GILDA LAZĂR, JTI ROMANIA: Excises and VAT make up around 80% of the price of a pack of cigarettes

Reporter: How would you describe the domestic tobacco market?

Gilda Lazăr: The local market is extremely competitive. It can be characterized as a "microcosm of tobacco". Winning in Romania is like playing on major international stage. Thus, any victory becomes very important. All the major cigarette brands are present in Romania, and they are fighting over a segment of consumers who are increasingly demanding, a segment of the global market.

Reporter: What obstacles are you facing in your activity?

Gilda Lazăr: Ever since the time of the monopolies, the tobacco industry has been a guaranteed source of money for the state. As a result, those working in this sector are a sort of tax collectors, whose first responsibility is to collect the taxes from consumers and to pay them to the state budget. Excises and VAT make up around 80% of the price of a pack of cigarettes. The remaining 20% cover the raw materials, packaging, the cost of production, shipping, distribution margin, the wages of employees and the profit, if there is any.

In 2009, for instance, there were two unplanned raises of the excise, in April and September, as opposed to just one in July, like it had been initially set. On top of that, we had the raise of the excise of January 2010. Thus, in just nine months, from 50 Euros, the total excise went to 74 Euros. The schedule of the excise raise was set together with the European Union, but in Romania, the deadline for raising excises was advanced. Due to the raise of excises, we were forced to raise our prices. Three tax raises and the adjustment of the Euro/leu exchange rate led to price increases of more than just 50% (the largest of all the products) in just a year, far above the purchasing power, which resulted in an accelerated drop of the volume of legal sales.

The main result of the increase in prices was contraband. Consumers didn"t give up smoking, but rather they chose the alternative of buying contraband products. In the beginning of last year, the black market had exceeded the record level of 36%.

Reporter: What legislative problems do you see on the tobacco market?

Gilda Lazăr: We are faced with initiatives that could stimulate contraband, and one of them concerns "duty-free" shops. The legislative project proposes the return to the previous status quo, and has been proposed by deputy Wiliam Brânză, who submitted a series of amendments with the budget and finance commission of the Chamber. They go against any intention of the government to fight contraband and tax evasion, to heal the budget and to correct the behavior of economic agents or to comply with our status as a member country of the European Union. Essentially, if these amendments go through, we will go back to how it was when smuggling done through "duty-free" shops accounted for 30% of the total. If the amendments get approved, the individual limit of the number of cigarettes for personal use would increase from 40 to 800 cigarettes, cigarettes would end up in the "duty-free" shops without the advance payment of VAT and of excises, the electronic stamping machines would be eliminated, the method for printing stamps would be changed, and thus the fiscal authorities would lose any control over the numbering of the stamped packs, the minimum limit for selling cigarettes will be expanded, as the "accidental exceeding" of the personal use limits will be allowed, diplomatic "duty-free" shops will be created anywhere etc.

In Romania, in order to comply with the law, you need to watch the Official Gazette every day. Unpredictability is worse than having a bad law. Every time there are difficulties with the collection of taxes, new ideas, one more "innovative" than the next, to squeeze money out of the honest taxpayers.

Reporter: What do you think would be the solution for these obstacles?

Gilda Lazăr: First of all, a cohesive fiscal policy, that is correlated with the purchasing power of the population. We hope that the transposition of the new directive concerning the taxation of tobacco and the annual schedule for raising the excise in equal tranches, on July 1st, until 2018, will provide the predictability and stability needed in this fiscal sector.

Also, we still need to improve the legislative framework concerning contraband. We have already forwarded proposals for a unified and simplified legislation and for using the same evaluation criteria, the quantitative criteria, both for contraband through the border crossing points, as well as for tax evasion. That"s because there is no unified methodology to calculate the customs value of the seized goods, the very notion of the customs value becomes inappropriate in the case of contraband. There is also the need to clarify the existing situation on the internal border with Hungary and Bulgaria, where there are no more customs checkpoints, and the infraction of contraband is defined in relation to them. Last but not least, it is necessary for the vehicles used by the smugglers to be seized, even though it hasn"t been technically modified to store products which were illegally brought into the country.

Reporter: What is the figure for the sale of cigarettes in Romania?

Gilda Lazăr: I have to mention that we do not have exact data, but we expect that in 2010, the total market amounted to about 32 billion cigarettes, of which contraband represents almost 9 billion. As I was saying, the legal market is in an accelerated decline, compared to 2009, when it was estimated at 30.4 billion cigarettes. As a result, in 2010, for a volume of legally sold cigarettes of about 23 billion cigarettes, the proceeds of the sales would be nearly 2.5 billion Euros, of which the taxes paid to the state budget would amount to approximately 2 billion Euros.

Reporter: What is domestic market share of JTI?

Gilda Lazăr: Approximately 25%.

Reporter: What was the strategy you used for overcoming the crisis?

Gilda Lazăr: 2010 was a difficult year, when the aberrant tax increases of 2009 made their effects felt. What"s more, the VAT was raised, and the excise also increased indirectly (which in the case of tobacco, is also paid for the VAT). We were forced to restructure the business and to layoff employees. We had great pressure on profitability, and the fight against contraband became our number one priority. Even though we kept our market share, the volume of sales pertaining to it decreased significantly. We invested in the production capacity and in modernizing the plant, which is de now one of the best of the plants owned by JTI.

We adapted to the market conditions and we have consistent in terms of the quality of our products. And that, despite the fact that the legal market for tobacco shrank over 25% last year, and sales decreased due to the excessive raise of excises, which resulted in consumers turning to contraband cigarettes. In 2010 JTI paid almost 470 million Euros in taxes. Thus, we paid more attention to exports.

Reporter: How much of its cigarette output does JTI export?

Gilda Lazăr: At the end of last year, approximately 35% of the output of the factory of Bucharest was being exported, as opposed to 20% in 2009 and approximately 5%in the previous years. In 1993, we began our business in Romania by importing "Camel" from Germany. Since 2009, the JTI plant of Pipera Platform exports "Camel" to Germany. In fact all of the "Camel" cigarettes without filter sold in the EU member countries are made in Bucharest. We also export a lot of other brands, from South America to Asia and Australia. At the end of last year, exports had reached 41% of the turnover of JTI Romania.

Reporter: What investments do you plan to make this year?

Gilda Lazăr: The investments in 2010 will be made based on the market conditions, the fiscal policy of the authorities and the efforts of the cigarette contraband. There are factors that we need to take into account when planning any business objectives.

Reporter: How many employees does the company have?

Gilda Lazăr: About 850.

Reporter: How many brands of cigarettes are you currently producing?

Gilda Lazăr: JTI Romania has a dynamic and varied portfolio. "Sobranie" in the prestige category, "Camel", "Glamour", "Salem" and "Benson & Hedges" on the Premium segment, "Winston" in the Mid category, "Winchester", "More", "Monte Carlo", "Ronson", on the Base and Value segments.

Reporter: What new products have you launched on the market?

Gilda Lazăr: Our portfolio continues to adapt to the tastes of the most demanding consumers. Thus, in 2010, we launched "Winston XS", the super slims cigarette in a King Size format, in two versions: "Winston XS Blue" and "Winston XS Silver". Also, in October 2010 we launched "Sobranie", also in King Size format, in three versions - Black, Blue and Gold.

Reporter: What other countries is the company present in?

Gilda Lazăr: Japan Tobacco International currently has over 25,000 employees and 26 plants in 120 countries in Europe, North America, Asia and Africa. There is a central unit that purchases raw materials and other materials for all the JTI factories, on a global level.

Reporter: Thank you!