Czech Republic - Philip Morris profits dropping 2-years in a row..

April 10, 2009 - Czech Republic's largest tobacco company, Philip Morris saw 2008 unconsolidated net profit drop 36.7 percent. The company has seen two consecutive years of declining profits, after a loss of 14 percent in 2007. Sales of premium cigarettes have suffered dual blows from tobacco taxes, which have doubled since 2004, and the ensuing recession, which persuades many smokers to switch to cheaper brands and loose tobacco. The state currently generates 40 billion Kč per year from tobacco tax revenues, nearly a third of all total excise tax revenues.

Petra Dobešová, director of corporate affairs of Philip Morris Czech Republic, pointed to the effects of illegal tobacco trafficking rather than the financial crisis causing the decrease.

The most recent tobacco tax increase January 1, 2008, put Czech cigarette taxes above the European Union's (EU) required level of 64 euros ($85 US/1,736 Kč) per 1,000 cigarettes. (The Czech Republic became a member of the EU in May 2004.) As prices rise in the Czech Republic, so does illegal cigarette smuggling, particularly from Eastern Europe, and the production of counterfeit brand cigarettes. Some may consider cigarettes in the Czech Republic to be unfairly priced - costing nearly twice as much as some of its Eastern neighbors but tobacco taxes serve an important purpose, said Radek Ležatka, a spokesman for the Finance Ministry, allowing the government to raise money directly from consumers.

The other major reason for Philip Morris' losses over the past two years is the common practice of hoarding tax stamps, which cigarette companies historically do in the months before a tax hike.

Reference: Cigarette tax unbalances profits Philip Morris ČR's net profits drop 36.7 percent in 2008, The Prague Post, 4/9/2009.