China's Cigarette Marketing System Undergoes Profound Changes

06/13/2005

The cigarette marketing system in China has been undergoing profound changes in keeping with a fundamental structural reform of the tobacco industry over recent years, particularly since China's entry into the World Trade Organization in 2001. As tobacco is a government monopoly and a type of instant consumer goods in China, the cigarette marketing system in the country is strictly under government control. Under the system of State tobacco monopoly, the cigarette marketing system is managed in a "vertical format" by tobacco monopoly administrative authorities at four levels, with the State Tobacco Monopoly Administration (STMA) at the top level, provincial-level tobacco monopoly administrations at the second level, city-level tobacco monopoly administrations at the third level and county-level tobacco monopoly administrations at the grassroots level. Because of the application of the system of State tobacco monopoly, the relationship between State-run tobacco companies and cigarette retailers in China has been a relationship between the management and the managed or between those in control and those under control. Once the system of State tobacco monopoly is weakened or canceled, such a relationship will disappear. Since China's WTO entry in 2001 and along with the development of the system of a socialist market economy in China over recent years, the system of State tobacco monopoly in the country has been in a situation of gradual weakening. Under such a situation, the tobacco industry of China is facing serious challenges in maintaining a firm control over existing marketing resources. [b]FORMATION OF A NEW CIGARETTE MARKETING SYSTEM[/b] In 1998, the STMA initiated the process of developing a new cigarette marketing system in China under the basic policies of "maintaining the leading role of the tobacco industry of China", "maintaining management by the tobacco industry of China" and "maintaining regulation by the tobacco industry of China". The policy of "maintaining the leading role of the tobacco industry of China" means that key commercial networks to be established as part of the cigarette marketing system will be mainly operated by the tobacco industry of China, and will make up a majority of all commercial networks to be newly established. The policy of "maintaining management by the tobacco industry of China" means that the decision-making power, the commanding power and the management authority in operating commercial networks including joint-venture networks and licensed wholesale networks shall be placed under the exclusive management of the tobacco industry of China. And, the policy of "maintaining regulation by the tobacco industry of China" means realization of regulation and control of cigarette markets in China by the tobacco industry through commercial networks. By the end of 2004, a new system of commercial networks "that are mainly based in cities, that extends from cities to rural areas, that covers all parts of China, that combines State tobacco monopoly with sales, that emphasizes the provision of services, that calls for full-scale sales promotion and that provides for centralized distribution of supplies" had basically formed in China. In fighting regional protectionism in tobacco trade and in an effort to establish a national single tobacco market, the STMA adopted in 2003 the reform measure of separating the manufacturing and commercial sectors of the tobacco industry through the establishment of provincial-level China Tobacco Industry Corporations independent from the local tobacco monopoly administrations which double as the local tobacco companies. Separation of the manufacturing sector from the commercial sector of the tobacco industry means that under the existing system of State tobacco monopoly in China, provincial tobacco companies (or provincial tobacco monopoly administrations) will no longer be under the dual responsibility of controlling the local tobacco trade and managing the local tobacco manufacturing enterprises. After the separation, provincial tobacco companies will only take charge of controlling the local tobacco trade, and will no longer be eligible to manage the local tobacco manufacturing enterprises. Meanwhile, China National Tobacco Sales Corporation was established to oversee the tobacco trade conducted by the provincial tobacco companies on a unified basis. Therefore, in developing markets in all parts of China, Chinese tobacco manufacturers need the approval of tobacco companies in all Chinese regions to gain access to local markets. So, how to establish a new trade relationship with local tobacco companies and retailers is of vital importance to Chinese tobacco manufacturers' marketing strategies. Presently, Chinese tobacco manufacturers and commercial enterprises of the tobacco industry are striving to establish a new trade relationship between them on the basis of "equality and mutual benefit, interaction, mutual trust, resources-sharing, efficiency and clear definition of responsibility." However, along with the elapse of time and development of the economy, big Chinese tobacco manufacturers will make efforts to establish their own commercial networks, sell cigarettes by themselves without the brokerage of tobacco companies, and gradually influence the change of relations of production in cigarette trade. Under such conditions, retailers previously affiliated to tobacco companies may become affiliated to tobacco manufacturers, extend powerful support to tobacco manufacturers in grabbing market shares. [b]STATUS QUO OF THE CIGARETTE MARKETING SYSTEM IN CHINA[/b] Following the separation of the manufacturing and commercial sectors of the tobacco industry, the STMA made the policy of developing big markets, big brands and a big marketing system in a timely manner. Under the guidance of this policy, commercial enterprises of China's tobacco industry have managed to reform themselves by becoming specialized operators of cigarette trade and managers of markets. As part of the reform of the commercial sector of the tobacco industry, there has been the establishment of cigarette chain store systems in China over recent years, which has been conducted in two stages – firstly, the establishment of cigarette chain stores directly operated by tobacco manufacturers in the form of specialty shops or exclusive counters at shops, and secondly, the conversion of qualified retailers into franchise stores. In the establishment of a new cigarette marketing system, tobacco companies have been striving to establish franchise stores affiliated to tobacco manufacturers, in efforts to maintain control over markets. In this respect, successful retailers in both urban and rural areas that have been operating sales in compliance with law are admitted as franchise stores. On the basis of agreement, tobacco companies will invest in the establishment of franchise stores, which will have unified logos, shop fronts, counters and indoor decorations, and which are brought under unified management by tobacco manufacturers. Meanwhile, an appropriate number of chain stores directly operated by tobacco manufacturers are established. However, the number of chain stores directly operated by tobacco manufacturers cannot exceed 1 percent of the total number of retailers locally, to prevent infighting in retail. Generally, there can be only one chain store directly operated by the tobacco manufacturer on each main street in the urban area or in each township in rural areas. In the establishment of a new cigarette marketing system in China, the STMA requires tobacco companies across China to organize the supply of well marketable cigarettes, particularly low-grade cigarettes, to rural areas in accordance with the local market demand, in efforts to prevent illegal trade of tobacco products in rural areas. Meanwhile, tobacco monopoly administrative authorities across China have strengthened supervision and control over cigarette markets. Specifically, they have exercised effective supervision and control over all forms of commercial establishments in rural areas including convenience stores, seasonal stores and mini stores, and have outlawed any unlicensed retailers. Besides, they have succeeded in joining hands with lawful retailers in fighting the trade of counterfeit or smuggled cigarettes in rural areas. Enditem