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Illicit trade impacts retail demand and is soaring as smuggling intensifies. Cigarettes are hit hardest, being mainly smoked by low-income men seeking low prices, with retail volumes declining. Anti-smoking campaigns and legislation are strong and see wide public support, although cigarette taxes and prices remain low. Cigars will drive growth, benefiting from world-famous quality and an aspirational image, although high prices limit sales and many are cutting back due to health worries.
This report analyses the market for tobacco in Honduras. For the purposes of the study, the market has been defined as follows:
Cigars, Cigarillos and Smoking Tobacco
Smokeless Tobacco and Vapour Products
Explanations of terminology used in this report are as follows:
GBO refers to Global Brand Owner, which is the ultimate owner of a brand.
NBO refers to National Brand Owner, which is the company licensed to distribute a brand on behalf of a GBO. The NBO may be a subsidiary of a GBO or it may be a completely separate company.
Retail refers to sales of tobacco through retail outlets including supermarkets, hypermarkets, discounters, convenience stores, internet and other store and non-store channels, as well as sales of tobacco through bar-tobacconists and hotels/restaurants/bars.
Duty-paid retail sales are legitimate sales with tax applied to the final price.
Illicit trade refers to sales of duty-not-paid (or DNP) tobacco.
Market sizes are researched at category level, lower data levels are modelled.
Although cross-border and duty-free sales are considered legitimate, they are excluded from duty-paid sales.
Illicit trade (DNP) tobacco refers to contraband, counterfeit and unbranded tobacco, as well as illicit whites.
Attitudes towards cigarettes are increasingly negative in Honduras. Smoking cigarettes is increasingly associated with low-income groups, antisocial behaviour and ill health. Following the introduction of a strong public smoking ban in 2011 and increased funding for anti-smoking campaigns, many consumers' negative perception of cigarettes increased. Attitudes towards cigars and cigarillos are considerably more positive however, with many being proud of their country's high-quality cigars and cigarillos and also of these products' contribution to the national economy.
According to WHO data, in 2013, there was an overall smoking prevalence of 19% among those aged 15 years and over, with 11% smoking on a daily basis. Smoking prevalence for cigarettes was however considerably lower at 14% in this year, while only 10% smoked cigarettes daily. Overall smoking prevalence levels are thus inflated due to some consumers opting for occasional cigars, while cigarette smokers are considerably more likely to smoke on a daily basis.
Smoking prevalence is considerably higher among men, at 36% of men aged 15 years and over in 2013, while only 2% of women over this age smoked. This is linked to stronger health-consciousness among women, particularly as they age. Underage smoking is more common among women than adult smoking, with 11% of girls aged 3-15-years smoking in the year. Older women are least likely to smoke, while smoking is increasingly common among younger Honduran women and underage girls. However, many female smokers quit due to health concerns when they reach their 20s or 30s, with this tendency increasing during the review period. Smoking prevalence thus reduced among adult women towards the end of the review period.
There is a strong government focus on reducing smoking prevalence, with government organisation Honduran Institute for the Prevention of Drug Addiction and Alcoholism (IHADFA) created in 1989. This organisation invests in extensive anti-smoking campaigns, with a particular focus on targeting teenagers in schools and colleges. IHADFA continued to adapt its campaigns towards the end of the review period as it sought to reach out to youngsters, with a growing focus on social media campaigns such as its #NoFumes campaign. IHADFA also engages in enforcement in partnership with the police, conducting raids and spot checks at on- and off-trade outlets. Those outlets found to be flouting the public smoking ban or minimum purchasing age for tobacco face heavy fines and potential closure for repeat offenders.
The main innovation seen in cigarettes towards the end of the review period was the introduction of flavour capsules by a number of leading brands. These aimed to attract younger consumers aged 21-30-years, by offering both novelty and a pleasant flavour. Many young adults prefer flavours that mask the taste of tobacco.
Cigars and cigarillos see the strongest innovation within tobacco however, with this linked to a strong Honduran industry that prides itself on offering high-quality and distinctive products. July 2016 saw Flor de Selva launch its Collection 20 range, including a highly-regarded Robusto. Many brands launch limited editions, often to commemorate anniversaries, with these commanding high prices. The start of 2016 also the launch of the Aruma flavoured cigarillos, with these hand-rolled cigars using only Honduran tobacco and sold in packs of five with flavours including chocolate, vanilla, strawberry and grape. This launch aimed to broaden the appeal of cigars, attracting more young adults and especially women by offering sweet flavours.
Overall, tobacco is expected to see a 2% forecast period value CAGR at constant 2016 prices, in comparison to an 8% overall decline during the review period. Growth will mainly be driven by cigars and cigarillos, with these products set to see a 3% CAGR. These products will benefit from growth in domestic production capacity, with Davidoff notably launching new production facilities in 2017. The high-quality tobacco that can be produced in the country is also expected to attract international investment from other companies in the forecast period. In addition, cigars and cigarillos will benefit from an aspirational image in comparison to cigarettes. Economic growth in Honduras will also boost disposable income levels, which will in turn encourage those buying these products to trade up to higher-quality products.
The overall volume of cigarettes smoked in Honduras is expected to rise in the forecast period. However, overall growth will be entirely driven by further growth in illicit trade volumes, with these set to see a 5% CAGR. Retail volume sales are expected to decline by 3%, chiefly due to strong competition from illicit trade. The government is seeking to clamp down on the sale of smuggled cigarettes but will continue to be hindered by highly porous borders and the increasing sophistication of organised crime. Illicit trade volume growth will however soften in comparison to the review period thanks to the government's efforts, while the retail volume decline will also soften. Cigarettes will contribute to overall retail value growth for tobacco, seeing a 1% forecast period CAGR, but this will mainly be due to tax increases. Value growth for cigarettes will however also benefit from some consumers trading up as disposable income levels rise.
Cigarette smoking prevalence is higher among low-income men than any other group in Honduras. Mid- to high-income consumers tend to have higher education levels and to be more health-conscious, with many of these consumers regarding cigarettes in a negative light. Low-income men are mainly attracted by low-priced cigarettes, with these consumers' price-sensitivity a significant factor behind strong illicit trade sales. When buying legal products, low-income men are most likely to opt for lower-mid-priced brands with a well-established reputation such as Belmont and Royal. They tend to buy mainly 10-stick packs, due to these offering a lower pack price. More affluent cigarette smokers tend to be attracted by premium imported brands that offer attractive value-added design and innovation, such as Dunhill.
Cigars and cigarillos are regarded in a more aspirational manner in comparison to cigarettes and see stronger sales among mid- to high-income groups. The high price of cigars in particular limits demand for these products to more affluent consumers, with cigars often enjoyed as an occasional treat rather than smoked daily.
Population growth was slow during the review period, at around 1% annually. The country continues to be impacted by high migration as a result of crime and gang concerns. The country remains young, with a median age of just 24 years at the end of the review period. This young population benefits sales of tobacco, as consumers in their 30s and older are most likely to quit smoking due to health concerns.
Tobacco products are widely accessible in Honduras, particularly cigarettes. Cigarettes are offered by almost all pulperias, with these independent small grocers present across the country. Independent small grocers accounted for a dominant 52% retail volume share of cigarettes in 2016, while gradually losing share. This share loss was partly due to the widening presence of modern grocery retailers across the country but was also linked to many consumers viewing these outlets as safer shopping locations due to the threat of gang activity. Gang violence and organised crime are resulting in the closure of many pulperias.
Conversely, however, independent small grocers benefit from many consumers preferring to shop close to their own homes, with this tendency also linked to crime concerns. Those that live close to independent small grocers but not modern grocery retailers, including many low-income consumers, are thus more likely to shop in pulperias. Supermarkets is the second-leading channel for sales of cigarettes, accounting for a 20% retail volume share in 2016, due to offering a growing number of outlets in major residential areas.
Cigars and cigarillos see considerably more limited distribution in comparison to cigarettes, with tobacco specialists accounting for a 97% retail volume share. This channel not only benefits from offering the most extensive range and expert advice but also from ensuring that these products are stored in optimum conditions. Most cigar enthusiasts thus prefer to shop at tobacco specialists. This channel slightly lost retail volume share in 2016 over the previous year however, due to a growing number of forecourt retailers offering cigarillos. Flavoured cigarillos are notably seeing a good performance in this channel.
Internet retailing sales have been prohibited since 2011, when the government introduced stricter anti-smoking legislation. This legislation also banned vending and single-stick sales, alongside self-service displays in outlets. In addition, this legislation set a minimum pack size of 10-sticks for cigarettes.
Illicit trade volumes are high in Honduras, accounting for 21% of overall consumption of cigarettes in 2016. Illicit trade volumes saw a considerably stronger performance in comparison to retail volume sales during the review period, seeing 89% growth and a 10% decline respectively. Illicit sales thus rose in share from just 11% of total consumption at the start of the review period. Illicit sales growth is linked to an overall rise in smuggling via Honduras' porous borders, with this in turn linked to a rise in organised crime in the country and wider region.
Illicit cigarettes are smuggled into Honduras from around the world, with key source countries including China and Paraguay. The main smuggling routes into the country include Panama, Guatemala and Belize. In April 2014, a report by the Honduran tobacco industry stated that while there were 34 different cigarette brands available in the country, only 10 of these had been licensed by IHADFA and the DEI (Executive Directorate of Revenue). The most significant smuggled brands are Modern, Hobby and Open.
The popularity of illicit cigarettes is chiefly due to these products' low prices. Due to avoiding tax payments, these products are generally available for around 20% less than legal brands. Strong price competition from illicit products acts as a constraint to the government in terms of tax and price increases for cigarettes.
Illicit products are also available within cigars and cigarillos, mainly in the form of export products diverted for sale within the country or in the form of counterfeits. There is little smuggling of these products into Honduras, due to this country producing its own high-quality tobacco and cigars. The presence of illicit cigars and cigarillos is clearly indicated by the absence of mandatory graphic and textual health warnings on many products for sale within Honduras. These warnings are required for all tobacco products destined for domestic sale, with only export products being excluded from this requirement.
The government continues to focus on improving border controls and breaking up the gangs behind tobacco smuggling, particularly as these gangs are also often involved in other serious operations such as drug running and people trafficking. March 2016 saw raids on the Carillo gang in the west of the country, with this netting a large volume of contraband Modern cigarettes alongside firearms, drugs and money. April 2017 also saw a major success with the National Police's capture of members of the Los Hernandez gang, alongside 780,000 illicit cigars valued at HNL1.6 million.
Honduras introduced stricter tobacco legislation at the start of the review period in early 2011. In addition to the areas covered below, this legislation also created a minimum pack size of 10 units and banned tobacco sales in stores based in healthcare or education facilities, libraries, museums and cultural and sporting facilities. This legislation also required any imported tobacco products' packaging to specify preparation date, expiry date and the geographic area where it is authorised for sale.
2011 legislation set the minimum legal smoking age at a high level of 21 years, with this age limit remaining unchanged towards the end of the review period. All tobacco vendors must feature a sign stating "No tobacco products sold to persons under 21 years of age" with this being at least 21.59cm x 35.56cm and placed in a visible site. Vendors are also required to verify age via identity card or passport if unsure.
However, underage smoking is common and is an increasing concern in the country. According to surveys by IHADFA (Honduran Institute for the Prevention of Drug Addiction and Alcoholism), many start to smoke as young as aged 10 years. This organisation thus focuses heavily on in-school education programmes focused on the negative health impact of smoking. IHADFA also focuses on spot-checks on tobacco vendors, with those caught selling tobacco products to underage smokers facing fines set at a minimum of one day's minimum wage. Repeat offenders face closure.
The country has had maximum legal tar and nicotine levels for cigarettes in place since 1995, with these set at 14mg/cigarette and 1.1mg/cigarette. These remained unchanged during the review period. 2011 also saw a ban on the use of phrases such as "low tar content", "light", "ultra light" and "smooth".
Most smokers continue to prefer cigarettes at the higher end of the permitted tar spectrum. This is particularly true of men, who tend to view high tar cigarettes as offering a richer flavour. Men account for the vast bulk of cigarette sales, with female smoking prevalence remaining very low. A preference for higher tar cigarettes is also more pronounced among low-income men, who often have low education levels and little interest in health concerns. These consumers' preference for higher tar cigarettes also contributes to high illicit volume sales, with many smuggled cigarettes having tar levels as high as 30% over the legal limit. Mid- to high-income consumers are however often attracted by lower tar cigarettes and their milder flavour.
2011 legislation banned all marketing for tobacco products, including radio, TV, print and billboard advertising, while also banning sponsorship. This legislation also banned the production of non-tobacco items that look like tobacco products, if these items could appeal to below 21-year-olds.
Since 2011, it has been mandatory for all tobacco products to carry health warnings covering 80% of both principal faces of packaging, with both graphic and textual health warnings mandatory. Levels of nicotine, tar and carbon monoxide must be printed on the side of packs, with this information covering 6.3cm by 9mm and using a specified bold font. Textual health warnings must be in Spanish and cover at least 25% of the total warning area. Every six months IHADFA reviews the range of graphic and textual health warnings used, with these rotated in order to ensure impact. Cigars and cigarillos sold in Honduras are also required to feature graphic and textual health warnings.
A full public smoking ban was introduced in 2011. This covers all workplaces, bars, restaurants and any other centres designed for entertainment, sports or culture. The ban also covers educational and healthcare establishments, public and private transportation and all retail outlets. This ban indeed went further than most smoking bans around the world, including "any public or private space fewer than 2m from where people gather or pass through" and even including homes. Those exposed to passive smoke at home are thus able to report the matter to the police. The only exception to the ban was cigar factories, which are permitted to offer designated smoking rooms.
Taxation and duty levies
Tobacco taxes remain low in Honduras, resulting in low prices and easy accessibility to economy cigarettes for all income groups. The government is aware of the strong presence of illicit tobacco, particularly in cigarettes, and also the role that sales of these products play in funding organised crime. These concerns could well be deterring the government from introducing higher tax rates. Illicit trade volume continued to see strong growth at the end of the review period, with an increase of 9% in comparison to the 1% retail volume decline seen for legal products.
In contrast to the general sales tax of 15%, which is applied to all products, tobacco products face a higher 18% sales tax. In addition, tobacco products face excise duty, with this imposed on both domestic production and imports. From 2015, this began to be adjusted annually in line with shifts in the Consumer Price Index in the previous year, with a limit of 6% annual increase. 2015 saw an increase of 5.82% in rates as a result, with this resulting in a tax of HNL409.58/1,000 sticks of cigarettes, cigars or cigarillos. These tax increases continued at the end of the review period, with 2017 seeing an increase to HNL433.12/1,000 sticks.
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Chart 1 Tobacco in Honduras in 2016 Chart 2 Honduras Socioeconomic Trends
Taxation and duty levies
Chart 3 Tobacco: Modern Retailer: Supermarket
Table 1 Sales of Tobacco by Category: Volume 2011-2016 Table 2 Sales of Tobacco by Category: Value 2011-2016 Table 3 Sales of Tobacco by Category: % Volume Growth 2011-2016 Table 4 Sales of Tobacco by Category: % Value Growth 2011-2016 Table 5 Forecast Sales of Tobacco by Category: Volume 2016-2021 Table 6 Forecast Sales of Tobacco by Category: Volume 2016-2021 Table 7 Forecast Sales of Tobacco by Category: Value 2016-2021 Table 8 Forecast Sales of Tobacco by Category: % Volume Growth 2016-2021 Table 9 Forecast Sales of Tobacco by Category: % Value Growth 2016-2021
Chart 4 Cigarettes: Modern Retailer Chart 5 Cigarettes: Modern Retailer Chart 6 Cigarettes: Belmont Brand
Table 10 Sales of Cigarettes: Volume 2011-2016 Table 11 Sales of Cigarettes by Category: Value 2011-2016 Table 12 Sales of Cigarettes: % Volume Growth 2011-2016 Table 13 Sales of Cigarettes by Category: % Value Growth 2011-2016 Table 14 Forecast Sales of Cigarettes: Volume 2016-2021 Table 15 Forecast Sales of Cigarettes by Category: Value 2016-2021 Table 16 Forecast Sales of Cigarettes: % Volume Growth 2016-2021 Table 17 Forecast Sales of Cigarettes by Category: % Value Growth 2016-2021 Table 18 NBO Company Shares of Cigarettes: % Volume 2012-2016 Table 19 LBN Brand Shares of Cigarettes: % Volume 2013-2016 Table 20 Sales of Cigarettes by Distribution Format: % Volume 2011-2016 Summary 1 Cigarettes Pricing
Table 21 Sales of Cigars, Cigarillos and Smoking Tobacco by Category: Volume 2011-2016 Table 22 Sales of Cigars, Cigarillos and Smoking Tobacco by Category: Value 2011-2016 Table 23 Sales of Cigars, Cigarillos and Smoking Tobacco by Category: % Volume Growth 2011-2016 Table 24 Sales of Cigars, Cigarillos and Smoking Tobacco by Category: % Value Growth 2011-2016 Table 25 Forecast Sales of Cigars, Cigarillos and Smoking Tobacco by Category: Volume 2016-2021 Table 26 Forecast Sales of Cigars, Cigarillos and Smoking Tobacco by Category: Value 2016-2021 Table 27 Forecast Sales of Cigars, Cigarillos and Smoking Tobacco by Category: % Volume Growth 2016-2021 Table 28 Forecast Sales of Cigars, Cigarillos and Smoking Tobacco by Category: % Value Growth 2016-2021 Table 29 NBO Company Shares of Cigars and Cigarillos: % Volume 2012-2016 Table 30 LBN Brand Shares of Cigars and Cigarillos: % Volume 2013-2016: Table 31 Distribution of Cigars and Cigarillos by Format: % Volume 2011-2016 Summary 2 Cigars, Cigarillos and Smoking Tobacco Pricing
SMOKELESS TOBACCO AND VAPOUR PRODUCTS
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