Illegal Cigarettes and Weak Purchasing Power Cut Gudang Garam Sales by Rp3.19 Trillion

Volume falls faster than the wider market

PT Gudang Garam Tbk reported a sharp contraction in its Indonesian cigarette business during the first half of 2026, citing illegal products and weak consumer purchasing power. Okezone reported that cigarette sales revenue declined by Rp3.19 trillion year on year, from Rp44.36 trillion in the first half of 2025 to Rp41.17 trillion.

According to IDNFinancials, Gudang Garam’s sales volume fell 13.6% year on year to 20.5 billion sticks. Management cited AC Nielsen data showing that the wider cigarette industry contracted by 6.8% during the same period, meaning the company’s decline was twice the market rate.

Okezone reported that volume decreased by about 3.2 billion sticks, from approximately 23.7 billion in the comparable 2025 period. Heru Budiman, Gudang Garam’s director and corporate secretary, said cost of revenue declined by about 13.3%, broadly in line with the reduction in sales volume. Lower selling activity also reduced routine operating expenses.

Machine-made kretek accounts for most of the decline

Machine-made kretek cigarettes, or SKM, remained Gudang Garam’s main category, accounting for 85.29% of first-half sales. SKM volume dropped 13.9% year on year from 20.2 billion to 17.4 billion sticks, according to IDNFinancials.

Hand-rolled kretek cigarettes, or SKT, contributed the remaining 14.71%. Sales in this category fell 11.8% to 3 billion sticks. The figures show that the contraction affected both major product groups, although the larger SKM division had the greatest effect on total volume.

Budiman linked the pressure to excise costs that have risen since 2020. Successive retail price increases encouraged downtrading among lower-middle-income smokers, with some consumers moving from higher-priced tier-one cigarettes to tier-two products or illegal cigarettes without excise stamps.

Pricing decision pits margin against market share

The price gap illustrates Gudang Garam’s dilemma. Budiman said a 12-stick pack of the company’s SKM cigarettes sells for about Rp26,000, of which approximately Rp19,000 is paid to the government as excise. That leaves the producer with Rp7,000 in net sales per pack. Illegal manufacturers can sell at around Rp12,000 without paying excise.

Gudang Garam is consequently cautious about further price increases and monitors competitors to avoid becoming the most expensive brand in its segment. Despite the volume decline, the company raised its net profit margin to 7.2% in the first half of 2026 through aggressive operating and marketing cost reductions and debt repayment. Management warned that this margin may not be sustainable if illegal sales continue. Director Istata Tasin Siddharta said the balance between volume and profitability will remain under review. If Indonesia keeps excise unchanged for the next several years, management sees an opportunity to defend SKM volumes, but it must still decide whether to protect earnings or use lower margins to support sales.