Cigarette production continued to drop in the four months to April, signalling slowing demand and an increase in counterfeits in the Kenyan market.

Output dropped by 8.9 per cent to 4.3 billion sticks in the period under review compared to a similar period last year when production stood at 4.7 billion sticks, which also reflected a fall of 6.4 per cent compared to 2008.

The decline in the first four months reflects the sector’s sustained drop in production over the years.

Last year, production dropped by 700 million sticks to stand at 14 billion sticks, representing a shrink of 5.3 per cent, with analysts attributing the decline to effects of the global recession and high inflation levels that knocked down consumption volumes.

Cigarette makers say the drop is due to subdued demand and rise in counterfeits.

“There has been an increase in cigarette counterfeits especially targeting Sportsman, British America Tobacco’s flagship. Because they don’t pay excise duty, dealers in counterfeits are able to sell their cigarettes at lower prices, undercutting genuine manufacturers by a few shillings,” said Mr Wycliffe Masinde, an analyst at Kestrel Capital.

“The problem appears to get worse as the imitations are more sophisticated and identifying a fake cigarette may now need a professional test,” he said.

Illicit cigarette trade is estimated to control about 12 per cent of the market.

Price-sensitive in the low-income bracket are the main targets of counterfeit cigarettes.

British American Tobacco, the major cigarette manufacturer which recently announced a 19 per cent growth in pre-tax profits to Sh1.46 billion in the six months to June, said its contract manufacturing dropped in the period under review as external demand slowed down.

“Contract manufactured volumes however declined resulting in marginal overall sales growth,” the company said in a statement.

Contract manufacturing accounts for about 65 per cent of BAT’s business and slow external demand has huge implications on the firm’s sales figures.

However, the fact that BAT increased its domestic sales by six per cent in the six months to June points to a recovery in the sector.

But analysts project major shifts in the tobacco market in the coming years.

“Consumers are likely to shift to high end cigarette brands. The tobacco industry will however see a gradual decline over the years,” said Mr Eric Musau, an analyst at African Alliance Investment Bank.

(By Victor Juma, Business Daily Africa, 19/08/2010)