Recovering From a “Frigid Winter”

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By TobaccoChina Online

For the Chinese tobacco industry, 2016 was a period full of hardships. In that year, the industry met unprecedented challenges with cigarette sales declining and inventories remaining high. Some leading competitive brands registered plummeting sales, which dealt severe blows to the entire industry. The industry has entered a “frigid winter”, previously unseen at least over the past decade.

In face of the hard time, manufacturing enterprises remain quite enthusiastic and active in innovation. Over the past 10 months, all major tobacco companies presented newly-developed cigarette products including bursting bead cigarettes, slim cigarettes, electronic athletics cigarettes, and makers cigarettes while others have chosen to offer regional customization, reintroducing brands, and integrating cigarette sales with liquor marketing. In short, they have each brought their unique advantages into play to innovate and develop new products.

But regrettably, neither the development of new products nor the adoption of new approaches has generated much value. For example, in the first three quarters of 2016, tobacco manufacturers nationwide presented to the market 178 new specifications of cigarette products covered by their 47 brands, with just 10 registering a sales volume at or above 10,000 cases (500 million cigarettes) and with more than 100 registering a sales volume of less than 1,000 cases.

In face of such a situation, one could not help but ask: In the “frigid winter”, is the zeal of the tobacco manufacturers to develop new products meant to recover their lost sales or are they futile efforts?

At a time when old products cannot maintain existing market shares, presentation of new products to the market is but a helpless choice, which makes new product development bear excessive high development expectation and pressure on growth. On the one hand, under high pressure, market operation tends to become abnormal, and execution of operation may become rash and too fast. It is just like building a skyscraper on a shaky foundation. On the other hand, under high expectations, there will be insufficient tenacity. Usually, any development of new products requires an indispensable process, which can be undergone after appropriate adjustment and persistence. Rashness in the development of new products under excessively high pressure will normally lead to failure and the whole process will have to be restarted.

Moreover, as a result of an unfavorable market environment and target pressure, the commercial sector in tobacco lacks the driving force and even vigor for new product development. Although the aforesaid new products developed are different from one another, the context of their development, the definition of their status, and their marketing strategies, there do exist some common characteristics and market performance.

The new products can be classified into three categories – Category I with further development momentum, potential, and space; Category II with further development opportunities but lack of effective maintenance; and Category III basically without anybody to care for them.

For the new products in Category I, including the Liqun brand from Hangzhou Cigarette (Zhejiang Prov.), Nanjing brand from Nanjing Cigarette Factory (Jiangsu Prov.), and Yunyan brand from Kunming Cigarette Factory (Yunnan Prov.), they are already time-honored products with fine reputations, as well as their high quality, outstanding characteristics and styles, fine market performance, rational development expectation, and scientific rhythm of supply. Market response to the new products in this category has been very active and positive, and both the commercial sector of the tobacco industry and cigarette retailers are fully confident in the follow-up development of these brands.

For the new products in Category II, the development of them has not been seriously problematic and they have not yet shown obvious defects since their presentation to the market. But, their sales seem to have been limited by the relatively poor popularity of brands and weak marketing. Besides, there are some brands that previously belonged to low-grade ones, and their owners strove to lift them to higher grades by developing new products. Since their presentation to the market, the manufacturers of the new products in this category excessively supplied them to the market. Although both retailers and consumers have had positive comments on these new products, they are generally lacking sustained investment and further development momentum. At the same time, follow-up promotion of the new products in this category after they were put onto the counter or on display at retail terminals has been relatively simplistic and insufficient. As a result, the manufacturers have failed to grow the group of consumers for these new products.

As far as the new products in Category III are concerned, though the manufacturers have all made heavy investment in their development, they do not show any distinctive intention and are all lacking sufficient characteristics and obvious advantages at the marketplace. Their supply to the market has appeared to be tough since the very beginning. Besides the meaningless cost and waste of resources in their development, people can virtually see nothing significant from their existence. Unfortunately, the new products in this category make up a larger proportion of all the new products than those in Category I and Category II. In reality, their development has done greater harm to the market, and has only led to the waste of marketing resources, overdrawn confidence from consumers, and tarnished the image of the relevant brands. Obviously, the development of the new products in this category is by no means cost-effective.

Therefore, what becomes essential now is how the tobacco industry should deal with each of these three categories.

For the new products in Category I, their future development can generally be predictable, and what needs to be cared for is proper control over the rhythm of their development. One the one hand, it is expected that the manufacturers of the new products in this category would attach greater importance to the status and profit making by retailers, and manage to guarantee that retailers would be able to make a rational amount of profit from sales from the very beginning. Due to the difficult situation faced by the tobacco industry, manufacturers should never make rash decisions and need to practically and sufficiently prepare in every process and every step. In particular, they need to plan well the scope of supply and the quantity of supply. On the other hand, they need to keep adding value in the consumption link and should be willing to make some hard or even “stupid” efforts that will not yield immediate interests. For example, they need to improve maintenance of their terminal display facilities to enable consumers to see their favorite products in a more distinctive and eye-catching way; strengthen efforts to send sample products to customers for test smoking to allow them to more perceptually experience products; and keep improving their products.

For Category II, the manufacturers of the new products in this category should primarily hold on steadfastly and patiently wait until the crucial process of presentation of the new products to the market has passed. What they need to do at this point are to develop policy support, allocate necessary resources. and appraise what has been done in a timely manner.  

For new products in Category III, what should first be done is to solve the looming problems. Why should we say so? Just take a look at the retail counters and see how much of the inventory on the counters are “new products” supplied to the market numerous years ago, regardless of whether the retailers are based in urban or rural areas, and regardless of their regional differences. Obviously, those that were put on the counter for display numerous years ago have turned out to be redundancies today! As bystanders, we just want to remind the manufacturers to launch fewer operations that would be given up halfway as a result of poor planning beforehand.

Frankly speaking, before the problems can be properly settled, manufacturers should refrain from launching any operation to rashly develop so-called “new products”. On the contrary, they should not only do a good job of preliminary preparation and basic work prior to new product development and market supply, but should also refrain from making futile efforts to work on the development of new products or market areas that are indeed lacking growth potential. Moreover, they should not show contempt for the interests of retailers, and should not unilaterally think that inventory held by the commercial sector have nothing to do with them.

Presently, it is by no means difficult for China’s tobacco industry to develop and present to the market new products in terms of technology. What is essential now is that in planning to develop and present to the market a new product, manufacturers need to carefully consider what consumer demands they need to satisfy and whether the new product will be marketable. They should not rashly develop and present new products without considering what will happen next. The Chinese tobacco industry is accustomed to both persistent high growth registered in the past few decades, and poorly planned development of brands. As a result, when problems kept erupting in the harsh year of 2016, manufacturers all longed to recover some lost sales and market shares by means of developing and presenting new products to the market. However, at such a point, what manufacturers should do is just to remember that they can no longer afford to waste time on futile efforts, and remain persistent in innovating new products.