The company Philip Morris International (PMI), which lost about half of its 28.5% share of the Ukrainian tobacco market at the beginning of the war due to the shutdown of its factory near Kharkiv, has managed to restore it to approximately 26% as reported by the General Director of "Philip Morris Ukraine" (PMU), Maxim Barabash in an interview with Interfax-Ukraine.
"Before the full-scale aggression from Russia, we had a market share of 28.5%. Due to the loss of production and the effective absence of our products for several months, we lost about half of our share. Then we switched to cooperation with another company, resumed imports, and gradually reached a share of 20%. Currently, our share, according to our calculations, is about 26%," he stated.
"This means we are gradually recovering, working hard, and we understand that our goal of returning to 28.5% will take another year, maybe even two... The competition in the market is very strong," Barabash added.
According to him, the opening of a new factory in the Lviv region in May this year, into which Philip Morris invested $30 million, has helped restore positions. So far, 220 relocated workers from the Kharkiv factory have been employed out of the planned 250.
The PMU CEO estimated the current Ukrainian cigarette market volume at 32 billion pieces per year, or approximately 140 billion UAH in monetary terms. Four international companies, each having one operational factory, hold a combined market share of 90%, while the share of legal Ukrainian producers is around 10%. "Their share has historically remained unchanged: it was 11-12%, but it has never been 30%," Barabash clarified.
At the same time, he emphasized that the illegal market has a significant impact on the situation, with its share reaching 25.7% by October last year but dropping to 14.5% by this summer.
"The fight against the illegal market is currently the most significant factor affecting volumes in the cigarette market. And for the state, the price of unpaid taxes is $700 million," said the PMU CEO.
According to him, after this issue was raised by international partners at the highest level, the effectiveness of the fight against the illegal market has increased, and the suspension of operations at illegal factories for three months this summer led to a rise in production volumes and excise taxes.
"The effect was immediate. We felt it in our volumes because for the first time in 10 years, they not only did not decline, but started to grow. Consumption did not change, but people who were looking for the cheapest product and could not find it in the illegal market began purchasing legal products," Barabash noted.
According to company data, tax payments in the market increased by 30% over three months.
"The cigarette market has stabilized now, partly due to the summer reduction of the illegal market. For next year, considering the current version of tax bill No. 11090 (which proposes a 40% increase in excise taxes – IF-U), we expect a market decline (in 2025) of about 10-12%," reported the PMU CEO.
At the same time, he indicated that illegal factories have not been completely shut down, and there is currently information about their production resuming.
"Activity is starting to increase, and it is already noticeable in retail: sales points are beginning to offer products that have been absent for months... The signal received indicates that we can quickly return to a (share of the illegal market) of 25%," noted the PMU CEO.
He added that next year, in the absence of a fight against shadow production, its profitability will significantly increase due to the adoption of bill No. 11090, which will lead to a price increase for legal cigarettes in the lowest segment from 80 UAH to 120 UAH – the current level of the most expensive cigarettes.
Barabash emphasized that the active fight against the illegal market and adherence to the agreed schedule for increasing excise taxes to European levels are the main factors for the company when making investment decisions.
"We are currently investing in a factory in the Lviv region. We are additionally investing 60 million UAH in a full-scale large storage facility for personnel. Two lines are operational, a third line is being installed, and two more lines have already arrived and will be set up by January 2025... If we see a scenario where, due to tax changes, we will be forced to raise prices to 150, 200, 250 UAH, and the fight against the illegal market continues to be 'one step forward – two steps back', then we won’t need these five lines... And we won’t need that many people either," explained the PMU CEO.
He noted that before the full-scale Russian aggression, the economy of cigarette production in Ukraine was heavily influenced by exports: of the 20 billion cigarettes produced by the Kharkiv factory, half were exported, including 7 billion to Japan.
"When the war began, and this volume was at risk, it was completely transferred to other production facilities abroad. Bringing it back to Ukraine now involves risks that have no economic justification... Therefore, for us, and I believe for many other companies, today large-scale export is unfortunately a prospect that is only realistic after the war," Barabash believes.
According to him, with the current production volumes and challenges such as energy supply restrictions or air alerts, producing cigarettes in Poland is already 10% cheaper for Philip Morris than in Ukraine, and Ukrainian branches of large corporations are now losing the competitive advantage they historically had compared to other countries.
Philip Morris was spun off from Altria in 2008 and is among the largest tobacco product manufacturers in the world. The company's revenue for 2023 increased by 10.7% compared to 2022, reaching $35.2 billion. The report indicated that Ukraine accounted for about 2% of total sales in physical terms and 1% in monetary terms.
In 2022, PMI reduced shipments in the Ukrainian market by 30.1% due to the war, down to 11.07 billion cigarettes and tobacco sticks, but in 2023, it managed to increase the shipment of finished products by 8.4%, including a 14.9% increase in the fourth quarter. In October last year, the company reported restoring its market share in Ukraine to 24%. This year, Ukraine's figures were excluded from PMI's quarterly reports.
In addition to cigarettes, PMI develops and produces smoke-free products – heated tobacco products (HTPs), nicotine-containing POD systems, and nicotine products for oral use. Sales from smoke-free products accounted for 39% of PMI's total net revenue in the first quarter and 38% in the third quarter of this year.
According to Barabash, the Ukrainian HTP market, after rapid growth in the first years following the launch of IQOS, has now stabilized at around 15%. "Growth has slowed because high taxes, like those on cigarettes, force prices to be set high, making the product less accessible for smokers," believes the PMU CEO.