Unlike the trend in most other EU countries, cigarette sales have risen by 3.5% y/y to 23.5bn sticks last year. The trend, however, may be reversed after another excise-tax hike in April, which meant that even the cheapest brands would have to have the hike fully reflected into the end price. This is due to previous absorptions of the tax hikes by producers, which significantly drove their margins lower. Further excise tax hike is expected in January 2007, which assumes a minimal tax of 32% from the retail price plus CZK85 per stick but not less than CZK1.75 per stick for middle priced cigarettes and a 55% increase to CZK0.62 per stick for cheap brands.
The proposal has been expected, nevertheless; we expect that the domestic consumption of cigarettes will be negatively affected partially compensated by cigarette purchases by foreigners making up between 20-30 cigarette consumption. As all producers would be passing further tax hikes into end prices and the minimal tax has moved significantly closing the gap between percentage tax meaning that the more expensive cigarettes will not be hit the hardest as in the past (PMCR’s brands); we expect that further erosion of PMCR’s market share can be more limited.