Tobacco in Japan: Shifting Preferences

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By Akari Utsunomiya, Research Analyst at Euromonitor International

Japan’s tobacco market is dominated by cigarette consumption, which accounts for 94% of total sales. Sales of cigarettes totaled JPY3,781 billion in 2016, but over the past decade, the market has suffered ongoing decline in volume.

The tobacco industry in Japan is suffering from demographic changes. The decreasing and aging population of Japan is reducing smoking prevalence. Growing health consciousness is also prompting more people to refrain from smoking. Compared to 2007, cigarettes lost 33% consumption volume and legal age smoking prevalence (Japan’s legal minimum smoking age is 20) declined from 26% to 19%.

In Japan, tobacco is very restricted in terms of sales promotions, with a high level of regulation and taxation. If we think of the price, for example, of a standard-priced pack of cigarettes, of JPY440 (US$3.90) per pack of 20 sticks, 63% of this price (JPY277) consists of 8% VAT, national excise tax, and tobacco taxes.  Even though the taxed price is relatively small compared to some other countries, a high proportion of this end price is tax. Basically, tobacco manufacturers are not allowed to raise their products’ price apart from tax increases by the government (Ministry of Finance).

Furthermore, tobacco consumption is likely to be impacted by VAT or tobacco tax increases. In recent years, however, manufacturers raised the average price of cigarettes, due to the difficult business environment, a decision approved by the Ministry of Finance as exceptional.

The market environment for cigarettes

The market environment for cigarettes in Japan is challenging, with an ongoing reduction in the smoking population necessitating price increases to offset volume decline. In 2016, retail sales continued to decline, down by 5% in volume and 3% in value. Growing health awareness and anti-smoking lobbying is combining with stricter smoking legislation, and Japanese people increasingly tend to regard smoking as an unhealthy and uncool habit.

Domestic company Japan Tobacco remains the leading player, with a 61% volume share, followed by Phillip Morris Japan (24%) and British American Tobacco Japan (13%). Japan Tobacco has a strong distribution network and several leading cigarettes brands, such as Mevius and Seven Stars. Japan’s tobacco industry used to be state-owned before Japan Tobacco was established in 1985 under the Japan Tobacco Inc. Act. Since then, the tobacco market has opened to overseas manufacturers.

Menthol, flavor capsules, superking/long cigarettes eke out growth

Menthol, flavor capsules, and superking/long cigarettes are the growing product segments, albeit still struggling in a difficult market environment. New product launches are quite intense in these categories. Menthol cigarettes now have a 23% volume share, and flavor capsule cigarettes account for an 8% share, up from 4% in 2011.

Superking/long cigarettes are 100mm in length, offering two main benefits for consumers. The first is saving money, with both king size/regular and superking/long cigarettes retailing at the same price, with the latter viewed as offering better value for money. Secondly, superking/long cigarettes are also seen as preferable as they usually have a lower tar content than king size/regular variants.

Heated tobacco – a dynamic alternative

Despite shrinking demand overall, heated tobacco, a new alternative, is growing in popularity, with sales of JPY222 billion. In Japan, only heated tobacco is available in vapor products, since under the Japanese Pharmaceutical Affairs Law, vapor devices containing liquid nicotine extract cannot legally be sold in Japan.

This change was triggered by the launch of iQOS in 2014 by Phillip Morris Japan. IQOS is now distributed nationally through tobacco retail channels, in addition to its own iQOS store. Supply is struggling to keep up with growing demand.

IQOS is popular as it does not produce smoke, appealing to both smokers and non-smokers who would otherwise be subject to passive smoking fumes, and is perceived as less harmful alternative to conventional smoking. The smartphone-like appearance of iQOS also appeals to consumers who feel familiar with the product due to the growing penetration of smartphones in Japan; this also makes heated tobacco seem technologically-advanced and sophisticated.

Phillip Morris has also tried to make iQOS look like cigarettes, so that smokers feel familiar and comfortable using the product. This combination of factors is underpinning growth, and encouraging more consumers to switch from cigarettes. In response to the success of iQOS, Japan Tobacco and British American also launched heated tobacco products in 2016. Japan Tobacco launched Ploom Tech, which is the renewed version of its initial heated tobacco, Ploom, launched in 2013. British American Tobacco has also launched glo. These products currently have a limited, regional sales presence; Japan Tobacco aims to expand its sales nationally through 2017.

Heated tobacco is expected to register high growth over the forecast period. A potential threat to growth would be the imposition of new restrictions on smoking heated tobacco products, since the definition of this new, rising tobacco category is under discussion.

Currently, the restriction differs between municipalities, based on whether to regard heated tobacco the same as cigarettes, due to the inclusion of tobacco leaves, or as a new product, incorporating smokeless, ashless, heat-not-burn tobacco. Further discussion about regulating these new products can be expected over the forecast period, not least in preparation for the Tokyo Olympics 2020.