Nov 2016 Financial News

Witco running a tight ship

Nov 24, 2016

Managing director of the West Indian Tobacco Company Ltd (Witco) Jean Pierre du Coudray says the after-tax profit of $372.6 million achieved for the nine months ending September 30, reflects the efficiency of the cigarette manufacturer’s business model. He said he is happy with the company’s year-to-date performance.

“We have a very strong brand portfolio. Dunhill, Du Maurier and Broadway are three very well known, very relevant brands in the market so consumers are very loyal to those brands. We have a very effective distribution network which helps us get our products to the marketplace in an efficient way.

“We have invested millions of dollars in the factories over the years and we are seeing the benefits of those investments in new kits, new designs and other types of upgrades. This has allowed to us to manufacture at a better quality and a better price,” he said.

Witco’s profit after tax for the nine-month period was an increase of 5.2 per cent over the correponding period in 2015 and du Coudray said it was a good result in what has been “a tough year all around.”

“We have been feeling the same pressures as our peers and we have not been isolated, so we are happy with that performance.”

Du Coudray said the 6.7 per cent in T&T’s gross domestic product (GDP) first half of 2016 had affected the dynamics of Witco’s domestic business and in the way consumers buy. Although the company has a history of strong brand loyalty,that is being eroded because of the economic downturn which has left consumers with less disposable income.

“The trade during recessionary times is watching their cashflows tightly—the trade being supermarkets and wholesalers. Perhaps they are ordering less stock than they would have ordered in previous years simply because the flow through from consumers is not as high as it used to be.

“From the consumer side, certainly there has been a shrinkage of disposable income and that has led to commodification by consumers.”

Du Coudray explained: “Although there might be a preference to stay with their favourite brand, the economic situation is forcing consumers to look for a cheaper solution. That is how we have been impacted and we have seen down trading taking place.

“What we have seen this year is almost like a changing consumer dynamic where people have been prepared to walk away from brands they have been loyal to and looking for cheaper alternatives.”

Maintaining that Witco is the market leader because they have a brand for every need, du Coudray pointed out:

“We have Dunhill Premium, we have du Maurier, which is our big brand in the T&T market and a very nationalistic brand. We also have Broadway at the bottom which has held its own for the last decade in terms of being a solid player in that segment. Depending on your financial situation, we have a brand for everyone.”

He said Finance Minister Colm Imbert’s announcement of billions less in energy income in this compared to 2015 will affect how Witco fares in the future since it is likely that people will adopt conservative spending patterns.

Price increase

Witco recently increased the price of its products due to the increased excise duty on tobacco of 15 per cent. A pack of Du Maurier has moved from $26 to $28, Dunhill from $29 to $31 and Broadway from $23 to $25.

“We can not absorb that, it is too substantial,” du Coudray said.

“We took a price increase on October 20 which was when the prices went into effect.”

However, he said, the problem is not increased taxes but products that enter the country illegally and are sold on the black market.

“Based on the prices they are selling at, it does not appear that there are taxes and import duties. What this tax has done is basically widen the gap between the legal market and the illegal one.

“The Government does not benefit as they do not collect revenue. The industry does not benefit as they are taking away sales from us who pay taxes and employ people. The consumers do not benefit as the quality of some of these products leaves a lot to be desired,” he said.

The illegal tobacco products are being brough in from as far as Vietnam, India, China, Sri Lanka and even Canada.

“I do not know how these illegal cigarettes get to T&T said du Coudray, outlining the series of steps a business owner must take to import a new brand of cigarettes for sale in T&T.

“First you get some samples, then you send it to the tobacco unit in the Ministry of Health. The director of this unit is supposed to validate the product in terms of its packaging, labelling and other requirements.

“Once these needs are satisfied, then the tobacco unit is suppose to submit a licence number to the importer. That number is supposed to be printed on every pack that comes into the market. Witco has complied with these things, so it is easy to see who has complied and who has not,” he said.

It is difficult to determine what percentage of the market is flooded with illegal goods but du Coudray said the fact that they are here “and there are more and more of these coming here means that it must be lucrative enough to keep bringing them.”

He said Witco has spoken Imbert, Health Minister Terrance Deyalsingh, Trade Minister Paula Gopee-Scoon and stakeholders who all agree that the illegal tobacco trade must come to an end.

He said Imbert is considering legislation to end the illegal importation of cigarettes but complained that the measure is taking much longer than it should.

Operating costs

Witco operations are not affected by the foreign exchange shortage in the country as the company exports 73 per cent of what it manufacture, so it is an earner of foreign exchange.

“We have been able to utilise that foreign exchange to supply our suppliers. Thankfully, we have that line of revenue in place to shelter us from the situation on the local market,” du Coudray said.

He said the company exports to the entire Caribbean and Guyana, Suriname, Jamaica, Barbados, St Lucia, Antigua and St Kitts are among its 22 markets in the region. However, every market has its own price point and in Guyana, for example, where the disposable income is a lot lower than T&T, Witco has to adjust to that market reality .

Compared with other plants owned by its parent company British American Tobacco (BAT), Witco is a small operation with just 160 employees.

“I know it has been important for the country in terms of manufacturing and it has been around for a long time but in the BAT world it is very small. It is also very important because it specialises in a type of tobacco called Virginia blended which not all factories are set up to do. From a consumer perspective the Virginia tobacco is probably the smoothest smoke,” he said.

He said because Witco has no control over the price of oil or the macro economy, the only option to is keep o improving its business efficiencies.

“It comes back to our brand portfolio, making sure that we have the right product, right innovations in the market, the right distribution, so that anywhere consumers go they can get it at the right price and make sure we invest in the factory. It has worked for us in the past.”

 

Source:
RAPHAEL JOHN LALL
R03;raphael.lall@guardian.co.tt
Business Guardian, A6
Thursday November 24, 2016