East Asia Companies Hitting It Big Overseas
KT&G’s popular Esse cigarettes
Despite influencing factors that included higher cigarette taxes, tougher regulations, and a challenging economic climate both domestically and internationally, the two leading tobacco manufacturers in the East Asia market has been able to increase their overseas markets while handling challenged domestic ones.
By Nattira Medvedeva
Record-breaking overseas sales
KT&G, Korea’s leading and the world’s fifth largest tobacco company, had a great start to 2016, reporting US$293.40 million in overseas sales in Q1, its highest quarterly achievement since KT&G first started exporting in 1988.
This figure was a 38% increase from 2015. Contributing to this achievement was a 30% hike in sales in key regions that include the Middle East, Central Asia, and Russia. New markets such as the Americas, Southeast Asia, and Africa also saw increased sales, achieving 48% more than last year. In Africa and Latin America sales went up by 59% and 186%, respectively.
In the Middle East, KT&G is trying to increase its business in Iran, following the lifting of international sanctions against Iran this past January. Esse and Pine products manufactured by KT&G have proven to be popular in Iran, with high brand awareness. KT&G’s success there is largely due to its aggressive marketing efforts when other multinational companies were still reluctant to invest in the country. KT&G pioneered a new market in Iran, focusing on low-tar and super slim Esse opposed to the high-tar cigarettes that was at the time favored by smokers there. KT&G entered the Iranian market in 2007 when it partnered with the state-owned ITC to produce cigarettes. In 2008 the company set up KT&G Pars. Then, a factory was set up in Tehran to produce Esse and Pine cigarettes
In 2011 KT&G started exporting Esse cigarettes to Iran. That year its sales was at $1.1 million. In 2015, that figure grew to $24.7 million. Currently KT&G enjoys a 10% share in the Iranian market, following Japan Tobacco International and British American Tobacco.
KT&G’s overall overseas cigarette sales surpassed domestic cigarette sales for the first time in 2015, with overseas cigarette sales, including both exports and local production, reaching 46.5 billion sticks, while domestic cigarette sales were 40.6 billion sticks. Over half of the exports was Esse cigarettes, which has been the top-selling super-slim cigarette in Korea for more than a decade and now counts for more than a third of the global super-slim market.
In 2015 KT&G reported domestic sales of US$1.64 billion (KRW1,927 billion), a 2% drop from 2014, and overseas sales of US$581 billion, a year-on-year 27.8% increase.
Moving forward, KT&G is undaunted and remains positive, despite Q1 results showing a 25.5% drop in its domestic sales from US$485.6 billion to US$361.8 billion. Its plans for 2016 include retaining its leading position in the domestic tobacco business and recovering a market share of 60%. In its overseas tobacco business, KT&G will continue to focus on making inroads into large emerging markets with high growth potential, including Africa and Latin America, while increasing profitability and stability in existing overseas markets.
Focus on Africa
KT&G is not the only transnational tobacco company looking closer at Africa. Japan Tobacco International (JTI) is, too, as evidenced from its recent bid of US$510 milion to acquire 40% of Ethiopia’s National Tobacco Enterprise (NTE). JTI’s offer was more than double of that of BAT’s bid of US$230 million. JTI already has established presence in other African countries, such as Tanzania and Sudan.
NTE is the only company allowed to trade, manufacture, or sell tobacco products in Ethiopia, Africa’s second-most populous nation with about 100 million people. It owns a factory in Addis Ababa and four farms.
Making a bigger footprint
Like KT&G, JTI also expanded its geographical footprint in 2015, as well as achieving increased market share in most of its key markets and double-digit profit growth at constant currency.
In Iran, JTI acquired Arian Tobacco Industry (ATI) by JTI PARS. The acquisition of ATI complements the JTI PARS set up, bringing strong value brands to an already robust premium and mid-price portfolio.
JTI’s international shipment volume in 2015 declined a mere 1% compared to 2014 to 393.9 billion cigarette equivalent units, due to significant industry contraction and a volatile operating environment in the Middle East. What helped lessen the drop in volume was driven by its global flagship brands (GFB), which are Winston, Camel, Mevius, Benson & Hedges, Silk Cut, Sobraine, Glamour, and LD. JTI’s GFB sales actually grew by 4.3% to 273.6 billion cigarette equivalent units. As a result, GFB counted for 69.5% of JTI’s total shipment volume, an increase of 3.6% from the previous year.
JTI gained market share and shipment volume in Italy, France, and Spain and achieved top spot in the UK market share. JTI now has the top spot in three of its seven key markets, namely Russia, Taiwan, and the UK. It has also achieved record market share in France, Spain, and Turkey and is the fastest-growing tobacco company in Italy. In 2015 Winston held its market share in Russia while becoming the number two brand in France and Spain, and number three in Taiwan. Camel became the number one brand in Turkey. LD achieved record market share in Russia and returned to the number three position in this market.
Domestic market still strong
JTI reported that the domestic industry volume decline in 2015 was moderate compared to their initial forecast. In 2015, industry volume was 182.3 billion units in Japan, one of the largest markets in the world. JTI owns 9 of the top 10 selling products in the Japanese domestic market and enjoys a 60% market share. Domestic sales volume was also in line with the company’s forecast, falling 2.8%.
Forecast for FY2016
JTI projects that it will be able to increase its 2016 operating profit for its international tobacco business by 9%, driven by top-line, and increase operating profit for its domestic business by 3% mainly through cost optimization.
JTI’s Q1 2016 results are promising. Total and GFB shipment volumes increased 7.1% and 10.7%, respectively, in the international business side. In the domestic tobacco business, JTI’s adjusted operating profit grew 15.4% due to an increase in demand ahead of retail price changes for some of JTI’s products, the acquisition of Natural American Spirit, as well as the effects of measures taken by JTI to strengthen the competitiveness of its domestic tobacco business. The company’s domestic sales volume for cigarettes in Q1 2016 was 35.1 billion sticks, a 1.3% increase from 2015, generating US$66.5 billion (JPY 201.5 billion) in revenue, a 2.6% increase year-on-year.