Head office in Bristol, UK
Established as early as 1901 in the UK, Imperial Tobacco Group has for decades been a global force to be reckoned with, offering a string of often iconic cigarette brands and other tobacco products in its diverse portfolio.
By Thomas Schmid
Imperial Tobacco Group PLC was originally formed in 1901 as The Imperial Tobacco Company (Great Britain and Ireland) Limited. Over the following decades, the company – today headquartered in Bristol, UK – went through several expansions, mergers, demergers, and acquisitions, but also has seen rationalizations and brand diversifications. Staying in tune with the times, it had to deal with and adjust to sometimes dramatic changes in technology, commerce, and society, too. Until 1973, Imperial’s trade was almost entirely limited to the UK and Ireland, but then the business gradually began to spread out around the world. Nowadays the company’s diverse global market footprint spans more than 160 countries and it employs approximately 33,000 people.
A Business Model and Strategy for the 21st Century
Life isn’t particularly easy for tobacco companies these days, especially the multinationals. Not only do they have to prevail over formidable competition, but also must deal with increasingly restrictive legislations and regulations regarding tobacco product sales pretty much everywhere they’re active. Add to that the rising cost of raw materials and logistics, and shareholders will develop deep furls on their foreheads.
But Imperial is successfully tackling this multi-pronged challenge by implementing an ingenious business model that creates value through a strategic focus on sales, cost, and cash.
“Our focus on quality sustainable sales growth combined with the efficient way in which we manage costs throughout our operations delivers high operating margins,” explained Iain Watkins, group communication manager of Imperial Tobacco.
This approach generates the strong cash flows that not only satisfy concerned shareholders but also are reinvested in the business. That strategy supports sustainable growth and at the same time enables sustainable returns.
Sales across all of the company’s brands and in all markets are developed through four main growth drivers: portfolio management, innovation, customer engagement, and pricing. Markets are clustered to either generate growth or returns. In growth markets, long-term share and profit growth is targeted, while in returns markets the priority is the active management of already existing strong share positions.
Global Brand Portfolio Optimization
More than half of the company’s net revenue is generated through its product ranges of growth brands and specialist brands.
“We have therefore optimized our portfolio to focus on our growth and specialist brands, whereas our regular portfolio brands either add to our revenue generation or will be [eventually] migrated into growth brands,” elaborated Watkins.
Imperial Tobacco’s growth brands have rather broad appeal and several of them have been developed into “total tobacco offerings,” as Watkins calls them, providing consumers with both cigarette and fine-cut tobacco smoking experiences.
The firm’s growth brands currently are: Davidoff, Gauloises, Lambert & Butler (L&B), Parker & Simpson (P&S), News, John Player & Sons (JPS), West, USA Gold, Fine, and Bastos
According to Watkins, Imperial’s growth brands continue to outperform the market, with underlying sales volumes up 12% and market shares of up to 6.1%. In line with the company’s strategy, this growth is mainly driven by brand migrations. “In optimizing our portfolio, we’ve clustered these 10 growth brands on to 5 platforms, or ‘brand chassis’. Brands that share the same chassis also share the same growth initiatives, including innovations and pack designs. This reduces cost and complexity and drives greater consistency in the way we push their performance,” elaborated Watkins
Brand migrations primarily focus on migrating regular portfolio brands into growth brands. These migrations support the performance of Imperial’s growth brands and recently included the migrations of Royale Club to Parker & Simpson (P&S) in Iraq, Brooklyn to West in Spain, and Maxim to JPS in Greece.
“We [currently] have a considerable number of portfolio brands, a legacy of our long acquisition track record,” said Watkins. “Many are single market offerings with limited brand equity. These brands can better support our quality growth aspirations by being migrated into stronger, higher-quality growth brands.”
These migrations are of course not executed on a whim, but are in fact carefully planned and implemented gradually – usually over a period of three to six months. A key measure of success is the number of consumers in the respective market or markets who can be persuaded to complete the journey from one brand to another. “In the migrations we have completed over the last year, we’ve achieved a high success rate in transitioning consumers,” Watkins asserted.
The second pillar of Imperial’s optimized global brand portfolio is composed of its specialist brands. These are brands that are enjoyed by specific consumer groups and represent a rather dynamic range of cigarettes, but also fine cut tobacco, rolling papers, cigars, and smokeless tobacco products. According to Watkins, all of them have a track record of generating strong returns and they are:
“Our specialist brands contribute positively to our performance with underlying net revenue growth of 2% driven by strong performances from the snus and premium cigars amongst them,” said Watkins. But contributions from Golden Virginia, Drum, Route 66, and Rizla also continue to underpin Imperial’s leading global positions in the product segments of fine cut tobacco and rolling papers.
However, some challenging market conditions and the company’s stock optimization initiatives in Eastern Europe and the Middle East affected the performance of Style and Gitanes there. Meanwhile, Imperial’s premium cigars - led by Cohiba, Montecristo, and Romeo y Julieta - made gains in a number of markets, and Skruf, a snus brand, according to Watkins also had another excellent year, further enhancing Imperial’s share position in Scandinavia.
Growth and Performance
“Our growth and specialist brands now account for 59% of all our tobacco net revenues, an increase of 7% in the last year,” Watkins summarized.
In terms of performance in the growth brands segment over the past year, JPS experienced growth in Australia and the EU, Davidoff enjoyed gains in Germany and Taiwan, and good progress was also reported from West in Turkey, Ukraine, and Japan. Some innovation initiatives and a newly launched international marketing campaign supported the development of Gauloises Blondes across the markets. USA Gold maintained its momentum in several key countries and the company also expanded the brand presence of P&S, which is now available in 27 markets worldwide. Bastos reportedly performed well in Vietnam while Imperial also recorded positive growth of its cigarette brands Fine and News in Africa and France, respectively. Additionally, the company has strengthened the UK share of L&B with a new value variant.
As far as specialist brands are concerned, Watkins said: “Our specialist brands contribute positively to our performance with underlying net revenue growth of 2% driven by strong performances from the snus and premium cigars amongst them”. said Watkins. Sales of Golden Virginia, Drum, Route 66, and Rizla continued to underpin Imperial’s leading global positions in the product segments of fine cut tobacco and rolling papers.
Commenting on the financial results of the first half of FY2015 (ended March 31, 2015), chief executive Alison Cooper said: “This has been a good start to the year. The progress we’re making with our strategic agenda is improving the consistency and quality of our performance, with our growth brands delivering 12% underlying volume growth and further gains from our specialist brands. We continued to build momentum in our growth markets and generated positive results from [our] returns markets. Cash conversion was up, our debt reduced significantly, and we delivered another dividend increase of 10%. We are building on these successes in the second half and look forward to completing the US deal and realizing the benefits of our enhanced brand equity and scale in this important market.”
The US Deal
On July 15, 2014, Imperial Tobacco announced that a subsidiary - ITG Brands - would enter into a purchase agreement with Reynolds American Inc. for the acquisition of a number of that company’s cigarette and e-cigarette brands and assets, and following Reynolds’ impending acquisition of Lorillard Inc. The deal was concluded on 28 January 2015 and was subsequently approved by the US Federal Trade Commission on 27 May of the same year. On June 8, the United States District Court for the District of Columbia approved the sale of the acquired cigarette brands and assets to ITG Brands in accordance with the Department of Justice case involving those brands.
“I’m delighted to announce the completion of this deal, which will transform our position in the US and generate significant returns for our shareholders. We will focus on leveraging our enhanced scale and capabilities to maximize growth opportunities for our portfolio and establish ITG Brands as a major competitive player in the US tobacco market,” said Alison Cooper at the time in a statement to shareholders and media.
The deal reportedly was worth a total of USD7.1 billion, including brands and infrastructure assets. The brands acquired were Winston, Salem, Kool, Maverick, as well as e-cigarette brand Blu, while the newly acquired assets included a manufacturing facility, national sales team, and various marketing resources.
Imperial’s Asia Operations and Key Brands
The company currently operates in Taiwan, Japan, South Korea, Vietnam, and Laos.
In Taiwan, its key brands are Davidoff, West, Boss, and P&S, all of which are reportedly well presented in the “convenience trade channel”, i.e. sold over convenience store counters.
“We also manufacture in Taiwan for the local and other Asian markets where we are present, particularly Japan,” explained Watkins.
The key brand in Japan is West and Imperial has poured considerable resources into building its market presence and marketing capabilities there since entering Japan a mere two years ago.
“We use a third party distribution network to ensure availability at an effective and efficient cost level,” said Watkins.
He added that sales volumes have been growing consistently in both Taiwan and Japan.
While Davidoff is the designated key brand in South Korea, Watkins admitted that sales have been impacted by exceptional excise tax increases. In Vietnam, Imperial is represented with Bastos and Fine, and in Laos the company named its key brands YSL, Bastos, and A. Cambodia is covered through the Fine, Davidoff, and Royale brands.
The main challenge in Asia for the company is the illicit tobacco trade, which is exacerbated by increasingly excessive regulations for legal products as well as tax increases.
“For example, the implementation of pictorial health warnings on tobacco packs in Vietnam resulted in the duty-paid, legitimate market in the country suddenly dropping by 20%; and all of this lost volume was quickly replaced by illicit brands,” Watkins said.