Egypt's sole cigarette manufacturer recently signed an agreement with a foreign producer in the first cooperation agreement of its kind in Egyptian tobacco industry history, reports Eman Youssef Two major cigarette manufacturing companies, Eastern Tobacco Company (ETC) and British American Tobacco (BAT) have joined forces and signed an agreement whereby both companies will make an investment to the tune of $10 million. The agreement, according to Mohamed Sadek, ETC chairman, will result in the manufacture of two new jointly owned brands, the first of which will be called Viceroy. BAT, whose brands include Rothmans, Kent and Dunhill, is the world's second largest tobacco group, with an annual net turnover of approximately $20 billion. "There is no doubt that such an agreement will reflect positively on all stockholders," Sadek said, emphasising that both companies are major players in the industry. He also added that they are actively seeking ways to deal with fierce competition in a highly sensitive industry which also faces growing anti-tobacco campaigns. In addition to making premium brands available for the high-income consumer, Sadek said that the agreement would provide new cash flows to both parties and thus maximise the advantages of their cooperation. Under the agreement, the two companies will work together, with ETC providing its expertise in manufacturing to the highest international quality standards and BAT providing its international expertise in areas such as distribution and product development. "Unless we mobilise all our powers, we will face a serious situation," Sadek said, adding that international transformations currently witnessed on a global scale represent huge challenges. "Being aware of such upcoming challenges, ETC adopted the policy of diversifying its product mix to meet the requirements of the biggest share of consumers," Sadek said. Graham Gibbons, general manager of BAT, said the company has invested $30 million in Egypt since 2001. He also said that the agreement between the two companies would bring new job opportunities and a larger infrastructure for their operations. Between June 2002 and March 2003, ETC raked in profits of LE203 million, compared to a net profit of LE183.30 million for the corresponding period of the previous year. ETC reported a 16.5 per cent bottom line drop for the nine- month period, which ended 31 March, 2002. The company enjoys a 90 per cent share of the Egyptian cigarette market. The remaining 10 per cent of cigarettes sold in Egypt are foreign brands, most of which are owned by the American tobacco giant Philip Morris. The state has a stake in this market too, since ETC manufactures most of these products under license from the foreign companies. The weakening pound has put stress on the government's ability to keep cigarette prices low. Despite a rich history in Egypt, tobacco cultivation is illegal, so the country imports all its tobacco from India, China and South East Asia, according to Sadek. "This law must be changed and tobacco cultivation should be allowed," Sadek said, explaining that the government did not want to lose the custom tariffs and the sales tax from tobacco imports. He also said that tobacco production required importing raw materials worth $1 million daily, LE16 million of which goes to the government. ETC currently employs some 13,000 people working on 13 different products, including the Cleopatra brand of cigarettes. The main reason for top line growth was the 18.6 per cent increase in local cigarette brand revenues, driven by both a 9.3 per cent rise in average price and an increase of 8.5 per cent in volume. ETC added 3.7 per cent market share over 2002-03 as consumers shifted to local brands, according to Sadek. The giant ETC also announced it would raise the price of its local cigarette brands by LE0.25, with the exception of the best-selling Cleopatra brand. "It is fair enough to do so, because of the changes in the dollar prices," Sadek said. The move aims to compensate for the company's declining profitability, which is due to the fact that the Egyptian currency has devalued over the past year. Cleopatra accounts for about 60 per cent of ETC's revenue and the price of a pack will remain at LE2. The price has been steady for 10 years, but the price has actually decreased when inflation is taken into consideration. "The price of Cleopatra will not be raised because it is the number-one brand in Egypt," Sadek said. "The policy is to keep strategic commodities stable, otherwise the people will suffer." The Egyptian pound fell 15 per cent against the dollar last year. ETC was hard hit by the devaluation as 90 per cent of its products -- including tobacco and packaging -- are imported and therefore subject to heavy taxation.
