This, however, is the facade intended specifically for potential buyers. In
reality, the situation is not as bright. The manufacturing performance gives
evidence of an impressive past. Growth in the past year is due to the
acquisition of Nevo Tabak and it is not yet clear whether Donskoy Tabakwill this year reach the same sales as the combined sales at Donskoy and the
acquired competitor last year.
In all probability, the potential for growth has been exhausted.
Performance is at its peak today and may start falling tomorrow, but it is the
new owner who will have to find out.
The tremendous success of the Kiss brand depends very much on an
exceedingly aggressive marketing strategy targeting adolescents. This autumn,
Donskoy’s advertising drew unprecedented condemnation in the blogosphere and
Russian media and many observers directly accused the owner, the then member of
parliament Ivan Savvidi. Moreover, Russian antimonopoly bodies which are in
charge of advertising control have fined Donskoy Tabak repeatedly for improper
advertising and the use of children’s images. All attempts by the factory to
challenge the fines in court (and the fines have lately reached significant
amounts) have failed.
Much of the factory’s sales in recent years have been to supply the army,
and the awarding of such contracts in Russia, even if they are put out to
tender, suggests far-reaching influence at the government level. However, in
the just-held parliamentary election Savvidi has lost his seat in the Duma and
with it his considerable lobbying capabilities.
Besides, other businesses of the former Duma member develop quite
successfully and carry no political or reputational risks, unlike tobacco
products. One may therefore conclude that the Savvidi is ready to
compromise with the new buyer and reach agreement on the price as quickly as
possible.
Finally, taking a closer look at Donskoy Tabak’s exports, reveals
that most products are supplied to three unrecognised republics:
Transnistria, Abkhazia, and South Ossetia. The Russian law exempts exported
products from excise. In the stated countries, no excise or other taxes are
levied on products imported from Russia so that this line of business generates
windfall profits even from the least expensive cigarettes: hence the
overall excellent financial performance of the company. Let us not dwell on
where these products go later, for instance from Transnistria, let’s just
say that the new owner, especially if it is a multinational corporation, will
probably not use dubious export schemes; and if it wishes to, it is by no means
certain that it will gain the necessary informal connections in those
countries.
