iQOS device with Marlboro HeatSticks
By Thomas Schmid
Japan may still be one of the most smoker-friendly industrialized countries in the world, but several compounding factors put increasing pressure on sales which should gradually slump over the next years.
Overall, Japan’s cigarette market continues to be dominated by three key players, home-grown Japan Tobacco Inc. (JTI) and multinational companies Philip Morris Japan K.K. (PM) and British American Tobacco Japan (BAT). In 2014, Japan Tobacco claimed a total market share of 60.4%, compared to 60.5% in 2013. However, sales volume declined to 112.2 billion sticks in 2014, representing a contraction of 3.6% over the 116.5 billion sticks sold in 2013.
Ryohei Sugata, JTI general manager, attributed this development to a range of issues such as “the aging of Japanese society, growing awareness about the health risks associated with smoking, the tightening of smoking-related regulations, and tax hikes.” Meanwhile, PM cited Tobacco Institute of Japan (TIOJ) IMS data, which stated a total market share for the company of 25.93% in 2014, down 0.73 percentage points from 26.66% in 2013.
Sources: Euromonitor International; from national statistics / *Japan Tobacco Inc., “Annual Japan Smoking Rate Survey” (May 2014) **Defined as daily smokers at and above the legal smoking age of 20 years.
Fewer Smokers, Fewer Sales
Naturally enough, a major factor contributing to diminishing sales is the decrease in the consumer base that has been afflicting the industry for several years. While long-term smokers – encouraged and perhaps even frightened by ongoing health warnings and anti-smoking campaigns – are quitting while many younger citizens do not pick it up in the first place. Although the proportion of smokers among a population of almost 127 million (2015 estimate) is still comparatively sizeable, it has experienced a creeping but steady decline according to research conducted by Euromonitor International (See Table 3).
Parliament 100’s Box
Underage Smoking Prevention Successes
But to further understand the thinning-out of the consumer base, one also has to look at Japan’s rather successful measures to curb underage smoking. The country’s Underage Smoking Prohibition Law stipulates that smoking is only permitted from age 20 onwards and this age restriction certainly also has an impact on plummeting smoker numbers. If someone isn’t smoking by age 20, the chances that they’re going to smoke at a later stage in their lives are arguably much lower than if they had been starting from a younger age.
TIOJ in particular is very active in preventing underage smoking. For several years running, the organization has earmarked every July as “Youth Smoking Prevention Reinforcement Month”, during which it disseminates leaflets, brochures, and stickers and conducts public information events at tobacconists. It also organizes anti-smoking campaigns at junior and senior high schools and recreational venues across the country where many minors gather. The initiative furthermore includes the year-round pasting of “Under 20 Years Old Smoking Ban” stickers on cigarette vending machines and on shop and door windows of point-of-sale outlets, as well as frequent placement of advertisements requesting that adults take responsibility for discouraging underage smoking.
Tobacco Institute of Japan logo
The Taspo Card
An important development to tackle underage smoking was the nationwide introduction in July 2008 of the so-called Taspo card system, which is deployed in virtually all cigarette vending machines. Buying cigarettes from vending machines is not possible without a Taspo card.
“The Taspo card is basically a contactless RFID smart card needed for age verification when purchasing cigarettes from a vending machine”, explains Yasuhiko Bunazawa, TIOJ’s managing director. Jointly developed by TIOJ, the Japan Tobacconist Federation, and the Japan Vending Machine Manufacturers Association, the card can be obtained free of charge. It electronically stores the age information of the holder and can only be acquired by adults aged 20 or above at tobacco retailers upon filling out an application form, presenting an official ID document, and having their photo taken.
Freebies Drive Convenience Store Sales
Meanwhile, Euromonitor observed in its most recent country report on Japan that in 2013 more than half of all cigarettes sales were made at convenience stores - at the cost of declining sales through vending machines. The research firm attributed this development to the comparatively complicated – thus inconvenient – Taspo card application process.
“Manufacturers, noticing such consumer inclination to convenience stores, subsequently allocated their resources more onto point-of-sales marketing at convenience stores”, the report said, and “attaching promotional freebies to cigarette [packs] is the most common marketing activity. Such freebies [may] include a lighter, a portable ash tray, [ready-to-drink] canned coffee, and chewing gums.” As a matter of fact, shelve space for cigarettes at convenience stores is limited and therefore manufacturer are compelled to offer attractive promotional gifts not only to being able to properly display their products but also to reach their consumers, the report implied.
The Ministry of Finance reported that there were approximately 264,864 retailers of tobacco products nationwide at the end of fiscal year 2014, a decline of 1.4% compared to the previous year (268,530). During the same fiscal year, 6,497 retail outlets opened up while 10,163 closed down their businesses.
Tax Hikes Stifle Profits
Yet another prime factor contributing to sales decreases – and affecting the profits of both retailers and manufacturers – are various tax hikes implemented in recent years. “During the last 10 years, the Japanese market has experienced two excise tax raises, in July 2006 and October 2010, plus a VAT increase in April 2014,” says TIOJ’s Bunazawa. “As a result, the average price for a pack of 20 cigarettes has jumped up considerably.” A further VAT increase from currently 8% to 10% will most likely occur in April 2017.
According to TIOJ, Japan’s excise tax comprises three separate taxes, namely the national tobacco excise tax, the regional tobacco excise tax, and the tobacco special excise tax. The calculation of these taxes is extraordinarily complex and applied at the manufacturing base to units of 1,000 sticks instead of packs (which is the reason why Japanese cigarette packs do not bear tax stickers): 1,000 cigarettes are currently levied with ¥5,302 (national tobacco excise tax), ¥6,122 (regional tobacco excise tax), and ¥820 (tobacco special excise tax). This translates as a total excise tax of ¥244.88 for every standard pack of 20 sticks. (¥100=US$0.80.).
Another JT bestseller,Seven Stars Charcoal Filter
Together with the current 8% VAT rate on the retail price of a standard pack, the average total tax burden pans out at approximately ¥276.73 per pack. This translates to approximately 64.36% of the retail price as TIOJ puts the average price for a pack of 20 cigarettes sold in FY2014 at approximately ¥430. Consequently, the average remaining margin of ¥153.27 not only must cover raw material, manufacturing, and distribution costs but also the net profits of both manufacturers and retailers. (See Table 4 for average cigarette pack price.)
To put this into perspective, the Euromonitor report offers an average cigarette pack price breakdown based on selected brand examples in the premium, mid-range and economy segments (deviations from the above figures are the result of sometimes considerable price differences across brands):
New Brands and Existing Brands in Broader Variety
Brand diversification, the introduction of new brands, as well as re-brandings (e.g. as it happened with Japan Tobacco’s Mild Seven in 2013; see side box) appear to be the most effective measures manufacturers currently have in order to shore up their customer bases and defend their market shares.
A minor shift has seemingly occurred in the current fiscal year, though, as the Seven Stars brand moved to the number one spot of the company’s best-selling brands, dethroning Mevius (the previous Mild Seven), although its sub brands Mevius One 100’s Box, Mevius Super Lights, Mevius Lights, and Mevius Extra Lights all occupy consecutive follow-up places in the company’s top five.
Furthermore, JTI announced the launch in late July 2015 of two new products in the Pianissimo brand range – Pianissmimo Precia Temore 6 and Pianissimo Precia Temore One, which will be the first-ever non-menthol Pianissimo and will be sold exclusively in Tokyo, Aichi, and Toyama prefectures.
In response to intensifying competition, JTI this year also will start to operate under a new organizational structure. “We will re-arrange our sales organization to strengthen consumer and trade marketing capabilities, and consolidate manufacturing facilities in pursuit of cost competitiveness,” said Sugata. “With these initiatives, [our] Japanese domestic tobacco business will be able to develop insight into consumers’ needs and promptly respond to their changes. In addition, we’ll continue to seek cost competitiveness,” he added.
Meanwhile, PM identified its biggest challenge in the circumstance that “all retail pricing for tobacco products must be approved by the Ministry of Finance as stipulated under the Tobacco Business Law. This price approval system prevents all tobacco companies from pursuing competitive pricing strategies,” said the company’s corporate affairs manager for communications and contributions, Gregory Melchior.
Currently, PM markets four cigarette brands in Japan: Marlboro, Lark, Parliament, and Virginia S., each one of them divided into several sub-brands. “Each of the 48 new SKUs launched in the Japanese market during 2014, 11 were launched by Philip Morris,” said Melcior.
Virginia S. Sophia 6100’s Box
The provided list is indeed impressive: Under the Lark brand the company launched Lark Black Hybrid 10 KS Box, Lark Hybrid Selection 1 100’s Box, Lark Hybrid Selection 6 100’s Box, Lark Ice Mint Selection 1 100’s Box, Lark Lights KS Box, Lark Royal Blend One 100’s Box, and Lark Smooth Taste KS Box, while to its Marlboro brand it added Marlboro Clear Hybrid 1 100’s Box, Marlboro Fusion Blast 5 KS Box, Marlboro Fusion Blast 8 KS Box, and Marlboro Fusion Blast One 100’s Box. And in May 2015, Philip Morris Japan expanded its Lark brand even further by launching Lark Tropical Ice Menthol 5 KS Box and Lark Tropical Ice Menthol 1 100’s Box.
E-Devices and PREPS Not Big
With regards to e-devices and cigarette alternatives like heat-and-burn devices, Japan, a country often associated with enthusiastically adopting new products and innovations, surprisingly lags behind several other westernized nations. This is due to the country’s Pharmaceutical Affairs Law, which defines nicotine as “medicine”, and correspondingly any e-cigarette or other nicotine-dispensing devices as “medical equipment”. Therefore, those require approval from the Ministry of Health, Labor, and Welfare (MHLW) before they can be marketed legally. According to JTI, there are currently no nicotine-containing e-cigarettes approved by MHLW. Sales of heat-not-burn and e-cigarettes in Japan therefore have been very limited. But consumers are permitted to order such devices from abroad as long as they only for their private use. The import quantity for re-fill cartridges is limited to one month’s personal consumption volume.
JTI in 2013 nevertheless introduced its proprietary Ploom device, a heat-not-burn tobacco product, on a trial basis in six markets, including Japan (the others are Austria, France, Italy, Korea, and the UK).
PM, meanwhile, held the world’s first pilot launch of its iQOS heat-not-burn device in November 2014 in the city of Nagoya. “Nagoya is a city that traditionally welcomes innovation. It also is the third-largest metropolitan area and fourth-largest city in Japan, making it an ideal location for our city test,” explained Melchior. “The adult smoker reception of iQOS has been very positive and has exceeded our expectations. However, as of today, iQOS is only available in Nagoya.” Melchior said the awareness rate of iQOS exceeds 42%, and that over 30% of adult smokers who have purchased an iQOS device are fully or predominantly using it instead of regular cigarettes. “We plan to expand iQOS coverage in the second half of this year,” he said.
Outlook and Forecast
In line with the prevailing relatively unfavorable market conditions, volume sales of cigarettes in Japan are expected to continue their slump over the coming years, forecasted Euromonitor in its Japan report (See Table 6). While the decline in the smoking population triggered by the rising health concerns remains the most significant reason, migration of cigarette smokers to other tobacco products also negatively affects cigarette sales. Since the tobacco tax increase in 2010 and the earthquake in 2011, which damaged the production facility of Japan Tobacco, cigarette smokers started to explore other products, such as RYO tobacco, as an alternative. RYO tobacco enables smokers to control the amount of tobacco to be used for each stick, which they perceive as a way to economize, the report said. But widening consumer preferences towards flavors also placed cigarette sales into a decline.
In terms of total value sales in the years 2015 thru 2018, Euromonitor attempted the following forecast:
Acknowledgement: TOBACCO ASIA wishes to thank Euromonitor International (www.euromonitor.com) for kindly providing their Passport country report “Tobacco in Japan” (October 2014).
MEVIUS: The Reincarnation of Mild Seven
Announced as early as 2012, Japan Tobacco changed the name of its long-standing flagship brand Mild Seven to MEVIUS in 2013. The company explained at the time that each letter of the new brand name conveyed a particular meaning and was not randomly chosen: “M” supposedly represented the first letter of “Mild Seven”; the subsequent letter combination “EV” stood for “evolution, while the “I” was to literally imply “I” (as in “I, myself”, in this case
referring to the company, Japan Tobacco Inc.). The “U”, on the other hand, was to be understood as “you”, i.e. the end consumer. And finally, the ending-“S” again
represented the “S” in the second part of the erstwhile “Mild Seven” brand name. Tobacco Japan said the main reason for the rebranding was the brand name particle “Mild” in “Mild Seven”. The brand was sold globally, and in some overseas markets the use of terms such as “mild” in relation to tobacco products is strictly prohibited, as they’re being construed as “misleading”. Since more than half of Japan Tobacco’s revenues are generated from its overseas operations, the company needed to take action to remove potential risks for its flagship brand, including ossible sales bans in certain countries. While some consumers reportedly were not happy with the name change because the new name was unfamiliar and they felt they’d lost their brand attachment, the company decided to go ahead anyway. As one of the industry’s biggest surprises of the year, the rebranding proved successful against all odds, perhaps also because Japan Tobacco invested a lot of money into rigorous product launches – or in this case, re-launches. In the event, Mild Seven in its reincarnation as MEVIUS was able to retain its volume share both at home and abroad.