The Czech cigarette market increased by 8% y/y in 2004 (CTK). The growth was driven by sales of cheaper brands, whose market share rose to 30% from the previous 10%. This market development was influenced by the closure of duty-free shops (with sales of 3-4bn cigarettes p.a.) in 2004, which are now partially reported under domestic sales. Also, the removal of import taxes after entry into the EU has led to imports of cheaper brands. On the other hand, demand from foreign consumers was strong, forming 20-30% of total cigarette sales. We believe that foreign consumers focus on more expensive brands, which are sold at a discount to prices abroad. This should be positive for Philip Morris CR and may partially compensate for the shift of domestic consumers to cheaper brands following the cigarette excise tax increase at the beginning of 2004.