Colombian cigarettes market is driven by two big firms: British American Tabaco Colombia and Phillips Morris International Colombia (Coltabaco). These firms share the local market in 55%-45% respectively. Moreover, the gross profits in colombian cigarettes market reached US$236 million in 2012, and they show economies of scale. However, cigarettes firms are worried because of per-capita consumption of cigarettes has shown an important decline since 2008. There are many researches that point the smuggling as a cause of it, but this note shows that the main causes are the government Law enforced in 2008 and the increase of narcotics consumption in local population. The Law bans the smoking in bars, restaurants and public rooms, and its impact is an annual reduction of cigarettes consumption in about 2.5%. In addition, the cocaine price reduction, and the increase of its consumption push down the cigarettes demand in about 0.41% as the cocaine price decreases in 1.0%. On the other hand, the economies of scale brings a new government issue concerned with substitution between new technology and employees; it means unemployment increases. Cigarettes production has economies of scale that means reduction of employees; in 1992 these firms had 2,997 positions in Colombia, but in 2012 these firms declined job positions to employ just 911 positions. Therefore, government has a challenge to sort out this situation; some answers to solve it come from Switzerland society that wants to give an universal salary to everybody no mater their job status, and it has to be afforded by big firms through increasing taxes.
Author: Humberto Bernal,
Economist,
e-mail: zhumber@gmail.com
Twitter: Humberto_Bernal
The annual cigarettes market equilibrium in Colombia used to be 64 packages of 20 cigarettes per capita in 2003 (people between 15 and 65 years old), but now it is 34. Moreover, the number of big cigarette firms in Colombia showed a decline from 12 in 1992 to 4 in 2012. Nowadays, they are British American Tabaco Colombia, Phillips Morris International Colombia (Coltabaco), Samkas International E.U and Procesadora Nacional Cigarrillera; nonetheless, these firms have increased their gross profits from US$24.7 million at 2012 prices in 1995 to US$236.0 million in 2012; the 99% of these profits come from British American Tabaco and Phillips Morris International Colombia where they share these profits in 55% and 45% respectively. Although the cigarettes business in Colombia is good in terms of profits because of active population is growing, these firms have been interesting on reduction of market in per-capita terms; it means they are taking care of their business in the long run. This issue was worked by many researchers supported by private firms and government bodies, and these results go to point the smuggling as a cause of this reduction, so they claim that registered data does not take the total consumption; moreover, they claim that government is missing taxes revenues because this smuggling. However, through this note is shown that the main causes of this reduction in per-capita terms are the Law 111 of 2006 that was enforced through Resolution 1956 of 2008, and the increase of narcotics consumption such as cocaine in Colombia.
Figure 1. Annual cigarettes packages per capita in Colombia 1992-2012
(annual data, packages of 20 cigarettes)
*Per-capita: People between 15 and 65 years.
Source: Bureau of Statistics Colombia (DANE-EAM) and own calculations.
The cigarettes market in Colombia
The reduction of smoking in Colombia is because of enforced Law in 2008 and increase of cocaine consumption. The cigarettes market in Colombia went from 45 packages of 20 sticks in 1992 to 34 packages in 2012; there were two picks in 2003 and 2008 with 64 packages per capita as figure 1 shows. After 2008, the reduction of this consumption was because of Resolution 1956 of 2008, so this Resolution banned the smoking inside of public rooms such as bars, restaurants, malls, hotel lobbies and so. Moreover, there are many taxes on cigarettes consumption that came with this Resolution also. The impact of this Resolution on cigarettes demand can be calculated in annual reduction of 2.5% of total volume of packages of cigarettes sold per year as table 1 shows; this reduction can be taken as the minimum percentage. There are other causes that pushed down the smoking in Colombia, and they are the consumption of cocaine. The cocaine consumption in Colombia shows an important increase; people who tried cocaine in Colombia were 1.2% of total population in 1996 and more than 2.4% in 2012, so the number of people who “enjoy” cocaine is more than twice that in 1996. The increase of local cocaine consumption is because its local price has shown a decline to reach US$2.5 per gram in 2012, so there is a trade off between cigarettes packages of 20 sticks that has a public price of US$2.0 in 2012 and cocaine gram that shows a price of US$2.5 in 2012. This impact of more cocaine consumption on cigarettes market can be measure as the price of cocaine shows a reduction of 1.0%, the packages of cigarettes demanded decline in about 0.41% as table 1 shows. It is true, smuggling has a negative impact on cigarettes local supply, and it is an annual decline of 0.06% of total local production; therefor it is low compared with Law impact and increase in consumption of cocaine.
Table 1. Cigarettes demand and supply in Colombia
(annual data, under model of type 3SLS)
Variable
|
Demand
|
Supply
|
Price per package (20 cigarettes)
|
-2.14%
|
-0.51%
|
GDP per-capta
|
6.24%
|
|
Cocaine Price Colombia
|
0.41%
|
|
Ban and Taxes
|
-2.5%
|
|
Labour productivity
|
0.75%
|
|
Smuggling
|
-0.06%
|
|
R2
|
0.72
|
0.99
|
Source: Bureau of Statistics Colombia (DANE-EAM). Own calculations Stata 12.1.
Economies of scale in cigarettes production
The cigarettes production shows economies of scale. The cost of package of 20 cigarettes declines as the volume increases; this statement is validated through a negative supply slope as table 1 shows (red number); moreover the number of job positions in cigarettes firms declined from 2,297 in 1992 to 911 positions, and their profits increased in huge (more than 9 times between 1995 and 2012). This type of technology lets cigarette firms reduce job positions. In most of cases, labour production shows diseconomies of scale and employees are sacked and replaced by new technology. Figure 2 shows the decreasing labour productivity for cigarettes firms; it shows as the number of employees increased, so the production per-employee takes a reduction. Therefore the rational decision is to cut the number of employees in order to maximize profits. To solve this unemployment issue can be through an universal salary as Switzerland society wants; it can be financed through higher taxes for big firms that show huge profits.
Figure 2. Packages per worker in Colombia 1992-2012
(annual data, packages of 20 cigarettes)
Y-axis: Average production per employee. X-axis: number of employees in cigarettes firms.
Source: Bureau of Statistics Colombia (DANE-EAM). Own calculations.
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