Source: The State of S. Paulo - São Paulo / SP - 09/11/2010

In the first nine months of the year, revenues from Souza Cruz, the largest cigarette manufacturer in the country, fell 8%, to R $ 4,06 billion. The final result, in the last line of the balance, had an even greater impact, around 10%. Even so, manufacturing and marketing such a stigmatized product, the target of all sorts of campaigns and regulations, remains a good deal. The profit of R $ 1,1 billion represents a return of more than 25% on revenues, a rate rarely found in Brazil.

Not by chance, Souza Cruz's shares are among Bovespa's top 5 stocks: according to a survey by the consultancy firm Economatica, with a 57,3% appreciation until October, its shares only lost to those of Lojas Renner (63,4%) and surpassed those of the third place, Ambev (40%). "Our shares are preferred by investors who have a long-term horizon, who are preparing for retirement," says Paulo Ayres, director of planning at Souza Cruz.

In principle, Ayres' statement may seem like a paradox, in the case of cigarettes, a marked product, if not to die, at least to undergo close surveillance by anti-smoking movements and governments. In fact, the weight of tobacco control and prohibition measures or restrictions on advertising appear to be less feared than other opponents, such as smuggling and heavy taxation, which reach 63% of the value of each packet.

In fact, for manufacturers in the industry, the two factors seem to go hand in hand. According to Ayres, the increase in smuggling, which had been manifesting since the beginning of the 1990s, did not reflect even with the adoption, in 1999, of adREM, a taxation system that affects the price of each pack of cigarettes according to the type of packaging and the brand, regardless of the final retail price. "Between 2000 and 2009, cigarette revenue grew 66%, against 18% for drinks," says Ayres, refuting criticisms that the current system would be harmful to public coffers. On the contrary, by not directly affecting the final price, taxation would be preserving the collection. "It prevents the government from funding a price war between manufacturers," says Ayres.

Paraguayan production. For him, the current structure has caused a substantial increase in the price of cigarettes. "A study by FGV shows that we are among the five most expensive markets in the world," he says. The high internal cost, added to the appreciation of the real, ends up stimulating illegal trade, via smuggling from Paraguay, a country that houses about 40 factories and has an annual production capacity of 40 billion cigarettes, equivalent to more than a third of the Brazilian , around 110 billion units. "Half of Paraguayan production comes to Brazil without paying taxes there or here," he says. “While the pack of Souza Cruz's cheapest brand, Derby, costs R $ 3,35, contraband cigarettes can be purchased for R $ 1,30.” According to Ayres' calculations, this means that at least R $ 2 billion in taxes per year has been lost.