Japan Tobacco and KT&G Dealing with Cigarettes Slump with New Products

Source from:  Tobacco Asia  08/27/2014

Due to new regulations and numerous anti-smoking social awareness campaigns introduced by both the public and private sectors as well as a rise in illicit trade, the global tobacco industry saw sales volumes go through fluctuations in 2013, more so in some parts of the world and less so in others. Recent data for 2013 show that some of the countries in East Asia with the highest number of smokers, such as Japan and South Korea, have been able tocope with the downward trend and have strategic initiatives in place to counter the effect and expand their market share.

Japan

The Tobacco Institute of Japan's statistics (for the fiscal year of April 2013-March 2014) show that after a 1.2% drop in 2012 to 195.1 billionsticks from 197.5 billion a year earlier, equaling¥61.5billion(US$606 million) less in revenue, in 2013 the Japanese tobacco industry saw a 0.9% increase in cigarette sales volume to 196.9 billion sticks, or a ¥27.9 billion increase in revenue,bringing the tobacco sales in 2013 to ¥4.074 billion. The top-selling cigarette brand in Japan for 2013 was Japan Tobacco Inc's Seven Stars, followed by Mevius Super Lights, Mevius One 100s box, Mevius Light, andMevius.

Japan Tobacco Inc. (JTI) reported a 3.3% growth in its domestic tobacco market in 2013, which it credited to steady growth in market share led by key brands and a one-off increase in demand preceding the consumption tax (VAT) hike, which is estimated to account for approximately 40% of a month's sales volume.Mevius remained the main driving force of the total market share gain to 61.0% (FY2012 total:59.6%). For the 12-month period since its rebranding (from Mild Seven) in February 2013, total sales volume grew for the first time since 1998 (with the exception of the temporary impact of the March 2011 earthquake). The release of new products, Mevius Premium Menthol Option, and MeviusPremium Menthol Spread contributed to the company's stronger presence in the growing mentholsegment.

JTI's international tobacco business, on the other hand, did not do as well as the domestic market. Total 2013 shipment volume decreased by 4.6 % (from 436.5 billion sticks in 2012 to 416.4 billion sticks)primarily due to significant industry contraction and trade inventory adjustments in a number of markets. Despite global flagship brands (GFB) shipment volume growth in Austria, the Caucasus markets, Czech Republic, Germany, Hungary, Kazakhstan, Middle East and African markets, Romania, South East Asia markets, Sweden, Taiwan and Turkey, GFB shipment volume declined 0.8% from 268.8 billion sticks in 2012 to 266.6 billionsticks in 2013. Year-on-year market share increased in France, Italy, Spain, Taiwan, Turkey and the UK. In Russia total share of value and GFB share of market continued to grow.

Despite the decline in volume, core revenue and adjusted EBITDA in US dollars at constant foreign exchange rates increased 6.1% and 11.3%respectively, driven by a strong price/mix, which more than offset the 4.6% overall volume decline. On a reported basis, core revenue and adjusted EBITDA grew 3.9% and 7.5% respectively. In Japanese yen, core revenue and adjusted EBITDA increased 27.3% and 31.6% respectively, as a result of the currency depreciation against the US dollar.

Moving forward in 2014, JTI remains optimistic and plans to expand their product and geographic portfolios, including the successful completion of the rebranding of Mevius, JTI's acquisition of a stake in Russia's leading tobacco distributor, and the introduction of tobacco vaporizer Ploom in several markets.

South Korea

South Korea's KT&G, the world's fifth largest global tobacco company exporting about 100 brands to 49 countries, saw its 2013 consolidated sales and operating profit decrease by 4.8%and 4.1% over the previous year, respectively. This was mainly due to sluggish tobacco sales volume led by tightening regulations in thedomestic market, temporary reduction of exports to the Middle East, anda slowdown in sales from KT&G's other businesses from economicslump and weak purchasing power.

In 2013, KT&G's tobacco sales in the domestic market posted KRW1.89 trillion (US$1.9 billion) and its market share was 61.7%.The Korean domestic tobacco market had been experiencing sluggish growth due to price regulations such as higher taxation, restrictions on smoking areas, and anti-smoking campaigns. To cope with these market changes, KT&G launched high-priced premium brands and focused on clearly differentiating its strategic brands. In the regular category, new innovative brands such as RaisonIce Presso, ToninoLamorghini Ice Tornado, and This Africawere launched. Raison Ice Presso cigarettes contain ice capsules that cool the distinctive RaisonPresso flavor when popped. The ToninoLamorghiniIce Tornado has a tornado-shaped filter that rotates smoke fast and delivers flavors faster. This Africa cigarettes contain tobacco leaf processed by traditional African methods for a delicate and unique flavor.

In the slim-sized category, KT&G introduced new brands:Boehm Cigar Mini, which is the world's first super-slim cigarette made by cigar-wrapping methods; EssePresso, which allows users to enjoy two flavors at the same time;and Esse Change, the world's first super slim capsule cigarette made with KT&G's innovative technology and product development capabilities.

KT&G alsoestablished its position as a market leader in product standards by commercializing the "Blue Band" technology. KT&G's new Blue Band technology allows for the manufacturing of cigarettes with low ignition propensity (LIP). This technology coats part of the cigarette paper with materials with low LIP to reduce fires caused by cigarettes. The company also successfully developed the "Seamless Scented Capsule" jointly with venture company At Lab. These thin capsules contain a mixture of aromatic scents and natural oils, which, once put inside the filter, give the cigarette a special flavor.These initiatives helped KT&G surpass its 2013 target operating profit.

KT&G's international tobacco business in 2013 sales recorded 27.7 million sticks and KRW452.7 billion (US$447 million), a decrease of 32% and 28%, respectively, from the previous year. The company had to strategically reduce exports to Middle Eastern countries because local dealers tightened their inventory control to cope with declining demand due to the depreciation of local currencies, which was driven by US economic sanctions against Iran. To drive overseas business, KT&G made inroads into new markets in South America, Africa, and Europe, increased manpower, and launched new brands to increase sales capability in Southeast Asian countries.

In 2014, KT&G intends to elevate its market dominance in the domestic market by capitalizing on expanding local distribution channels and a lineup of premium brands and employ diversified brand management strategies that are tailored to fit each consumer group. It also plans to continuously develop new overseas markets. 

KT&G has launched two new products in June 2014, the Raison Sun Presso and the ToninoLamorghiniSmartpack. The RaisonSun Presso is the latest addition to the RaisonPresso line, each cigarette containing a capsule in the filter that when popped, releases a second flavor. Before the capsule is popped the cigarette gives off is a rich coffee flavor. The second flavor that comes into effect once the capsule is popped is a refreshing orange menthol flavor. The new package features an image of cool waves under the burning sun on the front of the pack and an image of a capsule popping open on the back. The ToninoLamorghiniSmartpack began from an idea suggested by a client through KT&G's website bulletin board. Listening to the needs of its clients, KT&G explored the feasibility and design of this new product, which can be used as a smartphone stand as well as a cigarette pack.  The company released a limited edition of the Smartpack last July and received an overwhelmingly positive response from consumers. The Smartpack is applied to all cigarette packs in KT&G's Lamborghini line, namely the L6, Ice Tornado, Icevolt, and Crispy. Enditem