INTERVIEW - British American Tobacco's Serbian Unit Sees Turnover Flat at 120 Mln Euro in 2009, 2010

“We sell about four billion sticks a year. We felt a sale drop by about 5.0%. Consumption has dropped as a result of the crisis, people have less money,” the former general manager of BAT East Balkans, Luiz Augusto Heeren, told SeeNews in an interview last week. He officially stepped down on October 1 and was replaced by Kristian Kornerup.

“The sale of cigarettes is related to the availability of money and the purchasing power. [....] So, when a crisis hits, smokers tend to switch to cheaper cigarettes or slow down the quantity of smokes,” Heeren said, adding that output will also be flat next year.

BAT has not posted a profit in Serbia since entering the Balkan country's market in 2003 because cigarette prices in Serbia are the lowest in the region, Heeren said. The average price of a pack of cigarettes in Serbia is 80 dinars, equivalent to 86 eurocents under the current dinar/euro exchange rate, while in neighbouring Romania and Bulgaria the price is about 1.30 euro.

Around half of Serbia’s adult population smokes, BAT said in a statement on its website. This is, Heeren said, about a quarter of Serbia’s entire population of about nine million, including the population of the country's breakaway province of Kosovo, which Belgrade says it will never recognise as an independent state.

BAT bought Serbian tobacco company Duvanska Industrija Vranje (DIV) for 50 million euro in 2003 and has invested more than 100 million euro in it since then. The factory halved its workforce to 153 in July due to operating losses incurred by the global crisis.

“This was not an easy year. We had to lay off about 150 people but that will take us to the productivity level which is good, so we won’t expect further downsizing,”  Heeren said, adding that BAT had set up a training centre for those laid off to help them improve their skills in the existing market.

The company has focused its investment in Serbia, where it holds about 20% of the cigarette market, in marketing activities this year, Heeren said.

In February the government in Belgrade decided to raise the ad valorem tax on cigarettes to 35% from 33% as agreed with tobacco companies last year, backtracking on plans to increase this component of excise duty to 38% after tobacco majors said the bigger increase could force them to trim their investment plans in Serbia. In April, Phillip Morris, Japan Tobacco and BAT said they may slash their investment in the country if the government raises the specific part of excise levied on cigarettes to 9.9 dinars per pack from 8.9 dinars.

“We are OK with this excise level but it was a long journey to get to this situation. It was an eight-month battle,” Heeren said, adding that Serbia’s cigarette excise is currently on a par with other former Yugoslav republics.

“It is lower than in Bulgaria and Romania, where excise is in the range of 50%. Here it is on a par with Montenegro, while in Croatia it is slightly higher.”

Japan Tobacco International, Phillip Morris and BAT contributed some 40 billion dinars to Serbia's budget revenue in excises and taxes in 2008, Value Added Tax included, Phillip Morris said in January. The combined investment of Japan Tobacco International, Phillip Morris and BAT since the fall of former Yugoslav strongman Slobodan Milosevic in 2000 totals around 1.0 billion euro, BAT has said.

(1 euro= 93.2525 Serbian dinars)