Desk-column-Mystery-of-Philip-Morris-royalty-payment

Korean news outlets raise suspicions

Earlier this month, Philip Morris Korea came up with its accounting reports for 2019, which is available through the website of the country’s financial watchdog.

Then, some domestic media outlets raised suspicions about why Philip Morris Korea raised the royalty payment to its head office and related companies despite its disappointing performance last year.

Indeed, the Seoul-based company saw its 2019 sales and operating profit plummet 22 percent and 36 percent from a year before, respectively.

But its royalty payment jumped 38 percent year-on-year.

Close examinations of Philip Morris Korea’s financial reports prompt more doubts.

The outfit notes that its products have different royalty schemes. With regard to its representative brand Marlboro, Philip Morris Korea is supposed to pay 12 percent of net sales as a royalty.

The percentage is 12 percent for Heets, the disposable unit for the IQOS heat-not-burn device, and 10 percent for traditional brands of Parliament and Virginia Slim.

The rate is low at 6 percent for LARK-Harmony.

The rising royalty payments would make sense in spite of its diminishing top line, if the sales of high-royalty products like Marlboro and Heets rocketed last year while those of low-royalty items like LARK-Harmony dipped.

Indeed, Heets has gained popularity over the past few years. But such a scenario doesn’t seem probable because LARK-Harmony is not a killer item of Philip Morris Korea.

The royalty rates are fixed, and the sales mix appears not to have changed that much. Then, how royalty payments can shoot up 38 percent at a time when the sales plunged 22 percent.

That is a mystery. And as usual, Philip Morris Korea refused to answer the inquiry about the mystery, citing its policy of remaining silent about its financial reports.

This year’s financial reports may offer a clue. But it would take a year to be able to see them.