Photo courtesy of Bulgartabac Holding AD
Factory hall at one of Bulgartabac’s manufacturing locations.
When Bulgaria’s State Tobacco Monopoly crumbled, its successor entities faced potentially hard times. But the country’s tobacco industry managed a magnificent recovery thanks to invigorated marketing and a strong drive to expand beyond the Iron Curtain.
By Thomas Schmid
Throughout the Cold War era and well beyond the demise of the Soviet Union and her former allies, Bulgaria practically served as the sole tobacco and cigarette supplier for the entire Eastern Bloc. Through its Bulgarian State Tobacco Monopoly (BSTM) – renamed Bulgartabac in 1954 - the country had created a behemoth that dominated the region. When the end eventually came, the future looked bleak as the once mighty monopoly was split up into several separate successor entities.
Bulgartabac: a worthy successor
No article about Bulgaria’s tobacco industry would, of course, be complete without Bulgartabac, the trunk company of what today remains of the original monopoly. Privatized in 2011 to better cope with the free market economy dynamics that had also engulfed Bulgaria, Bulgartabac continues to be the leading supplier in the domestic cigarette market, but has also successfully nurtured and further expanded its international presence.
After comprehensive domestic market liberalizations were implemented in Bulgaria in 2006, Bulgartabac in 2008 sold two of its factories, which under new management emerged as local competitors. “However, this competition gave us the opportunity to move forward, become more creative and innovative, generate better ideas and offer better products,” said a Bulgartabac spokesperson. Eventually the company also saw itself confronted by the arrival of “the big four”, namely British American Tobacco, Philip Morris International, Japan Tobacco International, and Imperial Tobacco. “But we are proud to say that the company has remained the market leader in Bulgaria, which is an incredible achievement.”
Though the comfortable times as a regionwide monopoly were over, Russia and a number of former Eastern Bloc countries such as Georgia, Turkmenistan, and Kazhakstan, are still among the company’s key customers Yet the company’s presence nowadays reaches far beyond its former home turf, its products being sold in over 25 countries across three continents. Asia also is taking an increasingly important role as the company has identified it as a region with great potential. Bulgartabac currently exports to Taiwan, the Philippines, and Japan brands like MM, EA , Prestige, Victory, Welcome, and Global.
“In 2015, we have increased our sales [in Asia] by 25% compared to 2014,” Bulgartabac said, adding that the company has also encountered “an interest towards our brands from other markets in the region that we have so far not tapped, and we are in the process of negotiating with potential new partners.”
Bulgartabac expanded its manufacturing infrastructure, too (see Table 1), today operating three cigarette factories plus a facility for tobacco processing. “For the latter, we purchase all types of Bulgaria-grown tobacco – flue-cured, burley and oriental – and are in fact one of the major buyers in the country. For the past five years, Bulgartabac has consistently purchased about 20% of all green tobacco produced in the country,” the company stated.
To complement its existing cigarette factories in Blagoevgrad and Sofia (the original BSTM facilities) and enhance its overall output capacity, Bulgartabac in 2013 acquired Fabrika Duvana Banja Luka (FDBL) in the neighboring country of Bosnia and Herzegovina. “After that acquisition, we invested more than BAM5 million [Bosnia and Herzegovina convertible marks; approx. $3 mil.] into technology upgrades and work materials. FDBL currently has more than 350 employees and the factory’s production output is already exported to 7 countries on 2 continents,” said the spokesperson.
Much of Bulgartabac’s commercial success is grounded in the company’s flexibility when it comes to product variety. Besides manufacturing all its in-house developed tobacco blends into different product formats depending on individual market requirements, the company can also offer various kinds of pack sizes. It is furthermore fully entrenched in following the global trends of supplying light cigarettes and slim cigarettes.
“Bulgartabac is a company that lives in the present, imagines the future and learns from the past,” said the spokesperson. “We will continue to grow, and by using our wide-reaching expertise continue to produce high quality, successful products.”
Yuri Gagarin Plc: the filter-making and printing masters
Indeed named in honor of the Soviet-Russian cosmonaut who attained fame for being the first human in space, Yuri Gagarin was established in the city of Plovdiv in 1964 as a spare parts and r&d center for BSTM. In 1971, the outfit added a division for filter rod manufacturing, as well as a printing house. “But then came along 1993, which was a turning point for the company, determining its development for decades ahead,” said Yuri Gagarin’s filter expert Onik Arabyan, referring to the tremendous changes in Bulgaria’s and the Eastern Bloc’s economic climate which led to the restructuring of the entire industry sector behind the Iron Curtain.
Yuri Gagarin managed to not only survive that upheaval but grew immensely and expanded its markets beyond the post-communist realm. The main reasons for that success, said Arabyan, were a highly professional and motivated workforce, including specialists with huge international experience and wide-ranging competencies, as well as the company’s hefty investments in machinery, production facilities, and r&d. As one result of that drive, production of combined filters was introduced in 1999.
The main advantage experienced by the company after entering the public arena in 2011 was “suddenly being able to make decisions on our own, which was an interesting challenge on all levels,” recalled sales director Georgi Zisov.
The company had to become much more market-driven and start following global trends in both the filter and printed material markets. After hiring specialists with plenty of valuable international contacts and know-how, sales began to take off, reaching €55 million in 2015, while the number of employees peaked at 620 people in the same year. But the company also had to strive for improved efficiency. All production halls were modernized and equipped with new state-of-the-art machines for the printing and filter making divisions. The still existent spare parts department, however, was closed down for good, because analysis showed that it was much more cost-efficient to outsource spare parts.
As direct BSTM successors, Bulgartabac and Yuri Gagarin Plc maintain a close affiliation to this day.
“Overall, Bulgartabac is still our largest customer when it comes to volume and turnover,” said Arabyan. “Bulgartabac initiates lots of new projects, new designs, new technologies, TPD changes, and so on, which pushes us to follow suit and likewise be more forward-thinking in our own r&d and development.” For example, the printing department constantly introduces new printing technologies and effects, while for the filter manufacturing division the challenges lie in optimizing existing manufacturing specifications and coming up with new filter types.
“Collaborating with a big company [like Bulgartabac] allows us to become better and more innovative ourselves, and that leads to innovative products which we can then offer to all our customers with confidence,” Arabyan said.
Yuri Gagarin Plc at present is by far the largest producer of filter rods and tobacco-related printed materials (blanks, outer packaging, inner frames, filter tube boxes, etc.) in Bulgaria.
“Bulgaria currently has three [major] cigarette manufacturers, and Yuri Gagarin works with all of them, at least to a certain extent,” said Zisov. Meanwhile, the company also supplies customers in more than 30 countries worldwide, mainly in Europe and the Middle East. “But we have secured some customers from Africa, the United States, and the Far East too,” Zisov asserted.
Over the course of the coming three to five years the company intends to research other untapped markets in the Far East, Central and Southern Africa, and Northern America.
Meanwhile, the company is pondering further expansion of its product portfolio, particularly with regards to printed aluminum foil and tipping papers.
“Most of our customers are frequently asking about those products and we are thinking if we should add those to our portfolio within the next two to three years as well,” said Zisov. “Yet even without these additions, Yuri Gagarin can already fulfill pretty much every requirement, offering both rotogravure and offset printing. We can definitely supply hard packs, outers and soft packs, and have huge experience in applying special effects such as hot-foil, soft-touch inks, embossing, debossing, micro embossing, holograms for brand protection, and others,” explained Zisov.
Filters are meanwhile produced using a robust machine inventory covering the whole range of mono-acetate filters in terms of various lengths, diameters, pressure drops, PWP, etc. The company also has made its mark in special filter production, such as dual-combined filters with charcoal or different additives, recess filters in different formats or menthol, and fruit-flavored filters.
“And we are definitely going to complement our portfolio with other special filters for queen size and other newly developed cigarette formats,” Zisov assured. This also seems necessary, because Yuri Gagarin has observed that “different companies have vastly different sets of mind when it comes to filters.” Some of them, Zisov said, are very pragmatic and rely on mono-acetates only, while others like to experiment extensively with triple-combined, hollow, or capsule filters – and anything in between.”
images courtesy of KT International SA
Cigarette making at KT International
KT International SA: more formats, more choice, more success
Together with Bulgartabac and Yuri Gagarin, KT International SA (KT) likewise was born from the meltdown of the now-defunct state monopoly; and just like its “siblings” the company has fared exceptionally well and against all odds. Founded as recently as 2008, KT inherited a former BSTM factory with an annual cigarette production capacity of 3.5 billion sticks. While over the following two years this was gradually increased to 5 billion sticks, the old BSTM factory eventually proved no longer able to keep up with rising demand. In 2014, the company therefore opened a brand new, state-of-the-art manufacturing facility in the city of Plovdiv, which currently employs more than 460 people and has an annual capacity of 20 billion sticks.
“It has parallel production capabilities that provide total flexibility in manufacturing and, equipped with the latest technology, delivers against rigorous European standards and requirements,” elaborated Stuart Buchanan, global sales and marketing director. Besides a global portfolio of consumer-led cigarette brands, the company today also supplies processed tobacco leaves and cut rag.
“Moreover, we also offer our processing, preparation, and production facilities to independent companies and customers with private label brands,” remarked Milen Shterev, KTI’s head of global marketing.
While after its inception in 2008 KT initially began to kick off with sales restricted to the domestic market, management almost immediately also embarked on a determined global expansion drive. With its export division having grown stronger and stronger over time, the company and its products have since penetrated 31 countries on three continents.
“Our products are already well established in European countries like France, Spain, Italy, Romania, Czech Republic, Bulgaria, and others and we are currently also building our brands in the Middle East, for example in the U.A.E., Palestine, Egypt, and Israel,” explained Shterev. “We still only have a very small base in Asia… but countries like Malaysia, Singapore, and Japan will become important markets for us to enter, because it is there where we can give already very price sensitive consumers access to international brands with EU manufacturing quality at an affordable price.”
“Our results for the first quarter of 2016 have shown a 34% growth in value turnover compared to the same period in 2015, which translates to a 30.7% increase in volume,” Buchanan said. “We pride ourselves on the fact that this was not achieved through excessive price increases but through sustained volume growth in our key markets.” He insisted that although the company entered a few new markets recently, the largest portion of that growth came “from organic growth in existing markets where consumers are moving to our products due to our increasing reputation as an international producer of quality brands.”
KT’s internationally most popular brands currently are Corset and The King, which are primarily sold in Europe. In the UAE and other strategic Middle Eastern markets, the designer brand Falcon was launched a while ago. And although KT considers all of its current markets as key markets (Buchanan: “We work with the same passion and focus and effort on all of them.”), France appears to hold a place of honor, though, as the country was one of the first international markets the company penetrated and where particularly Corset maintains strong sales against a wide array of competing brands.
Yet this seemingly comfortable international position does not entice KT to rest on its well-deserved laurels. “Every one of our 31 markets needs to be developed further,” said Shterev. “Although we are small, we are expanding rapidly and we believe that we have room to grow in all our markets as more consumers move to our trusted brands that offer quality, style and value.” How serious the company is in this resolve is vividly illustrated by the diverse choice of different cigarette formats being offered. While king size is globally still the most popular format, long sizes and slim sizes are experiencing strong growth in many regions, too – and KT certainly appears determined to supply all of them. “In fact, we are not planning to discontinue any [of the currently marketed] formats. On the contrary: One of our upcoming projects will see the introduction of the so-called queen size format,” disclosed Shterev. He added that his company is also developing new EU TPD2-compliant slim and superslim pack formats. “But these are still strictly confidential and I cannot divulge any further information at this moment.”
Capital Tobacco: a global approach
Established in the 1990s, Capital Tobacco became independent and in charge of its own development from attracting foreign investments. Although headquartered in Bulgaria and with factories in Bulgaria and Moldova, Capital Tobacco has also set up a branch in South Africa, where it buys tobacco directly from farmers in countries such as Kenya, Uganda, Zambia, Zimbabwe, and Malawi. As such, the company sees itself as not only a Bulgarian company, but an international one as well, and a company that is well on its development path, enjoying a 14% growth for the past two years.
Capital Tobacco is considered to be one of the top buyers of Bulgaria’s tobacco crop, buying between 10-20% of it. In addition to that and the African tobacco, Capital Tobacco also buys a large quantity of tobacco from Asian countries like China, India, and Indonesia.
A key feature of Capital Tobacco’s products is their competitive pricing which is attractive to their clients in existing markets and new ones. “Before we were focused only on the Russian market and markets that were [former CIS countries] like Ukraine, Belarus, and Moldova,” said Konstantina Markova, c.o.o. of Capital Tobacco. “Now we are more worldwide. That’s why we established a branch in South Africa, that’s why we started working with more companies outside of the EU.” The company also has clients in Asia and is currently looking at opportunities in the US and Canada.
“If I have to be honest in Bulgaria we are not selling a lot,” Markova further explained. “We are not working with Bulgartabac, we are not working with Kings Tobacco. First of all, [it’s] because basically we have to buy from the same farmers from the same place and sell it to them without a profit. Second of all, even if we were able to source them tobacco from other countries, the payment terms for both companies are very, let’s say, not convenient for us, so for us there is no need to deal with the companies that the terms are not favorable.
“We have worked with Bulgartabac in the past, maybe 10 years back. We have never worked with Kings Tobacco because they’re quite new. We’re open to partnership, but [when we say] partnership it’s something that basically is suitable for you and suitable for the other side. We do have a very good market share in Eastern Europe, so we’re happy with that and we are more globally orientated, not so much Bulgarian orientated [in terms of sales].”
Aside from tobacco and tobacco blends, including RYO and cut rag, Capital Tobacco is currently developing its own shisha product that is expected to be introduced to the market in Q1 2017. “We are going to [launch the shisha product] in Greece, Serbia, Bulgaria, Moldova, and Romania first. These are the target markets right now because we are more local and we will be able to control the market better. At the second stage we will do Africa because our other head office is there and we will start [targeting] South Africa, Namibia, Botswana and all these countries where there is a bigger Islamic community and people who are going to be attracted to [this kind of product]. [From there] we’re going to see where else is asking us to go.”