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Executive summary
No hike in excise tax leads to vast improvement of tobacco sales
The tobacco industry in Indonesia suffered from declining volume sales between 2001 and 2003 despite an improvement in value sales due to hikes in the excise tax. Declining volume sales towards the end of the review period resulted in job losses among cigarette factory workers. Combined with complaints from local tobacco companies regarding the annual hikes in the excise tax as well as the growing concern about contraband sales, the Indonesian government decided not to increase tobacco excise tax in 2004.
This decision by the government resulted in a vast improvement in the performance of tobacco, with volume growth soaring by 7% in 2004 from negative growth of 8% in 2003 and current value growth rising from 3% in 2003 to 13% in 2004. The policy to freeze the hike in excise tax has also led to a slowdown in the volume growth of contraband sales, from almost 9% in 2003 to 4% in 2004. As such, tobacco companies in Indonesia have benefited significantly from the government’s policy in 2004.
New government policies aim to help the industry
In 2003, the government announced that a law on tobacco control would be implemented by 2005 as the result of negotiated agreement between the members of the World Health Organization (WHO) which seeks to better control the tobacco industry. As a member of WHO, the Indonesian government initially supported the Framework Convention on Tobacco Control (FCTC) agreement. However, the government then decided not to take part in the agreement, claiming that Indonesia already has its own laws regulating the tobacco industry in the country. The government’s decision to pull out of the FCTC was also intended to protect the welfare of tobacco farmers and manufacturers. Nevertheless, there were protests regarding the government’s decision to not take part in the treaty.
The government took another key decision in late 2003, regarding the revision of the government regulation that specifies a limit to the nicotine and tar content of cigarettes sold in the country. After strenuous debates with industry players, the imposed limit was lifted. The rationale for this revision was that the industry was not ready for the limitation of tar and nicotine content and that the incurred costs from manufacturing such cigarettes would harm the industry. This policy, along with the government’s decision not to sign the FCTC agreement, was intended as a way of supporting the tobacco industry in the country after its poor performance throughout the review period. From the results in 2004, these efforts would appear to have succeeded. However it remains to be seen whether the long-term effects will remain positive.
Kretek cigarettes continue to dominate
Kretek, the Indonesian speciality clove cigarette, reigned in the country up to 2004. Indonesian smokers’ preference for kreteks is so great that the majority of cigarette sales come from SKM – machine-manufactured kretek cigarettes. Kreteks are affordable, and the culture of smoking kretek cigarettes remained deeply entrenched in the majority of Indonesian males up to 2004. In comparison, cigars and smoking tobacco continue to have very limited appeal. In Indonesia, cigars are considered extremely costly and only very affluent consumers smoke cigars, as most of the products available are still imported. In addition, smoking tobacco is also hard to find as it is mostly only sold in tobacco specialist stores.
Warungs and pedagang asongans remain the backbone
Up to 2004, the distribution of tobacco products in Indonesia was still dominated by warungs – small owner-operated neighbourhood or streetside outlets – and pedagang asongans – street vendors who hawk their products to drivers and motorcyclists at traffic lights. These uniquely Indonesian distribution channels, classified under others and street vendors respectively, are the most convenient channel for consumers who buy cigarettes impulsively. Although modern retail outlets, such as supermarkets/hypermarkets, have shown a slight improvement as distribution channels of tobacco products over the review period, the traditional channels remained the backbone in the distribution of tobacco products up to 2004.
