As indicated by typical sales data, the demand for leaf tobacco supply seems to have been weak and have been declining in terms of value. Changes in preference of consumers to cigarette and supply of farmers may be able to explain this trend among companies in this sector.   

Sector’s Current, Trend, Causes behind trend, and Future

Current and Trend

1. The demand for leaf tobacco has been weak as indicated by decreasing sale volumes of companies in this sector.

2. There is an increasingly apparent trend in manufacturer demand’s shifting to lower priced products in the past several years.

3. The average selling price of leaf tobacco decreased in the past several years.

Causes behind the trend

1. Changes in preference of consumers to cigarette and increasing sensitivity to price can help explain manufacturer demand’s shifting to low priced leaf tobacco.

2. Oversupply from farmers in the past several years caused reduction in supply costs, which has been transferred to price of leaf tobacco due to competition.

3. Increasing competition from local leaf tobacco suppliers may be part of reasons for decline in revenue and price of US companies.

Industry Future

1. Demand for leaf tobacco of companies in this sector may continue to shrink putting huge pressure on price of their products and their profitability.

2. Emerging market, especially China’s market, may be the key to maintain their margins.

General Financial Performance of Companies In the Sector

It seems that demand for tobacco supply has been actually declining as indicated by slightly decline in volume of typical companies in this sector. Consistent with demand’s shifting to discount cigarette, manufacturers’ demand for raw tobacco has been shifting to lower price product, which, working together with oversupply in 2015 and 2016, put down the price of tobacco price.

While gross margins of those companies were improved due to oversupply of farmers’ production, their cash flow margins have been hurt due to deleveraging of corporate expenses as revenue declined.

The typical companies’ gross margin has gone up to 16% since 2015.  With a slight decrease in SG&A as percentage of sales (about 9% in 2017), the typical operating margin went up to about 7% in 2017.

The typical average enterprise/sales ratio is about 0.8.

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