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September, 2007

Profile: Japan
A New Day, a new Landscape

By Albert Chan

Through tax hikes and increased competition, a look at how one developed nation’s cigarette landscape is shaping in the modern market.

The cigarette market in Japan, which took a hit last year after a surprise tax hike last July, is slowly recovering but some believe it would take almost a year for sales to go back to the pre-tax days. The good news though is that despite the drop in sales (208.9 bn cigarettes sold during the first nine months of the fiscal versus 220.5 bn a year ago), actual revenues in Yen terms remained flat. Sales proceeds were ¥3,059 bn during the first nine months, which was very close to that of the same period a year ago. The three key players, Japan Tobacco (JT), Philip Morris, and BAT have been working hard in diverse strategies to hopefully grow market shares and sales.

The overall trend where foreign imports ate into JT’s turf is continuing with imports’ share of market rising from 24% to 35% in the past decade. The trend can also be explained by the transfer of Marlboro from “domestically manufactured” to “import” category after JT ceased producing the brand for Philip Morris in Japan in 2005.

In terms of market trends by segment, menthol and low tar continued to lead and showed increases across the industry. Total menthol segment was 1.05% up over 2005 (from 18.38% to 19.42%) while the low tar segment (1 to 6 mg tar) went up by 0.92% (from 27.12% to 28.61%). One interesting development last year was the premium segment which slowed down after the tax increase and finished 2006 by declining rather sharply (1.17%) over 2005 as consumers were clearly becoming more cost conscious as prices went up.

In response to the challenges posed by tax hike and aggressive competition, market leader JT (market share 64.9%) is quietly shifting gear in its marketing strategies to strengthen its foothold in the market.

A few years ago, JT used to launch a large number of new brands and brand extensions at the same time in various strategic locations to test the market. Depending on the success or otherwise of these, a handful would be selected for nation-wide launch.

The company has changed its strategy now as the effect of the discontinuation of the Marlboro licensing agreement has already leveled off. In the whole of 2006, only seven new products were introduced into the market and of these, one has been expanded to national sales. Meanwhile, two new products, Cabin One Tasty 100’s Box and Mild Seven Super Lights 100s Box were brought into the market nation-wide after a brief test marketing exercise in limited sales areas.

This year JT intends to “achieve steady growth within growing market segments such as 1mg, menthol and ¥320 (US$2.72) or above products by effectively launching new products,” according to Yukiko Seto, company spokesperson. The year 2007 also marks the 30th anniversary of JT’s flagship brand Mild Seven and the company will continue to try to “add value and enhance brand equity” to the brand, said Seto.

Apart from marketing efforts focused directly on its products, JT is also investing substantially in efforts to support smokers. For example, by October 2006, JT established 241 “smoking spaces” throughout the country in conjunction with 37 local governments.

These smoking spaces are outdoor designated smoking spaces with ashtrays, or smoking lounges made largely with glass with attendants, restrooms, vending machines for drinks and of course powerful ventilation and regularly cleaned ashtrays. JT has also offered technical advice to other location owners for establishment of these “smoking spaces” and a total of 475 were set up by October 2006.

Such moves were believed to be tactical response to the handful of local authorities that passed regulations in recent years to ban smoking on the streets although there is yet no national legislation on blanket indoor smoking bans. Japan therefore is actually quite unusual, as most other countries would start smoking restrictions indoors before moving to outdoors.

Second Place
Second in the market is US giant and global leader Philip Morris (PM) which commanded a market share of 24.7%. Although share of market was down 0.1% point from a year ago, share of its flagship Marlboro brand edged up 0.2% to 9.9% during the same period. Company spokesperson Peter Nixon attributed the growth to the termination of the contract manufacturing contract between PM Japan and JT in March last year.

“We are pleased to have total control of our brand,” said Nixon. One of PM’s 2007 focuses (which actually began late last year) was its second biggest brand in the market Lark (ranked fourth in Japan amongst all brands). The company is currently selling as many as 19 brand variants under Lark and a total re-design of the packaging was carried out last year and launched in December.

Nixon described it as “full packaging upgrade and product innovation”.

PM will also realign the 19 variants and may discontinue two or three. The second key initiative is the introduction of a new variant of its Marlboro brand called Blend 27, a 13 mg tar product which hit the market in February this year and was tailor-made for the Japanese market.

Commenting on the market trends, Nixon reckoned that tobacco companies in Japan, which used to launch new low tar variants to attract smokers, need to have more imaginative offerings to get ahead of the competition.

Nixon believes that the mainstream segment (¥300) is declining giving way to premium segment (¥320) while he does not see the value segment (¥280 and below) posing any threat to the market as has been the case in high tax markets such as Singapore and Hong Kong.

However, PM recognized the possibility of the trend spilling over to Japan and thus has proposed the idea of minimum pricing to the government arguing that this would ensure future tax hikes would have its desired public health impact. So far, there was no response from the authorities.

BAT, the smallest of the three key players was actually reporting better performance than its competitors in 2006. BAT’s market share went up marginally by 0.83 percentage points to 9.89% last year. The growth in fact accelerated after the tax increase. It broke the 10% barrier in July and kept consistently above 10% thereafter, according to Hideto Fukamachi of BAT Japan.

“The growth was led by strong performance of Kent and Kool,” he added.

Soft and Mature
Despite the softness and maturity of the overall market, the underage smoking problem remained a concern for both the government and the tobacco industry. While the WHO’s Framework Convention on Tobacco Control which advocated a prohibition of tobacco vending machines, the industry in Japan initiated an ambitious program to install age verification device in virtually all the vending machines across the country.

The program which took nearly eight years from planning to fruition will be launched in December this year in two southern prefectures and expanded to the whole of Japan in July 2008 covering some 620,000 machines.

This effectively means the purchase of cigarettes from vending machines will not be possible unless a “taspo” card (coined from the words “tobacco” and “passport”), which are only issued to adults, is verified by the vending machine reader. The card also contains the photograph of the holder and thus will deter unauthorized transfer and use.

However, there will still be around 100,000 vending machines owned by small retailers which will not join the program as yet.

“We need a law on vending machine to make it mandatory for owners to install the age verification system,” said PM’s Nixon. However, in the country where self-regulation is considered more agreeable than legislation, the suggestion is likely to remain... a suggestion.

Tobacco International - September, 2007

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