Proudly Independent

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Global cigarette markets are increasingly dominated by “The Big Five”. But there still are numerous independent manufacturers around who hold out against the overwhelming competition. In this continuing series on independent cigarette manufacturers, Tobacco Asia talks to two of them.

By Thomas Schmid

Almost not a week passes without news reports about one of the multinationals taking over yet another cigarette manufacturer somewhere in the world, assimilating it into their rapidly swelling corporate body. Some critics have warned that this continuous expansion might eventually lead to a world market where only the multinationals’ brands remain, possibly culminating in a cartel-like situation. But doomsday predictions of this sort are perhaps painting too dark a scenario. Despite all ongoing acquisitions the globe still brims with many independent manufacturers who are successfully carving out market shares for their distinctive brands. The world even sees the emergence of new companies, who are obviously confident enough that it is a worthwhile endeavor.

Acquiring a king-maker

It was only in 2014, when the Raleigh, North Carolina-based US Tobacco Cooperative, Inc. (USTC), purchased King Maker Marketing from ITC. The acquisition included the US cigarette brands Ace, Hi Val, Checkers, and Gold Crest. “We used these brands to augment and expand the brand marketing that we already had in place. In addition to cigarettes, USTC manufactures RYO and pipe tobacco, small filtered cigars, as well as cut rag tobacco,” explains the cooperative’s c.e.o. and president, Oscar House. In fact, the company’s top five bestsellers (see table) were not part of the brand package acquired through King Maker at the time, but already pre-existing.

A truly international player

Having matured into a truly international player, USTC is not restricting its cigarette sales to the US. The company entered Central America (Belize and Panama) in 2008 with brands like Sheriff and Patrol. And it was only in early 2019 that a presence in the West African country of Sierra Leone was established. Despite these overseas territories, the US market still accounts for USTC’s bulk of turnover. According to House, domestic sales currently make up 80% by volume, while exports contribute the balance. All cigarettes are produced at USTC’s sole factory operated by US Flue Cured Tobacco Growers Services in Timberlake, NC. One distinct advantage USTC has when compared to countless other cigarette producers is its ready access to FCV grown by cooperative members.

“Our domestic and most of our international cigarette products include our cooperative members’ flue-cured virginia tobacco,” House divulges, adding that “US-grown burley is as per blend needs and availability.” On the other hand, all Asian tobacco in the various blends is sourced internationally.

OEM: beneficial, but not essential

While some cigarette manufacturers may put a heavier emphasis on OEM manufacturing, USTC almost exclusively focuses on its proprietary brands. Only about 5% of its total annual output is delegated to OEM manufacturing, while the remaining 95% comprises USTC’s own brands. “We do some scheduled OEM manufacturing because it is beneficial to business,” says House, “and on occasion, we also have assisted companies that encounter unanticipated shutdowns with OEM manufacturing until they regained production.” The strategy seems to payout. While in 2015 USTC experienced an 8% year-on-year contraction in its total volume output, production grew again by a moderate 3% in 2016. In 2017, the company enjoyed a 37% year-on-year jump, followed by another 33% in 2018. But for 2019, House projects somewhat of a slowdown, expecting only around 10% volume growth.

TRQ’s negative impact

This may seem like a bit of a rollercoaster ride, but USTC does find itself in a rather unique position due to being a tobacco growers’ cooperative above all else.

“The mission of our business model mandates that member-produced flue-cured tobacco be used in USTC products in order for the returns to be eligible for grower patronage dividends,” said House. Because US flue-cured is relatively expensive, competitive product pricing is a challenge. Additionally, the United States’ Tariff Rate Quota (TRQ) has had a rather negative impact. It was originally enacted to ensure that 75% of the tobacco used in US-manufactured cigarettes was grown domestically. But today the TRQ is allowing cheap imported tobacco to flood the US market with up to 150,000 metric tons of quota annually.

What this means is that the percentage of imported tobacco used in US cigarettes has increased more than two-fold over the past 20 years,” House elaborates. “TRQ needs to be reduced to maintain the 75% domestic content as was originally intended,” he pleads.

Inadequate distribution muffles expansion

Market access is another problem area. “Deep pocket promotions,” House says, “are constraints to our market access.” And retail exclusion by competitors can deny opportunities to be exposed to customers. “Offering a high-quality product at a value price point should be a competitive norm and not subject to artificial exclusion to keep competitors out of the market,” House points out. On the international stage, the situation is not very different either, as much of the world market responds strictly to price. “While realizing that all markets react to [local] customers’ economic circumstances, we are targeting markets that have strong possibilities of recognizing and using high-quality, high-value products,” House explains USTC’s strategy.

And while USTC is by no means shying away from building a brand presence in the European Union, the Middle East, and select Asian countries, there is the often lacking or inadequate distribution that muffles the company’s ambitions. “There are some target areas where we see opportunity, but identifying consistent and reliable distribution networks is challenging.”

Monus: greenfield investment promotes expansion

Bulgaria’s immediate neighbor Serbia enjoyed its largest-ever greenfield investment in 2005 when local company Monus LLC built and opened its new cigarette plant. That money injection was enticed by the remarkable success of Monus’ inaugural cigarette brand, Fast, which quickly shot up the consumer popularity scale. While Fast still remains Monus’ bestseller both at home and in many of its export territories worldwide, the company strives to follow global trends by communicating with its consumers and developing design solutions, nurturing its existing brands but also investing in new ones, such as Nero, De Santis, East and, indeed, Monus. While the entire range is available in Serbia, sales there account for only 20% of Monus’ annual turnover.

“Our focus on reliability, high-quality products, and customer care are all driving values that have taken Monus and its products around the world,” points out the company’s export department director, Tatjana Agrez. The list of Monus’ current key markets indeed reads like an intrepid globetrotter’s travel schedule (see table). Monus’ strategic orientation is presently aimed at business expansion in MENA and bolstering its share in other existing markets.

“Accordingly, our main target is to find strong and well-organized distributors in order to build long-term, open, and profitable partnerships based on mutual trust,” says Agrez.

Eager to gain a foothold in more markets

Although Monus claims to already have a presence on five continents with more than 20 different cigarette brands, the company is nevertheless eager to enter additional markets… if only it were a little easier. “For instance, we see huge potential in Iran,” says Agrez, “but we’d need to find a reliable local importing partner, which is very difficult because there is a state monopoly, with all [tobacco product] imports being controlled by the government.”

Agrez also is intrigued by western and eastern Africa, for the two territories “have big volume sales potential,” but she readily admits that her company at this moment lacks the necessary expertise in doing so.

Of course, that doesn’t mean that penetrating new markets elsewhere would be a walk in the park. As far as the EU is concerned, Agrez explains that the biggest barrier for smaller cigarette companies, in general, is “the heavy investment in track-and-trace systems” that has become compulsory with TPD2. Meanwhile, in some of the northern African and Asian markets where Monus has already been able to gain a foothold, the primary challenge is “the strong presence of low-priced brands from China and India,” Agrez says.

Proprietary brands have priority

Nevertheless, Monus has enjoyed stable volume growth over the past years with its diversified brand portfolio (see table). The main goal being continued development of the proprietary brands, OEM, and contract manufacturing play a comparatively insignificant role, accounting for not more than 5% of Monus’ annual volume turnover. “OEM is always useful to profit from the economy of scale for us, but our primary focus is on our own brands,” asserts Agrez.

She discloses that Monus’ current key OEM clients come from Australia, Georgia, Albania, and North Macedonia. In terms of serving its markets, the company operates a state-of-the-art manufacturing plant, currently, with six fully-automated production lines (3 KS lines and one each for 100s, slims, and octagonal).

“We are also going to supplement our existing brands with nano and queen-size formats by the end of the year,” Agrez says, making it crystal clear that Monus LLC means business and is here to stay.