(Second of three parts)
At first glance, the battle for market supremacy between Philip Morris and Mighty appears like a case of a David versus Goliath. After all, industry ‘Goliath’ Philip Morris is one of the largest global cigarette brands, while the ‘David’ Mighty is a local brand catering primarily to the Philippines’ C-D-E market.
Philip Morris flagship products (Marlboro included) are also aimed at the A and B markets, even as its lesser-known brands such as Champion, Jackpot and Westpoint are fighting it out with Mighty in the low-end market.
Philip Morris, however, would be the first to say that the biblical comparison is unfair. From their point of view, they are engaged in the equivalent of a boxing match while fighting under the Marquess of Queensberry rules, while Mighty is ignoring the rules and playing dirty.
Philip Morris Fortune Tobacco Corp’s principal complaints center on what it claims is a huge disparity between the volume of tobacco leaves imported by Mighty as against the company’s volume of exports as declared to the Bureau of Internal Revenue (BIR). Also, the declared price per kilo of tobacco declared by Mighty is way, way below industry standards.
Other tobacco manufacturers import tobacco at P187 per kilogram, while Mighty only pays P25 per kilogram. The import-export difference for 2011 and 2012 has also been pegged at more than 10 million kg.
Among other sources, Philip Morris cited data supplied by AC Nielsen to determine the volume of sales of Mighty.
Finance Secretary Cesar Purisima has taken cognizance of the complaints raised by Philip Morris and has ordered both the BIR and the BOC to look into the allegations of technical smuggling and tax evasion by the local company owned by the Wongchuking (AKA Wong Chu King) family, which has been around for close to seven decades.
In a memo to the Bureau of Customs, the Finance secretary asked how Mighty could sell at P4.47 below break even price per pack, and noted that the variance of 212 million packs between the company’s estimated volume of removals and quantity of removals that actually reflected tax payments.
Under the latter, for the first half of this year alone, Purisima said in his memo that “the excise taxes evaded from this gap amounted to P2.54 billion.” On a per annum basis, this translates to more than P5 billion in excise taxes not being remitted to the government by Mighty.
While the Mighty brand has been around for a few years, it was only recently that its sales skyrocketed.
Exactly how this feat was achieved is the bone of contention between the two companies.
The Federation of Philippine Industries has taken the cudgels for Philip Morris. In a letter to Customs Commissioner Rufino Biazon dated September 30, this year, FPI Chairman Jesus Lim Arranza noted how “one erstwhile small player in the (tobacco) industry, Mighty Corporation . . . made a meteoric leap and now has 18.7 share of market.”
Arranza told Biazon that the FPI had been following the development in the cigarette industry after the new Excise Tax Law (RA 10351) took effect in January of this year.
The FPI, Arranza said, found the pricing structure of Mighty as highly irregular.
Specifically, the Federation questioned how Mighty could sell its bread-and-butter brand at P16 per pack, or less than P1 per stick.
“Simple arithmetic will show that after paying excise tax of P12 and the 12 percent Value Added Tax, the company is left with P2.30 to cover direct material cost, factory overhead, and operating margins.”
In other words, Mighty’s pricing would result in immediate bankruptcy for the manufacturer.
FPI said that two of their members from the cigarette industry found it impossible for a relatively small company like Mighty to sell at such a low cost.
Very large companies can kill the competition by selling either at a loss or at break even point, which small companies cannot afford to do.
In the case of Philip Morris versus Mighty, it is the small, local firm—the David attempting to slay Goliath—which is adopting the strategy, and seemingly getting away with it.
In this regard, the FPI communication to the Bureau of Customs chief alludes to the probability that Mighty Corp. is engaged in “illicit trade practices.”
The two unnamed FPI members from the tobacco industry—there is little doubt that Philip Morris Fortune Tobacco Corp. is one of them—cited an independent market research study that showed “Mighty’s volume in the trade is much higher compared to the actual withdrawals it reports to the Bureau of Internal Revenue.”
In other words, the small company is not remitting all the taxes due the government. It is not only the BIR that is not getting its fair share, according to the Federation. The BoC is likewise being underpaid the duties and taxes that should be collected.
Furthermore, Mighty may well be undervaluating the raw materials it needs to manufacture its cigarettes, and raw materials imported under warehousing entries may have come in sans payment of duties and taxes.
Mighty’s defense is one of outright denial.
The legal counsel of Mighty Tobacco Corp. categorically denied allegations that the company had underdeclared its production to avoid huge tax dues.
At the same time, Mighty’s legal counsel Miguelito Ocampo stressed that the sales of P1 per stick of Mighty cigarettes was not a result of such an illegal scheme.
“While our company cannot comment on how other cigarette companies price their cigarettes, what we can say is that our company can sell P1 per stick because aside from having comparatively lower administrative and operating expenses, Mighty does not pay royalty fees to foreign companies for the use of our brands of cigarettes,” Ocampo said.
Competitors with foreign brands have to pay royalties to their mother companies which adds up to the retail prices of their products, the lawyer explained.
“Mighty also does not pay service fees or management fees to any foreign company,” Ocampo said, stressing that the Filipino-owned cigarette manufacturing firm uses more local components and inputs rather than import most of them.
“Finally, it might interest the public to know that Mighty is not the only company that currently sells P1 per stick cigarettes,” the lawyer further said.
Ocampo said reports that the company is being investigated for tax evasion by the Bureau of Internal Revenue could be the handiwork of its rivals from whom Mighty took a substantial industry share.
When Republic Act 10351 or the Sin Tax Law was passed, it paved the way for the re-entry of players such as Mighty Corp. in the low-cost cigarette field. Since the law caused the prices of medium and high-end brand cigarettes to soar, it opened up opportunities for low-priced cigarettes to rule the market.
Many smokers shifted to the cheaper brands because they could get five sticks of inexpensive cigarettes for the price of one branded cigarette such as Philip Morris.
It was estimated that 25 percent of premium and sub-premium smokers have switched to cheaper brands like Mighty. The rest have stayed with their favored brands, at the same time attempting to reduce their consumption.
To be concluded