Tobacco in Israel

Tobacco value sales witness a slight increase in 2011

The tobacco market in Israel witnessed value growth mostly driven by cigarettes in 2011. It was mainly because of three reasons: firstly, the increased taxes on cigarettes in 2011 causing unit prices to rise; secondly, a continuing shift towards imported cigarettes, which are mostly mid- and premium-priced; and finally, slight growth in the cigarette market in volume terms.

New legislation increases tobacco Taxation in 2011

In 2011, a committee of the Ministry of Health, headed by Health Minister, Yaakov Litzman, passed their recommendations to prevent damage caused by smoking to the government for approval. On the 29 May 2011, the government approved the committee's recommendations and committed to a national programme to reduce smoking and the damage it causes. The new reform is divided into three stages, with the first stage taking place in 2011. The major new regulation is in the smoking tobacco category, which saw taxes on pipe tobacco rise from NIS50 per kg to NIS279.56 per kg, an increase of more than 450%.

Globrands Ltd witnesses the biggest increase in volume share during 2011

Globrands Ltd holds a wide variety of the imported brands of British American Tobacco Plc and Japan Tobacco Inc. During 2011, mid-priced cigarettes showed the biggest increase in volume sales. This was as a result of the rise in unit prices over the past two years causing a shift towards mid price brands. Consumers who smoked premium brands shift to the mid-priced band because premium products have become too expensive. Moreover, economy brands have stopped being seen as value-for-money products as a result of increased taxation. Globrands benefited from the prevailing market trends in 2011 because most of its brands are in the mid-priced level.

Vending machines will disappear from the Israeli tobacco market by 2015

The government’s approval of the health committee's recommendations and the national programme to reduce smoking and its effects have impacted distribution channels. One of the main regulations in the new reform is a ban on the sale of cigarettes trough vending machines. The new regulation will come into during 2014 and represents a step towards reducing and enforcing the minimum legal smoking age in Israel.

Tobacco sales are expected to grow slightly over the forecast period

Volume sales of tobacco in Israel are projected to decline over the 2011-2016 period, driven by the new national programme to reduce smoking and its damaging effects and a continued drop in the number of smokers. In addition, further tax increases to discourage the purchase of tobacco products are also expected to weaken demand. Value sales are, however, expected to continue to show marginal growth over the forecast period as rising prices will continue to drive value growth.

OPERATING ENVIRONMENT

Legislative overview/ FCTC ratification

• Israel has a strong and advanced legislative framework that is derived from its cultural and historical background. In 2011, there was a vast change in the enforcement of smoking in bars/pubs and restaurants in Israel. Namely, bars/pubs owners now hire people who are in charge of preventing customers from smoking (in some "Mega-bars", there is a new habit of pointing at smokers with laser-pens, in order to make them put out their cigarettes/cigars).

• On 20 June 2003, Israel signed the World Health Organization’s global tobacco control treaty, the Framework Convention for Tobacco Control (FCTC), which was ratified on 24 August 2005. The Israeli Ministry of Health uses the FCTC recommendations and methods to devise strategies to decrease smoking rates in Israel. The treaty obliges member countries to: ban or restrict tobacco advertising, promotion and sponsorship within five years; place large, graphic health warnings on cigarette packs, and prohibit the use of false and misleading terms such as ‘light’ or ‘low tar’; implement measures to protect non-smokers from second-hand smoke; increase the price of tobacco products, particularly through taxation; eliminate illicit trade in tobacco products; regulate the content of tobacco products and require public disclosure of ingredients; provide cessation assistance and treatment for tobacco dependence; and prevent the sale of tobacco products to minors. Since the signing of the treaty, the Ministry of Health has begun to enforce these matters with more conviction with the assistance of leading organisations

• The Israeli Ministry of Health, Ministry of Education and the ICA (Israel Cancer Association) strongly pushed anti-smoking legislation over the review period. Prior to this, only one law limiting smoking in designated public areas existed. Moreover, dating from 1983, this law was not enforced adequately. Due to growing health awareness and campaigning by the ICA, the Ministry of Health has been obliged since 2001 to present an annual report on smoking in Israel. Further legislation has come into force since 2004 regarding the marketing and advertising of tobacco products, which also prohibits the sale of tobacco products to minors.

• In 2006, a new law prohibiting the marking of tobacco products as ‘light’ or ‘mild’, which suggests that these products are less harmful than other tobacco products, came into force. In late November 2007, the Israeli government passed a law regarding the enforcement of non-smoking in public areas and work places (hereafter referred to as ‘the new law’). The new law, which sets high financial penalties for restaurants or bars that allow customers to smoke indoors, has been enforced widely. The ICA and other anti-smoking lobbies encourage public claims against businesses that do not adhere to the law and allow smoking on their premises.

• In December 2008, the Israeli Minister of Health obliged all municipal council heads to provide annual reports on their activities in terms of enforcement of the new law within their localities. Each local authority head was asked to offer a breakdown of the fines handed out, state how many supervisors were appointed and trained, and provide a telephone number that the public can use to lodge complaints.

• The supervision and enforcement of the new law is handled by municipal authorities. During 2008, hundreds of public claims were submitted against businesses (1,131 in Jerusalem alone). In 2008, 45 local municipal councils presented their annual reports on smoking fines to the Ministry of Health, while in 2009 only 16 cities reported activities in terms of enforcement of the new law within their localities with penalties ranging from NIS1,000-NIS150,000.

• According to a survey conducted by the Ministry of Health in 2008, 13% of smokers had changed their smoking habits following the introduction of the new law, while 40-50% of smokers support the legislation and further limitations on smoking in public areas.

• In addition, based on FCTC recommendations, the Ministry of Health requires all tobacco manufacturers and importers to hand in a detailed document stating their expenditures on marketing promotions by the first of June of every year. Based on a 2008 survey, during 2008 NIS49,860,205 was spent on tobacco marketing promotion, a 27% increase from 2007. 65% went towards advertising and direct mail, 33% went towards promotional sales and 2% was spent on sponsorships.

• In January 2008, a proposed law allowing smoking in 20% of recreational businesses, such as bars, restaurants and cinemas, was overruled by the Israeli parliament.

• Further legislation was approved by the Israeli government in February 2008, prohibiting the sale or rental of water pipes and water pipe products to under 18-year-olds. This legislation was informed by the fact that 30% of Israeli youths smoke water pipes. The penalty for the violation of this law is around NIS11,000.

• On 19 February 2008, the Israeli government passed a law that obliges the security forces to set internal instructions that adhere to the laws prohibiting smoking within the IDF (Israel Defence Forces) system.

• On 27 May 2008, further legislation was implemented, regarding the marketing and advertising of tobacco products. The new legislation prohibits sponsorship of any international event by tobacco companies.

• During 2009, public staircases within office buildings became an issue, as many workers were using these areas as smoking corners. In 2009, a judge ruled that public staircases cannot be used as smoking areas and that smoking in such areas would lead to prosecution. Smoking laws relating to the workplace clearly state that smoking is allowed in designated areas only.

• In Israel, there are a number of active anti-smoking bodies: governmental, public and voluntary non-profit organisations. The largest and most active is the ICA, a voluntary organisation established in 1952. The ICA’s main objective is to minimise cancer prevalence in Israel. It raises awareness and promotes anti-smoking by organising major campaigns through the Israeli media and educational system. The ICA campaigns for anti-smoking legislation and encourages the public to file complaints against bodies and businesses violating the laws regarding smoking. The organisation also arranges subsidised smoking detoxification programmes.

• Other active anti-smoking bodies include the Medical Association for Detoxification and Prevention of Smoking, a voluntary association of 200 medical doctors, established in 2006. The association’s goal is to promote awareness of smoking-related health issues and help smokers to quit by organising detoxification treatments.

• The Clean Air Association was established in 2007 in order to campaign for the reduction of public exposure to passive smoking. The association assists and encourages the public to file complaints when encountering violations of anti-smoking laws and provides legal counselling. During 2008, the association launched a website (www.avir-naki.com), offering a platform of information and counselling on the subject of passive smoking.

• The Israeli Ministry of Health is the main authority working with public bodies and other organisations to fight smoking. These include non-profit organisations such as the IDF and HMO.

• 2009 was a busy year for the anti-smoking lobby, with the launch of many new innovative information campaigns to raise awareness of smoking-related health issues among specific consumer groups. Many new areas and target audiences were targeted during 2009. For example, during the year, a new e-learning programme against smoking was developed especially for young high school children. This was the first programme that targeted such a young audience.

• Also during 2009, the anti-smoking lobby targeted different sectors in Israel: the Arab-Israeli community, the Jewish Religious community, the Bedouin community and the Jewish settlers. Around 1,675 colleagues were trained in order to conduct anti-smoking seminars at around 130 primary and middle schools.

• Other groups targeted were the Israeli Defence Force who continued to fight against smoking in the IDF and launched a special new programme, “Clean Bases”. In addition, many resources in 2009 went towards propaganda activity against smoking within prisons, both for the workers and inmates. This was done in order to reduce the number of smokers within prisons.

• From the 1 January 2010, the Israeli government approved the addition of Rx drugs to aid smokers in quitting to the national health basket. All HMO members aged 18+ can purchase subsidised smoking cessation aid products such as Zaban and Champix This raised the sales of Rx drugs as more consumers were eager to try these highly recommended methods for quitting smoking. This had a negative impact on OTC NRT smoking cessation aids and is expected to decrease sales even more over the forecast. After only five months, the addition of Rx smoking cessation aid drugs and workshops to the national health basket drastic results were seen.

• In 2011, the Israeli government approved a national programme to reduce smoking and its damaging effects. The programme will be long-term and will include three stages. In the first stage, the government raised tax on tobacco products for Hookah and pipe, and cancelled the tax reduction on cigarettes bought in duty-free stores. The main part of this law will come into force in 2013, with new regulations such as the prohibition of smoking in train and bus stations, limiting the maximum smoking area in public places, and obligating cigarettes distributors to include a graphic warning on product packages being enforced.

Minimum legal smoking age

• The minimum legal smoking age in Israel throughout the review period was 18-years-old. The law prohibits the sale of tobacco products to anyone under the minimum legal age and the penalty for the violation of this law increased in 2011, and is now around NIS13,000. This age limit has remained the same for many years and it is unlikely to change in the short-to-medium term.

Smoking prevalence

• The Ministry of Health is required by law to publish an official annual report on the status of smoking in Israel. The 2009-2010 report was published in May 2011 and it covers the period up to the end of 2010. The report states that 20.3% of the adult population in Israel (more than one million people) can be considered smokers. The 2011 data portrays a tendency towards a decrease in smoking prevalence in Israel over 1997-2009.

• The Ministry of Health’s annual report examines smoking prevalence in Israel by gender and population (the Jewish population + others accounted for almost an 80% share of the total population, while the Arab-Israeli population accounted for the remaining 20%). The report stated that just above 28% of Israeli men smoke compared to almost 13% of Israeli women. The data shows that the Arab-Israeli smoking population accounted for almost a 27% share of the total Israeli smoking population, compared to a 22% share for the Jewish smoking population. The Ministry of Health also reported that the smoking rate of Arab-Israeli men is almost twice as high as that of Jewish men, while the smoking rate of Jewish women is almost four times higher than that of Arab-Israeli women.

• Among the Jewish population, almost 23% of adult men and just above 13.5% of adult women considered themselves smokers in 2010. These figures represent a moderate decline in the number of smokers among the Jewish population, as the comparative figures in 2009 were 24.5% of males and 14% of females. Within the Arab-Israeli population, almost 44.6% of men and 3.7% of women considered themselves smokers.

• The Ministry of Health’s annual report also found that over 70% of Israeli male smokers consumed over 10 cigarettes a day, in comparison to only 50% of Israeli female smokers.

• The average age at which the interviewees (21-years-old-and-over) started smoking was 18.7 for Jewish-Israeli men and 20.5 for Jewish-Israeli women. By comparison, among the Arab-Israeli population, the age at which the interviewees started smoking was almost 20 for men and 26 for women.

• The Ministry of Health’s annual report also found that Israeli men start smoking at a younger age than Israeli women do. 75% of Israeli men started smoking under the age of twenty, in comparison to only about 60% of Israeli women.

• Although the legal age for smoking is 18, around 22% of Israeli youths (12-18-years-old) state that they have smoked cigarettes, while 4% smoke cigarettes on a daily basis. Furthermore, almost 30% have experienced water pipe smoking

• The strong legislative framework in Israel alongside weak enforcement makes it hard to envisage any major changes to smoking prevalence in the country. The impact of public smoking bans and other laws have changed the smoking habits of smokers in Israel; however, there has yet to be a major impact on the volume of cigarettes smoked. In recent years, there has been a declining trend in smoking prevalence among the Israeli population as the stronger focus on and stronger enforcement of laws, alongside strong health awareness campaigns, have driven smokers to try and quit the habit. From 2010, with the enforcement of the new legislations, the smoking population rate in Israel slightly decreased.

• In general, Israel encourages Jewish migration into the country from all over the world. In the past there have been several waves of large, organised migration to Israel, the largest of which was in 1990-1992 from the former USSR. This consisted of around one million people, 20% of the Israeli population at this time. Such waves have evidently impacted many Israeli industries, including packaged food, alcoholic drinks and tobacco. However, since the largest wave of immigration in Israel, there have only been very small waves, therefore this factor had no major impact on the tobacco industry during the review period.

• The government is extremely strong on public health awareness, as it is the main body dealing and/or cooperating with other anti-smoking organisations. There are many governmental, public and voluntary organisations in Israel that work both alone and together on anti-smoking initiatives and campaigns. The vast majority conduct information campaigns, special awareness programmes etc. There is a special information department within the Ministry of Health which deals with major campaigns and programmes. In 2011, the focus remained on preventing juvenile smoking, mainly by prohibiting the distribution of cigarettes through vending machines, and on preventing smoking in public places because of the damage caused to passive smokers. New regulations and campaigns encouraged non-smokers to stand up for their right to breathe fresh air and ask smokers to put their cigarettes out.

• Nicotine replacement therapy (NRT) products are available over the counter in Israel; however the impact of such products on smoking rates has yet to be fully proven. One of the reasons, the impact of NRT products is still marginal is that the tax on NRT products in Israel is the same as the tax on tobacco products.

• Smoking prevalence among the adult population is expected to continue to decline over the forecast period to reach around 20% in 2016. This is expected to reduce the market size of cigarettes in retail volume terms as fewer Israeli consumers are expected to smoke during the forecast period. However, in retail value terms, due to high taxation and rising unit prices, it is less clear how the market size will be affected.

Tar levels

• Israel has no limitations on tar levels per cigarette; such data is not stated on the pack. However, the law that has been suggested by the Ministry of Health obliging tobacco manufacturers to state product components and their harmful effects on the smoker’s health has been approved and is expected to be enforced from 2013. In 2006, the Israeli government approved a law prohibiting advertising and other references to tobacco products as ‘light’ or ‘mild’, or from making such statements on the pack. The government states that such terms are deceptive and imply that the product is less harmful than other tobacco products.

• Mid tar cigarettes continued to be the best-selling type in retail volume and value terms in 2011. There was a constant decline in the number of high tar cigarette smokers both due to growing health awareness and the higher unit price of economy cigarettes, which are mostly high tar, thanks to the taxation rise in 2010.

• In general, Israelis’ awareness of smoking’s damaging impact and their broader health-consciousness are growing, and it is likely that the stating of product components and their harmful effects on the smoker’s health on packaging will reduce the market shares of high tar cigarettes.

Health warnings

• In December 2004, the Israeli government ordered that all tobacco packaging be marked with a health warning, to be changed within retail outlets every 60 days in order to allow wider exposure to the different health issues related to smoking. The health warning is printed in Hebrew on the front of the package and in Arabic on the back. The warning must cover 30% of the pack’s surface. Each phrase points out a health effect caused by smoking, such as ‘Cigarettes cause addiction’, ‘75% of heart attack cases before the age of 45 are among smokers’ or ‘85% of lung cancer cases are caused by smoking’. The word “Warning” is printed in large red letters before the actual health warning phrase, while on 10-unit flip-top multipacks of cigarettes the outer carton must contain the warning “smoking kills”.

• Graphic images of diseased organs were not required by Israeli tobacco legislation until now. However, this regulation was approved by the Israeli Knesset, and will be enforced from 2013.

• The anticipated introduction of graphic images of diseased organs on cigarette packs is expected to cause much commotion among the orthodox-religious Israeli population as such images are believed to harm their religion. This is expected to be heavily protested against, and to reduce the volume of cigarettes smoked by this population.

Advertising and sponsorship

Advertising through media (television, radio, billboards, consumer press, trade press, cinema, etc)

• The advertising of tobacco products in Israel was still limited, in 2011, by a relatively new law that came into force in 2004. This law states that tobacco companies are forbidden to advertise via television, radio, public transportation, billboards or at public events. The law also specifies that tobacco product advertisements are prohibited in any printed publication designed for audiences under the age of 18. Such advertising is also prohibited in sports and recreation locations. All advertisements of tobacco products must include health warnings covering at least 5% of the size of the advertisement.

• In terms of advertising in the printed press, a company is allowed to post only one advertisement for the same trademark/brand in each issue. Printed press advertisements of tobacco products must include health warnings covering at least 5% of the size of the advertisement in black print with a minimum 12 font size that is visible from a reasonable distance and in the language of the printed press.

• On 29 May 2011, the Israeli Knesset approved a new law that will replace the 2004 one, which will come into force in 2014 and will completely ban the promotion of cigarettes and tobacco products.

Advertising through retail point-of-sale

• Advertising through retail points-of-sale is permitted, but the law specifies that these advertisements must include only the product name, brand name, manufacturer and trademark. Additionally, the advertisement must include a health warning, satisfying the same requirements as those for tobacco packaging.

• On 29 May 2011, the Israeli Knesset approved a new law which will replace the old one and will come into force in 2014. The new law will completely ban publicity material for cigarettes and tobacco products in retail points-of-sale, except for lists of prices.

Sponsorship of sporting/music events

• Tobacco companies are allowed to sponsor events on the condition that the event does not address an audience under the age of 18. Therefore, tobacco companies are usually unable to use sports and music events as sponsorship opportunities.

• On 27 May 2008, new legislation came into force regarding the marketing and advertising of tobacco products. The new legislation prohibits the sponsorship of any international events by tobacco companies.

• On 29 May 2011, the Israeli Knesset approved a new law that bans sponsorship of any domestic event or social gathering, including kiosks, bars/pubs, parties etc. This is quite unusual because, up until now, it has been most acceptable in Israel, that a new pub, for example, is sponsored by a tobacco company. This law will be enforced from 2014.

Distribution of tobacco branded gifts (eg cigarette branded lighters, pens, etc)

• The distribution of tobacco branded gifts (such as branded cigarette lighters, pens etc) is regarded as indirect advertising of tobacco products and is prohibited by law. It is also forbidden to market tobacco products by handing out free samples of the product as a gift, or in addition to a purchase of a different type of product. There is also a new ban (which came into force in 2011) on giving away free tobacco products as compensation after taking part in a survey of some sort.

Point-of-sale display bans

• There is currently no point-of-sale (POS) display ban in Israel regarding tobacco products.

Smoking in public places

• The new law regarding smoking in public places (effective November 2007) has had an impact on the smoking habits of smokers in Israel. For example, 13% of smokers stated that they changed their smoking habits in the year after it came in to force. This law prohibits smoking in public and work places, and it is enforced by municipal authorities. The law replaced earlier 1983 legislation which was relatively poorly enforced. The novelty of the November 2007 law is stronger penalties of NIS1,000-NIS13,000 for transgressions. As the law is claimed to have gained wide public support, further limitations on designated smoking areas are expected.

• The law clearly states the specific public areas in which a person is prohibited from smoking, such as:

a hall generally used as a cinema or theatre, or for concerts, opera or dance performances; a room or hall used for conferences, lectures or other gatherings, including its corridors and lobby space;

any area in a hospital or health clinic building, the part of a pharmacy open to the public;

a reading hall or reading room in a public library;

any area in a building used as an educational institution or an institute of higher education, including student living quarters;

a passenger lift, buses carrying passengers, taxis or mini buses with passengers, a passenger train except for a designated smoking carriage;

a shop, room or hall, open to the public, used for physical activity or sports;

a nursery school, kindergarten, crèche or children’s home;

a room or space open to the public in a bank, post office, or postal agency or other public place, or a room or hall or corridor used as a waiting area;

a workplace, except for a room or a hall in which smoking has been expressly permitted by the employer, after consultation with employees;

an area open to the public in a shopping mall or a hall hired for celebrations and similar gatherings;

The law also obliges the business holder to affix signs showing that smoking is prohibited, and strictly prohibits the placing of ashtrays in a public place.

• The Israeli law on smoking in public places has a section which includes provision for specific places such as: restaurants, cafeterias, coffee shops, or any other eatery or any public place serving beverages, any club, discotheque or other outlet which, among its other activities, serves food or beverages. There is an exception in the law for an entirely separate room (if any) set aside for smoking by the management of the eatery, with the condition that the said room has properly working ventilation facilities, that smoking in it does not constitute a nuisance to people in other parts of the eating place, and that the area shall not exceed 25% of the space open to the public.

• This law, at first, made waves in Israel in the media and amongst Israeli consumers, and owners of bars/pubs, restaurants and coffee-shops had a hard time getting used to the new regulations. However, now it is clear that smoking places are highly restricted, and smokers will double-check that smoking is allowed before they light a cigarette.

• The Health Department Public Committee report to reduce smoking and its damaging effects published new regulations to broaden these existing regulations:

Banning smoking at cultural events – including stand-up performances and rock concerts.

Banning smoking in hospitals – including up to at least 10 metres outside the hospital entrance.

Banning smoking in buses – including bus stations, and the space between the bus station and the road.

Banning smoking in trains – including all the area of the train station.

Banning smoking in government offices

Banning smoking in event halls or gardens – except for 25% of the area, which has to be in the open air.

Banning smoking in public swimming pools – including the surrounding area (at least 2.5 metres around the swimming pool).

Banning smoking in community centres, temples, churches and stadiums – except in a separate open air area which does not exceed 25% of the total area.

Low ignition propensity (LIP) regulation

• In Israel, there is no law regarding LIP (or fire-safe) cigarette regulation. However, there is a law forbidding the discarding of burning cigarettes or cigarette butts (a substential financial fine will follow), and smoking around gas stations is banned.

‘Reduced harm’

• Towards the end of 2011, "reduced harm" products, such as non-tobacco and non-nicotine cigarettes (for example – honeyrose) reached Israel. In Israel, this is still an undeveloped market, and awareness of these products is limited amongst the smoking population. Also, the price for these products in Israel is very high (45 NIS for a 20-cigarette pack). The reason for this high price is mainly tax, which is as high on these products as it is on tobacco products. Yet, in 2011, Israeli Knesset members proposed to the Knesset new legislation, which will exempt these products from tax. This proposal is yet to be approved.

Electronic cigarettes

• Until 2009, electronic cigarettes (or e-cigarettes) were present in the Israeli market and could be imported freely. However, from mid-2009 the Ministry of Health restricted any imports of e-cigarettes into Israel, even those that do not contain nicotine. This new restriction came shortly after the warning reported by the FDA claiming that some e-cigarettes tend to contain both nicotine and unknown substances that are not healthy.

• E-cigarettes that do not contain nicotine are classified as a medical device in Israel. Medical devices are products that are extremely close to cosmetics and toiletries in their definition and features, however, such products are allowed to make therapeutic claims after conducting thorough research and proving findings to the Ministry of Health. However, e-cigarettes that contain nicotine need to be registered as medical preparations.

• In 2011, e-cigarettes were still sold in kiosks and other retail channels. Companies still heavily advertise such products through the internet.

Litigation

• There have been several cases of litigation involving consumers and tobacco companies. In 2001, Dubek Ltd was sued by a private citizen, who blamed the company for his deteriorating health. In 2008, nine consumers of different cigarette brands sued Dubek, Philip Morris Ltd and Globrands Ltd, claiming these companies had violated Israeli law by marking products as ‘slims’, thus attempting to evade the prohibition on describing products as ‘light’.

• There has also been litigation between tobacco companies. In 2002, Dubek won a lawsuit against the tobacco importer Candice. Candice’s imported Prime Time cigarettes were deemed too similar to Dubek’s trademark Time cigarettes.

• The Israeli public does not believe that tobacco companies mislead the public and they are aware of the negative health effects of smoking. Thus, consumer litigation is mainly focused against businesses violating the laws regarding smoking in public places, and not against tobacco companies.

• During 2004, Clalit, a leading HMO in Israel, decided to sue Israeli, American and British tobacco companies for NIS7.6 billion. The HMO claimed that it was constantly treating Israelis for smoking-related illnesses, for which it had to incur the costs.

• In 2008, nine plaintiffs issued a law suit against six of the leading Israeli tobacco importers and distributors for a sum of NIS78 billion. They claim that these companies are using special techniques to sell cigarettes as ‘light’ by changing the colour of packaging and using special wording. This is claimed to violate the law which states that cigarettes must not be marketed as ‘light’ as this is misleading for consumers.

• In July 2011, the Israeli Supreme Court overruled a law suit of "Macabi Health Care", a leading HMO in Israel, against the leading tobacco companies and distributors in Israel, pleading compensation for the expenses they have suffered in treating tobacco consumers for different diseases and damage caused by cigarettes and tobacco products.

Death by cause

• Israel’s Central Bureau of Statistics (CBS) records data on mortality rates per 100,000 inhabitants, according to different causes of death. This data does not state whether the cause of death was smoking- or passive smoking-related. According to the CBS, 39,000 Israelis died in 2009. About 26% of deaths in 2009 were due to cancer; 17% were caused by different heart conditions; 6% were due to diabetes; and 6% were due to respiratory problems. This data cannot be attributed directly to smoking, but it is estimated that smoking is responsible for a share of these deaths.

• The ICA estimates that 14% of hospital occupancies in Israel are directly related to smoking and that 1,500 people die annually from passive smoking-related illnesses, however these figures cannot be linked directly to CBS or Ministry of Health official data.

• The Israeli Health Department estimated that in 2011, 8,900 people died as a direct result of smoking, and 1,000 people died as a result of passive smoking.

TAXATION AND PRICING

Duty paid packet marks

• Tobacco products for sale in Israel must carry a banderol stating that the duty has been paid. However, the law does not determine any limit on the maximum unit price, thus every retailer can set a different unit price.

• From 1 January 2014, the exemption from tax on cigarettes bought in duty free shops will be cancelled.

Taxation rates

• Tobacco products are subject to high taxation rates in Israel. Tobacco taxes and duty levies are increased often, and on July 2010 the tax on cigarettes was raised once again. In July 2010, the tax on cigarettes included an ad valorem excise duty of 260.6% on the price to retail, which means that for every NIS1for the importer out of the price to retail, an excise tax of NIS2.606 is charged. This ad valorem tax is in addition to the fixed tax of NIS214.5 per 1,000 sticks (NIS4.29 a pack). This new law affects all parties: importers and distributors, manufacturers and retailers, as well as the consumer. It is important to mention that there is a minimum tax of NIS475 per 1,000 sticks or NIS9.50 per pack.

• The Ministry of Finance decided in 2010 to revisit the allowance of tobacco purchases through duty free sales. Now there will be more supervision of the amount allowed; Israeli consumers will only be allowed to purchase one 10-unit multipack via a duty free store.

• Following the increase in the consumer price index as of 1 January 2012, the price of a pack of cigarettes increased by an average of NIS1.

• In 2011, the Israeli government decided to equalise taxes on all kinds of tobacco, claiming that damage from tobacco is the same whether it is cigarettes, cigars, unprossesed tobacco, water-pipes or in any other form. Due to this, taxation on cigars and cigarillos increased in 2011, and is now 65% of the pack price, but not less than NIS50.00 per kg of product. Also, tax on tobacco for water-pipes (Hookah) has increased from NIS50 per kg to NIS279.56 per kg – a 459% rise. Tax on unprossesed tobacco has increased from NIS214.5 per kg to NIS279.56 per kg.

• Due to these tax increases and price changes, the shift to mid-priced brands of cigarettes continued in 2011. The higher taxation raised the price of almost all cigarettes in Israel again, by around NIS1. This made lower end economy brands less attractive as they became more expensive, while on the other hand premium and super premium brands also witnessed a negative impact, as their unit prices became extremely high and unattractive for smokers who were willing to downgrade. This offered a strong opportunity for standard mid-priced brands.

• On the other hand, since taxation on unprossesed tobacco and cigars also rose, smokers who used to smoke products such as unprocessed tobacco because they represented value-for-money no longer have this motivation, as the prices are similar. For the same amount of money these smokers can purchase higher class products, and upgrade their smoking habits at least to mid-priced cigarettes.

Average cigarette pack price breakdown

PRODUCTION/IMPORTS/EXPORTS

• Based on information from the Israel Tax Authority, 339,932 packs of cigarettes were imported into Israel in 2011. During 2011 volume sales of imported cigarettes increased by 2.2%, while value sales increased by 9.4%. This continued the shift towards more imported cigarettes in Israel.

• Dubek Ltd, Israel’s only tobacco manufacturer, produces only finished cigarettes.

• Domestic production is declining annually as the volume of imports increases and the smoking population decreases in percentage terms. Local production declined by 10% in 2010 and by 3% in 2011.

• The volume decline in production and rise in imports is thought to be due to changing consumer tastes towards more internationals brands, bolstered by the increase in specific taxes.

• The shift to more international, imported brands is offset by the declining demand for cigarettes in Israel. Further declines in cigarette production in Israel, along with increased taxation on imported cigarettes, are expected to raise the average unit price further during the forecast period.

Illicit trade in cigarettes

• The cigarette category in Israel consists mostly of imported premium brands – around three quarters of retail volume sales are accounted for by imported products, with premium brands dominating. Illicit trade in cigarettes is focused mainly on international brands.

• Illicit trade volumes are relatively difficult to estimate, being dependent on the seizure and confiscation of illicit products by Israeli customs. It is estimated that the number of illicitly traded cigarettes in 2011 was around 217 million sticks. This represented a decline compared to 2010 as a major source of illicit trade was exposed and confiscated in 2011. The main factors that influence illicit trade are the increasing taxes on tobacco products and the demand for cigarettes in the country. However, on the other hand, the Israeli customs department is increasingly active in halting illicit trade which costs the government huge sums.

• One of the most popular illicit activities in terms of cigarettes comes from duty free sales, as Israeli consumers will often bring home more packets of cigarettes than are allowed. Importantly, many Israelis travel abroad often.

• Within the Israeli tobacco industry there are no legal parallel tobacco imports as the law states that all cigarette packs must come with a printed warning in the language of the purchasing country. This means that cigarettes must be purchased directly from the manufacturer creating a situation which makes parallel imports almost impossible.

• In 2009, the Israeli Tax Authority claimed that it had exposed, for the first time in Israel, an organised criminal organisation that has been manufacturing (within its own local factories), marketing and distributing illicit cigarettes for many years. These illicit cigarettes are mainly counterfeit imported cigarette brands such as Marlboro and Kent. According to Israeli customs, the factory manufactured an estimated 50 million cigarette sticks a year. The illicit packs were sold at half price making them much cheaper than legitimate cigarettes.

MARKET INDICATORS

MARKET DATA

SOURCES

Sources used during research include the following:

STRATEGIC DIRECTION

• Devidas Group Ltd is working to expand the variety of its product offer in order to drive future growth. The government increase in taxation on cigars in late 2011 is expected to cause unit prices to rise by more than 10% in 2012 and reduce consumption of premium brands.

• Devidas Group Ltd holds the distribution rights for a few of the most popular premium products in the cigars and smoking tobacco categories.

KEY FACTS

• Devidas runs a very popular website (www.cigar.co.il) in which consumers can purchase the company's products.

COMPANY BACKGROUND

• Devidas Group Ltd was established in 1974 by the Devidas family. Its main activities are the import of premium and super premium tobacco products, cigars in particular. At the end of the review period, the company was managed by Moshe Devidas and his son Eyal Devidas.

• Since the company was formed, its main activity has been to import and distribute a wide variety of tobacco products including cigarettes, smoking tobacco, cigars and other smoking devices. The main cigarette brands imported by the company are Davidoff, Golden Gate and Prima, while the main cigar brands are Cohiba, Montecristo and Romeo y Julieta.

• Devidas Group owns and operates three retail outlets in Israel: in Tel Aviv, Jerusalem and Hertzliya, where its headquarters are located.

PRODUCTION

• The company does not manufacture any tobacco products and is only responsible for importing, marketing and distribution.

COMPETITIVE POSITIONING

• Devidas' main strength is in cigars where it dominates the premium price band thanks to the exclusive marketing and distribution rights for Corporación Habanos SA’s products. In volume terms, the company is ranked second in cigars excluding cigarillos, but it leads value sales.

• Devidas also markets premium cigarettes, RYO, pipe tobacco and cigarillos. In addition, the company operates three outlets in prestige locations. This gives the company a unique position in the market as a premium marketer, and enables it to provide an advanced shopping experience, including lectures, VIP smoking rooms etc.

• The company is ranked second in smoking tobacco products. Devidas led the RYO category with a 90% volume share in 2011 and increased its market share thanks to its leading brands, Drum, Golden Virginia and Bali Shag. RYO grew significantly in 2011 and was one of the company’s main growth engines.

STRATEGIC DIRECTION

• Dubek’s main goal is to expand its brand portfolio to the mid-priced and premium price bands. In recent years, the economy price band showed declining market shares. Until 2011, Dubek had only economy brands. In order to see future growth, Dubek will need to invest a lot in trying to innovate and enter new segments apart from economic cigarettes. During 2011, Dubek launched its first mid-priced brand, named Choice. The new product offers the smoker the choice whether to smoke it as a normal cigarette or to break a capsule located inside the filter and smoke it as a menthol cigarette.

• One example of success is the Noblesse brand, which is the only Dubek brand that is gaining popularity in general, and amongst younger consumers in particular. Another strong asset of the company is its distribution system. Moreover, Dubek is constantly increasing its product portfolio from cigarettes to other tobacco products, tobacco accessories and non-tobacco products as well. This is expected to remain the company’s main growth driver.

KEY FACTS

COMPANY BACKGROUND

• Dubek was established in 1935 and, in 1960, became one of the first companies to be publicly traded on the Tel Aviv Stock Exchange. In 1989, Dubek was declared a monopoly in the Israeli cigarette category and in 2003 it became a private company.

• The company manufactures 24 different blends of cigarettes including American, Virginia and European blends. Included in its offer is the Time brand, which was Israel’s most popular brand before the relatively recent success of imported brands in the country.

• The manufacturer has a wide distribution network that includes more than 12,000 retail outlets countrywide and in areas under Palestinian Authority in the Gaza Strip and the West Bank.

• Dubek’s subsidiaries are: Israel Tobacco Corporation (MT) Ltd, which imports and markets tobacco, lighters, other accessories and non-tobacco products; Israel Cigarette Co Ltd, which imports and markets international cigarette brands; Jerusalem Cigarette Co Ltd, which imports tobacco and associated products in areas of Palestinian Authority and East Jerusalem; and Haifa Industrial Buildings Ltd, which leases Dubek’s warehouses and real estate investments.

PRODUCTION

• As mentioned above, Dubek is the only cigarette manufacturer in Israel. The company’s cigarettes are manufactured in two facilities – one in Beni-Brak and the other one in Petach-Tikva. The latter is a relatively new facility built next to the company’s administrative building.

• With no official export data since 2009, estimations in the tobacco industry are that Dubek's export is between 10%-15% of its activity. With the local market proving more difficult for Dubek, it is looking to export markets for future development.

COMPETITIVE POSITIONING

• Dubek, which accounted for a 19% share of Israeli cigarettes retail volume sales in 2011 is the third largest player in the cigarettes category in Israel.

• Dubek's year-on-year loss of share resulted from the poor image of its brands among young smokers, while rival international brands are gaining popularity. Moreover, the dynamic of taxation is putting pressure on economy and value-for-money brands, which constitute most of Dubek's brand portfolio.

• Within cigarillos Dubek is the leading player and its sales increased consistently over the review period.

• During 2011, Dubek entered to mid-priced cigarettes segment with the new brand, Choice.

STRATEGIC DIRECTION

• In 2010, Globrands became the second largest company in the cigarettes category. Its biggest challenge will be to maintain its share in cigarettes now that Dubek is trying to enter the mid-priced band through new brands such as Choice with innovative new products.

KEY FACTS

COMPANY BACKGROUND

• Globrands Ltd was formed in 2000 by Mr Yaron Gazit, who remained the chairman at the end of the review period.

• The company markets and distributes all Japan Tobacco Inc’s cigarette products in Israel, including brands such as Camel, Winston, and Magna. In September 2007, the company also got the licence to market and distribute all of British American Tobacco Plc’s products. The company is therefore responsible for several other leading brands such as Kent, Pall Mall and Vogue.

• Approximately NIS20 million was invested in gaining the licence to distribute British American Tobacco products, a move that consolidated Globrands as the third ranked cigarette company in Israel in 2009.

• After the acquisition of the rights to distribute British American Tobacco’s products, the company opened a new headquarters in Netanya along with four regional distribution centres situated across the country. In 2008, it distributed brands to a network of more than 11,000 outlets.

• During 2010 the company expanded its product portfolio from tobacco products to packaged food as well with the licence for Cadbury products in Israel. First to launch was the brand, Trident, which is purchased in similar outlets to cigarettes, and therefore most consistent with the company's current distribution infrastructure.

• In 2010, Globrands surpassed Dubek in market share and became the second largest cigarette company in Israel.

PRODUCTION

• All Globrands' products are imported exclusively by the company. There is no local production.

COMPETITIVE POSITIONING

• Globrands is the second leading cigarettes company in Israel, with a 23% of the market. Its main brands are positioned as mid-priced; Winston, Pall Mall and Camel are the more significant ones. LD is their leading economy brand, while Kent and Vogue are their leading premium brands.

• The new legislation and increasing prices of cigarettes bringing a trend of shifting towards mid-priced brands is the key reason driving Globrands’ growth.

• Globrands is improving its share annually thanks to its efficient distributing system. The company’s focus on mid-priced brands has led to constant development in its share, with the trend of constantly increasing prices as a result of regulation changes undermining the value-for-money status of economy brands.

HEADLINES

• Sales of cigarettes increase marginally in retail volume terms in 2011 to reach 8 billion sticks, which reflects growth of 0.1%.

• Sales of cigarettes increase in retail value terms in 2011 to reach NIS8 billion, which reflects growth of 4%.

• During 2011, new regulations against advertising and promoting cigarette brands were approved as part of a big reform being led by the Ministry of Health.

• The fastest growing category in 2011 remained ultra low tar cigarettes, with sales growing by almost 17% in retail volume terms.

• The split between domestic and multinational products is under 20% for domestic manufacturing and around 77% for imported brands. (The remaining 3% is illicit cigarettes). The share of imported brands is split between Globrands with 23% and Philip Morris with 54%. Almost all domestic cigarettes are manufactured by Dubek, which accounted for a 19% share of retail volume sales in 2011.

• Due to increasing tobacco taxation and laws regarding smoking, retail volume sales are projected to continue to decline, with a CAGR of -1% forecast for the 2011-2016 period.

TRENDS

• In 2011, a committee of the Ministry of Health, headed by Health Minister, Yaakov Litzman, passed their recommendations to prevent damage caused by smoking to the government for approval. On 29 May 2011, the government approved the committee’s recommendations and a national programme to reduce smoking and its damaging effects. The reform is split into three stages, the first of which took place in 2011. The second stage is scheduled for implementation on 1 January 2013 and 1 January 2014.

• In 2011, mid-priced cigarettes continued to increase their volume share at the expense of the premium and economy bands. Mid-priced accounted for 37% of retail volume sales in 2011, premium cigarettes accounted for 34% of retail volume sales, and economy cigarettes accounted for 29% of retail volume sales.

• Due to the tax increase, the average unit price went up during 2011, which had an impact on both volume and value sales.

• Sales of cigarettes increased by 0.1% in retail volume terms in 2011 to reach 8 billion sticks. Value sales grew by 4% during the year to reach NIS8 billion.

• Unit price of cigarettes in 2011 increased from NIS0.93 per stick to NIS0.96 per stick. This reflected a normal rise in the consumer price index, as well as additional price rises by retailers. There were no abnormal shifts in price segments. Most retailers did not make any changes to cigarette prices.

• The fastest growing category in 2011 remained ultra low tar cigarettes, with sales growing by 17% in retail volume terms. This was mainly thanks to the increase in consumption of superslim and slim cigarettes. However, this category remians an extremely small niche in actual sales terms in comparison to other cigarette categories.

• Mid tar cigarettes witnessed the second largest volume increase in 2011 with a 7% increase from 2010. The strong growth in mid tar cigarettes was mainly due to the changing brand choices of smokers due to higher unit prices.

• In 2011, high tar cigarettes continued to show decline in retail volume terms continuing the trend seen throughout the review period. During 2011, high tar volume sales dropped by 1%. This decrease was due to two main reasons: the desire to smoke lower tar cigarettes and the fact that the vast majority of popular high tar cigarettes are economy brands, which witnessed a significant percentage price increase following the 2010 tax increase.

• In 2011, menthol cigarettes continue to be a minor part of the market, accounting for only 2% of cigarettes volume sales.

COMPETITIVE LANDSCAPE

• Dubek remains the only cigarettes manufacturer in Israel, having had a monopoly on domestic production since 1988. Since then, the company has been privately-owned and it competes with major importing and distributing companies such as M H Elishar which is the distributor of Philip Morris products and Globrands.

• Domestically manufactured products account for less than 20% of Israeli cigarettes sales, with imported brands accounting for around 77% Imported brands’ share is split between Globrands, with 23%, and Philip Morris, with 54%. Almost all domestic cigarettes are manufactured by Dubek, which accounted for a 19% share of retail volume sales in 2011.

• Year-on-year the volume of imported multinational brands grows at the expense of domestic brands as Dubek’s share of volume sales declines. Dubek continued to lose market share during 2011, as its brands suffered from poor images and its economy products felt the negative impact of significant price increases.

• During 2011, Philip Morris continued to lead volume sales with a market share of 54%. Globrands showed the strongest share growth in 2011, with a one percentage point increase in volume share to reach 23% during the year.

• The largest companies are marketing brands across all price platforms. Philip Morris, for example, is marketing Next (economy) L&M (mid-priced) and Parliament and Marlboro (premium), a strong brand in each category.

NEW PRODUCT DEVELOPMENTS

• During 2011, few new products were introduced in the cigarettes market in Israel. Most of those that were focused on new packaging designs. For example, during 2011, Philip Morris refreshed its Parliament brand packaging and launched a new pack with most of it designed as a mirror. Globrands launched a new pack for the Camel brand, which opens at the side.

• Towards the end of 2011, Globrands relaunched the Lucky Strike brand with two types of tar level , high tar (red) and mid tar (blue).

• Dubek launched a new cigarette called Choice, which comes with a flavour capsule filter that gives the smoker the choice to squeeze and change the cigarette flavour to menthol instead of the standard flavour.

• In Israel, there are serious limitations on advertising cigarettes. This drives manufacturers to change packaging by making it more attractive for customers, as this is the only way to differentiate the brand from its competitors.

• It is hard to introduced new cigarette formats in Israel. Choice, which was launched in 2011, Marlboro Flavor Plus (2010), Camel Natural (2008), and Kent Nano Tek (2009), were not successful in the market. New products have regularly failed to meet the demands of Israeli smokers sufficiently to establish themselves in the market.

DISTRIBUTION

• The leading distribution channel for cigarettes in Israel remains newsagent-tobacconists/kiosks, which accounted for over 49% of retail volume sales in 2011. The second ranked distribution channel is independent small grocers, with about 18% of retail volume sales in 2011.

• The system of distribution of tobacco products in Israel differs between tobacco companies. Dubek, Israel’s only tobacco manufacturer, distributes its own products to retailers and points-of-sale, while other tobacco companies import products under licence and distribute them through independent distributors to retailers and points-of-sale.

• Given the limitations on advertising cigarettes in Israel, companies concentrate their efforts on the point-of-sale and getting the largest shelf-space by providing benefits to kiosks owner if they will give them more space.

• The only points-of-sale that are threatened legislatively are vending machines. Tobacco sales via vending machines will be illegal from 2014 as part of the new reform..

• During 2010, the law regarding vending of cigarettes in Israel was changed, as the Israeli Knesset approved the new preliminary law proposal to ban cigarette vending machines in Israel. This law is expected to come into force in 2014. In 2011, vending accounted for a 5% share of retail volume sales of cigarettes.

• Cigarettes account for over 50% of kiosks sales. Kiosks, along with small grocery stores, are the most significant channels for cigarettes companies. This structure creates a unique relationship between those retailers and suppliers. There are hardly any discounts or credits on purchasing cigarettes for the retailers but all the selling point promotion and advertisement is done by the companies free of charge. Moreover, the companies are constantly trying to create a personal relationship with the shop-owners by giving them incentives to sell their brands.

• Internet cigarette sales are not limited by any legislation in Israel. Even though, internet retailing is hardly developed in Israel.

PROSPECTS

• Mid-priced cigarettes are expected to hold the largest market share in terms of retail volume sales. The continuous regulation and limitations by the Israeli Government and the efforts of the Ministry of Health against cigarette-related damages and diseases will lead to a continual rise in the average unit price of cigarettes.

• The 2011 increase on unprocessed tobacco taxation is aimed mainly at reducing water pipe smoking (Hookah) consumption among teenagers and younger crowds. This may result in a strengthening of the cigarettes market as those consumers may shift to cigarettes instead.

• Israel has seen increasing tobacco taxation and laws regarding smoking, with further legislation expected to come in the next few years. As a result, the decline in retail volume sales of cigarettes seen over 2006-2011 (CAGR -0.2%) is expected to become even more severe with volumes projected to decline with a CAGR of -1% over 2011-2016. The forecast period is expected value rise with a CAGR of 3%, compared with a 4% CAGR for the 2006-2011 period. The main reason for this fall is the increase of the sales in the mid-price brands over premium brands.

• The main potential threats to growth in the Israeli cigarettes market are further regulations and limitations on sales of cigarettes and on promoting and advertising brands.

• Ultra low tar cigarettes are expected to see stronger growth than any other category over the forecast period with a 17% CAGR in volume terms.

• The serious limitations and regulations against promoting and advertising cigarettes brands lead companies to create limited editions of specially designed packs such as those that were launched by Philip Morris for Parliament and Globrands for Camel in 2011.

• In 2011, Dubek launched a new cigarette brand called Choice. Dubek spent a lot of money on the branding campaign and created a big buzz around their new product. However, in the long-run Choice is not expected to be a main player in the cigarettes market.

CATEGORY BACKGROUND

Cigarettes: price bands

• In 2011, mid-priced cigarettes accounted for 37% of retail volume sales, premium cigarettes accounted for 34% and economy cigarettes accounted for 29%.

• Mid-priced cigarettes got stronger in 2011 because of the increasing limitations and regulations on the cigarettes market. Premium cigarettes became too expensive for many, as some of the economy brands lost their "cheap" status. Mid-priced sales increased and will continue to increase in the next few years in retail volume terms.

• Dubek, launched a new mid-price brand, Choice, in 2011. Dubek is constantly trying to penetrate higher price bands as it controls the economy price bands but struggles to compete against more expensive cigarettes.

• The Israeli consumer was used to getting a NIS20 bill out of his pocket and buying a pack of cigarettes with it. As premium brands have seen prices rise significantly above the NIS20 anchor and most mid-priced brands have also crossed the NIS20 threshold, in the long-term economy brands are expected to get stronger as well.

Cigarettes: menthol/standard

• Flavoured cigarettes are very uncommon in Israel. Menthol is the only significant flavoured cigarette type in the market. It accounted for a 2% share of retail volume sales of cigarettes in 2011. The leading menthol brands are Montana, Winston Super Slims and Vogue. Marlboro, Pall Mall and Parliament also offer menthol variants, however none of them is a strong player in Israel.

Flavour threads and capsule filters:

• The only new 'flavour capsules' development that was launched in Israel during 2011 was Dubek’s new cigarette, Choice. Consumers can choose between smoking the cigarette as a standard cigarette and breaking the capsule inside the filter, by squeezing it, and smoking the cigarette with a mint flavour.

• There was no attempt to combine carbon filter and menthol cigarettes in Israel in 2011.

Cigarettes: filter/non-filter

• There are no non-filter cigarettes brands in Israel.

• Filter innovation is not common in Israel. Though from 2009, every few months one of the companies launches a limited edition of cigarettes with a special filter. Philip Morris did so through their Marlboro flavour filters in 2010 and Dubek launched Choice in 2011.

Cigarettes: carbon/standard filter

• Israeli law prohibits promoting a cigarette brand as less harmful than another. This makes promoting cigarettes with carbon filters impossible.

• During 2010, Philip Morris switched their Parliament brand filter from carbon to regular in the Israeli market.

• For those reasons carbon filters exist only in limited numbers that are most likely to continue to decrease.

Cigarettes: filter length

• Cigarettes are available in three distinct lengths: short (80-84mm), king size/regular (84-85mm) and super king/long (100-120mm). The most popular size in Israel is king size/regular with a retail volume share of 60% in 2011. As most imported brands are king size/regular, it is expected that this filter length type will continue to grow in retail volume share terms over the forecast period to reach an estimated 63% in 2016. Short held a 26% share in 2011, followed by super king/long with close to a 14% share.

Cigarettes: regular vs slims vs superslims

• Slim cigarettes accounted for a 1% share of retail volume sales in 2011. Superslims accounted for 2% of retail volume sales in 2011. Both categories saw a slight increase in share over 2010. Even though, slim/superslim remains an extremely small niche within cigarettes, this niche has witnessed steady share growth over recent years. The vast majority of slims/superslims cigarettes smokers are female, while the growing Russian population in Israel, many of whom are familiar with slims, also has a large impact on this category.

• Tax reform that place on July 2010 determined that the price of slims/superslims was reduced to the general price of the mother brand.

• Brands that are strong in this niche are: Winston Super Slims, LD Slims and Pall Mall.

• During 2011 no new slims/superslims were launched.

Cigarettes: pack size

• The 20s pack remains the only legal/formal pack size in the Israeli market.

• Many convenience stores in Israel sell their own little cigarette packs, each one contains up to five cigarettes, some of the packs are supplied to the retailers by the companies and are branded by them as well and some of the packs are made by the local store owners. Packaging takes place in the store and some of the retailers avoid using the little packs.

Cigarettes: pack type

• In 2011, flip-top (folding cartons) held a 90% share of retail volume sales, while soft packs (paper-based) accounted for a 10% share.

• Due to the restrictions on advertising, manufacturers are using new pack designs to attract consumers. For example, in 2011, Philip Morris and Globrands Ltd issued a new pack design for their brands Parliament and Camel respectively.

CATEGORY DATA

HEADLINES

• The cigars and cigarillos market keeps on expanding during 2011 with growth of 5% in volume terms to reach 3 million units in 2011.

• In 2011, the highest growth category continues to be cigarillos with a 7% increase in volume sales.

• Market leader, Dubek sees the largest increase in volume share in 2011, with its share rising from 33% to 35% during the year.

• Retail volume sales of cigars are expected to grow by a CAGR of 4% over the forecast period, a slower growth rate than the 6% CAGR seen over 2006-2011.

TRENDS

• One of the main trends in 2011 is the "drop down" size of handmade cigars. The more expensive handmade brands are trying to promote the lower end of their product portfolios by offering a wider range of small size cigars, all the way to just above cigarillos size. These products have lower prices and impulse consumers and occasional consumers can relate to them more easily than to the medium or full size cigars. During 2011, small size cigars grew by 4% in volume terms, second only to cigarillos.

• During December 2011, cigars and cigarillos tax rose from 54% and not less than NIS40 per kg to 65% and not less than NIS50 per kg. It is expected that the new taxation will decrease cigars sales in the future. The new cigars taxation can also be interpreted as a statement of the government’s intent to equalise legislation and regulations for cigars and cigarettes in Israel.

• The cigars and cigarillos market kept on rising during 2011 with 5% volume growth to reach 3 million cigars. This is slower than the 6% CAGR for the review period as a whole. The main growth drivers are less expensive, machine-made cigars, which are sold through a wider range of distribution channels than handmade alternatives.

• In 2011, cigars and cigarillos sales grew to the level of NIS46 million in value terms, which represents an increase of 4%.

• Unit price showed a small decline during 2011, from the level of NIS18.8 to the level of NIS18. Larger change is expected during 2012 due to the new taxation that took place in December 2011.

• During 2011, there were minor shifts in price segments. The main reason for that is the strong loyalty consumers feel towards premium cigar brands. Most premium cigars consumers are likely to stay loyal to this segment and not move in the future to consume machine-made mass-market brands.

• Cigars and cigarillos legislation is not as developed as in cigarettes. That said, legislation against smoking in public places influenced cigars and cigarillos smokers as well. However, the introduction of new limitations in the cigarettes market might have a positive impact on cigars and cigarillos in the future as some cigarette smokers who try to quit smoking switch from cigarettes to cigars or cigarillos.

HANDMADE VERSUS MACHINE MANUFACTURED SPLITS

• In 2011, handmade cigars have shown a relative stability with continuous insignificant decrease. The decrease mentioned is as a result of the global recession and the general price-minded atmosphere in Israel which is reflected in the huge social protest that took place on the last summer. This made cigar smoking a bit less popular than it used to be due to its "status" promotion image.

• Unit price has shown a slight increase in the large and standard cigars market. No change in 2011 in cigarillos and small cigars unit price. This is mainly thanks to growing competition in small cigars and cigarillos.

• Over the forecast period no significant changes are expected to take place and machine-made cigars will remain the majority of the market.

COMPETITIVE LANDSCAPE

• The leading player in cigars and cigarillos in 2011 was Dubek, with a 35% volume share founded on its strong distribution system. Esh-Li Cigars and Tobacco, with a 22% volume share, was ranked second thanks to holding the distribution rights for many international economy and mid-priced brands, including King Edward and Phillies. Devidas, with a 13% volume share, ranked third. All the products in the market are imported since there are no cigar manufacturers in Israel.

• Dubek showed the strongest share growth with an increase of two percentage points in 2011. As long as small cigars, cigarillos and, especially, economy cigars are growing fast, Dubek holds an advantage over other companies. It has the most efficient distribution system and the widest economy brands portfolio.

• Most premium cigar smokers tend to purchase cigars in duty free, and for that reason all the big cigars and cigarillos companies in Israel offer mainly mass-market brands.

NEW PRODUCT DEVELOPMENTS

• Driven by global trends, the focus of product innovation was mainly on small and standard handmade cigars.

• Three new Cuban brand extensions were launched in Israel in 2011. All of them were smaller-sized cigars for existing brands in the Israeli market - Ramon Alones, Hoyo de Monterey and Cohiba. No new cigar brands were launched in Israel in 2011.

• The new product extensions are sold only through specialist cigars shops and none of them is being sold through mass-market distribution channels.

• Competitive strategy differs between Cuban manufacturers and non-Cuban manufacturers. While Cuban manufacturers keep on launching new extensions for their brands as well as limited editions every year, non-Cuban manufacturers concentrate on imitating Cuban products.

• None of the new products in Israel is tailored specifically for male or female consumers.

• During 2011, Devidas launched a new series of cigarillos under the Viliger cigar brand, which they have imported for many years. The new Viliger cigarillos come with a cigarette filter. This is the first time cigarillos with such a filter have been marketed in Israel. The new cigarillos are popular among Israeli consumers.

• Manufacturers are not making significant efforts to attract consumers migrating from cigarettes to cigarillos.

DISTRIBUTION

• Newsagent-tobacconists/kiosks hold a 68% share of cigar volume sales, tobacco specialists hold a 21% share of retail volume sales, internet sales hold a 3% share, convenience stores account for 3% of sales and forecourt retailers are responsible for 3%.

• Newsagent-tobacconists/kiosks is the leading distribution channel in Israel thanks to the wide variety of brands that smokers can purchase and the impulse shopping experience that it provides to the consumers.

• Cigars and cigarillos products distributed through kiosks are often displayed nearby other tobacco products such as cigarettes. Thereby, those products are influenced by cigarette legislation and limitations on advertising. Premium products are usually promoted through "Cigar" magazine - a monthly magazine that informs its consumers on launches of new products and special exhibitions in the cigars world.

• The limitations on advertising to consumers have not brought a change in the point-of-sale, as the products are displayed the same way as they used to be in the past. No new limitations or restrictions are planned in the near future regarding the point-of-sale.

• Retailers in Israel do not get any incentives from manufacturers in order to promote their sales. Almost all of the valuable incentives are given by manufacturers to importers, which know that retailers need them more then they need retailers and that there is no need to encourage them.

• In Israel, there is no legislation against buying tobacco on the internet. Although, the internet is a minor distribution channel for cigars and cigarillos, holding a share of just 3% of retail volume sales.

PROSPECTS

• During December 2011, cigars and cigarillos tax rose from 54% and not less than NIS40 per kg to 65% and not less than NIS 50 per kg. It is expected that the new taxation will restrict cigars and cigarillos growth in the future.

• The “drop down” trend is expected to continue and handmade cigars will cause the unit price of small cigars to rise.

• Retail volume sales of cigars are expected to grow by a 4% CAGR over the forecast period, which reflects slower growth than the review's period CAGR of 6%. Excluding cigarillos, cigars’ CAGR is expected to be 2% in volume, in comparison to 4% CAGR for the review period. This deceleration reflects the government's new strategy of increasing taxation on cigars with cigarettes' annual increases.

• Devidas will, on the one hand, continue to import new extensions of its premium cigar brands and will keep on dominating the premium cigars category.

• Small handmade cigars, as well as flavoured cigarillos, are expected to be become increasingly popular in Israel over the next few years.

CATEGORY DATA

HEADLINES

• Smoking tobacco registered growth of 10% in 2011, up from 9% in 2010

• During December 2011, the Israeli Government decided to equalise legislation across tobacco products and increase the tax on smoking tobacco. The new taxation neutralised the largest advantage of RYO and pipe tobacco products - low unit price.

• In 2011, the fastest growth smoking tobacco category in Israel was RYO, with 18% volume growth. As the restrictions on smoking increase, more consumers are moving from smoking cigarettes to smoking RYO tobacco.

• All smoking tobacco products are imported to Israel, as Dubek, the only tobacco manufacturer in Israel, does not produce smoking tobacco.

• Many retailers in Israel believe that as a result of the new taxation the RYO category will disappear from the Israeli market.

TRENDS

• RYO and pipes have existed in Israel for decades. During 2011, RYO tobacco remained the fastest growing product type within smoking tobacco. Pipe tobacco, on the other hand, saw continued decline and is expected to do so in the future due to the absence of a new generation of pipe smokers. Water pipes, on the other hand are much more popular in Israel, which is surrounded by Arab countries and influenced by them in many different ways. Water pipes are mainly popular among Jewish Israeli men up to 30 years old and by Israeli Arab men at all ages.

• During December 2011, the Israeli government decided to equalise legislation across tobacco products and raise taxation on RYO products from NIS241.48 per kg to NIS279.56 per kg and tax on pipes/water pipes tobacco from NIS50 per kg to NIS279.56 per kg. This significantly undermined the price-competitiveness of RYO and pipe tobacco products, which had been their key advantage.

• Smoking tobacco value sales grew by 9% in 2011, with volume sales up by 10%.

• The average unit price in 2011 showed stability, a minor decrease of 1%.

• During 2011, the average unit price for pipe tobacco was NIS797.25 per kg, while RYO tobacco stood at NIS1028.93 per kg. Water pipe tobacco was much cheaper than other tobacco products in 2011. The price segmentations are expected to change dramatically in 2012.

• In 2011, the fastest growth category in Israel was RYO, with an 18% rise in retail volume sales. As smoking is subjected to ever tighter restrictions, rising numbers of consumers are moving from cigarettes to RYO tobacco.

• As water pipe smoking is very popular in Israel the range of different product types available is very wide. Water pipes are sold in many different sizes, and tobacco and coals for water pipes are to be found in every kiosk. Fruit flavours are common, as apple flavour tobacco and other fruit flavours are very popular within tobacco for water pipes. Water pipe tobacco is sold mainly in 40g boxes, though it is also available in larger sizes.

• Smoking in public places is prohibited in Israel. As a result, many restaurants and cafés which before used to rent water pipes for customers are not able to do so anymore. Most important decisions made by the Israeli legislature during 2011 apply equally to all tobacco products.

THE ROLE AND EFFECT OF CANNABIS/MARIJUANA

• Smoking cannabis in Israel is illegal. Although, it is widely available and the actual usage rate is estimated to be between 5% and 10% of the Israeli teenage population.

• Since 2009, the Israeli legislature has approved the use of cannabis for medical reasons through a special prescription that people can get from doctors.

• Researchers predict that the usage of cannabis in Israel will continue to increase in the next few years.

• Cannabis smokers tend to use cigarette tobacco for cannabis smoking much more than RYO and the impact of cannabis smoking on the RYO category is minor,

DISTRIBUTION

• The leading distribution channel for smoking tobacco remained newsagent-tobacconists/kiosks, which accounted for 43% of retail volume sales in 2011. Kiosks are a highly favoured distribution channel amongst the younger Israeli population with an estimated 2,500 kiosks in Israel. Kiosks are known to target all audiences, however, with a special emphasis on smokers as they hold a wide range of tobacco products and most of their sales are tobacco products. RYO is to be found in small grocery shops, as well as in specialist tobacco shops.

• The system of distribution in Israel is managed by private companies who manufacture (in the case of Dubek) or import their products and then distribute them by themselves in the different distribution channels.

• During 2011, no new legislation affecting distribution was published. RYO products are still being displayed on a shelf nearby cigarettes, which is often located behind the cashbox.

• It does not seem that points-of-sale are threatened by legislation. As the only place that manufacturers can differentiate their products from their competitors, it is hard to believe that there will be new limitations on the point-of-sale in the near future.

• No incentive is given by manufacturers to retailers in order to increase sales. Tobacco product consumers are a captured public which will buy those products even without any promoting, as these products enjoys high loyalty.

• Internet retailing is not popular in the smoking tobacco category in Israel and only a few products are purchased through this channel.

COMPETITIVE LANDSCAPE

• The main player in smoking tobacco in 2011 remained Nakhla Tobacco Co (which manufactures tobacco products for water pipes) with a 46% share of retail volume sales, followed by Devidas Group with a 42% share and Lane Ltd with a 7% share.

• All smoking tobacco products are imported to Israel, as Dubek, the only tobacco manufacturer in Israel, does not produce smoking tobacco.

• Nakhla Tobacco Co dominates the water pipe tobacco category with a 70% share of retail volume sales. As its products are well known, most consumers look for the familiar Nakhla box. Other consumers buy unbranded water pipe tobacco.

• In smoking tobacco category, Devidas Group continued to witness the fastest growth during 2011. Devidas is the exclusive distributor of some of the leading brands of smoking tobacco in Israel, including Davidoff, Golden Virginia, and Bali Shag.

NEW PRODUCT DEVELOPMENTS

• The main trend that has been driving product innovation in Israel is flavoured RYO, as new brand extensions were launched in Israel. The most popular flavours in 2011 were coffee, cherry, and vanilla.

• Three new brand extensions (for McBaren, Domingo and Drum) were launched in Israel in 2011. Two of them were flavoured tobacco and one of them was an organic tobacco. McBaren launched RYO in different flavours, Drum launched a new natural flavour RYO and Domingo launched organic RYO.

• The new products that were launched during 2011 were sold through kiosks as well as through specialist tobacco shops.

• Manufacturers try to attract new consumers by updating the variety of products frequently and thereby earn more shelf-space in points-of-sale.

• Manufacturers did not need to work to encourage cigarette smokers to switch to smoking tobacco, as smoking tobacco was much cheaper than cigarettes in 2011 and RYO is consider to be healthier product than the regular cigarettes as they don't have any burning material and addictive substances.

• No new packaging innovation took place in Israel in 2011 in the smoking tobacco category.

PROSPECTS

• The new reform that took place in late 2011 is expected to harm the water pipe industry severely. Unit prices are expected to rise by more than 400% in the forecast period.

• Smoking tobacco volume sales are expected to decrease from 132 million tonnes in 2011 to 75 million tonnes over the forecast period.

• In retail volume terms smoking tobacco is forecast to see a CAGR of 11% over 2011-2016 as a result of the new taxation that was implemented in December 2011.

• As the Israeli Government made a statement that all kinds of tobacco are to be treated equally in legislation, the largest threat in the smoking tobacco category is increasing taxation in the next few years. Tobacco products’ rising prices will decrease the relative purchasing power of consumers

• The new products that were launched in 2011 are not expected to perform well during 2012 as all the RYO category is expected to decline, as it lost its strongest advantage perceived value-for-money.

CATEGORY DATA

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Overview

Discover the latest market trends and uncover sources of future market growth for the Tobacco industry in Israel with research from Euromonitor's team of in-country analysts.

Find hidden opportunities in the most current research data available, understand competitive threats with our detailed market analysis, and plan your corporate strategy with our expert qualitative analysis and growth projections.

If you're in the Tobacco industry in Israel, our research will save you time and money while empowering you to make informed, profitable decisions.

When you purchase this report, you also get the data and the content from these category reports in Israel for free:

• Cigarettes
• Cigars
• Smokeless Tobacco
• Smoking Tobacco

The Tobacco in Israel market research report includes:

• Analysis of key supply-side and demand trends
• Detailed segmentation of international and local products
• Historic volumes and values, company and brand market shares
• Five year forecasts of market trends and market growth
• Production, imports by origin, exports by destination
• Robust and transparent market research methodology, conducted in-country

Our market research reports answer questions such as:

• What is the market size of Tobacco in Israel?
• What are the major brands in Israel?
• Which sector of the tobacco products market is the largest by value sales in Israel?
• Which sector of the tobacco products market has been growing the fastest, by volume and value, in Israel?
• Which sector is the most heavily taxed in Israel?
• Which companies dominate in the total tobacco market in Israel in terms of market share?
• What is the distribution channel split for the tobacco products market in Israel?

Why buy this report?

• Gain competitive intelligence about market leaders
• Track key industry trends, opportunities and threats
• Inform your marketing, brand, strategy and market development, sales and supply functions

This industry report originates from Passport, our Tobacco market research database.