On March 28, 2024, Kyung-man Bang was elected KT&G’s new chief executive officer during the annual general shareholder meeting, replacing his predecessor, Baek Bok-in. During his preceding dual engagement as chief operating officer and senior executive vice president, Bang had played a pivotal role in formulating the “2027 KT&G Vision” strategy poise to lead KT&G into the future. Bang reinforced that commitment by calling and chairing an executive meeting immediately following his election.
Tobacco Asia (TA): In late January 2023, your predecessor, Baek Bok-in, announced the “2027 KT&G Vision” strategy, which outlined growth strategies focusing on three core business areas, including HNB, health functional food, and overseas cigarette products. Will this strategy continue to be implemented under your leadership, or are you planning any changes?
Kyung-man Bang (KMB): Going forward, KT&G will not only continue to implement the 2027 Vision, but also strive to accelerate it. The main objective of the 2027 Vision is to achieve KRW10 trillion [approx. US$7.25 billion] in annual sales by 2027. Given that our annual sales nearly reached KRW6 trillion last year, our mid-to-long-term goal may seem ambitious. However, we believe that such an ambitious target is attainable with the implementation of our business transformation plan. We plan to strengthen our business portfolio by driving global expansion of [our] 3 core business areas [of] overseas cigarettes, next generation products, and health functional foods. Specifically, we aim to increase our overseas cigarette sales to account for 50% of total net revenue, up from the current 35%, and increase next generation product and functional health foods sales overseas to 60%. These targets are on track as demonstrated by the record revenue we achieved last year, which was driven by robust growth in overseas cigarettes and next generation products. Last year, the overseas cigarette business reported record annual revenue. In fact, we achieved an unprecedented milestone [in 2023] with an all-time high total overseas sales volume of cigarettes and heated tobacco sticks combined that surpassed 60 billion sticks. We [also] will make large-scale investments to establish and expand overseas manufacturing hubs worldwide, aiming to enhance our global production capacity and competitive edge.
TA: The Vision strategy also calls for developing and establishing a “virtuous cycle model” within KT&G’s business portfolio. What exactly is this “virtuous cycle model” and to what extent is its implementation underway?
KMB: Our ultimate goal is to build a sustainable future for KT&G and take a leap forward to become a global top tier company. To achieve this, securing a future growth engine is the foremost priority, requiring a long-term investment approach. [But] given finite investment resources, a tactical investment strategy is imperative. We plan to establish a virtuous cycle within our business portfolio by investing profits into businesses with high growth potential, such as overseas cigarettes, next generation products, and health functional foods, anticipating that these will make up the company’s future growth engine, generating sustainable profits and enhancing corporate value.
TA: Concretely, which main investments have already taken place and which main market expansions have been undertaken?
KMB: We have started executing investments in Indonesia and Kazakhstan. Last September, we conducted an investment support ceremony with the Indonesian Ministry of Investment to build a new manufacturing plant in East Java. The plant is scheduled to commence operations in 2026 and its products will be exported to various Southeast Asian markets. Then, in October, we broke ground for a new state-of-art manufacturing plant in Almaty, Kazakhstan. The factory is slated for completion in 2025 and will function as a hybrid facility, accommodating both next generation products and conventional cigarette production and addressing export demands across the Eurasian region. Following these two investments, we also have further invested in [an already existing] manufacturing plant in Turkey in January 2024 to expand its production capacity. With increased production, the Turkish plant will cater to growing demand in Latin American and African markets.
TA: You have repeatedly mentioned “health functional foods,” which somehow don’t seem to fit in with cigarettes and next generation products. What exactly are “health functional foods” and why did the company decide to add this segment to its portfolio?
KMB: Korea Ginseng Corporation* is a leading ginseng company with more than 120 years of history. We plan to transition KGC from being a leading player in Korea to becoming a globally recognized health functional food company. Given its substantial growth potential, the health functional food business is poised to serve as one of KT&G group’s mid-to-long-term growth engines. As KGC secures leadership in the global health functional food market, its revenue contribution towards KT&G group will increase significantly.
TA: Your next generation products core business also includes heated tobacco products (HTP), your strategy calling for developing more advanced, innovative technologies and expanding global production capacities in that particular product segment as well. What new technologies have been rolled out by the company since and what production capacity expansions have taken place and where?
KMB: We have been making aggressive r&d investments to develop new technologies, our most recent next generation product platform being the lil HYBRID 3.0. It was launched in the Korean market last year and is the latest and most innovative addition to the lil HYBRID lineup. The lil HYBRID 3.0 offers smoking experience in three different modes: standard; classic, which offers a stronger smoking experience; and casual, which reduces preheating time. The lil HYBRID 3.0 also includes smart features, such as an LCD display showing remaining battery and cartridge levels, and pause mode allowing users to pause and resume as many times as they prefer within 2 minutes. But we will of course continue our investments in developing new technologies for next generation products and expanding production capacities. As I already mentioned earlier, last October we broke ground for our new plant in Kazakhstan, which is expected to produce next generation products as well as conventional cigarettes. In addition, we last year also expanded our next generation products manufacturing facilities at the Daejeon factory, our largest plant in Korea.
TA: In 2020, KT&G entered into a distribution agreement with PMI to take care of marketing and sales of its lil devices and Fiit heat sticks outside Korea. Is that agreement still active?
KMB: Yes, it is. We introduced lil in three markets including Japan in the first year of the agreement. We then gradually expanded the coverage to more than 30 markets worldwide. Building on these achievements, we have entered into a new long-term agreement of 15 years with PMI on January 30, 2023, solidifying our commitment to collaboration. Based on our own independent assumptions, we estimate our overseas next generation product revenue to grow at 20.6% CAGR from 2023 to 2038.
TA: Which are the currently strongest overseas markets for lil and Fiit?
KMB: Lil is now commercialized in more than 30 countries worldwide including in Europe markets, such as Greece and Italy, as well as well as in Central American regions. It is also noteworthy that the 30+ countries in which lil is already available account for approximately 80% of the entire global heated tobacco products market.
TA: What’s the global market situation for KT&G’s conventional cigarette brands?
KMB: The two pillars of our overseas cigarette sales are the export business and the direct business through overseas subsidiaries. We are striving to strengthen both pillars. For the export business, we are pioneering new markets and expanding market presence in countries we have already started exporting to. Last year, the Middle East and new markets such as Latin America and Africa accounted for a significant portion of our total overseas sales volume. We are also working on expanding and promoting a direct business model by establishing overseas subsidiaries in countries with high market growth potential. We are operating subsidiaries in Turkey, established in 2007; Russia, established in 2008; Indonesia, established in 2011; Taiwan, established in 2021; and Kazakhstan, established in 2023. Indonesia and Russia together with the CIS countries are our key markets. Our flagship brand overall is ESSE, a bestseller since 2014 by sales volume according to Euromonitor. ESSE accounts for approximately one third of the global superslim cigarette market. It was first launched in Korea in 1996, with exports to the Middle East and Russia beginning in 2001. As of now, ESSE is commercialized in over 90 countries worldwide, its total accumulated sales volume exceed 900 billion sticks.
TA: And lastly, what future business directions do you have in mind for KT&G, Mr. Bang?
KMB: KT&G is facing extreme competition on a global basis. But, as we have “a history of success” that powered us through numerous crises along the way, we should build upon our legacy of perseverance while simultaneously aspiring to new heights of success by taking on new, daring challenges. I would like to introduce the “T-O-P Strategy,” which focuses on the three keywords, “Trust,” “Origin,” and “Professionalism,” It demonstrates our commitment to enhancing stakeholders’ Trust with proactive engagement, establishing an undisputed Origin with a first-mover approach, and securing global expertise and Professionalism through performance and growth. We have just carried out an organizational restructuring aimed at bolstering the company’s overseas business organizations and performance to secure Professionalism. Furthermore, we should not stay only in our core business, but instead promptly prepare for the company’s future by discovering new growth engines.
*KT&G wholly owns Korea Ginseng Corporation (KGC), which manufactures and sells ginseng and ginseng-related food and beauty products. Korean ginseng, also known as red ginseng, is one of the most widely-used health supplement in Korea and is renowned for its health benefits, such as immune system enhancement, fatigue improvement, anti-oxidational properties, etc. KGC’s ginseng products also are widely accepted by global consumers, as they are being exported to more than 40 countries.