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China’s tobacco industry delivered a good set of economic operation data in Q1 2024.
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China’s cigarette market has hidden dangers.
In Q1 2024, China’s tobacco industry delivered a good set of economic operation data, in line with previous expectations. It achieved a crucial stable start featured by maintaining reasonable volume growth, steadily enhancing tiering and branding, and improving overall market conditions.
Q1 characteristics
Despite favorable data, the basis and conditions for data growth showed significant changes and differences compared to previous years.
According to the data, growth is slower. The increment of cigarette sales volume reached its lowest point in five years. After achieving a good start in January 2024, it continuously declined in February and March, and the tiering growth also slowed down significantly. The average wholesale price of a single box in the first three months only slightly increased compared to the same period in 2020, and in March it fell back to triple-digit growth. High-priced products in some markets continued to decline.
On the one hand, the increment is not that much, and tiering growth is not so fast. On the other hand, there are also significant differences in the quality of growth. However, given the difficulties and challenges such as insufficient market demand and weak social expectations – together with many risks and hidden dangers especially the complexity, severity, uncertainty, and instability of the external environment – it is already commendable that China’s tobacco industry maintained stable growth above last year’s high growth base for the first quarter.
Main difficulties and pressures
The first challenge the industry faced is the pressure on tiering growth. The slow-down in structural growth, the increasing difficulty in tiering improvement, the weak demand for high-end and high-priced products, and the lack of vitality have affected the upward trend of tiering in the short-term. If there is no improvement for a long time, this will spread into relatively large difficulties. After a continuous decline and reduction in sales for several months last year, the ultra-high-end segment experienced a rare decrease in sales in January this year, and the continuous reduction has continued until now. Until the first quarter this year, the state of the ultra-high-end cigarette market was relatively flat and weak, the pressure on brands still relatively high. Retail customers also have some dissatisfaction. If the high-net-worth group is allowed to “move on” to other tiered products, this prolonged state of weakness will cause irreversible value loss.
Another challenge is pressure from the current state of the market. Consumer differentiation not only brings about a downward trend in tiering, but also further exacerbates the sluggish state. The previous sales growth was mainly driven by holiday consumption and gift marketing. However, a considerable part of this year’s sales growth came from the control and reduction of mid-to-low-end products, resulting in a slowdown in tiering growth. The high-end and high-price market remains relatively sluggish. In this case, as long as the investment in mid-to-low-priced products is appropriately increased, sales can be stabilized and growth can be maintained in stages. That is to say, if the sales of mid-to-low-end products decrease slightly, the sales indicators will look better, but the difficulty of tiering growth will continue to increase. If this issue is not effectively solved for a long time, it may in turn affect demand stability.
The third challenge is the impact of the large consumption environment. As the sales volume of the Chinese cigarette market continues to approach its theoretical value, coupled with an aging population, weakened consumption, and slack demand, it further weakens market vitality, reduces demand elasticity, compresses growth space, and constantly shakes the foundation of stock maintenance. However, the low interest of young consumers for cigarette consumption also affects the traction of the incremental growth. Therefore, in such an overall consumption environment, it is not easy for the Chinese cigarette market to maintain stable growth.
In fact, after the pandemic, the expected consumption recovery did not come as estimated, and retaliatory consumption gradually became a sustained and ongoing consumption differentiation, with affordable substitutes becoming a more popular choice. Statements like “It’s not that I can’t afford XX, but that XX is more cost-effective,” are self-deprecating and reflect more feelings of helplessness. In this large consumption environment, although the Chinese cigarette market has relied on the governance advantages of the tobacco monopoly system to achieve stable operation and sustainable development during and after the pandemic, consumption differentiation still continues to spread to cigarette consumption. In the short term, scientific and systematic operation and regulation can be used to support growth, but long-term stable growth still faces considerable pressure and challenges.
“Stability” is an advantage, but with risks and hidden dangers
From the overall economic performance in the first quarter, there is still a gap between the development status of the Chinese cigarette market and the ideal state. “Stability” is an advantage, but also has risks and hidden dangers. In a sense, stability means a lack of vitality. More important than stability is how to solidly promote brand innovation and development, and how to solve lack of vitality and influence for brands. Faced with the reality of scarcity, depreciating value and sluggish growth, and weakened driving force of large brands after a long period of development and continuous scaling, there is a need to pay more attention to the changes and opportunities brought by new technologies, new demands, and new trends. After all, competitive technological and product innovation is best for brand preservation, and can fundamentally maintain a good market state and stable economic operation.