Indonesian Tobacco Giant Sampoerna Shuts down Two Cigarette Plants
HM Sampoerna, Indonesia's largest tobacco company, decided to close two of its seven hand-rolled cigarette factories as the company needs restructuring due to its declining market share in the country's hand-rolled cigarettes industry. The market share fell from 30.4 percent in 2009 to 23.1 percent in 2013 as consumers are shifting to machine-rolled cigarettes. HM Sampoerna's hand-rolled cigarette plants in Jember and Lumajang (both in East Java) will be closed on 31 May 2014 and will lead to the termination of 4,900 employees.
In the first quarter of 2014, the decline in hand-rolled cigarettes continued. The production of this type of cigarette fell 16.1 percent (from the same period last year). HM Sampoerna's Corporate Secretary Maharani Subandhi said that the company expects this declining trend to continue and therefore decided to choose for restructuring. The employees that are terminated will receive a severance package as well as entrepreneurship training.
Besides consumers' shift to machine-rolled cigarettes, the company's performance is also negatively affected by a variety of domestic regulations such as an excise duty, higher local taxes (10 percent) and Government Regulation No. 109 - 2012 on the Protection of Materials Containing Addictive Substances (which requires all cigarette producers to include health warnings both in writing and pictures on the front and back sides of the cigarette box). Other pressures originated from abroad such as the World Health Organization's Framework Convention on Tobacco Control and other rules, including plain packaging for tobacco products (for example in Australia).
Sampoerna's revenue growth in the first quarter of 2014 slowed considerably. The company posted revenue growth of 5 percent to IDR 18.3 trillion (USD $1.6 billion) from the same period last year. In the previous year this growth had been 13.2 percent (yoy) in the first quarter.
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Meanwhile, the Indonesian Agriculture Ministry said that Indonesian tobacco exports plunged over the past five years by 66 percent mainly because of weak global demand and lower quality tobacco produced by local Indonesian farmers. Tobacco exports fell from 110,000 tons in 2008 to 37,000 tons in 2013. The Ministry said that the declining export trend impacts on domestic production and can lead to the need for Indonesia to import tobacco in the future.