Smoking is the most popular pastime in Romania. Curbing the deadly activity in public places, pubs or even at work, as is the fashion in Dublin and Milan, would be greeted by the puffing populace with a wheezing chuckle.
With this addictive customer base, the industry should create high profit margins.
Tobacco giants Philip Morris, JTI and BAT have managed to exploit Romania's passion for the fume, but the country's own domestic company SNTR has failed to seize the opportunities it has been given, especially when its Bulgarian counterpart BulgarTabac is now on sale for around 200 million USD.
Since the Revolution the former monopoly has suffered botched privatisations, rumours of corruption, a confused distribution network, a slashed workforce that fell from 7,500 in 1998 to 1,500, factory closures, plus a market share that dropped from 25 per cent in 2001 to ten per cent today.
This situation, coupled with a burden of debts to the state over 350 million Euro, have left business and customers wondering: will this domestic industry go up in smoke?
SNTR manufactures cut-price cigarettes, such as Carpati, Snagov and Marasesti. They are about half the price of BAT's Kent, JTI's Camel or Philip Morris's Marlboro which cost almost one Euro a pack (33,000 ROL). To give another example, in order to gain good marks in an exam, it is possible for a teenager to bribe a teacher with 200 of these multinationals' cigarettes, but not with ten packs of Snagov.
In 1995-1996, the state-owned cigarette firm SNTR was in its heyday. The Bucharest factory alone (one of five) was selling 400 to 500 tonnes of cigarettes per month. Until 1997, tobacco unions say, SNTR contributed four per cent to the state's GDP.
“Back then it was just a name, but now it has a bad image a black history created by several characters,” says Marcel Cadar, now general manager of SNTR.
Around 1996 SNTR invested almost 100 million USD in high-tech equipment, designed to produce 20,000-25,000 tonnes of cigarettes per year, paid with money from loans from abroad, says Cadar.
The Romanian cigarette industry only had the capacity for 34,000 tonnes per year, so SNTR was already over-reaching, especially because foreign interest in Romania began.
“It was impossible when the multinational companies started their activity,” says Cadar. “We could not remain with the same domestic market share.”
A lot of the technology was not put to use and SNTR could not afford to keep up with changes in the speed and efficiency of tobacco production, which means it cannot now find a buyer for this equipment.
In May 2000 SNTR was bought in an auction by Romanian-based firm InterAgro for 40 million USD. But, one of the other bidders, Greek firm Leaf Tobacco A. Michailidis launched a lawsuit against the privatisation, because it was full of conditions that only InterAgro met.
The deal was cancelled and the Ministry of Agriculture became the sole shareholder, but the Romanian State was now in debt to Interagro for the 8.4 million USD the firm bought SNTR for.
In June 2001 PriceWaterhouseCoopers made an evaluation of SNTR and recommended that InterAgro should receive 70 per cent of SNTR's shares. The Ministry of Agriculture was forced to follow the court decision and agreed to give Ioan Nicolae [boss of InterAgro] 53.72 per cent shares from SNTR.
But, around this time, Government source alleges that InterAgro was advised “not to pay its debts to the state” by the Minister of Agriculture Ilie Sarbu. “InterAgro, by a financial trick, won money from SNTR,” states the allegation. One of the firms that wrote down the evaluation report was allegedly a co-shareholder at Interagro. “This firm made an incorrect evaluation because the goods weren't suitably valued,” alleges the source.
Sarbu refutes the allegations. “SNTR had debts to InterAgro,” he says. “A part of the money that the Ministry of Agriculture paid to the Finance Ministry did not get to Nicolae, so he sued us and he won. After negotiations the shares that Nicolae received were given to him instead of money… As for the accusations that I sold SNTR to InterAgro, I've always said that I am at the Anti-Corruption Office's disposal whenever they want me…if Nicolae paid for SNTR, shouldn't he receive his money back?”
SNTR was now in the hands of the state and its fate would soon be determined by the Privatisation Authority (APAPS).
However the firm was still bullish about its future. In an interview with the newspaper Ziua in summer 2002, then SNTR general manager Tudora Lupa estimated their turnover would increase annually from a 25 per cent market share in 2001: “We are expecting this to increase to 31.4 per cent for 2002… and 34 per for 2005.” <>
But then, due to a lack of investment, in the six months between December 2002 and May 2003, total tobacco production at all its factories stopped. <>
“So in areas where we had been distributing, our competitors appeared,” says Cadar.<> On the 6 December 2003 APAPS appealed for a new buyer. The purchaser had to be experienced in selection, crop and preparation of tobacco and have a turnover of over one billion USD for 2002.
The agency received only one proposal from a 'mystery' consortium comprising of Galaxy Energy International LTD, based in a tax-free paradise the British Virgin Islands, and Italian firm CTS (Cooperativa Tabacchi Sangiustina), Italy. After an audit, the Privatisation Authority signed the deal and the firm was sold on 21 January 2004 for 50 billion lei (1.3 million Euro).
Neighbouring, but still state-owned BulgarTabac Holding Group is now up for sale. Although larger than SNTR, this firm includes tobacco buying, processing and leaf trade, manufacturing and export, research and development. Bulgartabac makes 90 billion cigarettes per year and has almost 17,500 employers, with a reported net profit of 3.3 million Euro for 2003. Although the deal collapsed last January, BAT was willing to purchase the firm for 200 million Euro.
Now, with only a tenth of the market in SNTR's hands, the hope of conquering a third of the market, similar to its Bulgarian counterpart, seems to have been stubbed out.
“In the countryside I can't find Romanian cigarettes and our customers will then look to the competition,” says Ioana Donta the leader of Bucharest SNTR's tobacco workers' union. “They [her bosses] are not doing their job.”
Cadar says the distribution network will be extended. When production stopped for six months, smuggled packets of 'fake' Carpati began appearing on the black market at two thirds of the 'real' sale price, along Romania's eastern and western borders. SNTR does not know who is responsible for this crime and Cadar says he will try to improve the distribution network in these areas.
Cigarette trade in a developing market, which does not yet suffer the regulations of the EU, should be highly profitable.
But, it seems, personal and political interests have allowed SNTR to undertake a slow suicide. Cadar blames the press. “This poor coverage means that doors are closing for us. First of all, the banks will not lend us money and the producers avoid working with us. We are trying to re-launch Romanian tobacco. We're working on several projects and the investors have come up with some money.”
Donta does not see why the firm cannot make a profit out of a high margin product. “At SNTR everything is about politics. After 1990, whenever there were changes in the Government, there were changes here.”
But Cadar believes high profit margins for tobacco is mythic. “They are calculating their value as primary material and not as a product. Every tobacco leaf is worth nothing if it isn't transformed into a cigarette. But on every cigarette you produce you have to pay an excise. For example, for Carpati, this is 62 per cent of its price.”
On local tobacco, Max Jonas, president of BAT Romania, says that unlike other markets, “Romania continues to deliver a volatile and unpredictable environment with direct negative implications on our business. This is now evident with the government's recent proposal to increase, three-months earlier, the excise on cigarettes in spite of the time-table agreed two years ago between the Industry, Ministry of Finance and EU Commission.”
This news is unlikely to help SNTR's huge debts.
At present, the firm has a notification from the Competition Council to receive state support, says new privatisation authority AVAS. But there is confusion over how much SNTR owes. According to Ministry of Finance figures at the end of 2004, the company owes to the state 13,354,745,822,420 ROL (361 million Euro).
Cadar says the firm has one debt to the state to be paid back in phases, of only 11 billion ROL (around 300,000 Euro). “But we have paid the eight million Euro external credit and we have also paid the two million Euro charge for dismissing employees,” he says.
But Dorin Tiganus, spokesman for the Ministry of Finance counters this argument. “When Cadar says that has no debts to the state, he is referring to the debts that should have been cancelled by emergency ordnance. But this has not been approved yet. As far as I am concerned, SNTR's debts to the state are 13,354,745,822,420 ROL (361 million Euro).”
This, coupled with the policies of a new Government intending to punish firms that run up too much state deficit, may mean this firm cannot rely upon such support for too long.
“The Competition Council is making a decision on whether they will receive state support or not, and that will determine whether or not operations continue,” adds a spokeswoman for the council. “Until then, we can't speak about the cancellation of the privatisation document or the abolition of the company.”
There have been some chances to sell to a large multinational, but these were not seized.
BAT was rumoured to be interested in cooperating with SNTR in 1993-1994, but this allegedly was not accepted. Now that BAT's deal with the Bulgarian firm BulgarTabac has collapsed, could it be interested in buying SNTR?
“There are no connections between the two markets,” says Jonas. “BAT's decision to pull out of the BulgarTabac deal has no effect on any other BAT potential acquisition around the world.”
Although the staff receive their salary on time, there are fears that without a long term marketing or production strategy, the workers may have to face a more uncertain future.
Donta says the firm is not selling half of what it produces every month and Cadar admits that SNTR has a marketing problem, which needs time, work and money to solve. “The other firms don't have to rehabilitate their company image,” he says.
Soon SNTR says it will cooperate with an EU partner, including specialists in technological problems and will be testing a new product.
The cigarette industry can be extremely profitable, but real estate is also an attractive prospect. SNTR is in possession of lands around the rich Baneasa zone, and the prime Bucharest site in Grozavesti, next to Carrefour Orhideea, which could turn a fast profit if there was no factory or hundreds of employees on the site to contend with. When InterAgro was asking for its money back from the Government after the failed privatisation, Sarbu says the firm came to his Ministry with a fresh demand for seven hectares of land from Baneasa. “I did not agree and that is why the land was registered as part of the firm's share capital,” he says. “Everyone wanted that land but as long as I was in charge it belonged to the state.”
Cadar says his firm will not go into real estate. “Stay calm, the consortium is not intending to sell SNTR. We are even forbidden from selling anything from SNTR's estate, such as the lands or the factory.”
Donta has another solution, more autonomy. Before 1998 she said every factory had its own administration, which seemed to function well. “SNTR should be divided if we want to survive,” she says. “The factories have to have independence, because if we, the workers, were the ones who were able to administrate the factory today, SNTR wouldn't have been in this situation.”
State of the estate
Although it cannot compare with its multinational equivalents, the Bucharest factory does boast high-tech equipment, but insiders argue SNTR does not take advantage of such technology. However, in order to cut costs in the factory, the heating in winter is not unlike the outside temperature and many of the staff wear their winter coats inside.
SNTR owns five tobacco factories (Sfantul Gheorghe, Targu Jiu, Bucharest, Iasi and Timisoara - the last two are closed) and eight fermentation centres (Barlad, Arad, Craiova, Ocna Mures, Rm Sarat, Titu, Urziceni and Vladuleni). “I don't feel that something has changed since the privatisation, and nothing good has happened,” says Donta.
“For example, the Bucharest factory was in third position in production when the privatisation started and now we are the leader. We made big efforts, by increasing production and cutting the staff, but also in reducing expenses. All of that are seen in the financial results of this factory. Bucharest is on profit, but due to the misfortunes of SNTR, the entire company is only breaking even.” The largest factory, Targu Jiu, is now functioning but at a low capacity, producing cigarettes only during four months of one year, says union boss Petre Istrate. After many staff losses, the factory only employs 293 part-time.
Meanwhile in the Timisoara and Iasi units, where only seven and nine people are now employed respectively, the situation is grim. Cadar says SNTR will not reopen these factories.
Although the future is precarious at SNTR there is the yearning to work and to revive the domestic Romanian tobacco industry, say the staff.
In 1993 SNTR had a turnover for about 20,000 tonnes per year and, in 2005, the firm aims to produce 6,000 tonnes, say the unions. The turnover for 2004 was almost 3,000 billion ROL (81 million Euro) with no profit, according to Cadar.
The shareholders from SNTR are 56.4 per cent consortium, 41 per cent InterAgro and the rest of the shares are own by Astra, Asirom and Ioan Nicolae.