[Intl-tobacco] Japan Tobacco plans

[Robert Weissman]

This is a multi-part message in MIME format.
--
Smelling of lemons

Oct 16th 2003 | TOKYO
>From The Economist print edition


Japan Tobacco still thinks that the tobacco business has a healthy future

TO SEE why Japan Tobacco is expected to bid in an auction in Turkey next
week, visit Tokyo's teen-centric Shibuya district. Youngsters happily
puff on cigarettes there, but ignore them=97they are not the real story.
Although nicotine has hooked males in Japan more than in any other rich
country, even the Japanese market is shrinking faster than those smoking
teens would suggest. Instead, stroll to the nearby Tobacco and Salt
Museum. There the story is told of tobacco's globalisation as it spread
from the Americas; of how technology has made consuming nicotine more
convenient; and of the role that brands have played in marketing the
deadly drug. No cigarette firm anywhere is striving harder to make money
from the continuation of all three strands of that story than Japan Tobacco=
.

Its interest in globalisation is easy to understand. Japan Tobacco's
domestic market is now shrinking, not least thanks to successive tax
hikes on cigarettes. In 1996-2001, the number of smokers in Japan=97as a
share of people aged 20 or over=97fell from 27.1% to 24.4%, says the
health ministry. Japan Tobacco's domestic tobacco sales fell by 2.4% by
volume in fiscal 2001, and by 3.5% last year. Taizo Demura of Morgan
Stanley reckons that they will fall by a hefty 5.5% this year.
In April 2005, Japan Tobacco will also lose its licence to sell Philip
Morris's Marlboro brand domestically, which the company says will knock
*50 billion ($455m) off its annual operating profits=97around one-fifth.
Japan's low population growth, moreover, will continue to hold back
domestic sales in the future, even if those Shibuya teens keep getting
hooked.

To boost tobacco profits, therefore, Japan Tobacco is banking on higher
revenue overseas. To this end, it has bought and is now aggressively
promoting a portfolio of leading international brands. In 1999 it
acquired the international business of America's RJR, giving it the
rights to the Winston, Salem and Camel brands outside America. Japan
Tobacco hopes that growing such high-margin brands will boost its
profits in Europe. But, even though the firm is confident=97perhaps overly
so=97that Europe is unlikely to follow America's courtroom assault on the
cigarette business, demographics, health concerns and politics (such as
proposed bans on smoking in public) make western European countries,
such as Britain and Germany, look potentially as unexciting as Japan.
This leaves the big emerging economies to be more thoroughly and
profitably addicted.

Alas, some of the biggest emerging markets are not very promising
either, at least in the short term. In China, the world's biggest market
by volume, Japan Tobacco cannot get past a state-run monopoly.
Indonesia, the fifth-biggest market, is dominated by locally made kretek
cigarettes (laced with cloves from the country's eastern islands). Japan
Tobacco has been especially aggressive, therefore, in Russia, the
world's fourth-biggest market, where smokers lit up 300 billion
cigarettes in 2002. And then there is Turkey, the world's eighth-biggest ma=
rket.

On October 24th, Tekel, a Turkish state-run firm that sells tobacco
products, salt and alcohol, will put its tobacco business on the auction
block. Although they are still looking over the details, Japan Tobacco's
executives say they have a strong interest in making a bid. Around half
of Turks aged 18 or over smoke, and Tekel has 61% of the market. Better
still, Turkish smokers are showing growing interest in higher-priced
upmarket brands.

Japan Tobacco is also acting on the third lesson from the industry's
history, by using more technology. Earlier this year, in and around
Tokyo, it began selling Lucia, a new citrus-flavoured cigarette that has
been specially blended to reduce odour. It claims these are as popular
with non-smokers, most of whom usually hate the smell of cigarettes, as
with smokers. Lucia will be sold nationwide from November 4th. The firm
will also begin to sell a similar reduced-odour cigarette under its Mild
Seven brand name=97which should make it more appealing to male smokers
than girlie Lucia=97in Tokyo.
Yet even if it keeps up its profit margins, shareholders are not
convinced that they will reap the benefits. Unlike the world's biggest
tobacco company, Philip Morris, which (through its parents Altria) pays
out half of its net income in dividends, Japan Tobacco only returns
about 20% of its net income to shareholders. Earlier this month, it
announced plans to buy back *50 billion of its shares. But so far it has
repurchased only about 70% of this total=97and most of these were from the
government's 66% stake. The firm was partially privatised in 1994.

One reason why the firm is loth to return more cash, says Masakazu
Kakei, the president of the tobacco business, is that it wants to invest
more in its pharmaceuticals business=97even though it has yet to produce a
marketable drug. Perhaps, a few decades from now, there will be a
pharmaceutical museum in Tokyo telling how cash flows from tobacco were
used to build one of the world's leading drugs companies. More likely,
Japan Tobacco's profits will instead go up in smoke.
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[ Converted text/html to text/plain ]
Note in the last paragraph Japan Tobacco's interest in investing in the pha=
rmaceutical
industry.

Smelling of lemons
Oct 16th 2003 | TOKYO
>From The Economist print edition
Japan Tobacco still thinks that the tobacco business has a healthy future

TO SEE why Japan Tobacco is expected to bid in an auction in Turkey next we=
ek,
visit Tokyo's teen-centric Shibuya district. Youngsters happily puff on
cigarettes there, but ignore them=97they are not the real story. Although
nicotine has hooked males in Japan more than in any other rich country, eve=
n
the Japanese market is shrinking faster than those smoking teens would
suggest. Instead, stroll to the nearby Tobacco and Salt Museum. There the
story is told of tobacco's globalisation as it spread from the Americas; of
how technology has made consuming nicotine more convenient; and of the role
that brands have played in marketing the deadly drug. No cigarette firm
anywhere is striving harder to make money from the continuation of all thre=
e
strands of that story than Japan Tobacco.

Its interest in globalisation is easy to understand. Japan Tobacco's domest=
ic
market is now shrinking, not least thanks to successive tax hikes on
cigarettes. In 1996-2001, the number of smokers in Japan=97as a share of pe=
ople
aged 20 or over=97fell from 27.1% to 24.4%, says the health ministry. Japan
Tobacco's domestic tobacco sales fell by 2.4% by volume in fiscal 2001, and=
 by
3.5% last year. Taizo Demura of Morgan Stanley reckons that they will fall =
by
a hefty 5.5% this year.

In April 2005, Japan Tobacco will also lose its licence to sell Philip
Morris's Marlboro brand domestically, which the company says will knock =A5=
50
billion ($455m) off its annual operating profits=97around one-fifth. Japan'=
s low
population growth, moreover, will continue to hold back domestic sales in t=
he
future, even if those Shibuya teens keep getting hooked.

To boost tobacco profits, therefore, Japan Tobacco is banking on higher
revenue overseas. To this end, it has bought and is now aggressively promot=
ing
a portfolio of leading international brands. In 1999 it acquired the
international business of America's RJR, giving it the rights to the Winsto=
n,
Salem and Camel brands outside America. Japan Tobacco hopes that growing su=
ch
high-margin brands will boost its profits in Europe. But, even though the f=
irm
is confident=97perhaps overly so=97that Europe is unlikely to follow Americ=
a's
courtroom assault on the cigarette business, demographics, health concerns =
and
politics (such as proposed bans on smoking in public) make western European
countries, such as Britain and Germany, look potentially as unexciting as
Japan. This leaves the big emerging economies to be more thoroughly and
profitably addicted.

Alas, some of the biggest emerging markets are not very promising either, a=
t
least in the short term. In China, the world's biggest market by volume, Ja=
pan
Tobacco cannot get past a state-run monopoly. Indonesia, the fifth-biggest
market, is dominated by locally made kretek cigarettes (laced with cloves f=
rom
the country's eastern islands). Japan Tobacco has been especially aggressiv=
e,
therefore, in Russia, the world's fourth-biggest market, where smokers lit =
up
300 billion cigarettes in 2002. And then there is Turkey, the world's
eighth-biggest market.

On October 24th, Tekel, a Turkish state-run firm that sells tobacco product=
s,
salt and alcohol, will put its tobacco business on the auction block. Altho=
ugh
they are still looking over the details, Japan Tobacco's executives say the=
y
have a strong interest in making a bid. Around half of Turks aged 18 or ove=
r
smoke, and Tekel has 61% of the market. Better still, Turkish smokers are s=
howing
growing interest in higher-priced upmarket brands.

Japan Tobacco is also acting on the third lesson from the industry's histor=
y,
by using more technology. Earlier this year, in and around Tokyo, it began
selling Lucia, a new citrus-flavoured cigarette that has been specially
blended to reduce odour. It claims these are as popular with non-smokers, m=
ost
of whom usually hate the smell of cigarettes, as with smokers. Lucia will b=
e
sold nationwide from November 4th. The firm will also begin to sell a simil=
ar
reduced-odour cigarette under its Mild Seven brand name=97which should make=
 it
more appealing to male smokers than girlie Lucia=97in Tokyo.

Yet even if it keeps up its profit margins, shareholders are not convinced
that they will reap the benefits. Unlike the world's biggest tobacco compan=
y,
Philip Morris, which (through its parents Altria) pays out half of its net
income in dividends, Japan Tobacco only returns about 20% of its net income=
 to
shareholders. Earlier this month, it announced plans to buy back =A550 bill=
ion
of its shares. But so far it has repurchased only about 70% of this total=
=97and
most of these were from the government's 66% stake. The firm was partially
privatised in 1994.

One reason why the firm is loth to return more cash, says Masakazu Kakei, t=
he
president of the tobacco business, is that it wants to invest more in its
pharmaceuticals business=97even though it has yet to produce a marketable d=
rug.
Perhaps, a few decades from now, there will be a pharmaceutical museum in
Tokyo telling how cash flows from tobacco were used to build one of the
world's leading drugs companies. More likely, Japan Tobacco's profits will
instead go up in smoke.

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