Danish-Ukrainian management plans production increase at Romanian Philip Morris factory despite lower local consumption

Philip Morris International, the largest cigarette maker in the world, aims to increase the production at its factory in Romania by 22% this year, to almost 28 billion cigarettes, according to Ukrainian Irina Ashukina, Philip Morris Romania operational manager. This is the equivalent of 1.4 billion cigarette packs, as one pack usually has 20 cigarettes. The market value of these cigarettes is over EUR 4.2 billion, considering an average sale price of EUR 3 per pack, in Romania. In other European countries, prices are even higher. However, the factory’s revenues are much lower, as taxes stand for much of the price. The highest part of Philip Morris’ cigarette production in Romania goes to export, as the local market, which is currently about 23 billion cigarettes per year, has been declining at a steady pace over the past years. The company, whose flagship brand is Marlboro, currently holds a 20% market share in Romania, according to Dane Steen Hjortholm, managing director of Philip Morris Romania. Philip Morris Romania exports to 16 countries. Italy is its biggest export market, not only its international brands, but for Italian brands as well. Philip Morris has started to produce cigarettes in Romania in 1998. The group has invested over USD 112 million in the factory located in Otopeni, in northern Bucharest, which currently works 24/7. The factory processes tobacco leaves, produces cigarettes and packs them. It makes some 76.7 million cigarettes a day, on average, based on its annual production. This means the factory produces some 3.8 million cigarette packs every day. The factory has increased its production by 30%, to almost 23 billion cigarettes last year, from 17.65 billion cigarettes in 2013. It employed some 100 people last year, reaching 600 employees, 80% of whom are working on the production lines. For this year, Philip Morris plans to add another 40 people, the group’s officials said. Adding the local distribution business, which is on a different company called Philip Morris Trading, the group has almost 1,000 employees in Romania. Philip Morris Romania, the company that operates the factory, had EUR 33 million in sales and a EUR 4 million net profit in 2013. Philip Morris Trading, which includes the marketing and distribution activities in Romania, had a turnover of EUR 456 million and EUR 1.87 million losses, according to official data from the Finance Ministry. Philip Morris representatives didn’t release any financial figures for 2014, as the parent-group is listed on the New York Stock Exchange and has to comply with some strict reporting rules. The group’s business in Romania has been facing some serious problems in the past years. On the one hand, the state’s decision to increase the excise duty rate for cigarettes in 2010 led to a 25% drop in the cigarette market. Since 2011, the market has been declining at an average pace of 2.7% per year. On the other hand, the illicit trade represents a big problem for all cigarette makers. As of January 2015, the black market for cigarettes was about 19% of the whole cigarette consumption in Romania. “Illicit trade is one of the biggest problems for us, as well as for the state. A one percentage point increase in illicit trade translates into EUR 30-35 million in lost revenues for the state budget,” said Steen Hjortholm, who took over as CEO of Phillip Morris Romania in January 2015. The cigarette industry is highly controversial because of the proven negative effects smoking has on human health. However, this industry brings a lot of money to the state budget. In 2014, tobacco companies have contributed EUR 2.7 billion to the budget, as excises stand for 80% of the cigarette price.