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Current issue      Features Selling the "Made in Vietnam" Label by Scott Herron and Glenn A. John     One cigarette market is legitimate; the other one, well . . . It is one thing for a few cartons of cigarettes to enter Vietnam on the back of a motor scooter. But, how does one explain an estimated 200 million packets of contraband coming in every year? Lots of motorcycles? Vietnam is a country obsessed with foreign made goods and a well greased smuggling machine feeds this demand, including cigarettes.     Officially, Vietnam confiscated three million packets of contraband cigarettes over the past last three years, but everyone knows it is much higher. Most sources for this story estimate that smuggling takes over 10% of Vietnam's total consumption.     Many world markets face smuggling. Usually the problem arises when a government raises taxes too high relative to neighboring countries and price skyrocket, such has been seen in Canada and Hong Kong. Consumers smoke untaxed smuggled brands to escape high domestic prices. Conversely, many of Vietnam's smokers seek out smuggled brands and eagerly pay more! Contra-band, untaxed packs of State Express 555 routinely sell for 10-15% or more than the same brand manufactured locally under license at the Saigon Cigarette Factory.     "It can't be that the taste is better," said Fred Combe, general manager, British American Tobacco Vietnam, comparing a smuggled State Express 555 to one made in Vietnam. According to Combe and other sources at BAT, every element of the locally produced brand - the blended tobacco, flavors, packaging, tear tape, overwrap - in short, everything is sourced at exactly same place as the State Express 555 manufactured at BAT's Southampton factory in England.     However, it is very hard to convince Vietnam's "imports are better" crowd that the MIV (made in Vietnam) State Express 555 is the same as the imported or smuggled version. Combe said that the difficulty of communicating this message to consumers is compounded by Vietnam's total ban on all forms of cigarette advertising and promotion.     Despite 10 years of trying to eradicate contraband cigarettes, smuggling is on the rise. In September 1998, another anti-smuggling program was proposed involving a tax stamp affixed to tax-paid cigarettes. But, wholesalers complain of the significant expense of affixing the tax stamp, according to a local industry source. Asked what else could be done about smoking, the source said, "nothing…[Vietnam's] borders are too big, too porous."     According to Vietnam's Investment Review board, international companies manufacturing brands inside Vietnam are struggling to profit due to smuggling and counterfeiting. Tax-paid Marlboro brand sales dropped by 23% in 1998, while Dunhill saw a decline of 25%.     "As Vietnam is economy improves, personal incomes increase," said Nguyen Nam Hai, Vinataba's recently appointed director general. The state-run Vietnam National Tobacco Corporation (Vinataba) produces approximately 80% of the cigarettes in Vietnam. It is the fifth largest company over all in the country.     "This means we see a switch from plain cigarettes to filter ones, and from cheaper filtered cigarettes to more expensive, higher quality filter cigarettes," said Hai. In 1998, filtered cigarettes took 77% of the market - an increase of approximately 50% from 1991 - picking up most of the 17% drop in the non-filtered end of the market. The medium and premium filter cigarette segment increased 12% in 1998 when compared with 1997.     In North Vietnam, domestic manufacturers such as Vinataba dominate the cigarette market. Yet while domestic brands such as Vinataba's Vinataba, Du Lich, and Hoan Kiem are popular, other jointly manufactured foreign brands such as State Express 555, Dunhill, White Horse, Marlboro, Everest, and Virginia Gold are growing fast. According to official figures, Vinataba sells 44% of its total production in the north of which 5% is non-filtered brands, 64% is cheaper filtered cigarettes, and 31% is medium and premier segment brands.     In South Vietnam, domestic manufacturers face strong competition from illegal imports and MIV licensed brands. Here, Vinataba and domestic makers fight illegal imports, especially brands such as Jet and Hero. Of Vinataba's sales in the south: 78% are non-filtered, 19% are cheaper filters, and only 2% are in the medium and premium segment.     To take a further lead in the domestic cigarette market, Vinataba outlined several steps it will take. Vinataba will invest in new machinery and equipment and new technology, mostly in order to manufacture higher quality brands as import substitutions and to replace consumption of foreign brands manufactured in Vietnam.     "Vinataba's manufacturing capabilities are sufficient to meet domestic demand," said Hai. "To avoid non-focused, scattered, and uncontrollable cigarette production nationally, the government plans to restructure cigarette manufacturing in a way designed to further integrate local cigarette production into Vinataba."     The government authorized Vinataba to discuss with foreign partners the manufacturing of the brand Jet for the Vietnam market. Currently Jet and its sister brand Hero take an estimated 80% of the smuggled market. "Jet is strong in the medium priced market segment," said Hai. "If Jet were manufactured in Vietnam and accepted by the market, Vinataba could increase its share dramatically." Hai added that this would serve as an effective countermeasure against illegal imports.     Vinataba plans to study further the manufacturing of cheaper filtered cigarettes. This is to meet the demand of non-filtered smokers switching to filters, and to make sure they opt for Vinataba brands instead of imports.     A major goal for Vinataba is to increase the quality and quantity of domestic leaf as a substitute for costly tobacco imports - Vietnam imports 50% of its tobacco requirements. Linked tothat is the need to develop a viable export tobacco market. (See related story on Vietnam leaf in this issue.)     Although all forms of advertising are banned, Vinataba plans to invest more in whatever marketing and promotion drives it can legally undertake with the view to increasing its domestic market share, and possibly develop export markets.     Vinataba aims for a bright future in Vietnam. Its "youngish" management understands the complex issues it faces in the domestic market, and look forward to developing Vinataba into a stronger force, at least domestically.     As the group increases the quality of tobacco, and materials used for cigarettes, they uplift the entire MIV segment including international brands. These new investments in improving image and quality may serve to dampen smokers' enthusiasm for smuggled brands.

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© Copyright 1999 By Lockwood Trade Journal Co., Inc.