J Tobacco Aims to Blow Smoke in Rivals' Faces

Source from:  ft.com By Pan Kwan Yuk October 26 2008 10/27/2008

On the wall of the chief executive of Japan Tobacco International's office in Geneva is a picture of a Marlboro man with a difference. In place of the traditional cowboy that has been the face of rival Philip Morris International's signature brand, is Joe Camel, the advertising mascot for JTI's Camel cigarettes, decked out in pinch front cowboy hat and rugged leather boots, cigarette dangling from its lips. The sly subversion of the iconic Marlboro image hints at the scale of Pierre de Labouchere's ambitions for Japan Tobacco, the world's third-biggest publicly listed cigarette maker. "Our goal is to overtake PMI as the industry's number one," says Mr de Labouchere with a laugh. "So yes, I guess you can say there's a subliminal message there [in the painting]." As the head of a division that has been the main driver of profit growth for JT over the past four years, the 54-year old Frenchman has reasons to be ebullient. JT, which also owns food and pharmaceuticals businesses, still has some way to go before it topples PMI from the top spot. But the gap between it and British American Tobacco, the industry's number two, became a lot narrower last year after JT swooped up Gallaher, the UK maker of Benson & Hedges and Silk Cut cigarettes, for £7.5bn ($12bn). The deal, the largest foreign acquisition ever made by a Japanese company, doubled the size of JT's international operations overnight and gave it a 10.6 per cent share of the global tobacco market, against BAT's 12 per cent and PMI's 15.6 per cent. (The Chinese state tobacco industry remains the biggest player, with 35 per cent of the market). The acquisition has also enabled JTI to secure its dominance in Russia, the world's third-biggest tobacco market behind China and the US as well as in the former Soviet bloc, where the booming economies are creating a middle class that can afford to trade up to JTI's higher price brand. As in the US and western Europe, cigarette sales in Japan have fallen amid rising health fears and stringent tobacco advertising regulations. With fewer smokers lighting up in its home market, JT has had to look abroad to compensate for the decline. It made its first big move in 1999, when it splashed out $7.9bn to buy Reynolds International, the non-US tobacco operations of RJR Nabisco. At the time, many analysts were sceptical whether JT, a former state-owned monopoly that is still 50 per cent-owned by the Japanese government, had the managerial acumen to make the acquisition work. But in an unusual move, Mr de Labouchere - then the president of Reynolds International - was asked to stay on to head the business, which was renamed JTI. "I think [Katsuhiko Honda, JT's then chief executive] came to the conclusion that to run an international business, you cannot impose a Japanese management culture," says Mr de Labouchere. Even today, JTI's structure stands out from most Japanese companies operating abroad in that it has one company for all global operations outside Japan and has its headquarters in Geneva. Of JTI's 16 executive officers, only two are Japanese, with the remainder hailing from 11 different countries. But if JTI is today in a position to give PMI and BAT a run for their money, Mr de Labouchere says that is only because of JT's consistent support. With the purchase of Gallaher, JTI now accounts for 48 per cent of JT's operating income and 70 per cent of its sales volume. The combination of the two companies is expected to generate $400m in cost savings and other synergies by 2010. But the challenge for Mr de Labouchere will be whether he can internationalise any of Gallaher's brands - most of which are relatively local in nature. In the longer term, JTI still faces gaps in its portfolio, notably in Asia and Africa, and particularly in Latin America. "At the moment our priority is to combine Gallaher into JTI's existing operations," he says. "But we are always looking. Asia is a region we would like to increase our presence in." Enditem