In Indonesia's burgeoning and colorful kretek culture, there is no more iconic or innovative company than Djarum.
Djarum has been at the forefront of kretek manufacture and design since 1951, when 10 people started rolling the first Djarum kretek on the floor of a humble workshop in Kudus, the country's kretek capital, under the hands-on tutelage of the company's founder, Oei Wie Gwan.
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Djarum (the word refers to a gramophone needle) were consistently crafted with skill and passion, and the blend of cloves and tobacco became popular on the streets of Kudus, where Gwan could be found selling his wares.
Today, Djarum is a sophisticated and progressive company, one of the top three tobacco manufacturers in Indonesia.
A significant part of Djarum's continuing success is the company's affinity with its roots and its adherence to the passion, craftsmanship and consistency that elevated Oei Wie Gwan's original Djarum kretek to popular acclaim.
The issues facing Djarum today are far more complex than those the company faced in the 1950s. Legislation, taxation and increased customer expectations and demands all play a significant role in defining Djarum's strategy and guiding its progress. Of these three, Djarum's product portfolio has consistently proven to be a winner with consumers, and its latest offerings might be considered cutting edge products in a market that has seen significant consumer demand for ever-more sophisticated choices.
The best performing brands and segments in Indonesia today are in the mild kretek segment of the market. The best performing mild kretek brands are Sampoerna's A Mild and Djarum's LA Lights. Marlboro continues to dominate the white-stick segment.
Djarum has several brands and variants on offer, including the Djarum Super, LA Lights, and Djarum Black families, as well as the hand-rolled kretek such as Djarum Coklat and Djarum 76. Cloves of course plays a significant part in Djarum's product development, but flavors such as cherry, vanilla and menthol are present in variants for international markets and cappuccino and tea flavors for the domestic.
Developing these brands and introducing them successfully to the market has been key to Djarum's competitiveness in the domestic market.
"Understanding of the consumers is important," Djarum told Tobacco Asia recently. "Of course, a great tasting cigarette is a key element of any success. As such an excellent Research & Development capability is a very necessary input in the process. The kretek market is very diverse. Both heavily-flavored and low-flavored products thrive in the market. Therefore, R&D mastery and strong support from the flavor suppliers are very important."
And the Djarum R&D department is not one to rest on its laurels because, as the company told us that: "we have just launched a new mild menthol kretek in black paper, it is a first in Indonesia."
The entry of a new player in the kretek field is always going to fuel speculation and excitement. Philip Morris Sampoerna takeover in 2005 was a case in point. And now BAT's recent purchase of Bentoel, a veteran kretek manufacturer and the country's fifth largest company by market share, presents a new dynamic to the market.
"BAT is surely a strong and able competitor," Djarum commented. "However, as yet, we do not see any need to change our strategy."
Packaging developments
For many years, kretek packaging was relatively simple and staid. The major players were not tempted to change the appearance of the packaging because consumers were very familiar to their chosen brands. Over time, as market dynamics started to change, partly as a result of tax increases that could prompt one brand's loyal customers to downtrade to another manufacturer's product for economic reasons, and partly because Indonesia's growing urban society became more accustomed and open to change, packaging has become much more important than it may once have been. Brands and variants now compete for the customers' attention using graphic design and enhanced materials.
"It is not really due to innovation, but cigarette packaging is clearly improving in quality due to better design, better printing capability and also improved packaging machine capability," said Djarum. "The improvement in packaging quality is apparent not only among the big players but also among the more modest players."
Another element in the changing equation that is Indonesia's kretek market is that the gap between urban and rural smoking preferences is actually closing, rather than widening, according to Djarum.
"We do not know the exact reason, but it is probably due to a combination of several factors such as increased exposure to mass media and the internet in the rural area, better education, and the development of a more mobile society, especially during holiday periods," the company said.
Taxation
Perhaps characteristically, the tax burden imposed by the government on kretek falls more heavily on the larger manufacturers than on the smaller ones. This can distort market shares somewhat as similar products can be taxed at different rates and therefore gain an advantage in the regions they compete in.
As Djarum pointed out, "The current excise climate is still skewed toward smaller producers - in other words, big companies must pay bigger excise rates. As such, the small producers are still gaining market shares, although the gain is quite modest," they said, adding that: "The government is gradually revising the excise code toward a fairer system whereby the excise burden gap between large and small companies will be reduced. There is no specific date line for this effort. Djarum supports this progressive move by the government."
The problem with taxes is that for some the temptation to cheat the government is always going to be proportionate to the tax rates applied. Illicit tobacco use continues to be an issue all manufacturers and the government have to face and rising taxation levels can exacerbate the problem, particularly in poorer communities.
"The illicit market is still significant especially in the islands of Sulawesi and Sumatra and also in East Java," noted Djarum. "However, the illicit market is also under pressure from increased government law enforcement. The illicit market has not affected Djarum significantly, because Djarum's main markets are not in those stated areas. The kretek association (GAPPRI) is actively assisting the government by providing leads on the illicit trade." The illicit market is comprised mainly of tax-unpaid or under-paid products. Counterfeit products are not yet prevalent in Indonesia.
The government's tobacco policies are shaped through a variety of imperatives and realities. While the tobacco industry does maintain a reasonable and productive dialogue with government, legislators are under increasing pressure from other elements as well.
"The anti smoking lobby is very active in Indonesia, and as a result we may see a higher excise increase within the 24 months time frame, especially on the lower price range of the market," Djarum believes. "As such the cigarette overall volume may be negatively affected. Djarum is relatively insulated because it operates primarily in the more premium segments."
Leaf issues
Of prime concern to both the government and tobacco manufacturers is the welfare and interests of tobacco farmers. Companies such as Djarum devote a great deal of time and effort ensuring the continuity and quality of leaf tobacco supplies, and are sensitive to the impacts of legislation.
"We primarily source our leaf and cloves domestically," we were told. "The majority of the farmers are poor people and will be most affected if there is any detrimental change to the industry. We buy most of our leaf and cloves directly from the farmers and send the material to our main warehouses in Kudus for aging and storage. We maintain a large inventory of leaf and cloves."
Djarum works with leaf growers to support, enhance, improve and sustain the tobacco crop, primarily in Temanggung and Lombok area.
"We see the farmers as our long-term business partners," the company said.
Djarum has developed three Corporate Social Responsibility programs that address areas in which Indonesia has the potential to exceed, but which require further development sponsorship to fulfill their potential," Djarum said. "We concentrate our efforts in sport, the environment and in education programs."
Export experts
Djarum is the world's largest exporter of kretek, having pioneered the promotion and marketing of Indonesia's unique cultural contribution to the world of smoking. The US, which is one of Djarum's most important markets, has recently introduced legislation that outlaws "flavored" cigarettes. This is a potentially devastating blow for Djarum in one of its best international markets, but the company intends to find a good solution to ensure it is able to continue selling product in the US.
"The Family Smoking Prevention and Tobacco Control Act or FDA Tobacco Act, in our understanding, is meant to protect children from starting to smoke," Djarum told us. "We do support this noble intention by not marketing our clove cigarettes to children, aside from this being our own corporate policy, it is also not allowed by the MSA. Based on the National Survey on Drug Use and Health (NSDUA), the percentage of youths that have tried clove cigarettes is miniscule, only 0.1%. The same survey in 2007 is even lower (0.01%) and they have stopped including clove users in the surveys now because of the small percentages."
There would appear to be a number of avenues on which the company can hope for relief, including clarification of the wording of the act.
"The meaning of so called "characterizing flavor" is not well defined yet," Djarum said. "For example, we have mentholated clove cigarettes. How would the authority define it: menthol or clove as characterizing flavor? As one of the biggest tobacco product manufacturer in Indonesia, we do produce regular cigarettes and various types of cigars beside clove cigarettes. When the situation is clearer, we may develop something that will comply with FDA Tobacco Act."
Besides the US, Djarum has developed a number of export-oriented products that have met with continuing success in diverse international markets.
"Djarum Black is now the bestseller for the Djarum exports," the company said. "It has a different taste compared to regular white cigarettes, because of the clove content, because it is wrapped in black paper, both the pack and the cigarettes look appealing. So Djarum Black makes an emotional impact on a smoker because it looks modern, stylish, different and classy."
Indonesia is a kretek-loving country, but in many countries the concept of mixing tobacco with cloves is unknown to most smokers. Reaching these potential customers and "converting" them is clearly an important aspect of increasing export sales.
"Some people who live in Europe were introduced to clove cigarettes while visiting Indonesia on holiday," Djarum explained. "They understood, explored, and experienced the unique taste of clove cigarettes while they were in Indonesia. When they smell clove tobacco, it brings the holiday experience back to their mind. But for some smokers, they just want to enjoy the experience of smoking kretek because of its unique taste and aroma."
A successful export strategy is achieved by "compliance with the regulations, meeting the consumer's taste preference and hard work." Djarum told us. "Djarum always complies with all regulations applicable in countries to which it exports and always tries to continuously improve its products to satisfy its consumers. As part of this effort, Djarum maintains an official website containing information and input from around the world, including from its non-Indonesian consumers."
Each individual market is carefully researched and catered to, according to Djarum.
"We treat our brands for each market differently," the company told Tobacco Asia. "It depends on the tar and nicotine regulations and taste preferences in each country. For example, in Europe, our Djarum Super has lower tar and nicotine content than our Djarum Super in Indonesia."
Since its humble beginnings almost 60 years ago, Djarum has grown to become a domestic icon by remaining true to its roots.
"We are hopeful," Djarum told us when we asked what it believed the future holds for it.
No doubt that hope, supported by hard work, products that continue to exemplify the best traditions of Indonesian craftsmanship and excellence, and its progressive understanding and development of both domestic and international markets and a corporate consciousness that embodies the finest aspirations of its founder will be enough to ensure that Djarum continues to grow and prosper. Enditem
