Cash-starved Spanish tobacco uses are trying to cut expenses on cigarettes – giving rise to a furious price war among leading tobacco companies. Imperial Tobacco has encountered £100 Million revenue drop resulting from the stiff price competition, tax hikes and smoking ban, implemented in Spain this year.

Imperial Tobacco, which is the fourth-largest cigarette maker in the world and leading Tobacco Company on Spanish market, admitted last week that a dramatic decline in tobacco purchases by local adult smokers has resulted in huge price war between major tobacco manufacturers. The average retail cigarette price on the local market has dropped 10% in two months and Imperial Tobacco– the maker of such brands as Fortuna Red Line, Ducados Rubio, and Nobel Style – as well reduced the price last week.

The tobacco giant has decided to reduce the price per pack of West, Ducados and JPS from €3.40 down to €3.30, after identical moves by its major rivals: Philip Morris has lowered the price of L&M brand while British American Tobacco has cut slashed the price of Pall Mall. But, the price of Imperial’s leading cigarette brands – Fortuna and Nobel – remained unchanged at €3.40.

A spokesperson at Imperial Tobacco admitted that Spain has become a challenging market for tobacco industry for a while, as the economic environment has been especially difficult, with dramatically high levels of unemployment.

Spain as well implemented a ban on smoking in enclosed public venues this year and increased excise tax on cigarettes to encourage smokers to quit and collect revenue for cash-strapped budget. The latest tax increase came six months after the VAT increase from 16 percent to 18 percent, imposed last July. “When bans on smoking are implemented, there is a usual small drop initially but after that normal levels of purchases return,” the Imperial’s spokesman added.

In its latest report, Imperial admitted it faced an 18% drop in cigarette shipments in Spain for the half-year to March, 31st. The tobacco giant’s net revenues grew to £926m up from £689m reported last year, due to sales increase of up 2% to £13.7bn. Chris Wickham, a senior analyst at Matryx, noted that illegal cigarette trade in Spain is growing. A significant market volume decrease of 15% likely demonstrates illegal trade growth rather than reduction in smoking rates.

Toby McCullagh, Morgan Stanley analyst mentioned that whereas the size of these declines is shocking, it is still possible that tobacco companies may found a more universal solution, and pricing might begin to grow again this year. However, he added that price reductions might as well cause an excise tax increase, since Spain currently collects a much-lower than predicted revenues from tobacco taxes.

By Sara Norton, Staff Writer. Copyright © 2011 Cigarette-Store.org. All rights reserved.