In Iran, smoking has for centuries meant using the waterpipe, which is called Qeliun in Persian. But the 19th century saw the advent of a very different product. The cigarette was introduced to the country in the way modernism often portrayed itself; through invasion and war. Smoking Russian and Turkish soldiers proved a fascinating phenomenon and soon wealthy Iranians picked up the habit. Tabriz, the capital city of East Azarbaijan Province, became the first major center of cigarette trade and ever increasing consumption led to the first tobacco cultivation in the wet and humid northern provinces of Mazandaran and Gilan.
Cigarettes have been hugely popular ever since. The mobile and pocket-sized cigarette overtook the large, traditional, situation-bound Qeliun as the dominant form of tobacco consumption in the 1920s.
Domestic manufacturing of cigarettes is almost as old as the tobacco cultivation itself. In 1890, Russian investors were the first to establish a cigarette factory in Rasht, Gilan Province. Less than 20 years later, labor-intensive cigarette manufacturing expanded to Mashhad in Khorasan region, Tabriz and Tehran.
Iranian cigarette smokers have always been highly price-sensitive perhaps because of cheap domestic production. When in the 1950s international brands started showing interest in the Iranian market, they quickly realized that more expensive imported cigarettes lost their market share to cheaper domestically produced rivals. The R.J Reynolds Tobacco Company (RJR) was the first to set up a production facility for its flagship Winston brand in the country in the 1980s. Winston has since become one of the most popular of the domestically produced brands.
The production of Winston cigarettes is licensed, as all other domestically produced brands, under the state-owned Iranian Tobacco Company.
In response to the larger market share of domestically-produced brands, foreign companies have since the late 1980s started an aggressive strategy of smuggling cigarettes and circumventing import tariffs.
Smuggling tactics have since been discovered and laid bare by the World Health Organization. A 2001 WHO report quotes a memo released by Phillip Morris, producer of the world’s most popular brand, Marlboro, in support of smuggling. The memo argues that taxation leaves room for smuggling, arguing that “we have demonstrated to the Iranian monopoly [on cigarette sales] that the excessively high level of duty encourages smuggling, estimated at one third of the market and that the optimum duty level is lower.”
One of the main reasons behind aggressive smuggling tactics has been the importance and growth potential of the Iranian market. British American Tobacco (BAT), which produces the Kent, Pall Mall and Lucky Strike labels, named Iran a “first priority” market.
Paradoxically, RJR first started smuggling cigarettes, although Winston was already produced domestically. This double tactic seemed to pay off: RJR’s market share grew steadily, reaching 50 percent in 1994, and an equivalent of 16.4 billion units were sold annually. Phillip Morris and BAT followed suit, establishing their own smuggling routes, often from Dubai and Turkey.
International competition and smuggling has dented the market share of domestically manufactured products. In 2012, the Iranian Tobacco Company supplied only 30 percent of the market, which left international brands with a sizeable 70 percent slice.
Iranian Tobacco Company produces a wide range of cigarette brands, by far the most popular of which is Bahman.
To counter smuggling, the government has tried to ease import restrictions. Currently, the total tax share of cigarette prices in Iran, including value-added and duty taxes, stands at 19.16 percent, which is still far below international standards of around 70 percent of retail price.
However, smuggling continues. According to a 2009 study by the Tobacco Control and Prevention Research Center, 20.9 percent of all imported cigarettes lacked appropriate labels.
Intensive Competition
The sensitivity of smokers to price changes has also depressed prices. A 2002 report published in the Tobacco Control journal shows that cigarette prices have fallen by 9 percent for local brands and 9.06 percent for international ones in the 10 years preceding it.
More recently, heavy inflation caused a sudden jump in already high price-sensitivity in the past two years, leading to swings in consumer behavior. For example, Japan Tobacco International, the successor of RJR, which is the leading multinational tobacco company in Iran, increased its unit prices in 2012, causing a considerable drop in volume share. This in turn allowed BAT to take advantage and become the largest foreign seller.
The Iranian cigarette market is thus braced for intensive price competition. However, low costs have also contributed to huge growth, mostly amongst young people. Research conducted by Shahid Beheshti University shows that the younger generation, those born around 1975, had much higher rates of experimentation at the age of 20 compared to older generations, standing at 49 percent for men and 40 percent for women (see figures below). Estimates put smoking prevalence between 10.6 and 24 percent. Figures also show that rates of prevalence amongst rural and urban inhabitants are similar, 11.9 and 11.8 percent, respectively.
Currently, total domestic consumption is about 63 billion cigarettes annually, based on official statistics.
Figures released by the Iranian Tobacco Company indicate that tobacco cultivation has steadily increased over the last few years, pointing to the possibility that international sanctions have had a positive effect on domestic production. While in the Iranian year ending March 2013, 5,939 hectares were under tobacco cultivation in Iran, the number increased to 6,094 in the following year. In the current Iranian year (ending March 2015), cultivation is expected to further increase by 10.8 percent to cover 6,750 hectares.
Western sanctions imposed against Iran in recent years have similarly cut cigarette imports. In March 2013, figures released by Iran’s Customs Administration showed that the value and weight of imports fell by 73.65 percent and 52.22 percent, respectively.
However, the majority of imports, 72.8 percent, came from Turkey and Dubai – countries famous for their smuggling routes to Iran.
Sanctions have indeed caused a severe growth in smuggled cigarettes. Figures show that in 2012, when sanctions hit the country hardest, smuggling was up by 111 percent. At the time, the share of smuggled cigarettes of the total market size was estimated at between 45 and 50 percent. In 2013, estimates put this number even higher, at 60 percent.
Despite all its negative health effects, the increasing prevalence of smoking, mostly among the younger generation, in combination with high sensitivity to prices and sanctions, has made it profitable for foreign brands to continue smuggling cigarettes into Iran and push their market share even higher.
