Cigarette Industry in Switzerland
This essay provides a detailed account of the current cigarette market in Switzerland. The paper describes the industry’s product market and its geographic market. In an attempt to shade some light in this industry, it explores the various dimensions of this tobacco industry. It goes from the general outlook of the industry as a whole to describing how particular player in the venture fairs both nationally and internationally. Based on the broader market situation for the industry in the country, this paper outlines the aspects of product demand, and its elasticity, competition, as well as projections of the past year performance of the industry. Finally, the discussion shifts from the broad cigarette industry description to analyzing how a particular cigarette firm is doing in Switzerland.
The paper, in order to achieve objectivity and details, provides a comprehensive account of the cigarette market in Switzerland. Switzerland makes the top players in the industry and has always been on top in this venture. However, in order to be objective and exploit what needs to be known about the industry, the study is limited to Switzerland and one of its major industry players.
The geographic market
Switzerland over the years has remained one of the leading smoking havens in the world. Smoking is legal, though series of smoking bans have infiltrated into the industry, thus significantly reducing the rate of consumption and interfering with the entire consumer behavior regarding the product (Pampel, 2009). Statistics show that a vast majority of Swiss people, especially the urban dwellers are active smokers (Colombo, Zurn, and Oxley 2006). This provides a perfect environment in which cigarette smoking in the country has thrived in for decades and continues to blossom. In Switzerland, tobacco accounts for a significant percentage of its contribution to its economy. Going by the recent statistics, the active smoking in Switzerland provides a perfect market for the product to exist and sell very well.
The product market
In this section, we discuss we discuss in detail what is offered in this industry, to whom, how, the pricing and product promotion. Cigarette is the product. A vast majority of people in Switzerland consumes it. It is classified into the stimulant group of drugs and is available for use in pipes, snuffs, or chewing. Its target consumers are the large number of smokers in Switzerland Pampel, C. (2009). Because of the addictive nature of the commodity, tobacco enjoys an almost indispensible existence in Swiss market accounting for a large percentage of smoking stuff (Colombo, Zurn, and Oxley 2006). Mostly adults consume Cigarette, and the market is not really segmented as smokers occupy almost the same level, save for the difference in financial ability of the smokers.
Cigarette is distributed regionally, nationally and internationally, but since our scope of study is limited to cigarette in Switzerland, it will be worthwhile looking into how the product reaches the local consumers. Cigarette is distributed in packs contained in dozen to be sold in different quantities according to the consumer’s preference and their economic ability (Weerapana, 2009). The pricing mechanism of the product is widely dependent on the level in the chain of supply. A packet of twenty cigarettes, for instance, goes for a retail price of 2.9 Euros (Colombo, Zurn, and Oxley 2006). However, the price reduces toward the producer along the supply chain. Consumers are reached through a variety of media and other programs. However, in the recent past media tools of promoting the product have been on the decline due to the airing of explicit adverts on TV’s.
Price elasticity of demand
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Considering the addictive nature of the commodity, it would be fair enough to argue that the price elasticity demand curve is inelastic. This is to say that even for a major change in price of the commodity, it may not produce any magnitude of change in the level of demand for the product (Besanko, Braeutigam, Braeutigam. 2010). Therefore, even times of harsh economy, which may be characterized by hiking of prices, people still demand almost the same quantity of cigarettes as before. Recently, a number of changes in the world’s economy have lead to a substantial rise in the price of cigarettes, but it seems the consumers are oblivious of the change and still adjust their other income expenses in order to keep up with their usual smoking habits.
The law of price elasticity supply as Besanko, Braeutigam, Braeutigam (2010) postulate, would suggest that for a rise in the price of the commodity, one would expect a corresponding decrease in the level of demand for the cigarettes. In view of the extensive use of the commodity, this principle holds low when it comes to this cigarette industry. For example, recently, the industry registered a massive decline in supply of tobacco. In an attempt to counter the shortage and keep sanity in the industry, price of cigarette was raised. Unsurprisingly, this did nothing to quench the thirst of the smokers spread across the nation. This is because; a survey that followed the price rise showed demand for cigarette remained almost unchanged. Cigarette, per se is not a necessity. It is a luxury. However, even though the law of price and demand would predict a corresponding change in demand in the event of a change in price, especially for luxury goods, this is not true for cigarette (Besanko, Braeutigam, and Braeutigam. 2010).
Positive cross price elasticity
In this cigarette industry, there are a number of firms producing the commodity. This means that a number of strategies exist in the quest to amass a larger proportion of the market by the key industry players. The firms engage in a series of strategies in order minimize the cost of production so that they keep their selling prices low and consequently draw consumers to themselves. Cross price elasticity, demand postulates that a change in price of one product produces a change in the demand of another product of a similar product (Lipsey and Harbury, (1992). In this industry, the existence of more than one producer of cigarettes provides a number of substitutes for cigarette smokers (Besanko, Braeutigam, and Braeutigam. 2010). Therefore, a positive cross price elasticity of demand will be realized in the event that the other major competitor cigarette producer increases its prices.
A representation of the above relationship in a graph shows that in the event that firm X, that produces a substitute cigarette increases its price, a demand- price curve in firm Y will inevitably realize an outward shift in its demand curve (Miller,1982). The opposite is true for a decrease in the pricing of cigarettes in firm X. This relationship is largely observable in the cigarette industry in Switzerland. Firms try to outdo each other based on prices and thus resulting in changes in consumer behavior toward cigarettes produced by other firms.
Negative cross price elasticity
This principle postulates that an increase in price of a complementary product will cause a decrease in demand for another product (Lipsey and Harbury, (1992). Although this is not largely applicable to the cigarette industry in Switzerland, a close look at the relationship between the major players in the industry, it is evident that such an instance exists. Smoking is habit-forming, and one would want to get a stick or two. Therefore, in the event that another firm producing cigarette and another producing it pipes experience a change in price, it is because the other first altered its price consequently affecting the other (Miller, 1982). In Switzerland, however, most tobacco firms are concentrated in cigarette production; thus, a change in the price of other tobacco products may not have such a big impact on the demand for cigarettes. Conversely, changes in the prices of cigarettes in the recent have registered a significant change in the demand of its complementary goods.
Income elasticity of demand
In this industry, it would be fare to classify our product as a normal good. This is because in the event that the income of a smoker suddenly or gradually. However, this only applies in the condition that the price of cigarettes does not change. This industry exhibits a unique feature in terms of consumer behavior compared to other consumer goods. This is to say that smokers conform to changes in their income with regard to cigarette, as they would do with other consumer goods. However, largely, this relationship is mostly applicable to consumers with unsteady income, such as casual laborers.
Perfectly competitive industry
A close study of the cigarette market in Switzerland reveals that there is more than one firm venturing into the industry. It is not only the existence of more than one firm that leads us to come to the conclusion that the industry forms a perfect competitive environment, but the absence of restriction of entry of new firms. The existing firms are free to venture into virtually every part of the country to promote their brands depicts the freedom that exists in the market. However, this freedom is restricted to consumers because most firms have designated areas where they source raw materials where other competitors may not have access. The industry is free to enter and exit for all its firms. An analysis of the trend in competition shows that completion is the only way used by firms to outdo others and not through restrictive measures aimed at dominating a particular market. Judging from their market share and publicity, there are four most vibrant tobacco firms in Switzerland: Japan Tobacco International, Imperial Tobacco, Philip Morris International, and BAT British American Tobacco.
Although these firms have been in the market for quite some time, they do not engage in restrictive competition, and the government, aware of the economic benefit brought about by the cigarette industry, prohibits such restriction, and grants freedom of entry and exit in the multi-billion dollar sector.
Performance of the industry
Just like any other economically dependent venture, the cigarette industry in Switzerland has had in share of difficulties as the world’s economy continually takes different states. At a time when economic recession caused fierce global outcry, this industry was not left behind (Weerapana, 2009). Numerous adjustments were made both on the part of the consumer and as well as the producer’s. The industry faces a myriad of difficulties, from harsh legislative laws and bans to skyrocketing taxation. Although all these are aimed at protecting the health of the active and the passive smokers, as well as the partial smokers, it is economically unfair to impose such measures, as have been witnessed (Boyle and Gray 2010). This trend has the producers worrying about their future in the market at the same time, consumers, since the taxation burden is being passed to them, opt for cheaper cigarettes. Evidently, this trend causes a shift toward Roll Your Own Cigarette (RYO).
Given the low cost associated with RYO, together with the speculation that it is less harmful, low-income earners, especially men have shown a significant drift to this habit. Secondly, on the justification that fine-cut tobacco is taxed less compared to the regular cigarette, in the past two years, there has been a substantial shift to RYO. Over a period of four years, most firms have realized a decreases in the expenses directed toward advertisements. This is because of the introduction of legislations that bar firms from advertising on TV’s and sport-related programs. This, on the other hand, has reduced significantly the level of income.
A recent study has shown that tobacco exports have significantly increased due to the nationwide crusade that people should quit smoking. This has opened up a window of opportunity for this product to make a bigger impact in the global market. This trend has lead to an increase in the quantity of tobacco exports by doubling what it was four years ago. Consequently, the figure representing cigarettes made and sold within Switzerland is on the decline. Therefore, it is only the globally recognized firms that will fit well in the new era of cigarette marketing beyond the borders. Furthermore, Boyle and Gray (2010), argue that the industry is likely to experience more and more difficulties as the health sector continues to push for a more smoke-free environment.
British American Tobacco
The British American Tobacco (BAT) is the world’s second largest tobacco firm. It is ranked second after Philip Morris International based on its market share percentage. With more than 150 branches in different countries, BAT commands a very significant percentage of the cigarette industry in Switzerland (Bonin and de Goey, 2009). In Switzerland, BAT commands a market share of 44%. This by all standards forms the rationale for our choice of firm in this research paper.
Looking at the firms performance over the last decade, it is evident that it has continually risen, from possessing a market share of 40% in 2001 to outstanding 44% by the end of 2010, it is clear that despite the economic turmoil encountered in over the decade, BAT continues to rise above the odds. Currently, BAT is gaining from what it refers to as Global Drive Brands (GDB). BAT has reaped a lot from these internationally recognized brands, realizing a growth of 7% in 2010. This success is earned from the innovative production, branding and marketing strategies employed by BAT. It uses cutting-edge technology throughout its production line to ensure that it gives its consumers something better than what is provided by competitive firms. Currently everything is working out for BAT in Switzerland.
To say it is doing well or not so well is not enough. The justification of this argument lay in the idea that, currently, the BAT is increasing its market share. This is true in almost all the countries that host the firm, therefore, the same strategies employed by BAT in other countries are earning it really well in Switzerland (Bonin and de Goey, 2009). Though health practitioners defer with BAT’s claim that some of its brands are designed to be less harmful to the users, it would just be fair enough to argue that BAT is performing better by day and will continue flying high. However, BAT has not been spared by that fact that counterfeit products are on the rise and illegal tobacco business is on the rise in Switzerland (Boyle and Gray 2010).
Price elasticity analysis of BAT
Looking at prevalence and publicity of BAT’S products, it gives us the opportunity to study how consumers respond to the changing economic environments. From the cigarette market analysis, we have made, it is possible that just as any firm under the same industry would do BAT would tend to depict a similar trend. However, according to Bonin and de Goey (2009), this may not be the case when it comes to individual firms, so this part of the paper provides an analysis of the actual situation when things are narrowed down from industry level to particular firms.
Consumers of any product in any industry identify themselves with a particular product because of their unique tastes and preferences. The products could be priced and made available by two or more different firms, but there are other underlying factors that draw consumers to particular products and not others. However, price remains the biggest determinant when it comes to consumers’ decision over what brand with which to satisfy their needs. Therefore, in the cigarette empire with different and production marketing, strategies pricing dictates a lot about demands of such products.
BAT products are clearly distinguishable from its various competitor products. Therefore, consumers who are die hard users of its products claim that it has unique satisfactory feeling that they cannot do without. This, they admit that despite the changes in the pricing of BAT’s cigarettes, they cannot seem to have enough of it. This explains why despite an increase in price tags they still would smoke. This is mainly because of the nature of the product: Addictive. This means that the consumer behavior, with regard to BAT’s products, defy the law of price demand elasticity (Bonin and de Goey, 2009).
A close look at how the product’s consumption prevails in the market, in the presence of other similar products, it is clear that BAT is far from indispensable. Philip Morris, its major competitor, more often than not influences consumers’ behavior toward BAT’s products (Lipsey and Harbury, (1992). The reverse is also possible. Every time any of the two adjusts its price tags, it alters consumers’ behavior toward cigarettes sold by the other. RYO for instance, recently lowered their prices. This caused a significant drop in the demand of BAT cigarettes. On the other hand, a fall in the pricing of another firm may not cause an increase in demand as the law of negative cross price elasticity of demand suggests (Bonin and de Goey, 2009). Apparently, this consumer theory is not applicable to BAT in relation to changes in the pricing of cigarettes by the other firms.
Finally, we look at how consumer behavior changes with regard to changes in their income. A brief calculation of income elasticity of demand shows that it remains at zero (0). This means that regardless of either an increase in the consumers’ income demand for BAT cigarettes does not change at all (Lipsey and Harbury, (1992). Since BAT is not the only player in this industry, it is subject to competition from the other firms who would employ any strategy available to stay abreast with BAT (Stone and Stone 2003). This shows hat BAT has to employ counter strategies in order to get to the top and stay on top of the industry.
Finally, this essay relates BAT’s way of existence in relation with how the industry is postulated to exist in terms of elasticity. From the analysis of the industry and that of BAT as a constituent of this industry, one would expect BAT to exhibit the same in terms of elasticity. This, to some extent, is true. This is because as the industry handles products of a unique characteristics which, every firm in the industry facing the same environment and consumers who share almost the same needs.
From the study of the two scenarios, it suffices to say that the cigarette industry in Switzerland has features that depict what other goods of the same class would. The fact that the elasticity and market type of both the industry and the firm show a similarity means that picking any other cigarette firm in Switzerland one would come across the same relationship all other factors held constant. However, for different reasons a different firm may not show the same performance over the same time in both the past and the future. This is because of managerial dependent factors that differ from firm to firm.