Despite its unique culture and geography, Central Asia presents to the tobacco industry the same challenges and opportunities as do many other markets.
By Shane MacGuill
Having looked in my last offering for Tobacco Reporter at the potential-laden Iranian market, I turn my attention in this piece to the neighboring Central Asian region and, in particular, its major markets of Kazakhstan and Uzbekistan. Historically—at least in recent decades—the region has not been seen as a high profile tobacco consumer with relatively little attention focused on it by international manufacturers. However, this is changing. As a collective, the five nations of Central Asia (Uzbekistan and Kazakhstan plus Tajikistan, Kyrgyzstan and Turkmenistan) boast a population in excess of 65 million people, putting the region on a par with larger European countries in terms of the scale of the user base.
In population terms, Uzbekistan and Kazakhstan (in that order) are the largest markets in the Central Asia region, with a combined population of close to 50 million people. They are also the only two markets of the five in Central Asia in which Euromonitor conducts direct research. While each, in theory, represents a growth opportunity for tobacco manufacturers (at least in value terms), conditions are complicated by demographic, political and economic factors, and the efforts of government in each to exert greater control over the tobacco consumption of its citizens.
Uzbekistan
The single largest market, Uzbekistan, with a very gradually declining smoking prevalence of 23 percent, has a cigarette-consuming population of more than 4 million people, the vast majority of whom are males, and a legal cigarette market size of about 10 billion sticks in 2015. However, over the last 5 years, the national government has attempted (with relative success) to depress the consumption of tobacco products in Uzbekistan. A series of laws and regulations, within the framework of the Ministry of Health’s anti-tobacco policy, have tightened the regulatory environment, challenged domestic and international manufacturers, and led to double digit declines in the sale of cigarettes in the market since 2010.
In recent times, the tobacco category in Uzbekistan has also faced challenges stemming from the country’s macroeconomic fortunes, specifically the instability caused by the fallout from Western economic sanctions against Russia, with whom the country has close economic ties. Last year’s sharp depreciation of the national currency, the som, against the U.S. dollar presaged higher prices for most products, particularly imported ones. Moreover, consumer purchasing power was indirectly affected by the devaluation of the ruble, due to a significant drop in the value of the remittances sent by many Uzbek migrant workers in Russia to their families at home. Consequently, an unfavorable economic environment had a negative influence on the sales dynamics of many industries, including tobacco.
British American Tobacco Uzbekistan (UZBAT) is the clear market leader with more than 90 percent volume share, primarily through Pall Mall and Kent. A sharp excise hike on imported products in 2014 and the 2015 devaluation of the som against the dollar has allowed it to strengthen its already dominant position in the market as the resultant drastic unit price growth for imported brands (particularly in the context of increased economic personal hardship and a shift to lower value brands) makes it harder for them to compete against BAT’s portfolio, manufactured domestically in a facility in Samarkand.
In recent years, the government’s anti-tobacco policy and stronger control over sales of tobacco products forced many retailers—particularly supermarkets and kiosks—to suspend tobacco sales due to their proximity to educational, sport and religious institutions. Consequently, independent small grocers remains the most popular channel – driven by the high penetration and the convenient positioning of such outlets.
Fundamentally, demand for cigarettes in Uzbekistan is expected to exhibit a gradual decline over the forecast period as growing health concerns among consumers and the government’s anti-tobacco policies increasingly produce the sluggish consumption environment typical of more developed tobacco markets. Furthermore, the expected continuing outflow to Russia of male Uzbekistanis, the primary consumers of tobacco, as labor migrants will also lead to contraction in the market over the next five years.
Kazakhstan
To the north of Uzbekistan, in Kazakhstan, male smokers also play a key role. In fact, at 43% in 2015, male smoking prevalence there is comfortably within the world’s top twenty markets for smoking incidence among men. However, the trend has been one of considerable decline – down from just under 30% (for total smoking prevalence) in 2010 to the mid-twenties by 2015. And very similar dynamics to those in operation in neighbouring Uzbekistan mean this trend is likely to continue.
According to Euromonitor data, the consumption of cigarettes declined by 10 percent in retail volume terms in 2015 contributing to a 15 percent contraction between 2010 and 2015. The main drivers for these volume losses are growing health awareness amongst Kazakhs, the decreased purchasing power of consumers caused by currency devaluation and increased excise duty (the government introduced a minimum retail price in 2007, which has significantly increased the value pool, even as volumes slip). As a result, existing smokers appear to be consuming less and fewer new smokers are entering the category, with many young adults opting to consumer water pipe tobacco rather than cigarettes. There has also been evidence of a growing interest in vapor products,, though this is still a niche category and its development is so far limited to large urban areas.
Two major interlinked trends in the Kazakh cigarettes market since 2010 are the shift of consumer preference both to economy products and to slimmer, queen-sized variants. The economy price band has grown share by 5 percent between 2010 and 2015, reaching more than 46 percent of the market last year. This trend was amplified in 2015 by the increase of the minimum retail price of a 20 cigarettes from 200 Kazakhstani tenge to 220. The severe devaluation of the tenge has also significantly reduced the purchasing power of the population. As a corollary, manufacturers have increasingly launched and consumers are increasingly favoring compact/queen-sized cigarettes that have the same length as king-size, but which are thinner, although still not slim, e.g. L&M Compact and West Compact.
The Kazakh cigarettes market is considerably more competitive than in neighboring Uzbekistan. In 2015, Japan Tobacco International (JTI) Kazakhstan TOO overtook Philip Morris International (PMI) to became the leading player, with a share just under 40 percent. Between them, JTI and PMI make up just shy of 75 percent of the market, with British American Tobacco (BAT) and Imperial Brands splitting a further 20 percent. Despite JTI’s recent success with its portfolio (specifically LD, which has seen significant share growth since 2010) PMI’s Bond Street remains the country’s leading brand with 23 percent of the market in 2015. LD, Sovereign and Winston from JTI and BAT’s Kent make up the remainder of the top 5 ranking.
In terms of distribution, independent small grocers’ outlets, usually situated on the first floor of private houses are the most popular places for Kazakhs to buy cigarettes. These stores are by definition integrated into local communities and generally stock a very broad range of economy and midpriced brands, allowing consumers easy access to cigarettes in circumstances in which they do not have wider retail missions. OTP products such as cigars, cigarillos and smoking tobacco are mainly purchased at tobacco specialists’ stores. In the realm of vapour products, as in other markets, there has also been a growing trend towards internet retailing. Half of all sales of vapor products are estimated to be made online in Kazakhstan, assisted by the category’s penetration in higher density urban areas.
Broadly speaking, over the next four to five years, it is expected that the consumption of cigarettes in Kazakhstan will continue to decline, potentially at a rapid rate. Weaker purchasing power, in tandem with higher excise is set to drive some consumers out of the category altogether or into the illicit trade. Younger adult consumers may also opt for the use of water pipe tobacco over cigarettes while consumption of vapour products may further erode consumption of cigarettes, particularly in large towns and cities, although the relatively high price of these devices remains a significant limiting factor on their future growth.
Rest of region
The three smaller markets that make up the Central Asian region, Tajikstan, Kyrgyzstan and Turkmenistan, currently exhibit broadly similar trends in terms of penetration of tobacco use, excise and regulation. According to Tobacco Atlas, the respective rates of male smoking prevalence are 30 percent, 35 percent and 37 percent, while the tax burden is lowest in Tajikstan at just 3 percent and 16 percent in both Kyrgyzstan and Turkmenistan. Tajikstan and Kyrgyzstan each have a regulatory environment that would be regarded as weak in an international context, even within the context of the region.
In Turkmenistan, the picture is more complex. The authorities there, for many years, have been vociferously anti-tobacco with a range of restrictive regulations in place. However, it is not always clear how well this regulation is enforced and excise burden there remains low. Earlier this year an intervention by the country’s President Berdymukhamedow made international headlines as a “total ban on tobacco,” but it is plausible that this was a mischaracterisation of a structural reorganization of the distribution landscape. Several international diplomatic sources currently make reference to the availability of tobacco through state-controlled outlets.
If the situation in Turkmenistan is difficult, Tajikistan and Kyrgyzstan, while smaller markets, with their own political and administrative differences, arguably offer greater growth potential than their larger regional peers, at least to the extent to which they are slower to exhibit the kind of trends in tobacco control policy and macroeconomic travails becoming prevalent in these neighboring countries. With a combined population of around 15 million people, assuming the average male prevalence remains close to 30 percent, in the short to medium term this represents a smoking population comparable to Kazakhstan’s in size but within a less onerous regulatory and excise context.
Shane MacGuill is head of tobacco research at Euromonitor International.