An evolving tradition: Traditional tobacco products continue to lead the segment

With its internationally famous clove cigarettes, known as kretek, and an expanding domestic market, Indonesia is a centre for many global tobacco companies. The industry provides employment and income for tens of thousands of people, from growers to hand-rollers and retailers. With an estimated 60% of adult males smoking and a population of 240m overall, Indonesia is also the third-largest market for tobacco products in the world, making tobacco a major part of the nation’s economy. Around 10% of the country’s revenues come from the growing and selling of tobacco products. In recent times, though, the sector has been facing growing challenges. More regulation is on the way, as are campaigns to spread awareness of health risks. Changes in taxes and tariffs are contentious, with the lack of an overall, consistent tobacco law a complaint for many in the sector. Nonetheless, most remain bullish that the market will continue to grow in coming years.

A DIVERSE MARKET: With three main types of cigarettes available (hand-rolled kretek, machine-made kretek and whites) Indonesia has one of the most varied markets in the world. The kretek cigarette is something of a national symbol too, traditionally hand rolled from a mixture of black tobacco and cloves. Indeed, at Philip Morris-owned manufacturer Sampoerna’s plants in Central and East Java, some 30,000 people are still employed to hand roll cigarettes. In terms of the market overall, around 92% of all sales are kretek, with whites holding a roughly 8% market share over the past five years. Hand-rolled kretek accounts for around 30% of sales and machine-made kretek the other 62%. The market is dominated by three companies: Hanjaya Mandala Sampoerna (HMS), Gudang Garam and Djarum. Two other important players are BAT/Bentoel and Nojorono. Market share has remained fairly constant over the past few years, with figures from Nielsen Retail Audit results showing HMS with 29.1% in 2010, Garam with 21.8%, Djarum with 19.7%, BAT/Bentoel with 8.4% and Nojorono with 6%. The remaining 15% is mostly a variety of small manufacturers, largely local outfits lacking national distribution. From 2006 to 2010, the compound annual growth in volume was 3.3%, from 229bn sticks to 270bn. Of the 2010 figure, 21bn were white, 167bn machine-made kretek and 82bn hand-rolled kretek. At a time when many markets are shrinking, Indonesia is thus a major source of industry growth.

FUTURE ROADMAP: The Indonesian market remains somewhat undeveloped in legislative framework terms. Cigarette advertising is still allowed, with packets displaying minimal health warnings. In 2007 the government launched a Tobacco Industry Roadmap, which set out three periods for industry development. In the first, from 2007 to 2010, the order of priority was protection of employment, revenue and health. For the 2010-15 period, health moved to number two and revenue to number one, with employment bringing up the rear. From 2015 to 2020 health takes the top spot, followed by employment and revenue. The tax structure has traditionally been at a fixed rate per piece and designed to help small manufacturers by adjusting the rate according to volume produced. The manufacturer, not the retailer, pays sales tax. The tax structure is due to be simplified in 2012, removing the production volume determinant and setting three across-the-board rates for the three cigarette types. Rates will also go up, with more damaging varieties penalised. This is not expected to have much impact on demand, however.

The government has set a limit on total production between 2012 and 2014 of 265bn cigarettes per year, although previous targets such as this have proved hard to meet, as the market keeps expanding. Parliament has been debating new tobacco laws, while a separate piece of legislation from the Ministry of Health was initiated in 2011, although the issue was still being debated in November 2011. These bills offer increased regulation, which is broadly welcomed, although players also advocate a comprehensive and simplified approach via a single new law, created by all stakeholders. In the meantime, the market looks set to continue growing, with kretek maintaining its overall dominance.