[Intl-tobacco] One Country, Two Markets (fwd)

[Robert Weissman]

One Country,  Two Markets
Source: Tobacco Journal International, Tuesday, 2/15/00

Ten years after the fall of the Berlin wall, the German cigarette market
is still divided. Although western trends are slowly picking up, the
leading brands of eastern Germany cannot be found on the shelves of
western German shops. Prices, advertising campaigns and the importance of
the various trade channels remain different in East and West. Total German
cigarette sales went up in 1999.

The German cigarette market registered a positive trend in 1999: total
cigarette sales increased by 2.2 billion to 173 billion units. Trade
brands managed to cement their success in Germany in 1999, reflecting the
growing price consciousness of consumers; yearly sales in this segment
increased by 19.4 per cent to 10.6 billion units. They now account for 7.6
per cent of the total market. Sales of factory-made brands grew by 1.9 per
cent to 141.1 billion pieces (1998: 138.4 billion), while cross border
sales declined by 2 per cent to 13.9 billion cigarettes in 1999.

Philip Morris, who held a market share of 40.4 per cent in 1999, was once
more the market leader. However, the company registered its second sales
drop after 1998 to 57 billion pieces, and its market share went down by
0.9 per cent. The German cigarette manufacturer Reemtsma managed to
increase its sales to 32.2 billion units in 1999; its market share
remained stable at 22.8 per cent. The clear winner in Germany during 1999
was British American Tobacco, whose sales rose by 5.5 per cent to 26.3
billion cigarettes. The German division of the UK-based company now holds
a market share of 19 per cent and has taken over the second position in
the ranking of manufacturers in 2000 after the merger with Rothmans
international was fully implemented.

However, Rothmans faced a further drop in sales with 7.6 billion
cigarettes sold in 1999, accounting for 5.4 per cent of the market (1998:
5.9 per cent). Mr Georg C. Domizlaff, chairman of the board of BAT
Germany, stated recently that =93the company will have to integrate the
Rothmans brands into the company's portfolio and will have to find a
common strategy for the German market=94 =96 which could mean that, at some
point, the production of certain Rothmans' brands could be discontinued.

With sales of 6.1 billion units, RJ Reynolds =96 now Japan Tobacco
International =96 also had to face a drop of 7.8 per cent in volume sold.
The latest results frustrated hopes that the company could be able to
sustain the positive development of 1998, when it was able to increase its
market share slightly from 4.7 to 4.8 per cent, selling 6.6 billion
pieces.

Marlboro King Size held its position as the top selling brand in the whole
of Germany; however, the flagship of Philip Morris' German portfolio lost
1.3 percentage points accounting for 16.8 per cent of total sales of
factory made cigarettes (1998: 18.1 per cent). The market share of
Marlboro Lights King Size, which ranks second on the top ten list, was
stable at 10.8 per cent, while Marlboro Medium continued to grow.

Reemtsma's West brand gained market share and now holds 7 per cent of the
market (1998: 6.8 per cent); it is followed by BAT's HB with 5.4 per cent,
which has been facing a steady decline (1998: 5.9 per cent). Lucky Strike
Filters, which ranked seven in 1998 has improved its market share
significantly from a 2.8 per cent market share to 3.3 per cent and now
ranks fifth. The brand has been helped by a clever advertising strategy.
Lucky Strike was the clear front-runner among the fastest-growing brands
in Germany in 1999 with a sales plus of 23 per cent or 899 million pieces
against 1998.

F6, a Philip Morris brand sold in the eastern part of Germany, ranked
sixth (3.4 per cent market share), followed by West Lights, Peter
Stuyvesant, Camel Filters and Marlboro Medium. The success of the F6
brand, which is sold exclusively in eastern Germany but is among the top
ten German-wide, already shows how different the markets in eastern and
western Germany are.

Ten years after the fall of the Berlin wall and nine years after
reunification, differences remain between the two parts of the country.
The eastern German smoker is much more price sensitive =96 hardly a surpris=
e
with a jobless rate around 20 per cent. The average price of cigarettes in
the East, currently at DM 4.80, is much lower than in the West (DM 5.80).

The so-called =93eastern brands=94 dominate the cigarette market in the
territory of the former socialist republic. Whether they are old,
traditional brands =96 such as F6, Cabinet and Juno or brands introduced
after reunification =96 such as Pall Mall, they are sold only in the east.

East German smokers still generally prefer stronger cigarettes; the market
share of light brands is still around 20 per cent, while it makes up for
more than one third of the west German market. The trend, however, follows
the developments in the west, and the growing rate for lighter brands is
much higher in the east. Market studies show that the eastern German
consumer has different needs than its western counterparts; he or she is
much more concerned about the practicalities at life and is generally
worried about the future. Thus, the cigarette advertising in east and west
Germany reflects this. Pall Mall, for instance, is running an ad that
offers a chance for young people to take up practical courses in the USA.

Manufacturers had to learn that the eastern consumer can be sensitive to
things that are considered to be common ground in the west. For instance,
Philip Morris has recently launched an American blend version of its F6
brand. However, it was advised to call it an =93international blend=94
cigarette, since the word =93American=94 may have a negative connotation fo=
r
some consumers. The trend towards bigger packs of 24 or 25 originally
started in the east, and has now established itself in the west.

Vending machines are a very important distribution channel for cigarettes
in western Germany, with a market share of 31 per cent, and their
importance is also growing in the east. These machines are at the centre
of a polemic, since they are considered unsafe for minors. Distributors,
cigarette companies and manufacturers of vending machines are now
developing a kind of =93ID card=94 for these machines that will be given on=
ly
to adults; this way, the polemic could be taken out of the line of fire of
anti-tobacco activists.

Besides cigarettes, tobacco rolls (pre-portioned tobacco wrapped in paper
to be introduced in a filter tube) still play a role in the German tobacco
market. They were originally defined as an unfinished tobacco product and
thus taxed as fine-cut , but have gradually lost this status and since
January 1, 1999 they are now being taxed as factory-made cigarettes. Most
rolls manufacturers, including market leader BTM, Brinkmann-Niemeyer and
Philip Morris decided to continue production, although prices had to be
increased dramatically by DM 0.90 (US$ 0.55) for a pack of 30. They lost
17 per cent of their sales volume with a drop to 2.9 billion pieces (1998:
3.2 billion units), but the market seems to have reached a fragile
stabilisation.

=93Classic=94 fine-cut again enjoyed an increase of 2 per cent, with a volu=
me
equivalent to 15.2 million RYO cigarettes in 1999. Market leader was
Brinkmann Niemeyer with 29.5 per cent in the first eight months of 1999,
followed by Imperial Tobacco Agio (21.7 per cent), Heintz van Landewyck
(11.2 per cent) and Alois P=F6schl with 10.4 per cent. BTM held 7.6 per cen=
t
while British American Tobacco accounted for 3.4 per cent of the market.
The top-selling brand in this segment was Drum Halfzware, followed by
Samson, Schwarzer Krauser No.1 and Van Nelle Halfzware.

Private label brands are very important in this price-sensitive market.
More than half of fine-cut sales come from cheaper brands, which are seen
as an alternative to cigarettes.

Germany's cigar market continued its upward trend despite opposite
developments in other major markets such as the US, where cigar sales have
reached their climax. German cigar sales reached 1.84 billion pieces in
the first nine months of 1999, 14.5 per cent more than in the comparable
period of 1998. Manufacturers forecast a total sales volume of 2.4 billion
pieces for the year.

This growth is mainly due to the continuing upsurge of so-called
=93eco-cigarillos=94, which were first introduced in 1996. Their flavour
resembles that of cigarettes but they are, technically speaking,
cigarillos. Since the taxation of these products is lower, they offer a
further cheap alternative to cigarettes.

Their sales volume reached 866 million pieces in the first ten months of
1999 while total sales of eco-cigarillos in 1998 amounted to around 700
million pieces. Especially popular in this segment are the filter
cigarillos, which climbed by 91.5 per cent to 542 million pieces in the
period. Filterless eco-cigarillos, which can be introduced into a filter
tube, stagnated at 324 million pieces. The leading brands are Westpoint
Filter cigarillos (Brinkmann Niemeyer) followed by West Rollies (BTM
Roth-H=E4ndle) which was only introduced in August 1999. The upsurge in
sales of eco-cigarillos contributed significantly to the higher sales
volume of the entire cigar segment, whose turnover reached DM 722.7
million in the first nine months of 1999 and is estimated to reach around
DM 1 billion for the year. In 1998, the country's cigar sales volume only
amounted to DM 860 million.

Apart from eco-cigarillos Germany's classic cigar market also grew by 1.5
to 2 per cent to 1.2 billion units in 1999. The highest sales volumes are
generated in the low-price segment, mainly due to the dominating role of
cigarillos, which account for 84 per cent of the total market. The
best-selling brand was Clubmaster (Arnold Andr=E9), followed by Dannemann
Speciale (Dannemann) and Meharis (Imperial Tobacco Agio). The 100 per cent
tobacco cigarillo Nobel Petit of Gebr. Berens ranked fourth, followed by
Biddies (Agio), Fino (Willem II) and Backgammon (Villiger).

Aromatic cigarillos continue to gain ground in the German market. An
estimated 200 million pieces were sold in 1999. Mainly the young and
female smokers have been attracted by the =93aromaticos=94.

Meanwhile, almost all cigarillo manufacturers have introduced at least one
flavoured brand. The leading brand within this sector is Moods of
Dannemann, followed by Clubmaster Fellows of Arnold Andr=E9 and Meharis Mil=
d
respectively Biddies Aroma, both of Imperial Tobacco Agio.

Around 1700 cigar and cigarillo brands are currently being sold in Germany
by 40 manufacturers and importers. Four companies hold around 90 per cent
of the market, which is led by Arnold Andre and Dannemann, followed by
Villiger and Imperial Tobacco Agio.

The sales of premium cigars, whose popularity certainly has helped the
industry in the past few years is stagnating at 15 to 20 million pieces,
accounting for a relatively small sales volume compared to total sales of
cigar products in Germany.

Pipe tobacco sales have gone down in Germany from 1236 tonnes in 1997 to
1161 tonnes in 1998. There is a wealth of brands available in the country.
Stanwell led the market in the first half of 1999 with a share of 28 per
cent, followed by Planta (18.5 per cent), Alois P=F6schl (16.3 per cent) an=
d
Von Eicken (15.9 per cent). Rum & Maple (Planta) was the market leader in
the first six months of the year, followed by Mac Baren Mixture (Mac
Baren) and Danske Club Black Luxury (Stanwell). Premium tobaccos are not
the best-selling pipe tobacco category in Germany; still, their sales have
been increasing fast. Flavoured tobacco brands, which have a high
acceptance among surrounding non-smokers are also gaining popularity. This
category includes, for example, Stanwell Vanilla (Stanwell) or Vanilla
Cream (Mac Baren). The German pipe tobacco manufacturer Vauen has
introduced Pipoo, a new product aimed at making pipe smoking easier and
more popular. A special pipe is filled with pre-portioned tobacco, which
does not need to be pressed and can be thrown away after smoking. It
remains to be seen whether the new product will be accepted by the German
smokers.