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The future of tobacco in Sri Lanka is in doubt due to tightening legislation, with the government considering a full ban on imports and domestic production by 2020. Tax hikes have made cigarettes increasingly unaffordable, while traditional tobacco poses strong competition. A ban on single stick sales is likely. This would make cigarettes, the only significant product area, inaccessible to most smokers. Most consumers are however uninterested in tobacco and view it in a negative light.
This report analyses the market for tobacco in Sri Lanka. 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.
The majority of consumers in Sri Lanka do not smoke, with a survey by the country's ADIC (Alcohol and Drug Information Centre) in 2015 estimating smoking prevalence at just 31% of the overall population aged 15 years and over. Smoking prevalence rises with age, with over 40-year-olds most likely to smoke. Low-income consumers and those living in rural areas are also more likely to smoke, although these groups are numerous, with 82% of the population being rural at the end of the review period. Those with lower education levels are also more likely to smoke, partly due to being less aware of the health implications and strong social censure that smoking increasingly faces. Overall smoking prevalence is however low on a regional basis, while those that do smoke consume a smaller number of cigarettes per day in comparison to other countries in the region.
The strongest determinant of smoking prevalence is gender. Female smoking is not socially acceptable and rates of smoking among women remain extremely low, at less than 2% of over 15-year-old women. Both smoking and drinking are regarded as male activities in Sri Lanka and indeed often go hand-in-hand. Women rarely socialise with men, particularly while the latter are drinking or smoking. Those women that do smoke are mainly older rural women that smoke traditional beedis.
Attitudes to smoking are thus widely negative, with negative perceptions intensifying during the review period as a result of strong anti-smoking campaigns by the government and ADIC. The government has strong anti-smoking legislation in place and is increasing its investment in anti-smoking campaigns. The country's media is also increasingly vocal in condemning tobacco, citing not only its potential negative health impact but also the impact that it has on low-income household's budgets.
There is however a strong tradition for smoking in Sri Lanka, with traditional tobacco products remaining popular in rural areas. Low-income rural men account for the bulk of sales of cigarettes but tax hikes resulted in some switching to traditional alternatives such as hand-rolled beedis and suruttu at the end of the review period. Beedis are hand-rolled cigarettes and suruttu are cigar-sized variants, with both being wrapped in tendu (Coromandel ebony tree or Diospyros melanoxylon) leaves. These products are excluded from the scope of this report and while they are sometimes sold in a packaged form, they are more commonly sold unpackaged, generally produced in small quantities in rural homes. Chewing fresh beeda/babul is also common in rural areas, with these being a tobacco, areca and spice mix wrapped in betel leaves and sold in a fresh and unpackaged form.
New product development is severely limited by the lack of competition in tobacco. The sole legal player in cigarettes is Ceylon Tobacco, with this company facing competition only from traditional tobacco products. This player's investment in innovation is also restrained by a highly price-sensitive consumer base, particularly in the wake of the tax hikes seen in 2016.
Ceylon Tobacco launched two new products in 2016 however. These were both for premium brand Dunhill and aimed to appeal to consumers seeking quality and innovation. Dunhill Tube Filter offers a recessed filter, which is positioned as minimising staining and offering a smoother flavour. Dunhill Fine Cut uses tobacco that is cut twice as fine as standard for cigarettes, with every square inch being cut 46 times. This offers a flavour that is simultaneously intense and smoother.
These launches proved successful to an extent, with Dunhill proving more resilient in share in comparison to mid-priced brands John Player and Bristol in 2016. However, sales of cigarettes are increasingly reliant on low-income rural men, who are primarily interested in a low price and strong flavour. As a result, the only brand to gain share in cigarettes in 2016 was unfiltered economy brand Capstan, while Dunhill accounted for less than 1% of retail volume sales in the same year.
While new products were launched for Dunhill, Ceylon Tobacco also pared down its portfolio at the end of the review period. 2016 saw the company delist the 3 Roses and 4 Aces brands. These traditionally popular brands were reintroduced by the company in 2001 with the stated aim of competing with illicit white cigarettes. Tax hikes impacted these products' ability to compete with illegal cigarettes' prices however and sales had dwindled to insignificant levels by the end of the review period.
Value sales at constant 2016 prices are expected to see a stronger performance in the forecast period, with 9% overall growth in comparison to a 7% review period decline. This will be solely due to further tax increases and price hikes however. Retail volume sales of cigarettes, the sole significant product area, are expected to decline by a further 7% in the forecast period as these products become increasingly unaffordable to their core low-income consumer base.
Cigarettes are likely to remain the only significant product in tobacco in the forecast period. High prices, a limited brand range and narrow distribution reach will hinder cigars and cigarillos. Smoking tobacco and smokeless tobacco are likely to continue to lack a significant distribution presence, with consumers unlikely to be interested in these products due to the availability of low-priced and unpackaged traditional options such as beedis and babul. Vapour products has the most chance of carving out a sales niche but they will be hindered by high prices and low consumer awareness and interest.
However, even the future of cigarettes in Sri Lanka is in doubt. The government has stated that its aim is to ban tobacco cultivation in Sri Lanka by 2020 and also to ban tobacco imports into the country by this year. If this legislation is passed, cigarettes could well be banned during the forecast period. The sole cigarette producer in the country, Ceylon Tobacco, has notably begun to scale down its operations, with the company announcing at the start of 2017 that would close two leaf depots. This followed on from an announcement in late 2016 that it would reduce employee numbers at its Colombo factory by 20% and shut a further four leaf depots.
Income levels directly correlate with smoking prevalence in Sri Lanka. Low-income men are most likely to smoke, while mid- to high-income consumers with higher education levels are more likely to condemn smoking as unhealthy. Low-income men in rural areas often use traditional tobacco products that are excluded from this report, such as hand-rolled beedis. The small number of Sri Lankan women that smoke are also generally from low-income groups in rural areas and opt for beedis.
Low-income men are also most likely to smoke cigarettes, with much of the criticism aimed at smoking focusing on the impact that this has on their household budgets. While cigarettes are increasingly unaffordable for this group, they remain accessible due to single stick sales being legal. Single sticks are believed to account for the bulk of cigarette sales, with some estimates placing their share of overall retail volume sales as high as 80%.
The availability of single sticks not only enables low-income consumers to afford economy cigarettes such as Capstan but also upper-mid-priced brands such as John Player. However, the government announced in November 2016 that it plans to ban single stick sales in the near future and to introduce a minimum pack size of 20 sticks. This is likely to have a significant impact on low-income consumers' ability to access cigarettes.
Mid- to high-income consumers are considerably less likely to smoke and generally view smoking in a negative light. Female smoking is insignificant in these income groups, while those men that smoke generally opt for cigarettes. Mid-income smokers generally opt for mid-priced John Player, which has been present for over 65 years and enjoys strong brand awareness and a high quality image. Lower-mid-income consumers are more likely to opt for lower-mid-priced Bristol. High-income smokers are meanwhile most likely to buy Dunhill, which has a premium positioning and is priced accordingly.
Smoking is generally viewed in a negative light by Sri Lankans, rather than seen as aspirational. John Player and Dunhill are however viewed as offering higher quality in comparison to Bristol or Capstan. Tax shifts towards the end of the review period reduced the price differential between these brands, with some mid-income Bristol smokers thus trading up to John Player or even to Dunhill as a result. Capstan however benefited most from tax hikes, with many low-income consumers trading down from John Player to this brand in search of value.
The Sri Lankan population is only seeing slow growth, with an increase of just 2% over the review period. This was however chiefly due to high female migration, with women often travelling to countries such as Kuwait or Saudi Arabia to work as domestic staff. These consumers are unlikely to smoke however, due to strong Sri Lankan social censure of female smoking. The population had a median age of 33 years in 2016, which is relatively old on a regional basis. This offers some benefits to tobacco, with smoking prevalence rising with age in Sri Lanka. Overall, the consumer base for tobacco products is becoming smaller and older however.
Cigarettes remain widely accessible in Sri Lanka via independent small grocers and supermarkets. These products are also sold by street vendors, although the high risk of buying counterfeits via this channel deters many from doing so. The bulk of sales continue to occur in the form of single sticks, with these offered mainly by independent small grocers and street vendors. The high price of a full pack of cigarettes limits sales via supermarkets, which generally only offer this format. In retail outlets, cigarettes are generally displayed in special display units such as glass boxes, with these placed behind the counter due to the high cost of cigarettes.
Traditional tobacco products have wide availability, particularly in rural areas where the majority of the population continues to live. Products such as hand-rolled beedis and babul fresh chewing tobacco are sold via bars, open markets, street stalls and vendors or even homes. Asian-style chewing tobacco pan masala is also offered via restaurants and cafés.
In contrast, packaged tobacco products other than cigarettes have very little distribution presence. Cigars are only sold via a handful of supermarkets and hypermarkets in major cities, with sales being minimal. Vapour products are mainly available via foreign internet retailing sites, with only one store offering these products in Colombo as of mid-2017.
Illicit trade volumes remained low at the end of the review period, accounting for only 2% of total cigarette consumption. There was however a sharp rise in illicit trade towards the end of the review period due to the introduction of considerably higher taxes, resulting in an increase of 10% in illicit trade volume in 2015 and further 3% growth in 2016. This was stronger in comparison to the 1% rise in retail volume sales seen for legal cigarettes in the latter year.
Illicit cigarettes are smuggled into the country from a number of production hubs, with Turkey being prominent and China growing in significance as a source country. The Middle East, Malaysia and Eastern Europe are also significant sources. Basic illicit white cigarettes known as sudu beedi are also illegally produced in Sri Lanka.
Growth in illicit trade is being hindered by the government's increasingly strong border controls and tougher action against illegal domestic production. The government clampdown is also pushing up the price of illicit cigarettes and resulting in shortages in this area. November 2016 saw customs officers seize 36,600 sticks and 80,000 sticks in two separate incidents, while February 2017 saw three people seized with 70,000 sticks that they were attempting to smuggle into the country. The police also continue to raid suspected premises in Sri Lanka, with the authorities seizing 2.3 million cigarettes in the first three months of 2016. Illegal cigarettes remain more affordable than legal cigarettes however, priced at LKR20-30/stick, around half the level of the leading legal brands.
Traditional semi-formal and informal tobacco products pose stronger competition than illicit products. While beedi hand-rolled cigarettes wrapped in leaves are nominally taxed, these products are generally informally produced and producers and vendors pay no taxes. Larger cigar-like versions are known as suruttu and similarly see strong informal production and sales. Estimates for usage vary, although some sources believe that beedi consumption equals that of cigarettes in terms of stick volume and increased rapidly at the end of the review period due to sharp tax hikes on cigarettes. The government refutes these claims however. These products are mainly smoked in rural areas, but 82% of the population remained rural at the end of the review period. Unpackaged Asian-style chewing tobacco is also popular in the form of mixes wrapped in a betel leaf, with these known as babul or beeda. These are mainly sold via roadside stalls.
There is no minimum legal smoking age, although the legal minimum purchasing age is set at 21 years. The retailer is liable to enforce this legislation, although many retailers do not check National Identity Cards for age and instead rely on displaying a sign stating that cigarettes will only be sold to over 21-year-olds.
The Youth Tobacco Report published by the US Centers for Disease Control and Prevention in 2017 rated Sri Lanka as having the lowest rate of smoking amongst 13-15-year-olds globally, at below 2%, with this based on surveys conducted over 2012-2015. However, many smokers do begin to smoke before they reach the legal purchasing age, with an ADIC (Alcohol and Drugs Information Service of Sri Lanka) survey from July 2015 finding that 54% of smokers began aged 16-20-years and a further 15% began aged 11-15-years. Most parents are keen to prevent their children smoking, however, with smoking being a particular social taboo for girls.
There is no legal limit on tar levels, although the introduction of such a limit continues to be discussed and may be introduced in the forecast period.
There remains a strong preference for high tar cigarettes in the country, with these regarded as offering a richer flavour. This is partly due to the established popularity of beedis, with these informal cigarettes having a strong flavour and high tar level. While there is no limit on tar levels, the use of misleading terms such as "light" and "low" is prohibited.
Tobacco advertising and sponsorship has been banned since 2006 via the National Alcohol and Tobacco Act. In stores however, products and prices can be displayed in branded cases. Corporate sponsorship is also permitted, excluding sports events and events targeting young consumers, although branded sponsorship is not permitted. Publicity related to corporate social responsibility initiatives is also permitted. The country's sole cigarette player Ceylon Tobacco notably operates the Sustainable Agricultural Development Programme (SADP) focused on reducing rural poverty, with this supporting close to 18,500 families across 16 districts in March 2016.
Graphic health warnings proved a point of contention between the government and the country's sole cigarette producer Ceylon Tobacco during the review period. August 2012 saw the government announce mandatory graphic and textual health warnings covering 80% of cigar and cigarette packs, with these set to become mandatory from February 2014. This legislation was challenged in court by Ceylon Tobacco. While the Supreme Court found in favour of the government in May 2014, it ruled that such warnings need only cover 60% of packs.
Graphic health warnings thus became mandatory for all new cigarette packs produced from 1 January 2015, with retailers and producers only given until 31 January 2015 to shift old stock. From 1 June 2015, the government furthermore made 80% warnings mandatory, with this move uncontested by Ceylon Tobacco. Graphic and textual health warnings must now cover 80% of the front and back of cigarette and cigar packs, with images being rotated every six months and text in Sinhalese. One side of packs must also indicate tar and nicotine levels.
Traditional tobacco products do not have to carry graphic or textual health warnings. Many feel this offers these products a sales advantage over cigarettes and also places their largely low-income consumer base at risk. Many users continue to believe that these products are healthier in comparison to packaged cigarettes. In November 2016, the government stated that it was considering making graphic health warnings mandatory for beedi hand-rolled cigarettes and suruttu hand-rolled cigars. However, this legislation is likely to be difficult to enforce, as the bulk of these products are sold in an unpackaged form and produced at home by small-scale rural producers.
There is a longstanding partial public smoking ban in Sri Lanka, with this in place since 2006. This ban covers healthcare, educational and government facilities, alongside offices and public transport. It does not however cover bars/pubs, hotels or larger restaurants, which are permitted to offer smoking areas. The government further extended the smoking ban from 1 January 2017, with this ban now covering all army premises.
The government is also considering further legislation for tobacco. November 2016 saw the government announce plans for a ban on sales of single cigarettes, with the minimum pack size set at 20 sticks. This would have significant repercussions for cigarette sales, as single sticks make these products accessible to low-income consumers and account for the bulk of overall sales. If this legislation is introduced, it is likely to result in a strong shift from cigarettes to beedis among low-income men, particularly in rural areas.
November 2016 also saw the government announce plans to make plain packaging mandatory for tobacco products. This announcement was made by the Sri Lankan president at the WHO FCTC COP7, the world's biggest convention on tobacco control policies.
Earlier in 2016, the government announced plans for even more drastic legislation, however. The government stated that it will aim to ban all imports of cigarettes and tobacco by 2020 and also to ban all tobacco cultivation within the country. If this legislation is introduced, it will effectively prevent tobacco sales within Sri Lanka.
Taxation and duty levies
The Sri Lankan government is increasingly aggressive in its approach to smoking deterrence, in line with its stated aim of prohibiting tobacco cultivation and import by 2020. The end of the review period thus saw a flurry of tax increases. In 2014, the government increased excise duty but withdrew VAT and NBT (Nation Building Tax) from tobacco.
However, October 2016 saw the government reintroduce VAT on tobacco at 15% and also increase production tax by LKR5/stick, resulting in a surge in prices. This followed on from further sharp increases in excise duty, with January 2016 seeing the price of cigarettes increase by LKR1-2/stick and October seeing an increase of LKR7/stick. Cigarettes are thus becoming unaffordable to many, while there were product shortages due to stockpiling prior to the October 2016 increases, which were widely anticipated by consumers.
By May 2017, cigarettes faced a striking 125% general tax, in addition to 15% VAT and excise duty based on length. Excise duty ranged from LKR11.7/stick for those shorter than 60mm to LKR34.25/stick for those longer than 84mm, with the latter being the standard length for king size cigarettes. Imported products face a further 30% import duty, although the high price of these products results in a minimal presence.
The government has faced heavy criticism from the country's sole tobacco player Ceylon Tobacco for failing to ensure a level playing field by imposing similar high taxes on traditional tobacco products. Hand-rolled beedis continue to be largely unregulated and available at very low prices as a result.
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Chart 1 Tobacco in Sri Lanka in 2016 Chart 2 Sri Lanka Socioeconomic Trends
Taxation and duty levies
Chart 3 Tobacco: Traditional Retailer
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: Traditional Retailer: Independent Small Grocer Chart 5 Cigarettes: Traditional Retailer: Independent Small Grocer Chart 6 Cigarettes: Dunhill 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
CIGARS, CIGARILLOS AND SMOKING TOBACCO
Chart 7 Cigars: Modern Retailer: Supermarket(1) Chart 8 Cigars: Modern Retailer: Supermarket(2) Chart 9 Cigars: Modern Retailer: Supermarket(3) Summary 2 Cigars, Cigarillos and Smoking Tobacco Pricing
SMOKELESS TOBACCO AND VAPOUR PRODUCTS
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