Kingdom of Tobacco Faces Imperative to Develop Big Brands

Source from:  tobacco china 05/17/2005

Southwest China's Yunnan Province - the largest tobacco-producing region in China known as the kingdom of tobacco - now faces an imperative to develop big competitive brands of Chinese-style cigarettes to maintain its leading status in the tobacco industry of China, as competition at the domestic marketplace of tobacco products is turning increasingly intense. Amid increasingly fierce competition at the marketplace over recent years, the tobacco industry of Yunnan seems to have understood that it would be much better to develop its own big competitive Chinese-style cigarette brands in realizing rapid business growth than always follow the suit of others. [img border=0 hspace="4" vspace="4" align="left" src=http://www.tobaccochina.com/english/picture/050513tttt.jpg] The tobacco industry of China has defined Chinese-style cigarettes as cigarette products with distinctive characteristics of aroma and flavor manufactured with core technologies possessed by itself that are capable of meeting the current and potential demand of Chinese cigarette consumers, mainly including Chinese-style flue-cured-type and Chinese-style blend-type cigarettes, with Chinese-style flue-cured-type cigarettes taking the dominant position. In 2003, the State Tobacco Monopoly Administration (STMA) defined the development of Chinese-style cigarettes as a direction of China's tobacco industry. In the 1980s, the tobacco industry of Yunnan, taking advantage of the supply of high-quality raw materials locally and introducing advanced production equipment, succeeded in reaching the top position in the national tobacco industry. From 1985 to 1995, the cigarette output of the tobacco industry of Yunnan increased by an annual average of 12.7 percent, with the amount of manufacturing and commercial taxes and profits going up by an annual average of 37.1 percent. During those years, the tobacco industry of Yunnan was unmatchable in China, earning itself the reputation as a "super tobacco producer". It rapidly became the backbone industry for Yunnan Province, generating over 70 percent of the revenues for the provincial finance. However, in the 9th Five-Plan Period (1996-2000), a number of previous little known Chinese cigarette brands, such as Dahongying (The Great Red Eagle) from the eastern province of Zhejiang and Baisha from the south central province of Hunnan, emerged as burgeoning competitive brands in China, and time-honored brands of Yunnan appeared somewhat lackluster. From 1995-2001, the cigarette output of the tobacco industry of Yunnan declined by an annual average of 0.7 percent while the amount of taxes and profits generated by it went up by an annual average of 2.6 percent only. In contrast, the annual cigarette output and annual taxes and profits of the tobacco industry of the eastern province of Jiangsu went up 6.8 percent and 23.9 percent respectively, and Zhejiang Province 3.7 percent and 37.1 percent respectively, in the same period. As a result, many new big players emerged besides the tobacco industry of Yunnan. Meanwhile, there occurred three mainstay tobacco manufacturing systems in China - the system led by the tobacco industry of Yunnan, the system led by the tobacco industry of Shanghai in east China and the system led by the tobacco industry of Hunan. So far, the tobacco industry of Yunnan is still advantageous in terms of the scale of production, and is still in the first place in respects of the total quantity of famous and high-quality cigarette brands, the output of famous and high-quality cigarettes and market shares. In 2002, Yunnan took three of the seven cigarette brands listed as famous Chinese brands. In the standing of Chinese cigarette brands in terms of the single-brand sales volume in 2002, Honghe (The Red River) and Hongmei (The Red Plum Blossom) of the tobacco industry of Yunnan took the 2nd and 3rd places. Moreover, the tobacco industry of Yunnan has taken 10 of the 36 key Chinese cigarette brands designated by the STMA. But as compared with big foreign brands, cigarette brands of the tobacco industry of Yunnan are in a weak position because of a low degree of concentration, which has become a major obstacle to its further development. Besides, the tobacco industry of Yunnan also suffers from such problems as rationality of the structure of brands, serious infighting and unclear definition of the development strategy of cigarette brands. For example, the tobacco industry of Yunnan has many medium-grade cigarette brands which are traded at similar prices, making infighting all the more serious and making it impossible to optimize the structure of resources, to the detriment of developing big competitive brands. Even some famous and high-quality cigarette brands, such as Yunyan, have three levels of pricing, in violation of the principle of pricing of brands. For some well-priced brands, their imaging and psychological definition has appeared to be problematic. For example, the famous brand of Yuxi has a total of eight sub-brand names, which are inconsistent with one another, making it difficult for consumers to understand and recognize them. As new big competitive brands emerge like mushrooms elsewhere in China, time-honored cigarette brands of Yunnan are in a somewhat downward trend. Besides, since China's entry into the World Trade Organization (WTO) in 2001, transnational tobacco giants have tried to gain greater access to markets in China. Under such a circumstance, it is imperative for the tobacco industry of Yunnan to develop big competitive brands of Chinese-style cigarettes, to meet the serious challenges posed to it. [b]STRUCTURAL REFORM: KEY TO DEVELOPMENT OF BIG COMPETITIVE BRANDS OF CHINESE-STYLE CIGARETTES[/b] Under the strategy of developing big enterprises, big markets and big brands, the tobacco industry of China has been undergoing a fundamental structural reform, which is only the initial step toward the enhancement of its competitiveness. Therefore, reform of the structure of existing cigarette brands is essential to the development of big competitive brands. The tobacco industry of east China's Anhui Province appeared to be well aware of the advantage from reform of the structure of existing cigarette brands. Over the past three years, the number of existing cigarette brands of the tobacco industry of Anhui has been cut down by 80 percent. But the amount of taxes and profits generated by it has gone up by an annual average of 50 percent, with the annual amount of profits alone more than doubled. In April 2004, Anhui Provincial China Tobacco Industry Corporation was established to take charge of overseeing operation of the tobacco manufacturing enterprises in Anhui. It has taken the lead in formulating a plan for further reform of the structure of existing cigarette brands, under which the 84 specifications of the 19 existing cigarette brands in Anhui will be reformed into 34 specifications of five big brands. According to the law of the market economy, when a stable and mature structure of markets of tobacco products develops in China, there will be only nine to 15 remaining cigarette brands. Under such a harsh situation, the tobacco industry of Yunnan has to take a preemptive step by reforming the structure of existing cigarette brands as early as possible, in order to form a rational structure and system of cigarette brands, put an end to infighting among its different brands and practically strengthen its competitiveness. Restructuring of productive forces following reform of the structure of existing cigarette brands will lead to the success of both the remaining core brands and those withdrawn from the marketplace. Firstly, those designated as core brands as a result of reform will be given priority in further development. The core brand of Honghe owes much to this in its success over recent years. Secondly, producers of brands withdrawn from the marketplace as a result of reform can take processing orders from producers of core brands, which will contribute to improving economic efficiency. For example, Taiyuan Cigarette Factory in north China's Shanxi Province was licensed by Kunming Cigarette Factory in Yunnan to produce cigarette using the latter's brands. Consequently, the amount of taxes and profits of the former almost redoubled from 255 million yuan (30.7 million U.S. dollars) in 2001 to 1.014 billion yuan (122 million U.S. dollars) in 2003, and Kunming Cigarette Factory has succeeded in rapidly developing markets in Shanxi. Besides, the significance of marketing channels needs to be sufficiently recognized. China's signing of the Framework Convention on Tobacco Control (FCTC) in 2003 will contribute to compelling competition among cigarette brands to shift onto the end point of retail. Therefore, traditional marketing channels will become important channels for advertising and sales promotion, rather than channels for distribution. The tobacco industry of the United States, which has been under heavy pressure from tobacco control movement for years, has fundamentally changed its way of marketing. Its traditional way of marketing mainly led by advertising through mass media has been replaced by the way of sales promotion and advertising at the end point of retail. But under the existing system of State tobacco monopoly in China, Chinese tobacco manufacturers are not allowed to restructure in a vertical way, and they must develop their own unique capability to control marketing channels. Therefore, at a time when the STMA is striving to promote the development of a national single tobacco market in China, the tobacco industry of Yunnan, which has been a victim of regional trade protectionism in China for years, needs to take preemptive steps to develop new channels of marketing. Enditem