Could you briefly outline the history of Tabak, its main products and its relationship with Philip Morris?
Tabak was formerly a state-owned company, and the privatization took place in 1992. Thirteen companies participated in the tender, and Philip Morris won not only because of its cash offer for the company, but also because of other commitments such as follow-up investments, modernization, training, and development. So it was a combination of more than one factor which led Philip Morris to be selected.
And what has changed since 1992?
Almost everything has changed. In those days the company did not have a Prague office; it was based in the factory in Kutna Hora, which is about 60 kilometers from Prague. It is still one of our factories, and in fact is the jewel in the crown of the company. It is where the majority of our investments were made.
The first thing we did was to set up a Prague office, which was created in this building but on a much smaller scale. I think we started only on three floors, and now we occupy the whole building. We wanted to set up the kind of departments that are usual for Philip Morris, but which had not existed under state ownership. For example, a marketing department, a corporate affairs or public relations department, a human resources department and a sales department had to be set up from scratch.
At the factory level, in Kutna Hora we built a new factory on the old site. Kutna Hora is particularly attractive because it is the site of an 11th Century Cistercian monastery. One of the conditions of the acquisition was the restoration of the monastery, which we have now done.
In the other factories, we modernised the existing buildings and improved their external appearance. Inside, the buildings were characterized by numerous pillars, which was not ideal since they waste space, but nevertheless we were able to modernize the equipment and now we really have effective operations everywhere.
To put things in perspective, the machines which were producing cigarettes in 1992 were Skodas, running at the rate of 2000 cigarettes per minute. It was good equipment, but too slow and noisy. In Kutna Hora, machines are now running at 8000 per minute, and in the Hodonin factory at 5000 per minute.
This year Tabak was listed in the Top 5 for its net profit, and in the Top 20 overall. What is the secret of your success?
One of the results of the acquisition was obtaining an 80% market share. The challenge is to hold on to that market share, and thankfully, by staying very well informed of market trends and using our competitive advantage, we have actually held on to that 80% share. According to Nielsen we actually gained a share point in 1999. You know, if you have a 25% market share and go up to 26%, it's not as exciting as growing from 80% to 81%.
One of the things that helped us hold on to our market share was the creation of a direct distribution system. We now have sixteen depots across the country, and a fleet of vans operating in each of those depots. It's a very large and costly operation, but we felt that it was a worthwhile cost to incur provided we could hold on to that 80% market share. I believe that it has paid off, and we now have a market coverage which our competitors cannot easily achieve, because of the cost of such distribution.
The state tobacco industry has been privatized into two parts; the part which is now the Czech Republic, and the part which is now Slovakia. The German company Reemtsma bought the part in Slovakia, so they are the second biggest company and our biggest competitor, followed by BAT and RJ Reynolds.
In Slovakia we started with a market share of about 25%, and we have gone up to almost 55% in eight years, which is very encouraging.
Is the production of Tabak only focused on the Czech market, or are you looking to sell to other markets?
We used to export in the past, producing cigarettes for Philip Morris which were destined for the former Soviet Union. Most of these exports have now dried up as Philip Morris steadily increased its local production capacity in the former Soviet Union, enabling it to be more competitive. Import tariffs on finished products are much higher than on raw materials, so it is much cheaper to compete by importing raw materials and producing locally.
We were a useful export facility at the time that Philip Morris did not have a sufficient local capacity in the Soviet Union. But the decline in the economic situation in the former Soviet Union led consumers to look for less expensive cigarettes, and to offer a less expensive cigarette, you must produce locally.
Is there an advantage to producing cigarettes in the Czech Republic ? Are the standards up to EU levels ?
The Czech Republic is always working towards EU approximation. In our industry they have made advances as far as waste laws, labeling and product regulations, but they have ground to make up in terms of tax harmonization. If you look outside our industry, there are still many hurdles to cross in terms of legislation.
| How has the recent recession affected your products ?
I would say that we were not badly affected. What makes it difficult to answer your question is that every time there is a tax or price increase, the trade stocks up heavily before the increase to obtain a windfall profit. This creates huge surges, making a graph of sales to the trade look like a roller-coaster. When you smooth this out to approximate sales to consumption, I think the bottom line would be to say that there has been a very slight decline in consumption.
The second reason is that in our industry some sales go to tourists and border shoppers. German and Austrians living near the Czech Republic often cross the border to take advantage of cheaper fuel and cheaper cigarettes. There is also the effect of seasonality; right now we are having a very mild winter, but in January when it is minus fifteen and the roads are blocked by snow, you will not find the Austrians or Germans crossing the border. So this also has an effect on consumption.
Do you find that the prestige of the Marlboro image has changed the smoking habits of Czechs ?
In the immediate post-revolution period, there were huge sales of so-called western icon brands, like Marlboro, Coca Cola, Nike, and Levis. Such rapid growth could not continue for ever, partly because only a certain part of the population can regularly afford Marlboro, but also because Czech consumers seem to have an extraordinarily high degree of loyalty to Czech products, provided that they are good quality at a fair price. If you can offer that combination, the loyalty to Czech trademarks is unbelievably high.
How has your experience been as a foreigner working in the Czech Republic ?
I came here in 1994, whereas the privatization and acquisition took place in 1992. So the people who were here before me really had the hard work to turn the company around almost 180 degrees. By the time I arrived in 1994, much of the work had already been done, and a very solid base had already been built in terms of corporate culture, what Philip Morris stands for, and the work ethic of its employees.
Today I think we are one of the best companies in the Czech Republic. All of us in the management team have great people supporting us, and it is really a superb company.
What is your final message to our readers ?
My experience in the Czech republic has been very positive. The acquisition of Tabak has been a great investment. We have worked hard at it, and Philip Morris has received a very good rate of return. We started off with 22 expatriate employees out of a total workforce in those days of about 2,200. Now we are down to 8 expatriates, and within the top management group we already have three Czechs. We have such a strong group of Czech and Slovak employees that it won't be long before all of our positions, including mine, will go to our Czech and Slovak personnel. We have a terrific work force which is second to none, an excellent work ethic and we spend a lot in training.
The second thing is that we have made every effort to be a good corporate citizen, by supporting the community in various different ways. We have been involved in projects like the Our Child Foundation, of which we are a major sponsor. We also run some very successful environmental programs called Green City projects, in which we work with local authorities to clean up the cities by offering vacation employment to university students. It is a way to help the communities. We started this in Kutna Hora, and over time the municipality has taken it up as their own project. Now we are also supporting Green City projects in other cities as well (in Prague 7 this year).
We also take the position that minors and juveniles should not smoke. In this respect, there are two programs where we are involved. We have developed a program which addresses the issues which juveniles typically face between the ages of 10 and 14. This is not only geared to smoking, but also to peer pressure, behaviour towards each other and other juvenile issues. The project was introduced on a pilot basis in a number of schools where it was done on an extra-curricular basis . We had very positive feedback, and it was an excellent way to address certain issues in a non-confrontational manner. Thanks to the co-operation of various educational authorities, the programme was integrated into the extra curricular activities of numerous schools this year.
The second project for youth which we are involved in is to work with retailers to restrict the access of cigarettes to minors. The law change which occurred last year raised the minimum age to buy cigarettes from 16 to 18. Now that it has been implemented, we are producing materials and training manuals which give retailers information on the law and why it is important not to sell to minors.
Another program is to accommodate both smokers and non-smokers in public places, particularly in restaurants. We recognise that non-smokers may appreciate eating in a smoke-free environment. It has been difficult to persuade restaurants to provide non-smoking sections, because they believe that there are more important issues to deal with. Nevertheless, we are providing materials to help them create an environment which satisfies both smokers and non-smokers. |
