By Allen Liao
At a time when the Chinese government is about to implement a set of stringent regulations over smoking in public places nationwide, slim cigarettes, which used to be neglected by Chinese smokers, are, against all odds, enjoying increased sales in the country.
Under the current, somewhat unfavorable, situation brought about by increased tobacco control efforts, the Chinese tobacco industry generally expects slim cigarette production and sales to become a new driving force for growth, help meet demand for more consumers, and lead to a change in the nature of cigarette products in China.
Since 2010, slim cigarette sales have grown at an annual rate of 40%, with the sales of slim cigarettes dubbed a “blue sea of value” that represents a “unique landscape”.
In 2014, domestic slim production continued the trend of five consecutive years of robust growth, with the output reaching 310,000 cases* (15.5 billion cigarettes), up 99% year on year, and with the sales volume hitting 279,600 cases, up 102.1% year on year. By the end of December 2014, 16 of the 18 China Tobacco provincial-level corporations, except Shanghai Tobacco Group and China Tobacco Fujian Industrial Co., Ltd., all had slim cigarette brands, with the total number of slim cigarette brands reaching 20 and the total number of specifications of slims reaching 40. In its capacity as a leading slim manufacturer, China Tobacco Jiangsu Industrial (CTJI) from China’s eastern Jiangsu Province, produced 7.58 billion slims in 2014, accounting for 48.9% of the segment’s output in that year, followed by China Tobacco Hubei Industrial (CTHI) with 4.915 cigarettes or 31.7% of total output, and China Tobacco Shandong Industrial (CTSI) with 1.525 billion cigarettes or 9.9% of the total output. The other 13 manufacturers produced a total of 1.48 billion slim cigarettes, accounting for 9.5% of total output that the year.
* (Note: 1 case = 50,000 cigarettes)
By the end of December 2014, there were 20 slim cigarette brands, including six approved after July 16, 2014. CTJI, CTHI, as well as China Tobacco Anhui Industrial (CTAI) and China Tobacco Industry Development Center (CTIDC) each own 2 brands, and the other 12 manufacturers own 1 each.
By the end of December 2014, of the 20 slim cigarette brands CTJI’s Nanjing was the largest, with sales volume reaching 138,300 cases, or a 49.5% market share, followed by CTHI’s Yellow Crane Tower with 78,100 cases, or 27.9%, and CTSI’s Mount Tai with 28,400 cases, or 10.2%. The aggregate sales volume of the other brands reached 34,700 cases that year, which corresponds to 12.4% of the market.
Of the 40 specifications of slim brands that existed by the end of December 2014, there were 7 with annual sales volumes in excess of 10,000 cases each – the Yellow Crane Tower (Famous Tower Under the Heaven) with 71,200 cases, Nanjing (Xuanhe Gate) with 67,600 cases, Nanjing (Twelve Beauties Flue-Cured) with 45,200 cases, Mount Tai (Xinyue) with 24,000 cases, Nanjing (12 Beauties Mint) with 13,700 cases, Nanjing (River Stones) with 10,400 cases, and The Red Golden Dragon (Hard Blue Aini) with 10,200 cases. The aggregate sales volume of the aforesaid 7 specifications reached 242,300 cases in 2014, accounting for 86.7% of the total segment’s sales that year.
In 2014, slim cigarettes were on sale in 33 provincial-level regions across China, with the sales volume varying rather significantly from one region to another.
Geographically, the slim market can be classified into four categories. The first category comprises Shandong Province and northeast China. Sales volume in Shandong reached 65,800 cases in 2014, accounting for 21.9% of the national total, while the sales volume in Liaoning, Jilin, and Heilongjiang Provinces as well as Dalian City in northeast China reached 105,100 cases that year, which corresponds to 35% share. The second category comprises the Inner Mongolia region, Shanxi, Hebei, and Shaanxi Provinces, the city of Beijing, and other regions in north China, with the sales volume there reaching 53,800 cases in 2014, or 17.9% share. The third category comprises Jiangsu and Sichuan Provinces in southwest China, Hubei and Henan Provinces in central China, and other regions, which are considered both slim cigarette production and marketing areas, with the sales volumes there reaching 34,200 cases in 2014, corresponding to an 11.4% share. Finally, the fourth category comprises the other 19 province-level regions other than the aforementioned 14, with the sales volume reaching 41,400 cases or 13.8% share.
Despite a slowdown of economic growth in China that has resulted in near-saturation of cigarette sales in the country, slim cigarette production and marketing – as a new point of growth for the tobacco industry – face a rare period of opportunities for development.
Slim cigarettes were originally designed for female smokers, but the traditional definition has been fundamentally changed. They are now considered fashionable, novel, graceful, pioneering, and individualized, and are gradually being accepted by all consumers. Along with steady increases in the segment, there is growing market demand for supply, giving rise to greater room for further market development.
A few years ago, technological know-how of transnational tobacco manufacturers was needed in developing and manufacturing slim cigarettes in China, mainly when it came to developing blend-type products and those with flowery, fruity, and milky flavors, which, however, could hardly gain favor with Chinese smokers. Under the new situation, the tobacco industry has managed to develop Chinese-style flue-cured type of slim products, which have been well received by Chinese smokers.
Production Costs Have Been Lowered
For tobacco manufacturers, slim cigarettes are an ideal way to apply lean management principles and lower costs of production. For example, with a diameter of 5mm, a slim cigarette is about half the size of a regular cigarette, not to mention reduction in the weight. Therefore, slim production incurs lower consumption of raw materials, and can be an effective approach in response to control over growing of leaf tobacco.
And finally, slim production also conforms to the trend of lowering the tar level in tobacco products. For years, the tobacco industry has been trying to lower the tar level and reduce the content of other harmful substances in tobacco products. Slim cigarettes use the perfect medium to drive the tar levels down and increase the content of aroma in tobacco products.
In 2015, the tobacco industry continues focusing energy on developing and producing the segment as a new point of growth in its endeavor to reduce the content of harmful substances in tobacco products, upgrade cigarette products, lower production costs, and raise production efficiency, as well as meet the new trend of consumption and increase effective supply. As a result, slim cigarettes will continue to grow. From January to April 2015, the output nearly doubled (194%) over the same period last year, with the sales growing by 172%, and with the commercial sales value growing 160% year on year. In the first four months of 2015, the number of slim brands increased to 21. The top three in terms of sales in this period were Nanjing, with 98,900 cases, up 1.6 times year on year; the Yellow Crane Tower, with 41,500 cases, up 72.21%; and Mount Tai, with 15,100 cases, up 84.43% respectively.
Because of favorable policy support, the trend of robust development has not changed. It is predicted that over the next 3-5 years, slim cigarettes will acquire the following characteristics:
To begin with, market competition will become increasingly intense, and existing market shares will undergo fundamental changes. In 2014, the tobacco monopoly administrative authorities approved 27 slim specifications, accounting for 51.9% of the manufactured total. Since the development of new products takes some time, marketing will likely stay more or less the same in the 2-3 years. But in the next 3-5 years, the landscape of slims competition is likely to see drastic changes. The existing competitive brands will probably see development due to their marketing advantages and change their existing market share. For example, the slim Yellow Golden Leaf (Aishang) – a product of China Tobacco Henan Industrial, approved only on June 10, 2014 – saw its annual sales volume reach 4,900 cases the very year of its approval. Presently, this brand is in the eighth place among all slim cigarettes on sale, showing a trend of robust growth.
Secondly, the structure of the slim market will continue to undergo improvement, and the manufacturing of some high-end products will probably show rapid growth. In 2014, the wholesale price for slims reached RMB167.98 (US$26.70) per carton, or RMB61.85 higher than the average general cigarette wholesale price of RMB106.13 per carton. Last year, the slim cigarette products were all medium- and high-end products. As slim cigarettes are increasingly accepted by consumers, such high-end products as Suyan (Eaglewood), Nanjing (River Stones), Mount Tai (Buddha’s Light Slim), the Yellow Crane Tower (Hard Peacefulness) and Yellow Golden Leaf (Heaven Fragrance Slim) may show a trend of rapid and robust growth.
And finally, both the output and sales volume of slim cigarettes will continue their rapid growth, although the pace is likely to slow down to some extent. In the four-year period from 2010 to 2014, slim cigarette sales grew 117 times, with an annual increment of 159.7%. In 2011 alone, it reached a peak of 273.6%.
When it comes to the trend of development, the growing quantity of slim cigarettes shows that production and marketing will continue to grow rapidly over the next 3-5 years. If an average annual growth of 30% can be maintained over the next 5 years, output may reach 1 million cases; and assuming the average annual growth of 50%, the output may reach 2 million cases. In this scenario, the segment will cease to be a niche product and become a “mainstream” one.
What is just a small market today, may become a huge market tomorrow. Although the market share of slim cigarettes is very small, its development potential cannot be overestimated. In China, slim cigarette production and marketing is a potential new point of economic growth for the tobacco industry.