How a small but mighty player changes PH cigarette industry

When retail prices of cigarettes surged following the implementation of Republic Act No. 10351, or the law that restructured excise taxes on so-called sin products this year, even regional trial court judges who are smokers shifted to low-priced cigarette brands.

Barrientos, with portrait of Mighty
Corp. founder Wong Chu King in
the background. SONNY ESPIRITU
“Some of my friends who are also judges shifted to Mighty cigarettes because of the comparable packaging and quality,” says Oscar Barrientos, a retired judge, who joined Mighty Corp. as executive vice president and spokesman in November 2013.

Barrientos mentioned this in an interview, to illustrate the shifting preference of Filipino smokers for low-priced, but still “high-quality” cigarettes, following the imposition of higher excise taxes on cigarettes.

The Sin Tax Reform Act of 2012, he says, led to the rise of Mighty Corp. as a major player, which is beginning to break the monopoly in the industry. “This is the only Filipino tobacco cigarette company,” he says, referring to Mighty Corp.

He says Mighty Corp. accomplished the feat, despite the higher excise tax imposed by the government and the lower industry sales this year, which hit market leader Philip Morris Fortune Tobacco Corp.

P8-b excise tax

Asked how Mighty Corp. performed this year, Barrientos says: “I don’t have the exact figure, but if you based it on excise taxes, you will have an idea. In 2012, we paid more than P300 million in excise taxes, this year we paid over P8 billion as of December,” he says. “The excise tax alone is over P8 billion, which is a conservative estimate. This means the sales really jumped.”

Mighty Corp., a 68-year-old cigarette manufacturer which was established by an immigrant from China shortly after World War 2, recently hired the former judge as a top executive.

Formerly known as La Campana Fabrica de Tabacos Inc., Mighty first became popular as a producer of native cigarettes such as La Campanilla Matamis, Magkaibigan and Marka Niyog, but transformed into a major player in the low-priced cigarettes for the mass market almost overnight, following the implementation of the Sin Tax Reform Act of 2012.

Barrientos, a retired judge, professor and certified public accountant, joined the company in November as executive vice president to rebuff allegations that Mighty Corp. is engaged in technical smuggling and tax evasion, enabling its cigarette sales to jump substantially this year.

“Mighty Corp. is now the oldest and the only tobacco company in the Philippines, after Philip Morris absorbed Fortune Tobacco during their merger. That is why that company is now known as Philip Morris Fortune Tobacco Corp. or PMFTC and it has lost its identity as a Filipino tobacco corporation, leaving Mighty Corp. as the only tobacco company in the Philippines,” says Barrientos, who had served as a regional trial court judge in Malolos, Manila and Caloocan City.

Founded in 1945

Mighty Corp. executive vice president and
spokesman Oscar Barrientos. SONNY ESPIRITU
Barrientos says La Campana was established in 1945 by Wong Chu King, a migrant from China who married Nelia of Cavite and built a small cigarette factory in Makati that catered mostly to the old cigar and cigarette smokers. “These are the native cigarettes known as Matamis. The lighted lid is what is put in the mouth,” he says.

The company was renamed Mighty Corp. in 1985. It bought the trademarks of Alhambra Industries, its main competitor in 1993 and started exporting cigarette products in 2000. It is now considered a fully integrated tobacco company which has a nine-hectare tobacco processing and cigarette manufacturing site in Malolos, Bulacan and a four-hectare administration complex in Makati City. Nelia Wongchuking, the widow of Wong Chu King, remains the chairman and president of the company, with their six children also involved in the business.

Barrientos is not new in the corporate world, having also served in various companies as an executive before he became a judge. He obtained his Commerce and Law degrees from the Pamantasan ng Lungsod ng Maynila and his Master’s Degree in Business Administration from the Asian Institute of Management. He was a lecturer at the PLM and Rizal Technical University, with specialization in law, public administration, financial management and managerial accounting.

“Mighty Corp. is well managed, from production line to marketing. They hired me in November this year, but I have been a consultant earlier,” he says. “I retired as a judge in 2012. I also took a leave from teaching, because I was tired and wanted to take a rest. But now, I am a full-time executive of Mighty Corp. Previously, I was just a consultant. They gave me the position as executive vice president and spokesman,” he says.

“Generally, I handle legal matters. But we also have consultants in legal and paralegal. If the plan pushes through, I will also handle human resources by next year,” he says.

Barrientos says Mighty Corp. has more than 2,000 workers in its Bulacan facility and 100 staff in the Makati office.

No legal case

The retired judge says despite various accusations of tax evasion and smuggling hurled against Mighty Corp. in Congress and the media, no case has actually been filed against the company. “There is no single case. Congress should not be used as battleground for market share. If they have a case against Mighty, then file a case,” he says.

He says the fact that Mighty Corp. paid over P8 billion in excise taxes this year only shows it is sincere in settling its obligations with the government.

“You can be guilty of tax evasion for P1 million. You can be guilty for tax evasion for P8 billion. So whether it is P1 million or P8 billion, you will be considered tax evader. But if we are truly a tax evader, we will not pay P8 billion,” he says. “With P8 billion, how can there be a tax evasion?”

“Those allegations are undocumented. We are up to date in our payments to the BIR and Bureau of Customs. We were cleared as of March 2013 by BIR and we were cleared by Bureau of Customs as of February 2013,” he says.

Barrientos says the BIR has even exceeded its excise tax collection target this year. Data show that excise tax collections climbed 81.5 percent in the first 11 months to P91.6 billion from P50.4 billion a year ago, following the implementation of the Sin Tax Reform Act of 2012.

Of the total excise tax collection, P61.6 billion came from cigarette products and the remaining P29.9 billion from alcoholic beverages. Excise tax collection from cigarette products surged 111.5 percent from P29.1 billion last year while revenue from alcohol products climbed 40.54 percent from P21.3 billion.

The BIR said excise tax collection increased despite a decline in sales volume in the January-November period. A total of 1.196 billion cigarettes sticks were withdrawn from factories in the 11-month period, down by 17 percent or 857 million cigarette sticks from 5.054 billion sticks recorded during the same period last year.

Good strategy

Barrientos says the rise of Mighty Corp. as a tobacco company this year can be attributed to good marketing strategy and cost management. Mighty Corp. sources tobacco leaves from Ilocos provinces but also imports from different countries such as China, South America and Thailand, he says.

Barrientos says Mighty Corp.’s strategy is to focus on low-priced cigarette products, which proved the right move under the Sin Tax Reform Act regime. “Under the Sin Tax Law, the excise tax will increase until the fifth year when there will be a unitary tax of P30. The market leader [PMFTC] did not foresee the market shift. Because they have higher-priced products, the smokers shifted to the low-priced but high quality Mighty cigarettes,” he says.

“We are focused on low-priced Mighty cigarettes, with 24 different variants and flavors,” he says.

Barrientos says retail prices of Mighty cigarettes are now about P22 per pack, up from the previous price of P18 per pack before the implementation of the Sin Tax Law. “After five years, there will be a unitary tax of P30 per pack,” he says.

Shift to low-priced cigars

He says Filipino smokers shifted to Mighty cigarettes because they are cheaper and found their quality at par with the competition. “The taste is very close to the Filipino palate. The flavor, packaging and quality is almost at par, even though you are comparing apples with oranges,” says Barrientos.

“As far as low-priced product is concerned, we are number one,” he says.

He says Marlboro brands are sold at P60 to P70 per pack. “It is almost P50 difference. If you are a chain smoker and you consume three packs a day, that will cost you P200 a day. With Mighty cigarettes, you will spend only P66 a day,” he says.

Barrientos says even PMFTC discovered that price matters when it comes to the buying behavior of smokers. “PMFTC claimed if your price is P1 per stick, you are selling at a loss. That was their argument. Now they wanted to sell lower-priced products,” he says

He says Philip Morris asked the Bureau of Internal Revenue for a permit to reclassify Marlboro brands under the lower-priced category.

PMFTC blamed downtrading, or switching of brands by smokers to lower-priced cigarettes, for the drop in production and sales of the company. “To prevent this dire development, the company is willing to significantly cut its margins by introducing new Marlboro products. The company is hoping to get an additional volume of 8.9 billion sticks in 2014 which, in turn, can help the BIR collect more revenues from cigarettes,” the PMFTC said in a statement.

To this, Barrientos says: “They have an application with BIR, but it was rejected. They wanted to downgrade their premium brands. It was denied. They are now eating their words. Under the law, you cannot downgrade a product that has been known for premium price.”

Barrientos says PMFTC also dismissed the threat of Mighty Corp. as a player. “They thought that with Mighty Corp.’s 3- percent market share, it would not be able to meet the rising demand under the Sin Tax Law. That’s what they thought. But Mighty expanded its production capacity and planned it very well. When demand rose, it added equipment to expand capacity,” he says.

“Our marketing strategy covered rural areas and we invested in R&D [research and development]. We conducted field assessment for direct sales,” he says. “We were taken for granted. They thought Mighty would not be able to catch up. They had a wrong reading, because we penetrated the market.”

“If you based it on survey, first there must be awareness on the part of the smokers and there must be acceptance. These are basic principles of marketing. The market is now aware that the product is there and there is acceptance on the part of the market,” he says.

Focused marketing

He says Mighty Corp. has a focused marketing strategy. “There is a principle in marketing that if you wish to lose your share, then let the whole world be your own market. This means if your products are high-end, then focus on high- end market. Don’t mix your high-end products with low-end, because the consumers or the public will be confused. In that case, we focused on the low-priced products,” he says.

“If ever we have an application for premium products, that is not for income purposes, but to improve the image,” he says.

Barrientos says as the company grows, its employees also benefit from increased profits. “We treat our workers as family members. For example, they eat here for free. We have dormitory for them where they can stay for free. They only have to pay P300 for electricity and water bills each month,” he says.

“We improved the livelihood of our workers. There is also an increase in benefits and they also have bonus, yes. When we had our Christmas party, we raffled off P500,000 in cash,” he says.

He says the rise of Mighty is also helping generate jobs and boost tax collection. “Our contribution is in the form of taxes, because it helps the development of the country, with taxes. We were paying P300 million before, now we are paying more than P8 billion in excise taxes. and that helps the economy. We also employed more factory workers. Now, we have more than 2,000,” he says.

Mighty plan

Barrientos says with bigger contribution, Mighty Corp. is also expanding its corporate social responsibility projects to help tobacco cooperatives increase their production. “As far as CSR is concerned, we will have irrigation pumps in their area and provide mini tractors. This will come in the form of grant. We will have scholarship grants,” he says.

“We have other plans. Aside from scholarship, by next year, we plan to give awards for outstanding farmers, in cooperation with the National Tobacco Administration,” he says.

Barrientos says Mighty Corp. has a long-term plan to further improve its market share and help its workers.

“We will study the market. Definitely we will increase the price because of the additional tax every year for five years, until there is a uniform excise tax. It will end Dec. 31, 2017, afterwards the tax will be unitary at P30 per pack,” he says.

“We will improve our market share, definitely. With the current trend, we will improve our market share. This is only the first year and we were able to increase our market share to more than 20 percent,” he says.

“We are concentrating on improving our market share and improving our products. We also work as a family, taking care of our workers,” he says. RTD


Topics: Mighty , tobacco , cigarette
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