid.
It then quotes examples of other States and explains further how such price increases affect consumer
behaviour.
Likewise, in Texas and Iowa, that each increased their cigarette taxes by $1.00 in 2007,
the number of calls to the state quit-lines have been much higher compared to the
previous year. It is also clear that these efforts to quit by smokers after tax increases
translate directly into lower future smoking rates. In Washington State, for example, adult
smoking from the year before its 60-cent cigarette tax increase in 2002 to the year
afterwards declined from 22.6 to 19.7 percent, reducing the number of adult smokers in
the state by more than 100,000, despite overall population increases. 64

Increasing U.S. Cigarette Prices and Declining Consumption

18

(Source: www.tobaccofreekids.org).65
The Campaign explains with help of these various national surveys and explains the above diagram as
follows:
Although there are many other factors involved, comparing the trends in cigarette prices
and overall U.S. cigarette consumption from 1970 to 2007 shows that there is a strong
correlation between increasing prices and decreasing consumption.
The federal tax on cigarettes also increased from eight cents to 39 cents per pack and the
average state cigarette tax increased from 10 cents to $1.07 per pack during that time
period. Without these federal and state tax increases, U.S. cigarette prices would be much
lower and U.S. smoking levels would be much higher.66

19

(Source:

The

political

economy

of

tobacco

taxation,

Chapter

4,

P86,

http://www.who.int/tobacco/publications /en_tfi_tob_tax_chapter4.pdf).67

The table above gives a different perspective by showing how much percentage is derived from
tobacco companies in these countries from the total excise revenue. The percentage share as is the
case in all three countries is most in the mid price segment. The table establishes a link between the
higher end brands premium and the middle segment too, Mid Price.

The above table shows that as taxes increase, premium and high-price brands are expected to generate
more stable revenue than the other price bands due to their less price sensitive consumption base.
High income smokers are more likely to smoke premium, high price brands and are less responsive to
price than are smokers in lower income groups 68. So the article creates a difference also between the
types of brands smoked and how such consumers respond to price changes i.e. price elasticity of
demand.
As a business that operates in a controversial industry, we have an increased impetus to
demonstrate to our stakeholders that we run our business in a sustainable manner.69
Though the implementation of tax laws is enforced at a larger scale abroad, these tax rates and laws
have to be observed by these registered companies in particular, given the complex environment in
which they operate.
20

(Source: Pakistan Tobacco Industry, Overview and Economic Contribution, 2010, P4) 70
The law is from the Martial Law Order-487 of 1985 in respect of NWFP (where 75% of tobacco is
grown)71 and it shows that it is not just the companies that push prices up to save profit margins or due
to the tax rates increasing, but the law requires that each years tobacco crop will be more expensive
from the previous year. Thus indicating the price increase as being mandatory for companies to pay
the farmers and eventually end up passing the annual increase in cost to the consumer.
Studies have shown that tobacco taxes are the most cost effective way to reduce tobacco
consumption. Implementation of a package of price and non-price policies (e.g. banning
smoking in public places, banning advertising etc.) is also highly cost-effective. 72
Not just such efforts regarding taxation and pricing are made, but the reason why this project took into
account foreign market patterns as well was because such policies and regulations are also monitored
by various global initiatives such as the World Health Organizations Framework Convention of
Tobacco Control (FCTC)73. The industry and how it operates with so many restrictions becomes all
the more complex and important to study and since both the micro and macro economic variables
keeps changing; research then in this industry, particularly in developing countries such as Pakistan,
becomes all the more valuable.
The literature above of the tobacco industry as a whole and within Pakistan; the various complexities
involved in the tax structures regarding tobacco and their relationship to prices and sales of these
tobacco companies i.e. area of research, all aim to prove that these increasing taxes ultimately impact
the sales negatively.
Competitor Analysis and Review

21

Pakistan Tobacco Company and Philip Morris International, both dominate the market according to
their reports, surveys and according to various economists and influential and authentic papers such as
the Business Recorder. Together they take up around 80-81.5% of the market share, the remainder as
explained in the literature review is taken up by the illicit trade sector. Local Duty Non-Paid sold
around 13.5 Billion Sticks from 2009-2010, taking up 17% of total market share and resulting in a net
loss of Rs. 7.5 Billion to the Government Revenues.

Smuggled Trade sold around 1 Billion Sticks from 2009-2010, taking up 1% of the total
market share, resulting in a net loss of Rs. 1.5 Billion to the Government Revenues.
Counterfeit Trade is still smaller than the other two types of illicit trade as the risk here is
much higher. Still this trade manages to sell up to 500 Million Sticks from 2009-2010,
taking up a total of 0.5% of the total market share, resulting in a net loss of 0.5 Billion to
the Government Revenues. The Market Share of this sector stands currently at 19.2% of
the domestic market.74

The financial year of 2011 was not a very good year for Philip Morris International (PMI). The gross
turnover decreased by 4.8% while the gross profit decreased by 28.4% which led to a loss of 455
million after tax. This loss was primarily associated to the falling sales by 4.0 billion cigarettes. 75

Completely contrasting views were witnessed for the predominant market leader, Pakistan Tobacco
Company:
Despite all the aforesaid challenges, our company has outperformed the competition and
strengthened its market leadership. Our sales have grown by 3 billion versus SPLY,
reaching 39.8 billion sticks and our market share has increased from 47.8% in 2010 to
48.6% in 2011. This growth has been led by an unprecedented performance by Capstan
by Pall Mall Original (CbPMO), launched in July 2010. This brand has now grown to
14.4% of the market.76

Further reinforced by the statement: Capstan has become a key driver for growth in the company. 77

22

Coming back to the falling sales of PMI which reflected a 14.6% decline in market share, these
damage the company and the industry as a whole, as excise tax driven increases provide non-tax paid
products with an increasingly unfair competitive advantage. The company claims to have increased
operations from 2010 by a whopping 27% to a total of Rs. 769 million in order to expansion to take
place and for modernizing manufacturing projects, however, remains unclear regarding its Mandra
Factory which they have significantly reduced in operations, owing to an increasing cost of
production.78

An article shows us how not only PMI but PTC and the overall industry are being affected in the
recent past. It says,

Philip Morris Pakistan is beginning to feel a financial pinch, and is already reducing the
scale and scope of some of its manufacturing operations inside the country.79

The article goes on to say how the one of the factories of Philip Morris might close down:

It, however, declined to say whether the factory would be completely shut down. Mandra
is the companys smallest factory, and that its main product is now illegal, the operational
costs per cigarette at the plant would effectively become too high to be sustainable. Philip
Morris did not disclose how many of its 2,363 employees in Pakistan work in Mandra and
how many of them would be laid off.80

It reinforces the arguments posed in the introduction section of this research paper which stated that
out of the two key players, one is more dominant and has a much larger market share and profit
margin. The statement that follows further establishes the same concept.

The acquisition by PMI also did not prove to be profitable for the company. Profits have
gone from Rs1.5 billion in 2007 to Rs573 million in 2010, a nearly 62% drop. 81

23

Furthermore the article explicates on the competition between PTC and PMI also, giving us a
different perspective on what the competition is really like. It states,

Philip Morris got into a cut-through price war with Pakistan Tobacco over the lower-end
brands, said one person familiar with the matter. And Pakistan Tobacco has an
unassailable advantage on the higher-end segment of the market because of their Benson
& Hedges and Gold Leaf brands. Philip Morris appears to have come out the worst of that
price war, with revenues declining by 3.9% to Rs24.7 billion during the first nine months
of 2011. By contrast, Pakistan Tobaccos revenues went up by 12.3% to Rs49.9 billion
during the same period.82

However, the Net Income for PTC for the year ended, 2011, fell from 2010 from Rs 925,100,000 to
Rs. 363,785,000, still a profit and after in-depth loss adjustments, the amount stands at Rs.
268,385,000.

PMI contributed Rs. 20.8 Billion to the national exchequer in the form of federal Excise Duties,
Custom Duties, Special Excise Duties, Sales Tax and Income Tax, representing a 4.6 % decrease
compared to 201083. On the other hand, during 2011, PTC contributed over Rs. 45 billion to
Government Revenues, in the form of Excise, Sales Tax, Income Tax and Custom duties which was
12.8% higher than 2010.84

As a forward looking tobacco company, we are known for our responsible business
conduct and practices. We are one of the country's largest excise revenue generators and
have played a significant role in the development of Pakistan's industrial sector.85

The diagrams below indicates the Gross turnover of PTC for the last 5 years and the Government
levies, for the same period and how the two has increased, the levies at a faster rate:

24

(Source: Annual Report, 2011, PTC, P17)86

(Source: Annual Report, 2011, PTC, P17)87

Two very interesting articles published in the Business Recorder analyze separately both the
competing companies. Both articles were published in 2012 and provide an updated in-depth analysis
of the competition that is inherent in the Tobacco Industry.

CY11 has been a challenging year for Philip Morris and the tobacco industry due to the
weakening economic situation fuelled by power crisis and rising inflation. The company
faces stiff competition from its Competitor Pakistan Tobacco Company which has a
market share of almost 60 percent. Moreover, the illicit market is a serious concern for
the company as it accounts for almost a 20 percent market share. 88
25

The excerpt shows that PTC still stands at Number 1 although, the prevailing economic concerns for
the tobacco industry is not only damaging but worsening.

This article further goes on to say that:

The company faces high taxes and duties expenditure as it is a cigarette manufacturer and
an importer. The company's sales tax and excise duty as a percentage of its gross turnover
for the CY11 stood at a little above 61 percent, and this share has remained fairly constant
over years.89

This paper has mentioned before that the sales of PMI were greatly impacted in 2011 and declined by
4 billion cigarettes90 out of a total of approximately 29 Billion Sticks 91. The contribution toward the
national exchequer especially after a 4.6% fall since the previous year takes up to 61% is a very large
amount/share from the gross turnover of PMI; it significantly affects the companys net profits and
sales.

The paper further reinforces the concept of the key driver for PTC in the Revenues and Profitability
section by saying the:
Gross turnover experienced a decline of five percent from Rs 34 billion for CY10 to
RS32.3 billion in CY11. The decline in gross revenue (for PMI) is not only due to the
tough economic environment, high government taxes and illicit trade but also due to the
successful launch by PTC of its brand, Capstan which alone has a market share of 14
percent.92
Falling sales, profits and revenues affected the overall operations of the company also, no matter what
the Directors Review would state. The Gross margins fell to 24.8 percent during 2011 compared to
32.7% for the previous comparable period. This further affected the marketing and distribution
activities also as explained below.

In its Liquidity Position and Operations and Issues section, the article states:
Compared to the current ratio of 0.81 of PTC, Philip Morris Pakistan had a ratio of 1.51
for CY11.

26

However, a current ratio of higher than one and the industry average suggests that the
company is not investing excess assets....PTC outshines its rival Philip Morris Pakistan
Limited in its efficiency at using its assets in generating sales revenue. The fixed asset
turnover in CY11 for Philip Morris Pakistan stood at 3.19 compared to 11.08 of PTC. 93

The article by the Business Recorder above clearly demonstrates the growing concerns in the tobacco
industry and especially the two key players, PTC and PMI and which of the two stands out in terms of
market share, profitability etc. Whereas that analyzes both the companies financially for the
comparable period of 9 months in 2011, in quite some detail, the analysis below is from the
Highlights Section of the other article in the Business Recorder and it delves deeper into PTC and
gives a reinforcing perspective to the whole discussion for the whole year/year ended 2011.

Before we move onto reading the other article, a few graphs of PTC and its financial performance
would help us understand more clearly the trends that are enveloping the Industry Giant and hence the
other players involved.

(Source: Annual Report, 2011, PTC, P17)94

27

This diagram shows the falling trend over the years for all three: Gross Profit, Operating Profit and
Profit after Tax for Pakistan Tobacco Company, especially after 2009, whereby various laws were
imposed, taxes rose exponentially, etc. Overall the Gross Profit has increased from 2006 to 2011,
currently at Rs. 6,241 Million, however the Operating Profit and Profit after Tax has decreased,
drastically. This same concept can be further elaborated upon and explained in detail by the table
below:

(Source: Annual Report, 2011, P34, PTC).95

The table above indicates the same figures as the diagram before, exemplifying the falling Operating
Profit and Profit before and after tax. There is a large change from the Gross Turnover the company
gets and the Profit after Tax, more than almost Rs. 67,100 Million. Whereas the Gross Turnover, Net
Turnover and Gross Profit increased from 2010 to 2011 by 12%, 10% and 1% respectively, the
Operating Profit, Profit before tax and Profit after Tax fell drastically by 57%, 61% and 61%
respectively.

Coming to the highlights section96 of the second article it gives a detailed analysis of the financials
of PTC and how the Company has been fairing in the overall competitive environment. It elaborates
how the company beat the market by its growth in only one particular brand. It goes on to say that:
Overall in CY11, Company was able to sell 3 billion cigarette sticks, increasing the
Company's market share from 47.8 percent in CY10 to 48.6 percent during CY11. This
28

growth was triggered by the unprecedented performance by Capstan by Pall Mall

Original (CbPMO), launched in July CY10. It owns 14.4 percent of the market. The
situation for PTC is not different from other FMCGs'.
The Company enjoyed reasonable top line growth in CY11 but this couldn't be carried
down as the increase in cost of sales and other expenditures trimmed returns and power
outages and inflation also further fuelled the costs of sales. 97

The second article, from the Business Recorder, in its highlights section shows an interesting trend
that whereas there might have been profits made and unprecedented growth rates in certain brands at
the same time costs increased as well and macro economic factors had a negative impact as well.
Elaborated below:
Adding to the agony, the Company also had to increase product prices due to increase in
excise duty. The unfavourable economic environment had already eaten away the
purchasing power of consumers hence the excise duty hike led to increase in prices and
forced them to switch to cheaper illicit sector brands which evade taxes and hence have
become highly price competitive.98

The extract above explains clearly that in this highly competitive industry, cost of sales are pushed
higher and so companies need to come up with various strategies to tackle these expected and
unexpected changes and risks.

Overall, the financial year, 2011, was not a good year for the two companies. The article states in their
Profitability Section for PTC that:
The trend of falling margins continued in CY11. The gross profit margin fell to 27.2
percent in CY11 from 29.6 percent in the same period of last year. This trend of lower
margins despite reasonable revenues is owed to power shortages and inflation. The
Company was badly hit by the increase in prices of its brands led by the increase in
excise duty; which is imposed as a penalty on items that are discouraged. 99

It sheds light on various ratios. The Operating margins fell from 21.2% in 2009 to 7.3% in 2010 to
finally 2.8% in 2011, an alarming decline. These falling margins and affected sales drastically affect

29

the costs of the company and need to be efficiently and effectively managed. PTC, according to the
article managed to reduce its selling, distribution and an administrative expense by 5%. 100

After analyzing the annual reports as well, many financial ratios for PTC came forward. Overall the
net margins fell to 1.6% from 4.4 percent in 2010 101. The debt to equity ratio improved in 2011, it
decreased as compared to 2010 when the ratio was 0.63. The decline in this ratio, according to the
article is mainly due to an approximate 40 - 45 percent decline in the short-term running finance 102.
The current ratio also was below 1 which does not reflect a good solvency position for the
company103.
Turnover ratios such as the total asset turnover and the fixed asset turnover both increased
in 2011 mainly due to the increase in sales showing better utilisation of its machinery.104
However, the coverage ratio could be a cause of concern for the company as it has fallen from
10.23 in 2010 to 4.7 in 2011.105

In conclusion, the aforementioned arguments and detailed discussions suffice to say establish the
preliminary stance that this project has taken, in order to move on to the research method and
subsequent analyses. The competitor analysis shows the various complexities involved within the
tobacco industry and also how tobacco companies are tackling factors such as increasing tax rates,
illicit trade and costs. Keeping all the articles, reports and quoted material we can still see clearly how
despite the increasing challenges there are still two key players within the industry, namely, Pakistan
Tobacco Company Limited (PTC) and Philip Morris Pakistan (PMI) and that PTC has the larger
market share, is faring well compared to its rival, PMI, that is facing falling profits and even higher
costs. At the same time, the above articles also clarify the factors previously ignored by the tobacco
companies, especially in Pakistan, and which may adversely affect them by worsening over the years.

30

Research Methodology
Research Objectives:

(From Most Important to Important)

The size and contribution of the tobacco industry and major firms.
Understanding the Area of Research comprehensively.
Identify the Changing Macro-economic variables related to Tobacco Industry and key players

i.e. PTC and PMI.

Regulations and Limitations tobacco companies are exposed to.
The complex structure of taxes levied on the tobacco industry.
An increase in tax rates lead to an increase in prices of those products the taxes have been

levied upon.
Cigarette smoking is not price inelastic and changes to price lead to changes in demand.
These changes in demand are a downward trend i.e. falling demand and falling sales.
Gathering information about the tobacco industry which would lead to increased awareness.

The above mentioned objectives will help give clarity to the purpose of this project. They will
also set a direction in terms of what methodologies would be incorporated and at what level.
Why the basics, such as size and contribution of the tobacco industry or the various macro
economic variables involved, are classified as being most important, some would ask, is
because they need to be understood by the reader before the project actually starts analyzing the
basic problem proposed and the various recommendations as well.

A theory is a conceptualization, or description, of a phenomenon that attempts to

integrate all that we know about the phenomenon into a concise statement or question. 106

The possible research question/problem/theory made then is: Do increasing prices affect sales of key
players in the tobacco industry in Pakistan.

Research Design:

31

The basic research design employed for this research is that it has overlapping methodologies that are
followed i.e. both qualitative and quantitative tools used. Location or parameters are defined as
Lahore being the area studied, more specifically Gulberg and Defence locations. A random probability
sampling method is employed with a sample size of 50 respondents for the Questionnaire. One major
distributor/retailer of cigarettes was interviewed. Increasing taxes means increasing prices, one of the
parameters within the study, though distinctions within the text have been made. Key Players
specifically mean PTC and PMI, more so, PTC as clearly it has the largest market share within the
tobacco industry, as highlighted within the text of this research. The justifications and detailed
explanations are given below as to why such a design has been used, specifically with regards to the
tobacco industry which is to say the least, a controversial industry.

With each data collection technique i.e. secondary sources (introduction, literature review and
competitor analysis), interview and questionnaire, there is an independent analysis that goes along the
text and subsequently is at the end of each chapter. Once independent analyses are done of each of the
sections/chapters, an in-depth overall analysis has been included to give the project its final shape and
furthermore reinforce the concepts highlighted before.

The text below starts off by defining independent and dependant variables, then states what those
variables are within this project. It goes on to explain what qualitative and quantitative data is and
why methodological pluralism should be incorporated within a research, what sampling is and what
sort is used here and finally mentions the various sources of primary and secondary data.

The independent variable is called independent because it is independent of the

outcome being measured. More specifically, the independent variable is what causes or
influences the outcome.
The dependent variable is called dependent because it is influenced by the independent
variable.
For example, in our hypothetical study examining the effects of medication on symptoms
of depression, the measure of depression is the dependent variable because it is
influenced by (i.e., is dependent on) the independent variable (i.e., the medication). 107

32

From the objectives above and the literature review gathered, the independent variable was considered
to be increasing prices of cigarettes and the dependant variable, sales of tobacco companies.

Justification of employing overlapping methodologies Data Analysis:

Quantitative research addresses research objectives through empirical assessments that
involve numerical measurement and analysis. Qualitative research addresses business
objectives through techniques that allow the researcher to provide elaborate
interpretations of phenomena without depending on numerical measurement: its focus is
on discovering true inner meanings and new insights.108
Research methods have seen an evolutionary phase over the years.
In a nutshell, they started off from the first experimental laboratory set up in Leipzig in
1879 by Wilhelm Wundt. Over the years psychologists and various researchers realized
that such lab methods presented more quantitative and reliable data or statistical data but
lacked the reasoning or the logic which was left for the researcher to interpret. 109

However, It was not long before when researchers realized that the quantitative data they gathered,
though might be statistically correct giving them answers of the who, what, where, when, how, but the
question of why was still unanswered: it is crucial to get the insights of the sample respondents and
gauge why they have answered the way they have. 110 Over time methods developed into being more
qualitative in nature, giving respondents the chance to say what they think in lets say focus group
discussions, unstructured interviews or open ended questionnaires etc, or now these methods
increasingly do not take place in labs but in real life situations, with companies trying to sell colas to
their consumers or even banks trying to analyze their financial statements and that of their
competitors, etc.

The best research method, in order to ensure a relative amount of both reliability and validity, will
have to be one which uses a method called triangulation 111. It uses both qualitative and quantitative
data within the primary and secondary data, a combination of data collection and analyzing
techniques. Or as explained by in this paragraph below:

33

Mixed Method approach is one in which the researcher collects analyzes and integrates
both quantitative (quant) and qualitative (qual) data in a single study or in multiple
studies in a sustained program of inquiry.112

This project will aim to do just that, to bring in as much empirically statistically correct data and also
the insights and interpretations of various scholars, professionals etc i.e. using overlapping
methodologies or both qualitative and quantitative analysis techniques. Aptly explained in the excerpt
that follows:
The application of the scientific method is searching for the truth about business
phenomena. These activities include defining business opportunities and problems,
generating and evaluating ideas, monitoring performance, and understanding the business
process.113

Sampling:
The sampling of this project is random probability sampling, 50 respondents were chosen for the
Questionnaire, living in Lahore. For the interview, there was one large retailer/distributor of
cigarettes/tobacco products in Lahore.
The population is all individuals of interest to the researcher. For example, a researcher
may be interested in studying anxiety among lawyers; in this example, the population is
all lawyers. For obvious reasons, researchers are typically unable to study the entire
population. In this case it would be difficult, if not impossible, to study anxiety among all
lawyers. Therefore, researchers typically study a subset of the population, and that subset
is called a sample.114
Data Collection:
The data collection or how the research will be carried out will be in two ways:
1. Primary data
2. Secondary data

Primary Data will consist of:

1. Previous observations by the researcher from Internship at PTC.
2. Interviews with retailers.
3. Questionnaire Survey carried out on smokers.

34

Ultimately, measurement is critical in research because it allows researchers to quantify

abstract constructs and variables. This is an essential step in exploring the relationship
between various independent and dependent variables. 115
Secondary Data will consist of:
1. Information from:a) Internet.
b) Book, Journals, Articles, Cases.
c) Projects carried out by A.C Nielson and LSE.
d) Lectures given at Lahore School of Economics and Lahore College of Arts and Sciences.

This data will be reflected in the literature review and the basic purpose will be to fully understand the
industry and the environment in which it operates and to enhance the quality of questions asked
within the primary survey and interview and eventually to have a better grip over the analysis
conducted on all the material. The following guidelines were used:

Define the topic, together with your reason for selecting the topic. Identify overall trends,
gaps trends, and particular themes. The literature review should present an overview of
the subject, issue or theory under consideration, along with the objectives of the literature
review. The literature review should discover the areas of controversy in the literature.
The literature review should be directly linked to the research question being
developed.116

These helped to give the project a guideline, a basis for why the literature review is needed and how
can it really add value to this project.

In summary, a researchers basic curiosity about an observed phenomenon typically

provides sufficient motivation for choosing a research topic. 117

Interview
Data Tabulation:

35

**This interview was carried out in English for which reason the retailer interviewed was a large distributor in
Lahore for the key tobacco companies and could speak the language.

Tabulations are as follows, excluding the introduction and briefing regarding general idea/question of
study:(Question 1) Interviewer: What are the timings of your shop?
Interviewee: 9am-10pm, Sunday off.
(Question 2) Interviewer: How many brands of cigarettes do you keep at your section?
Interviewee: 40
(Question 3) Interviewer: On average how many cigarette packs do you sell in a day?
Interviewee: More than a hundred. Certain months in multiples of hundreds as shops also buy from
my store.
(Question 4) Interviewer: Which brand/brands would you say sell the most from your shop or
otherwise?
Interviewee: Dunhill, Marlboro, Capstan, Gold Leaf, Benson, Pine etc. I can't really tell you 'the
most' but these generally sell more.
(Question 5) Interviewer: Why such a variety of brands?
Interviewee: A variety of people come, sometimes the same people get different brands and when
shops come they take a big variety of brands.
(Question 6) Interviewer: Do you have brand loyal customers also?
Interviewee: Yes, some have been buying the same brand for more than 10 years now.
(Question 7) Interviewer: Over the years, have prices of cigarettes increased?
Interviewee: (With raised eyebrows, enthusiasm). Obviously yes, a lot.
(Question 8) Interviewer: Do you feel these impacts your sales at this store?
Interviewee: Its difficult to answer, (long pause) but yes I think it has, my expensive cigarettes don't
sell that much now but overall I get more money than my sales before.
(Question 9) Interviewer: What do you mean, could you explain this please?

36

Interviewee: Other brands start to sell more and then certain buyers still buy the same and also shops
keep buying in large amounts from me.
(Question 10) Interviewer: Have you witnessed any other change in buying behaviour? How does the
buyer respond?
Interviewee: (Hand on chin) Hmm. Prices keep increasing but in 5 years they have increased a lot.
The picture on the pack was a fast change that really upset a lot of customers. Also finishing the pack
of ten was in the beginning taken badly by people.
(Question 11) Interviewer: Do you smoke?
Interviewee: Yes
(Question 12)Interviewer: I won't ask which one, but have you always smoked the same brand?
Interviewee: No
(Question 13) Interviewer: Why did you switch?
Interviewee: Because I have smoked so long want to smoke something lighter.
(Question 14) Interviewer: Was the increasing price a factor?
Interviewee: (Laughing) Of course it is for everyone. (Yahan kee nahi toh ghar ke kharchoun kee hee
mehangayi dekh lein).
Interviewer: Thank you so much for your time. It was a pleasure talking to you.
Interviewee: Thank you. It was good talking about my experiences.

(Complete anonymity shall be kept of the interviewee, except gender, and was also told the general
idea/question of this study to the extent that it would not affect his responses while at the same time
letting the research and interview violate no research ethics).

Analysis of Findings:

The questions asked were sequenced in an order so as to engage the interviewee and also gain
maximum information from him relating to this project.

37

Questions 1 3 have been asked in order to see how popular the store is in order to determine how
large the sample is that comes to the store. The questions reveal that the shop is open for more than 12
hours; it has a sufficient variety of brands and sells a more than adequate amount to fulfil the
parameters within this research. These parameters would simply be to increase the reliability and
validity of this project as much as possible.

Questions 4 and 5 gauge the interviewees responses regarding which brands are sold the most.
Though not really precise, he managed to name a few brands upon which greater discussion will be
done as the paper delves into the Survey which was carried out. Out of the brands, 4 were of PTC, 1
was of PMI and 1 was of another company. It shows that according to the interviewee, PTC has the
largest market share or its brands are sold the most.

The questions that follow (Q6 Q14) ask the interviewee about consumer behaviour vis--vis the
price increases in cigarette packs.

Question 6 and those that follow are linked in a different way. They were inserted to see whether
people have smoked the same brand over the years (brand loyal), despite price increases. Question 6
is answered (in the tabulation above) right below the question its self but the reasoning and logic or
intent of the question is answered in questions 8 and 9. A way of improving the content validity of the
interview and to gauge whether the answers correspond or not whether there is reliability or not in
the data produced.

Where in question 8 the interviewee says that expensive cigarettes do not sell as much, implying that
maybe those brand loyal customers, buying the same brand for more than ten years, now might be
switching, if they smoke those expensive brands, to other cheaper brands.
However in question 9, a contradictory phrase is said by him, whereby he says that some people still
buy the same brands, implying that maybe he is referring to those people in question 6. It would be
further explained in questions 7, 10 14 and in the analysis of the survey carried out.

38

Questions 7 10, 12 - 14 were inserted so as to gather any other opinions of the interviewee regarding
the buying behaviour or sales of the store and in turn the tobacco companies.

To sum up the obvious indication that the interviewee has confirmed for us, is that the increase in
prices do affect sales and not just that, the perceptions of the consumers as well, at times leading them
to switch brands. These answers and their explanations will be linked with the questionnaire and
explained question by question, in more detail, in the chapter below.

Questionnaire

Brief Summary about Questionnaire:

39

The premise and the actual purpose of the questions within the questionnaire are as follows.
(Explained in detail in the tabulation and Analysis):

At the top, Name, Age, and Gender were general demographics regarding the sample and

were optional.
Question 1 and 2 were General knowledge questions asked about the industry: In order to

gauge whether the respondents knew the industry well or not.

Question 3 -9 were inserted to find out the various brands smoked by the respondents and
frequency of smoking over time: In order to determine brand loyalty, familiarity to firm etc.
(Question 3,5 and 6 also check which company has the larger share, also indicating the

validity of the Q1 data as true or false

Question 10 12 were inserted to find out whether the respondents had knowledge of

government involvement in tobacco sales: Government Involvement.

Question 13 18 were inserted to find out the relationship between the increase in prices and
impact on sales. (Question 14 18 are inserted to reconfirm and check whether the questions
answered have consistency and whether price changes do really affect).

Data Tabulation and Explanation:

Question 1: According to you, which tobacco company in Pakistan has the largest Market Share?
PTC= 35Respondents.
40

PMI=15 Respondents.

LARGEST MARKET SHARE?

PTC (70%)
PMI (30%)

Out of the 50 respondents, 35 said that PTC had the largest market share, which is 70% of the chosen
sample. The remainder 30% chose PMI as having the largest market share. Khyber Tobacco Company
which was option 3, none of the respondents chose that company.

Question 2: Which cigarette brand would you say is the most successful? (=Number of respondents)
MARLBORO=12
DUNHILL=3
CAPSTAN=9
MORVEN=7
GOLD LEAF=14
BENSON=2
PINE=2
DAVIDOFF=1

41

MOST SUCCESSFUL BRAND

MARLBORO
DUNHILL
CAPSTAN
MORVEN
GOLDLEAF
BENSON HARD
PINE
DAVIDOFF

Question 2 estimates the respondents beliefs about which brands are the most successful in their
opinion. Out of the 8 brands that were named by the respondents, the 4 most successful were: Gold
Leaf (14), Marlboro (12), Capstan (9) and Morven (7). The percentages/probabilities of just these four
brands from the total number of brands (8) that were mentioned by the respondents are: 28%, 24%,
18% and 14%, respectively, making a total of 84%, which shows a lot of concentration among these
four brands.
Note: The respondents were told that success can be defined by them in whatever way they want, in
terms of: market share, profitability, brand value etc.

Question 3: Which brand of cigarettes do you smoke?

BENSON HARD=8
GOLD LEAF LIGHTS=1
GOLD LEAF HARD=14
MARLBORO HARD=7
MARLBORO LIGHTS=10
DUNHILL LIGHTS=3
DUNHILL HARD=2

42

DAVIDOFF HARD=4
DAVIDOFF LIGHTS=1
CAPSTAN=1

WHICH BRAND DO YOU SMOKE?

16
14
12
10
8
6
4
2
0

BRAND PREFERENCE

The third question regarding which brand the respondents smoked, 4 brands were more popular,
namely: Gold leaf hard (14), Marlboro Lights (10), Benson Hard (8) and Marlboro Hard (7). The
remaining brands as you can see were not smoked as much by the respondents.
Note: Some respondents chose more than one brand that they smoke currently.

Question 4: How many a day?

Cigarettes smoked in day= by number of respondents (50 total).
4=1
5=2
6=2
7=3
8=1
10=9

43

12=2
15=11
20=6
25=6
30=4
35=2
40=1

45
40
1 Resp.

35

2 Resp.
2 Resp..

30

3 Resp.
1 Resp..

25

9 Resp.
2 Resp

20

11 Resp.
6 Resp.

15

6 Resp
4 Resp.

10

2 Resp...
1 Resp

5
0
Respondents

This question tested the frequency of brands being smoked in a day. The tabulation above simply
shows: Cigarettes (sticks) smoked in day = by number of respondents (50 total). At the left, y axis, are
the numbers of cigarettes smoked in a day. And on the right there is a list given showing the colours
which represent how many respondents chose what frequency.

The first bar (starting from the left, navy blue) indicates that 1 Respondent said he/she smoked 4 times
in a day while the second bar (starting from the left, maroon) shows that 2 respondents said they

44

smoked 5 times in a day. 11 respondents said that they smoked 15 cigarettes in a day, 9 said they
smoked 10 cigarettes a day and 6 respondents said they smoked 20 and another 6 said they smoked 25
in a day.
The least number of times smoked and the highest recorded number of cigarettes smoked were both
recorded on individual cases. The least is on one respondent saying 4 times, and the maximum is on
one respondent claiming 40 times a day. The data reveals the baseline of the cigarettes consumed by
smokers, and sets a trend for future questions to determine why it has increased/decreased over time
and why.

Question 5: Have you always smoked this brand? (= Number of Respondents)

YES=18
NO=32

ALWAYS SMOKED SAME BRAND?

YES (36%)
NO (34%)

Question 5 reinforces the baseline being established by the previous question while at the same time
creating a base/platform for the question to follow. Those respondents that answered Yes (18) will
skip questions 6 and 7 and go straight to question 8, whereas those who said No (32), they will
answer in sequence of numbering.

Question 6: If no, then name the previous brand/s you smoked? (=Number of respondents/chosen
brands).
BENSON HARD=16

45

GOLD LEAF LIGHTS=1

GOLD LEAF HARD=10
MARLBORO HARD=12
DUNHILL HARD=9
CAMEL=1
DAVIDOFF HARD=1
CAPSTAN=1
MELBOURN=1
18
16
14
12
10
8
6
4
2

BENSON HARD
GOLD LEAF LIGHT
GOLD LEAF HARD
MARLBORO HARD
DUNHILL HARD
CAMEL
DAVIDOFF HARD
CAPSTAN
MELBOURN

0
NUMBER OF TIMES PREVIOUS BRANDS WERE CHOSEN/SMOKED

Previous brands that were smoked, the most chosen as you can see were of PTC and by Question 3 we
see that they are still of PTC. Most people switched from Benson Hard, Gold Leaf Hard, Marlboro
hard and Dunhill hard.
Note: Respondents chose more than one brand that was previously smoked.

Question 7: State the reasons why you switched the brand? (=Number of respondents)
TASTE=6
QUALITY (& NOT FRESH, FAKE, STALE) =6
PRICE INCREASE (& PRICE DIFF, TOO EXPENSIVE) =13
NICOTINE LESSER (& SUITS BETTER, LESSER HARM IN LIGHTS) =7
PACKAGING =3
GOT MORE MONEY =3

46

TOO (& HARD) =3

Question 7s answers shed light as to some of the reasons why they switched their existing brands. It
was an open ended question and the results have been qualitatively analysed as:
Quality would entail freshness of the brand, stale flavour, or fake (responses verbatim used by
respondents). In this instance 6 respondents switched brands due to the quality i.e. 14.6% of the total
sample.
Note: All the headings and the words within are the words of the respondents. They have just been put
into similar categories for purposes of analysis and ability to read for the reader. More than one reason
was given by certain respondents.

Question 8: Over the years have you increased/decreased smoking?

INCREASE=30
DECREASE=12
NEUTRAL=8

OVER THE YEARS, HAVE YOU INCREASED OR DECREASED SMOKING?

INCREASE (60%)
DECREASE (24%)
NEUTRAL (16%)

As you can see in the diagram above, 30 respondents from the sample answered that they had
increased smoking, more than double who decreased it. 60% increased smoking which is
representative of the sample that overall there has been a general increase in smoking, only 24% they
had decreased smoking and 16 % remained neutral.

47

Question 9: State reasons why?

HABIT (& ADDICTION, LIKE SMOKING, TASTE, BRAND) =17
STRESS (& STUDIES, PROBLEMS TENSION) =11
AFTER FOOD=1
HEALTH (& AWARENESS, HARMFUL) =7
PRICE INC=5
LESS IS MORE (& DIDNT NEED TO INCREASE) =6
AGE=2
HAVE LIGHTS NOW =1
SAD STATE OF THE WORLD=1
SOCIAL ACTIVITY=1

This was an open ended question in the questionnaire and after the results had been analyzed; their
responses have been grouped in such a way in the aforementioned heads. For example, the heading
habit includes how many people increased smoking due to habit or addiction or that they simply like
smoking, the taste or the brand (or all of the these reasons or just a few of them under this heading).

Most people increased smoking due to habit (17 respondents), next was due to stress which could also
mean stress general or due to studies or problems, tensions generally they faced (11 respondents). Due
to health related reasons that they became aware of the health related issues that would come etc 7
people said they decreased due to this reason. The remainder 5 who decreased smoking (total 12 who
decreased as seen from Question 8), did so because of the price increase.
Note: All the headings and the words within are the words of the respondents. They have just been put
into similar categories for simplicity for the reader. Also the respondents could write more than one
reason.

Question 10: In your opinion, does the Government regulate tobacco smoking?
Y=27
N=10

48

M=13

DOES GOVERMENT REGULATE TOBACCO SMOKING?

YES (54%)
NO (20%)
MAYBE (26%)

This question will try and prove that the secondary data researched is valid. It will try to establish,
along with the questions that follow, that an increase in taxes directly lead to increase in prices which
ultimately affect the demand and reduce sales. 27 respondents said that the government does regulate
tobacco smoking, whereas only 10 and 13 said No and Maybe, respectively.

Question 11: If YES/MAYBE, then state how, in order of most important/impactful?

(=Number of respondents/chosen response)
PICTORIAL HEALTH WARNING ON PACK=20
NEGATIVE ADS, WARNINGS ON TV CHANNELS AND MOVIES=8
INCREASE IN TAXES (& PRICES, INFLATION) =17
NO PICTORIAL WARNING BEFORE=2
RESTAURANTS (& AIRPORTS BAN) =2
LAWS (& ANTI TOBACCO) =7
DONT KNOW=4
NO BRAND ADS=2
AGE LIMITS=2
SMUGGLED=1
INDIFFERENT=1

49

In continuation to question 10, this question asks the respondents that if their answer was yes or
maybe then they should state how, in order of most impactful or important does the government
regulate. This was an open ended question in the questionnaire and after the results had been
analyzed; their responses have been grouped in such a way in the aforementioned heads. For example,
restaurant bans would also include the response of airport bans i.e. public ban of smoking by
government.

As to their responses, 20 respondents said that the government regulates via the pictorial health
warning on packs, 17 said via increase in taxes or prices or also inflation and 8 said via negative ads
warnings on TV and 7 said via laws (anti tobacco).

The remainder options were not chosen to the extent as the 4 specifically mentioned above.
Note: All the headings and the words within are the words of the respondents. They have just been put
into similar categories for simplicity for the reader. The respondents could choose to give more than
one reason.

Question 12: Why, in your opinion, is that the most important/impactful? (= Number of respondents)
Harsher laws (constant change) = 4
Negative Advertisement (Pictorial, disgusting, disagreeable) = 9
Newspaper=1
Impact on consumer=7
Increased price (& affordability) = 3
Reduced demand =4
Advertisement power =1
Airport =1
Age =2
Awareness = 25
Change in preference=1
Health=3

50

The aforementioned data shows that basically three heading, awareness, impact on consumer and
negative advertisement were the three reasons why. Respondents reacted to this question in an
interesting way. They gave multitude of responses. They said they understood more now and were
aware of their surroundings, of the increasing inflation at such an increasing rate, the health related
issues, the fact that with such laws etc being introduced to curb tobacco consumption were actually
affecting the respondents in some way or another.
Note: Respondents chose to give more than one reason.

Question 13: Since the last two years, have prices of cigarettes increased?
YES =46
NO =1
MAYBE =3

SINCE LAST TWO YEARS HAVE PRICES OF CIGAREETES INCREASED

YES
NO
MAYBE

As mentioned in the beginning of this project, increase in taxes is to be taken as an increase in prices.
After establishing that fact also by this survey that government increases the prices to reduce the sales
or affect, negatively, the tobacco consumption, we come to question 13 where the respondents were
asked whether the prices of cigarettes had increased over the past two years or not. 92% chose to
respond with a Yes. Only 2% chose No and the remainder were unsure.

51

Other than seeing how knowledgeable the sample is and generally establishing the fact that prices
really have increased (as proven by the results); this question tests their knowledge to see whether the
questions that they will answer later would be valid or not.

Question 14: The average price of a pack of 20 Cigarettes (middle segment brand) was Rs. 55-60 two
years ago and now Rs. 70-80. Do you feel people would have switched brands because of this?
YES =18
NO =27
MAYBE =5

DOES PRICE INCREASE LEAD TO PEOPLE SWITCHING BRANDS

YES
NO
MAYBE

When talking about brands, smokers are usually sensitive, as seen by this research survey. When
asked whether the price increases would lead to people switching brands 27 respondents said No,
whereas 18 said yes and 5 were unsure. 36% chose to respond with a Yes, whereas 54% and 10%
responded with a No and Maybe.

Few want to admit people would switch brands due to an increase in price whereas question 9 shows
us that 5 respondents themselves decreased smoking due to an increase in prices in cigarettes.
Wording within the questionnaire then and the sequencing becomes extremely important, for which
reason, the remainder questions, 14 18, all test and recheck this relationship between an increase in
price and impact on sales/people switching.

52

It is important to mention that out of 50 respondents, 18 said that people would switch brands due to
the price increase and so they believe that this does in fact affect their perception of eventually which
brands to buy.
Note: Those who said yes skip the next question. Those chose No will answer in sequence. Those who
said maybe, it is optional to answer the next question (Question 15).

Question 15: If NO, then if the prices were increased further, would people still remain brand loyal?
YES =12
NO=10
MAYBE =6

IF PRICE INCREASED FURTHER, WOULD PEOPLE STILL REMAIN BRAND LOYAL?

YES
NO
MAYBE

Out of the 27 respondents that said people would not switch brands due to the price increase of about
Rs. 10-25, when asked if there was a further increase in price, 12 (46.1%) still said that people would
remain brand loyal i.e. not switch brands. 9 (32%) changed their response to No and said that people
would switch brands if prices would increase more, this change is enlightening and will be explained
in the paragraph below as well. And 6 were unsure now as to how it would affect the demand.

53

Only one who said Maybe in the last question, chose No this time which meant that now from
being uncertain he/she was certain that people would switch brands now.

This makes it a total of 28 respondents who answered this question: 27 who said No and 1 who said
Maybe in question 14 answered this question then. It shows, according to the respondents results,
that now a total of 28 people would switch brands, keeping in mind the responses in question 14 (18
respondents answered they would switch brands) and question 15 (ten more said they would also after
a further increase) combined responses after the overall price increase.

This is a change of 55.6% in the respondents answers, the 28 respondents who previously chose no
and said people would not switch brands. It provides proof that people do eventually switch to other
brands if prices increase, thus affecting profits of companies, sales etc.

Question 16: The average price of a pack of 20 Cigarettes (middle segment brand) was Rs. 55-60 two
years ago and now Rs. 70-80. In your opinion, does this affect the sales of these tobacco companies?
(= Number of respondents)
YES =26
NO =24
MAYBE =0

DOES PRICE INCREASE AFFECT SALES OF TOBACCO COMPANIES?

YES
NO
MAYBE

54

Simply, 26 respondents said that an increase in prices would affect the sales of tobacco companies
whereas 24 respondents said that they do not. The probability of sales being affected is higher as
shown by the fact that 52% said that sales would be affected and 48% said they would not. The next
question will just show to what extent and also verify the responses in this question.
Note: Those who said yes skip the next question. Those who chose No as a response would follow the
sequence. Those who said maybe, it is optional to answer the next question.

Question 17: If NO, then if the prices were increased further, would sales still be unaffected?
(= Number of respondents)
YES =10
NO =10
MAYBE =4

IF PRICE INCREASED FURTHER, ARE SALES STILL UNAFFECTED?

YES
NO
MAYBE

For those respondents who answered the previous question with a No i.e. that with a price increase
sales would not be affected, their response was basically being gauged here, in question 17. Out of the
24 respondents, 10 said sales would still be unaffected, 10 said with a further increase in price, sales
would be affected and 4 were uncertain now. So keeping in view the previous questions responses,
now a total or aggregate of both questions combined: 36 respondents said that sales would be affected

55

(72% probability), 10 only said now that sales would not be affected (20% probability) and 4 were
unsure now (8% probability)

Question 18: According to certain officials, the brand value of Gold Leaf Cigarettes and Marlboro
Cigarettes is Rs. 100, would you agree?
YES =18
NO =16
MAYBE =16

BRAND VALUE OF GOLD LEAF AND MARLBORO RS. 100?

YES (36%)
NO (32%)
MAYBE (32%)

Like all the other questions had a key variable, the word, brands was the key variable in question 18.
The purpose was that by the end of the questionnaire, this project wanted to check whether two of the
most sought after brands: Golf Leaf and Marlboro were really that strong in the perception of the
respondents, especially after the series of questions previously asked. 18 respondents agreed that the
brand value of the two brands could be estimated at that amount.

56

Analysis of Findings:

The first question asks the respondents which company out of the three (PTC, PMI and KTC) has the
largest market share. It shows that in the view of the respondents, PTC has the larger market share.
The results stand true as the secondary data collected and analyzed shows the same results. From the
second question we can say that, 50 respondents chose 8 brands as being the most successful, out of
which four were the more successful brands (2 of PTC: Gold Leaf and Capstan and 2 of PMI:
Morven and Marlboro). Also reflected in Question 3, brands by PTC, again in the perception of the
respondents are the most successful. 4 brands are by PTC, 2 by PMI and 2 by other companies, this
again shows that the number of brands selected were exactly double than those of PMI reinforcing
the results of question 1 (bringing in an element of reliability).

From question 3, it is noteworthy to mention that out of the respondents, 5 were big retailers/shops
that were also interviewed and these questionnaires were asked from them as well. In their opinion as
well, the aforementioned brands were the ones that were widely sold and consequently smoked by the
respondents. Out of the ten brands named by all the respondents, 6 are products by PTC/BAT and 2
are of PMI, once again showing that the results Questions 1 and 2 are consistent with each other and
are indicative to the positive result findings of the research. Question 4 simply gauges how many
cigarettes the respondents smoke in day, each bar is indicative of the frequency and on the right in the
chart above; there are the number of respondents who opted for the corresponding colour frequency. It
helps in establishing a baseline as to whether the frequency has increased or decreased over a period
of time.

Question 5 asks the respondents whether they have always smoked the same brand, correlating the
frequency and brands switched or not over time. It also sets a benchmark for questions 6 and 7, those
respondents who said No, will answer in sequence and those who chose Yes will skip the next two
57

questions. Almost double the amount chose the No option (64%) and so it allows the research to
delve deeper not only to get into a qualitative perspective but also a quantitative one. Question 6 and 7
will establish a relation for those who said that they had smoked previous brands before and the
questions that follow will delve into the reasons as to why these changes occur i.e. what this research
will prove.

Question 6 is again a conditional question i.e. if previous question answered No then answer
question 6, which is basically asking the respondents the names of the previous brands smoked. From
this question it is also important to mention here that only one respondent shifted from smoking a
lights brand, that to from Gold Leaf Lights to Marlboro Lights (as shown in question 3 in excel sheet
in annexure). The rest of the respondents (31), who had answered in question 4 that they had smoked
other brands before: all smoked hard brands and shifted to other brands hard/lights. This question
could have been misleading showing that most people switched PTC brands, however the previous
questions show that still the most smoked brands are of PTC.

From Question 7 onwards the real juice of the analysis begins. It shows the reasoning of why the
respondents switched brands. The results show that most respondents switched brands due an increase
in price or price comparativeness or that the cigarettes had become too expensive (31.7% of the
sample). This is interesting as this is exactly what this research project is trying to prove and show
how such problems can be tackled. People might have switched brands but ultimately have they
increased or decreased or are have they remained the same (neutral) over the years is what will lead us
to question further and find out the reasons why (Question 9 and onwards): Question 8 aims to find
out just that, and the results show that more than double have increased (60%) smoking over the
years, reflecting an increasing smoking incidence over the years. When asked the respondents as to
why this smoking had increased/decreased (Question 9), most responded due to habit (17
respondents). The questions that will follow will show more reasoning for this particular question.
Though its importance here too is clear, it indirectly tests the maturity of the sample, how valid their
responses would be and how reliable the results would be also.

The questionnaire also shows that 54% of the respondents believed that the government does regulate
tobacco manufacture, distribution and sale etc. 20% said it does not, whereas, 26% were unsure or
maybe believed that it did regulate but did not know how. For those who answered yes/maybe the
government does regulate then went on to answer the corresponding Question 11, as to how the

58

government regulates in order of being most impactful to least impactful. Most chose that it regulates
via the Graphical Health Warning and then chose increase in taxes/prices of the products. Again
showing correlation to the fact that increasing prices have and affect on the consumers mindset and
perceptions. It not only shows that the sample is well aware, but also shows the level of involvement
of government regulation is so many ways and more so via increase in prices or taxes, second most
chosen response by the respondents.

Questions 13 18 are all linked in an intertwined way, they test the reliability of the answers of the
respondents as they answer the questions and also the content validity of the overall questionnaire.
Simply put, most of the respondents believed that the prices of cigarettes have increased over the
years and that ultimately increases in prices will affect, making them switch brands and also that
these increases affect the sales of tobacco companies.

Question 18 asked the respondents whether they believed that the brand value of Gold Leaf Cigarettes
and Marlboro Cigarettes is Rs. 100. Interestingly 36% answered yes and 32% answered no and 32%
answered maybe. In this case, the option, No does not mean that the brand value is lesser; it could
mean that the respondents feel that the brand value is more. However, in most of the cases they felt it
should be lesser. Maybe is the key option that should be observed here, the uncertainty in the
respondents, after being certain in most cases. When put a number, Rs. 100, they are unsure whether
the price/brand value could be that much, considering the fact that they believe (can be generalized
now) that if prices increased people would switch brands.

Finally, the questionnaire, consisting of 18 questions is consistent with what the literature tells us,
which is that price increases will affect their behaviour and in retrospect the sales of tobacco
companies. It allows us to really comprehend the reasoning and logic of why consumers behave the
way they do and at the same time giving us quantitative data as well to gain a better understanding of
the recent trend within the tobacco industry and market as a whole.

59

Overall Analysis

This section is an analysis of the previous analyses done on the interview and questionnaire relating it
to the literature review and competitor analysis. Out rightly, we can state that the research question of
this project has been answered by stating that yes tax increases or price increases do affect the sales of
the key players within the tobacco industry, or any industry as a matter of fact as well, though that
would be making a way too holistic argument.

After careful analysis it can be seen that both primary and secondary data reveal that prices have a
pivotal role in determining consumer behaviour. This has not only been accepted by tobacco
companies, as stated in the literature review, but also by consumers when the surveys were carried
out: interview and questionnaire.

The analyses of the secondary data and primary data show many interesting facets that are involved
within the tobacco industry, not just in Pakistan but on a global scale as well. These mandatory tax
increases or changing regulations are part of a wider agenda as directed by the World Health
Organization (WHO) and the treaty signed by Pakistan, among 100 plus more countries, known as the
Framework Convention on Tobacco Control (FCTC).

Interestingly, data gathered from the primary sources, more so the questionnaire, shows that the
general public or more specifically the chosen sample, representing the general public smoked for
many years and belonged to different ages, genders and educational backgrounds, yet, were unaware
of the role of the Government of Pakistan (GOP) for tobacco regulation or what the various bodies
were that are in place for keeping a track or check on tobacco manufacture, distribution and
consumption within the country.

60

FCTC and WHO suffice to say were things that people were completely unaware of. This project
should also serve as a basis for readers who want to know more with regards to these factors and that
the GOP makes concerted efforts within this regards, not just the GOP, but also the compliant,
legitimate tobacco companies as well.

The treaty requires the countries that are a part of it to go according to certain guidelines in order to
control and regulate tobacco usage, both within and among countries. The project furthermore found
out that the increase in taxes i.e. prices of tobacco products i.e. cigarettes, coupled with the fact that
these tobacco companies can neither advertise nor promote their products, in fact have negative
advertisements i.e. health warnings on their products, all the more affect how they operate within such
hostile environments.

It is important to mention that a research project would be biased if it were only one sided. The data
gathered both primary and secondary, presents arguments that are two sided, not just taking the view
that increases in prices affect sales negatively but also that they do not affect the sales at all. It
discusses at length within the overall text that price increases might not affect the sales of tobacco
companies because consumers might switch to lower segment brands i.e. cheaper brands of the same
company ultimately not affecting their sales; profits is another discussion altogether, however the
articles and discussions also highlight how profits have been affected for some i.e. PMI and at other
instances, despite the rising prices and costs, PTC continues to make profits.

At certain instances, it has also been mentioned that price increases do not affect the smoking
incidence at all or simply put, these increases do not affect consumers buying behaviour. At other
instances these price increases do not affect the smoking incidence because people switch to cheaper
illicit brands and so demand of tobacco remains the same.

We can then assume that the wider agenda adopted by Government is not being fulfilled, that tobacco
usage has not been monitored and regulated or reduced in a manner of speaking. This then leaves
room for more research to be carried out, that why are not increasing prices deterring consumers from
smoking? Whether this is the right tool, or should there be a set of tools to regulate? The facts that
have been analysed in this research open up other avenues in which research can be carried out.

61

This project, as mentioned before focuses on one particular research area that is Finance. Other
areas or departments such as supply chain, marketing, production, sales, legal all have pivotal roles to
play but in the end it all boils down to money i.e. whether the company is sustaining and growing its
profits.
Marketing within the company is not as aggressive within the industry as a whole that tobacco comes
in Fast Moving Consumer Goods Industry (FMCG). Other FMCGs like UniLever, Procter and
Gamble, Coca Cola, Pepsi etc are promoting their products much more aggressively, have larger
marketing budgets naturally then and can promote their products freely, this is not the case with
Tobacco FMCGs, these companies are not allowed by law to advertise, promote etc and are
monitored closely by the government, not the case with other companies.

Also within this research, there are examples of not just other companies or government bodies, but
also of other countries and what the trends are there. This has been done to give the research some
more validity, to enhance its parameters, though only to the context the examples have been used in.
Pakistan can understand what the trends are globally and can use these government tools or company
strategies and can benefit from them, not just the public but the private sector as well.

In conclusion, stating the obvious the analyses of all the sources not only help us to better understand
the tobacco industry and how firms operate within, but also equip us to understand the propose
various recommendations to the tobacco companies which they can adopt and modify and use to their
own advantages. This aspect will be discussed in the chapter below. The project explains the research
area of finance and subsequently sales also at great length, from the very beginning to the end,
especially with in the competitive analysis, although it discusses in ways that the readers can easily
comprehend what exactly is happening and can get a better grip and understanding over the research
area as well.

62

Recommendations

Making recommendations with regards to the research objectives and subsequent results that have
been analyzed is not a simple task. However, they allow companies that should find this project useful
to further delve into the various complexities that are involved in running their operations or the
modus operands and how to deal with a diverse set of both macro and micro economic factors. 118

There are a set of four recommendations that have been made bearing in mind the increasing taxes
and prices of tobacco products and the negative impact they have on the sales of these companies.
From the data gathered and analyzed above, it is clear that Pakistan Tobacco Company is the
Company that this project focuses on as it is the key player within the industry. Given the fact that
PTC has the most muscle as a tobacco company in Pakistan, the recommendations or suggestions that
follow will then be most applicable to this Company, however in some ways they are generic as well
and can followed by the other 49 registered companies also.

1. Increase volumes to tackle the reducing profit margins due to increasing cost. The law of
economies of scale is simple, mass production and sales allows for costs to reduce relative to
the profits achieved.119
2. The retail price for a cigarette pack for example for Dunhill Switch Pakistan is Rs. 128.
Retailers, however, sell it for Rs. 130, keeping a profit of Rs. 2 per pack. Various deals can be
made with the retailers or large distributors to share that profit margin with the companies and
in turn the retailers can get maybe concessions on large orders or other monetary benefits.
This allows the companies to increase their profits regardless of tax increases. Tax increases
will keep pushing prices for cigarette packs up, however, the margin that the retailer keeps for
himself has more or less remained the same (of course investment has increased). For

63

example if even .50 paisas is given to the company per pack, then if approximately 10 Million
packs are sold, an added Rs. 5 Million is achieved by the company.
3. Monitor, review and proactively approach various law making and implementing agencies
and work with them collaboratively in order to anticipate major changes vis--vis the
regulations that will or might come into effect.120
4. Do more consistent research to evaluate and analyze the changing perceptions of the masses
so as to gauge what more the company can do to increase their market share and in turn their
sales and profits. This is a factor that is constantly done by many companies, multi nationals
within the country and as globally as well. As the world flattens 121, it is becoming even more
accessible to all the nation states; this makes research all the more valuable and seen as a
necessity by companies worldwide.
5. It is inevitable that the laws and regulations that exist will keep changing, becoming harsher
and more stringent for companies, but their enforcement in Pakistan is not as strong. This
gives companies some wriggle room, though it is not advised by this project research to
exploit that factor.
It is however, recommended that the companies proactively adopt and implement the laws to
their utmost capability so that the affects of them can be seen and in turn harsher laws and
regulations don't crop up every year or within a year and the Government waits to effectively
enforce one law at a time, giving some temporary relief to companies or spreading out the
negative consequences over a period of time.Removing or reducing illicit trade would also
allow companies to increase prices as people would not switch to cheaper brands thereby
increasing both companies revenues as well as the revenues for the Government in form of
taxes paid by the legitimate sector.

64

Conclusion

This project has made a strong basis for further research to be carried out in many areas but more
specifically with regards to the affects of increasing prices and sales of tobacco companies, consumer
behaviour and demand. It has opened perhaps other areas that were previously untouched to be
researched upon as well.

The results have shown that these increases in prices do actually affect sales of tobacco companies
negatively and by definition, demand is not inelastic. Furthermore the results also reflect that not just
increases in price, but changing and harsher regulations that are imposed on the tobacco industries
globally have a great affect on how tobacco companies operate. The findings reflect how little people
know, what and how governments regulate tobacco consumption within countries and cross borders as
well.

Many interesting facts came to light after carrying out this research, like how these companies were
affected when the pack of 10 cigarettes were stopped, how their costs would have naturally increased,
what the consumers perception was, how illicit trade is rampant with in the country and the companies
that are involved in it are making huge profits and are a threat to major legitimate companies namely
Pakistan Tobacco and Philip Morris, that have already been affected by this illicit sector and will
continue to be affected negatively as time passes by.

The findings are also indicative of the fact that despite people are becoming more aware of the health
risks associated with smoking, the smoking prevalence has remained the same in Pakistan, more or
less, and in some cases they have increased smoking after having switched many brands over the
years. Most of the respondents within the sample increased smoking due to stress, depression, tension
and some simply liked smoking.

Agreed, there is a lot of literature available on the tobacco industry, even with in Pakistan, but very
limited to what the consumers perceptions and buying patterns are within it. This is most crucial for

65

any company, not just tobacco companies, to know what their customers want, to know what they are
thinking and more importantly, why they think or perceive things that way.
Since these companies cannot openly market or promote their products like other Fast Moving
Consumer Goods (FMCGs) companies, research will allow them to know what the customers really
want and whether these companies should adopt different approaches of marketing techniques (what
little they have) or strategies on how to deal with the media portraying negative images of tobacco or
engagement with Government officials and to keep tabs on various global initiatives that are being
incorporated within Pakistan as well.

The methodologies adopted for this research, suffice to say have been employed so as to get an
increased degree of both, reliability and validity. Furthermore, both approaches allow questions such
as what, where, how and when to be answered as well as the question - why. The project allows the
readers not only to understand the overall trends or complexities involved but also the reasoning as to
why these trends are taking place and how they can be tackled by these companies.

The analyses, as mentioned before, have been done within the text of each chapter and at the end of
each chapter as well, and ultimately just before the recommendations an overall analysis was done of
all the previous analyses. It increases the content validity of the research being carried out and that
which has been previously done as well i.e. secondary data, ultimately increasing the reliability as
well of the findings and analyses done of the data. Analysis is both qualitative based and quantitative
based, the aim was to make the readers understand the facts and trends and not just know them.

Considering the age old philosophy that nothing is permanent except change, not just this research
gives merit but also that one absolute of change being inevitable, which makes further research into
the tobacco industry, or mentioned research problem all the more viable, significant and necessary.

Laws and regulations at a global level keep changing and Pakistan, being a signatory to some of these
regulatory bodies needs to subsequently amend its stance as well. Not just at a global level, but within
the country as well laws are changed or added and so research into this industry, like this one, will
always add value.

66

The recommendations aim to tackle these harsh changes and given the data collected and analyzed,
recommend to the companies that further research should be done as a principle. The project proposes
solutions, briefly, for the companies to employ and incorporate within their strategies in order to
sustain and maybe increase their profits and sales. These may be as simple as engagement with
retailers or Government Agencies but they have a significant impact on their businesses and
operations.

Finally, it has been a true journey, an illuminating experience carrying out this research in one of the
largest industries in the country and major contributors towards Government revenues. As a student of
Finance I can only hope that this knowledge is passed on and is useful to other students, companies
and the general public as well. More importantly the aim of this research was also to make it an
interesting read so that the readers may enjoy and consequently learn from it as well.
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67

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3

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