Hard times for tobacco companies in Russia can be explained by the economic situation in the country. But is that the only reason? Maybe many tobacco companies do not try to work properly in the new environment? Yet there is a positive experience, too. As practice shows, the turbulence on the market can be withstood by those who bet on new technologies.

Objective difficulties

The Russian tobacco market is going through difficult times. Thus, four years ago, BAT-Yava factory was closed and its production capacity was decided to divide between St. Petersburg (BAT-SPb) and Saratov (BAT-STF). And last summer, a decision was taken to close the Liggett-Ducat factory, located in Moscow. It was owned by Japan Tabacco International (JTI).

Soon to be closed is the oldest Russian tobacco factory, located in Yaroslavl: Yaroslavl Imperial Tobacco. The owner, Imperial Tobacco, which acquired the company in 2008, says that 284 employees will be fired as a result. According to the owners, they didn't have any other solution. General Director of Imperial Tobacco Yaroslavl, Oleg Dyatlov, explains that the factory used only 40% of its capacities. Therefore, the closure of production is a logical step: this will ensure the business activities in the future.

The remaining production is to be transferred to the production site of the company in Volgograd. The businessmen refer to objective reasons to explain the situation, which are primarily related to the difficult state of the Russian economy, and an increase in tobacco excise taxes. One should recall that in November, the State Dua adopted amendments to the Tax Code, which provide for an increase in excise duties on certain products, including tobacco products. In 2017, the excise tax on it shall be not less than 2123 rubles. The manufacturers believe that it, in turn, will lead to increased cost of a packet of cigarettes by an average of 20%.

The production of cigarettes in the first half of 2016 increased by 10% compared to the same period of 2015: 136.9 billion in 2015, and 152,9 billion in January-June of 2016. Part of the production remains undemanded. According to opinion polls in May, over the past year the number of non-smokers of Russians has increased by 3%. Now 69% of the total population do not smoke. 

Compared with 2015, the number of male smokers decreased from 52% to 45% (by 7%) among women from 19% to 17% (by 2%). It is obvious that the number of smokers in the future will decrease, and won't affect the tobacco companies positively. But so far the number of those who quit the bad habit, is not that great. And the tobacco companies have been complaining of difficulties for the past several years. What's the deal here?

The most hazardous industry

Perhaps the reason lies in the fact that tobacco companies continue to operate in the old way, preferring not to bet on new technologies? Residents of the Kashira highway, for example, received with joy the closure of the BAD-Yava tobacco factory. Liggett-Ducat was repeatedly subjected to checks by the Nagatinskaja district prosecutor's office, the Moscow Department of Natural Resources and Mosekomonitoring. In addition to tobacco dust emissions, supervisors fixed toluene, butyl acetate, acetone, ethanol.

In the summer of 2013 it was reported that due to the violation of eco norms, the activities of the Kashirskaya tobacco factory may be suspended. A narcologist from the Center for Prevention of Tobacco and Non-Chemical Dependence, Valery Lykov, estimated the tobacco production as one of the dirtiest. And in general, the activities of the JTI international corporation in Russia have been associated with large scandals.

For example, the company's JTI Yelets factory in the Lipetsk region produced the so-called reconstituted tobacco using harmful ingredients, such as chlorine and nitrate. Because of this, the factory was subjected to the prosecutor's check. However, it invested more than 300 million rubles in the creation of environmentally friendly cogeneration plant, generating electricity and heat from natural gas. As reported, the new thermal power plant would help to improve the environment in Yelets, and in addition, will reduce the burden on the city's power grid. This news, of course, is positive. However, the thermal power plant is unlikely to compensate for the harm to health of Russians from the reconstituted tobacco.

The potential for reduced risk

However, not all tobacco companies have bad time in Russia. Those who bet on new technologies are more resistant to the turbulence on the market. For example, Philip Morris announced that it could stop the sale of cigarettes altogether: the so-called alternative products might replace them. This was announced by CEO Andre Kalantsopulos. The top manager also pointed out that Philip Morris is aware of the harm that tobacco causes to human health and the task is to find and implement less harmful products. Statistics show that the number of users of electronic cigarettes is growing: 0.8% of the population consumed nicotine vapor in the year before, 1.1% in the last year, and 1.4% now. 

Last spring the company announced the launch of a revolutionary product iQOS. The new device makes it possible to heat the tobacco within a controlled regime. This is the so-called potential health reduction risks (RRP - Reduced Risk Products). It is known that when smoking a conventional cigarette, tobacco temperature may reach 900 degrees Celsius. This leads to chemical reactions resulting in emission of harmful or potentially harmful substances in the smoke. iQOS does not burn tobacco, heating it to about 240-270 degrees Celsius. As a result, instead of the smoke, aerosol is released, and its chemical composition is significantly different from a conventional cigarette smoke.

The impact of a new product on humans is not yet quite clear, but the company claims that it does less damage than a normal cigarette. Especially for iQOS, HeatSticks (tobacco sticks) were developed under the Parlament brand. As the HEAT-NOT-BURN technology eliminates the combustion process, there's significantly less odor and ash and no smoke at all when using iQOS. Today, the company is confident that iQOS is a real alternative to traditional cigarettes for adult consumers of tobacco products; it is sold in more than ten countries, including Russia, Japan, Switzerland and Italy.

Looking for alternatives

It is not superfluous to recall that the smoke itself is harmful. Tobacco companies such as Philip Morris stress that new developments, like iQoS, can not be considered completely safe products. The best way to eliminate the risk to health is to completely abandon the use of tobacco products. At the same time, the development and research of alternatives to traditional cigarettes to create a product with a reduced risk potential is, in fact, another opportunity for businesses to feel confident at the time of economic instability. It turns out, that Philip Morris's approach differs positively from its competitors, who instead of evolving and looking for a new niche prefer to cut production and lay off the staff.

Reference

There are 80 tobacco companies currently operating in Russia. The largest are  Philip Morris Morris International"(Moscow), BAT Russia (Moscow), OOO Petro (St. Petersburg) (the only remaining production site of Japan Tobacco International (JTI) in Russia), OOO Reemtsma-Volga Tobacco Factory (Volgograd). FMSM / Philip Morris International in the past year, according to Forbes, ranked sixth among the 50 largest foreign companies in Russia, much ahead of MUMT / British American Tobacco (15th place).