PAIN in Spain. That is the cause of lower sales at Imperial Tobacco. The Spaniards, hurt by austerity and high unemployment, have decided to kick the cancer sticks. The quintessential cafe culture moment – a strong black coffee and cigarette – is a thing of the past. Or is it? We doubt it somehow.
While it is true that sales in Spain have fallen by double digits, that is partly explained by a bitter price war. First Philip Morris cut the price of its leading Spanish L&M brand to €3.30 to compete with British American Tobacco’s Pall Malls. Imperial Tobacco’s biggest label Fortuna looked expensive by comparison at €3.40, so it cut its own prices too.
Imperial was right to cut prices to protect its market share. It currently has 34 per cent of the market but Philip Morris, on 32 per cent, is snapping at its heels.
Volumes have also declined, which can be explained, in part, by the smoking ban and changing attitudes towards smoking. But the black market for cigarettes in Spain is probably more responsible. Spaniards aren’t necessarily kicking the habit – just feeding their addictions more cheaply.
Spain is currently losing as much as €6bn a year in VAT and duty due to contraband cigarettes, and analysts expect new Prime Minister Mariano Rajoy to launch a crackdown in the near future.
That would allow the tobacco firms to call off the price war; Imperial’s profits and sales would somewhat recover. With that in mind, we still think the shares are worth a puff.
