Financial Times

Glimpse into the Future
Ceylon Tobacco:Growing in a controversial market
What is CTC's overall aim with regard to Sri Lanka in the long-term?
We are a tobacco-manufacturing organisation. We manufacture and sell cigarettes to adult consumers who wish to make an informed choice. In Sri Lanka the total tobacco market is about 10 billion sticks. CTC controls 47 percent of this market.

There is also the beedi market, smuggled and counterfeit market and the illicitly manufactured cigarettes. CTC believes that this is a sustainable industry in the future. We have to generate profits for our shareholders within the parameters of the concerns raised by the stakeholders. So we have to look at it from that point of view. CTC totals 10 percent of national tax revenue. Last year we contributed Rs. 25 billion in customs duties, excise, and corporate taxes. Altogether CTC adds a substantial amount to the government coffers.

CTC is achieving growth in terms of turnover and profits in Sri Lanka. How does this compare with other British American Tobacco (BAT) subsidiaries around the world and how significant is CTC's returns with that of its counterparts in the region?

It depends on each market. In the Asia-Pacific region to which we belong, the markets have turned in profits. You have to be competitive on quality and price and deliver what the customer demands. Our customer is an adult customer and we have to focus on what he wants. Whatever we export we have to be competitive on cost and quality. One of the major tasks of BAT is to drive productivity. Our BAT strategy is to establish the leadership position in the tobacco market.

The three pillars that we work on in order to do this is concentrate on both acquisitive and organic growth, productivity and responsibility because we are marketing a controversial product. We have over the years been extremely productive and have been able to meet shareholder expectations through very good management practices in the reduction of cost, increasing of productivity within the factory and through our suppliers as well. Eight years ago our leaf producers produced 600 kg of leaf per hectare and now they produce 1200 kg per hectare. We have done two things to achieve this. We have increased the farmer's wealth through productivity improvements rather than increase the product price.

Being a quasi monopoly, does it give you a competitive advantage or is it better if you had competition?
We consider ourselves to have competition. We benchmark ourselves against the region and the BAT world in general. CTC believes that if the company doesn't have competition you will never improve your quality and professionally manage your business. Sri Lanka is considered as a centre for management excellence in the BAT, because we focus on these areas.

How has moving out of advertising affected your bottom line?
We are a mature market. By advertising we are only creating brand awareness among smokers. This is a line that the anti-tobacco lobby will never accept. Our sales were about 60 percent of the total tobacco market in 1986. Today it has fallen to 47 percent. This is because of education and people are responsive to the risks associated with smoking. The Chairman of BAT in his exit interview last month had stated that if the market has become smaller, we have to live with it. We are growing in a contracting market.

CTC apparently faces stiff competition from illegal brands such as Gold Seal and counterfeits. Are these locally made or imported?

As far as we are aware they are imported.

The Sri Lankan government appears to be the biggest beneficiary in terms of tax revenue from CTC. Does the government provide the relevant support in combating the menace of illicit cigarettes?
Very much, because they know that their revenue streams are also being affected. The government authorities have gone all out to support us and we very much appreciate their support.

What is the tax composition in the price of a cigarette?
Approximately 80 percent. The average tax composition in other nations is around 55 percent. Raising the price will develop the black market. There is a fine line between social cost and black market.

Do illicit cigarettes and counterfeits pose higher health risks to smokers?
That I am not prepared to say because we have not analysed it. We don't know what the quality of the products are.

The habit of smoking appears to be declining in particular among the urban Sri Lankan population. Does this affect CTC's business?
Yes, it does. Unless you have taken management decisions such as increasing productivity and cutting down cost, it does affect the business.

What is BAT's overall strategy towards the global decline in smoking?
Globally smoking is more or less stagnant, and BAT will continue to look towards increasing their share within the market.

The tobacco industry is globally faced with an aggressive anti-tobacco lobby. How is CTC combating this?
We educate our retailer universe as to why they should not sell cigarettes to youngsters. We also carry messages at retail points. We are not the enforcers of the law. The law prohibits anyone under the age of 16 purchasing a cigarette. However we have instructed our retailers to sell cigarettes to adults over 18. There is no law that prevents us from advertising, though there is a perception. We have on a voluntary basis withdrawn from advertising because there was a perception among the public that advertising attracts smoking. However it is not necessarily that a consumer buys a shirt each time it is advertised.

Nevertheless we have to respect public perception. Then we came out with a voluntary code for our marketing activities in 2000. Now there is not a single board talking about John Player Gold Leaf and we don't do any product sponsorship. We do corporate sponsorships only, such as backing an artist's exhibiting or supporting a book publication.

It is a collective decision that we have taken to follow a voluntary code of marketing. We constantly have discussions with stakeholders. We enhanced our code in 2002. In Sri Lanka we reached a peak in the late nineties. Despite being strict about our marketing activities, we still get complaints. Our marketing department is very committed to enforcing the voluntary code that has been agreed to.

There are ethical dilemmas with regard to smoking such as smoking among young individuals, smoking related diseases and individuals spending excessive funds on smoking while neglecting other priorities. How can CTC as a tobacco company address these?
We are totally against under aged smoking. We have always maintained that position.

With regard to health issues we agree. That is why we always encourage people to be aware of the product, be conscious of the health risks associated with it. Smoking should be an informed adult choice. People make lifestyle choices. Our product is controversial and we make no bones about it.

Is it possible to develop new types of cigarettes, which actually do not have any medical implications while providing the relevant satisfaction to the smoker?
We are working on it. CTC is not part of the research umbrella but our parent company is working on it. We have not done local research on this.

CTC is involved in many projects of social responsibility and community development in Sri Lanka. How does this help towards the business strategy of the company?
I don't perceive it as a business strategy. The modern shareholder does not only think about the return, but also wants to know how the business is conducted. You have to be open and transparent. They ask how the company contributes to the community within which they operate. Profit is not the only motive of the shareholder anymore.

We have introduced a technique called Sloping Agricultural Land Technology (SALT) by which soil erosion is prevented in the hilly areas and add nitrogen back to the soil.

What are the major challenges faced by CTC in Sri Lanka in the course of its day-to-day operations?
Counterfeits and illicit cigarettes are the biggest challenges.

You have been in the company for the past 31 years. What was the most challenging moment you encountered in your career with CTC?
The greatest one is that we have seen a tremendous transformation in the culture of the company. Up to 1990 we were voted as the worst employer - employee relations management company, but today we are the best. We are very open and transparent with the workers. There is no compartmentalised thinking.

The peace process and the cessation of hostilities - has it contributed towards the bottom line of the company and how?
Markets have opened up. Quietly but slowly the markets are moving up. We were always there in the north and the east, but the point of penetration or the product availability was at times an issue. Peace has certainly contributed in a big way.

CTC has a work force of around 390. How is your labour turnover and what mechanisms do you have in place to retain and develop your workforce?
Retaining is easy because the wages are high. We have a good training structure in place, which helps retain our people. When there is an eight to nine percent growth rate in the labour market, then the labour turnover is going to be low. Also our career development process is very good.

CTC has a separate subsidiary by the name of Advent the role of which is providing IT consultancy. How does Advent add value to CTC, BAT and are there plans to provide services to others outside the BAT umbrella?
We have a very good IT base and have agreed to provide support to other BAT companies.

Do you see potential for the Sri Lankan economy and how do you think that Sri Lanka can make it into the league of developed nations?
We have enormous potential. However we have to recognise and effectively market Sri Lanka as a product, overseas. Then you need to identify the platforms on which the economy can be developed. Infrastructure is a must. Telecommunication and transport have to follow. We have a highly educated population, but our educational thrust has to change, to meet the identified demands of the economy.

English education is a must to be competitive and to communicate with the rest of the world. This is a way of getting into the league of the Tiger nations. Also we need to change our mindset.

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