Tobacco industry

Tobacco industry Tobacco industry Tobacco industry plays as a pioneer in the modern marketing. Tara Parker-Popes ‘Cigarettes: anatomy of an industry from seed to smoke acknowledge that the tobacco industry represents promotion and marketing itself. It is the industrys marketing ability which made tobacco a high necessity good for billions of people around the world, despite the products nature of harmfulness. The world tobacco industry has been recently hit by the criticism on major companies social responsibility as the awareness of the products harmfulness increases. This is followed by anti smoking campaigns and various regulations in the global market. Despite the adverse environment, the industry is still growing and its influence on the world economy has not weakened. A question then arise, what type of marketing strategy the industry has been applying in order to form a huge global market and what would be effective strategy to adopt in changing environment. The question can be tackled by analysing an individual company which has been adopting its strategy successfully to changing environment. BAT (British American Tobacco) The worlds biggest market is China where 35per cent of the global total output is consumed and industry is state owned monopoly. Outside China there are four major companies which account nearly half of the global market, which PMI (Philip Morris International), with a global market share of 15.6per cent, BAT (British American Tobacco) with 12per cent, JTI (Japan Tobacco International) with 10.6per cent, Imperial Tobacco with 3.5per cent. (Yuk. Pan Kwan, 2008, p18) BAT was founded in 1902 and has sustained a significant industrial presence for over 100 years. They produce 684 billion cigarettes a year through 47 factories in 40 countries with 53,000 employees worldwide. Their continuous growths can be identified from their financial performances, where the figures for growth turn over, revenue and profit is in increase. BAT is the most multinational cooperation among the international tobacco companies operating in five regions around the globe. They are America Pacific, Latin America, Europe, Africa and Middle East and Asia Pacific where Its brands hold robust market positions and have leadership in more than 50 markets. While their competitors focusing on the large and base markets (Philip Morris- US, Japan Tobacco- Japan), BAT successfully adopted marketing strategies to the new environments and developed new markets. BATs success in the South Korean tobacco market is the typical example where its effective marketing strategy adopted to fast changing environment. By looking at the market closely, the factors which led to the success will be identified. BAT in South Korean Tobacco Market BAT has entered South Korean tobacco market in 1988 when state monopoly company KTG (Korean Tobacco and Ginseng)s exclusive monopoly on tobacco sale has abolished. Until 1990s its forefront brands KENT and KOOL has failed to adopt the Korean market and experienced market divest for twice. However by re-positioning its brand to DUNHILL in 1993, the sail started rise and in 1996 BAT successfully occupied the competitive position in Marketing Environment The analysis will start with looking at strengths and weakness the BAT obtained internally over the competitors. The opportunities and threats will then be verified to investigate the external environment the BAT is facing in the Korean tobacco market. This will help understanding BATs strategies and will provide solutions to current environment changes. Strength BAT had effective quality control process which ensures customer satisfaction. Over 300 quality tests exist through the manufacturing process from purchasing raw materials to finished products. The products produced in Korea are regularly sent to the BATs lab in London to ensure its quality is maintained. This helps to deliver the BATs image of high premium tobacco producer, which also aid by its 100 years of history. BATs localisation strategy enforces its competitive position in the market. By having a local production facility, its products are made by locals which dilute possible variance the foreign imported goods obtain. With over 500 salespersons operating through 19 regional offices, BAT is able to gather effective information on sales. Salesperson visits 7,200 retailers across the country twice a week, and conducts monthly marketing surveys which not only improve marketing decisions, but improve company reputation. Weakness Local consumer can be hostile to BAT as there is ambiguos impression of greedy foreign multinationals. Also the products nature of being harmful to health multiplies the issue; a good example would be a campaign held in November 2002 by the Korean Writers Association opposing governments grant on BATs manufacturing plant. The hostility to foreign company can be expressed through various way especially in the tobacco market where many governmental restrictions exist. Opportunity Increasing awareness of tobacco products harmfulness, led to demand rise in high quality and low tar tobacco products. This matches with the image of BATs forefront brand DUNHILL-light and the companys reputation of quality tobacco producer. Threat Privatisation of KTG triggered the competition war between global rivals in the Korean tobacco market. This year JTI (Japan Tobacco International) revealed its plan on construction of new manufacturing plant in Korea where as PMI (Philip Morris International) announced the  £65m expansion on its manufacturing facility by 2009. While the competition between incumbent companies grew stronger, Altadis Group which occupies 27per cent of the world cigar market entered Korean filtered tobacco market with its high premium brand at forefront. Korean tobacco market also suffers from increasing awareness on tobacco products harmfulness over the world. The prohibition campaigns led by social groups effected government legislations to restrict the products promotion, sale and consumption. While looking at BATs opportunity and threat, the external environment factors are identified which had big influences on both company and the industry. In order to look into the strategies, needs arise for more thorough investigation on its current market environment. PEST analysis will be conducted to divide the environment into political, economical and social terms which will be defined in more depth. Political Recently governments around the world have applied added restrictions on the tobacco markets Korean market is no different. Restrictions are mainly set in two different ways; restrictions on the manufacturer and restrictions on the consumer. In Korea the direct promotion of tobacco products are only allowed on the printed publications which its reader groups are verified as male adults, excluding daily publications such as newspapers. However even this way has limit on number of appearance, which is set not to exceed more than 60 times a year per brand. On daily publications, only indirect promotions are allowed where only promotions on the company image can be advertised not the product. In July 2002 BAT was prosecuted by Ministry of health and welfare for directly promoting tobacco products on daily publication which cost company with fine. The international organisations pressure on tobacco market is also growing. In last 30th May, WHO (World Health Organisation) said ‘Governments need to ban all tobacco advertising and promotions to deter adolescents from smoking announcing international agreement on prohibiting tobacco companies product promotion through sponsorship on sports, music, etc. If the government sta rt to force this by legislations, BATs current marketing strategy would be affected strongly as most of its promotions are done through sponsorship. Economical Current recession in world economy spreads negative effects throughout the industries, although its results come out to vary between industries. In 2003 Korean economy experienced a recession caused by what is known as ‘Card-crisis, when major finance companies collapsed. The recession spread across the industries except for alcoholic drink and tobacco market. Through the period, the survey reports that sales for alcoholic drink rose by 3.1per cent and sales for tobacco rose by 8.9per cent. (cho-sun il bo) These results put forward the issue on growing tobacco industry in recent hit by health warning and economic recession. Figure1 and Figure2 also support the argument on increasing demand for tobacco in recession period. KTB Investment Company forecasted as ‘considering the current economic recession, the tobacco sales in Korea will increase in next year. The economic recession also affect the trend of the tobacco market. The recent trend in the Korean tobacco market was on low tar high quality brand and this was the reason BATs DUNHILL-light was successful. However analysts argue that the trend is shifting from low tar cigarette to high tar cigarette due to long recession over economy. If this turns out in true, BATs low tar brands will face decline where as PMIs high tar product; Marlboro will be gained. Social Social concern on the tobacco users health is not a very new issue. However increasing concern on the health-right of the passive smoker brought active antismoking campaigns across the world. by nearly 30% from 67.6% in 2000 to 40.4% in 2008. The figure is still declining and the Ministry of national statistic forecasts that the rate will fall to 30% by 2010. The environmental factor of BAT in Korean tobacco market is now defined. The analysis will be used to identify the BATs current marketing strategies and possible changes to be made in adopting with changing environment. Marketing Strategy Marketing strategy is defined through two main processes. Positioning strategy by correct target segmentation and marketing mix strategy by defining four Ps (Product, Place, Promotion and Price). Positioning strategy can be identified through three processes; defining market segments, targeting selected segments and positioning of products on customers perception. Segmentation Korean tobacco market can be divides into demographic region and psychographic region. With nature of tobacco companies being large co-operations, segmenting geographic region is not necessary especially defining a relatively small Korean market. Also Behavioural segmentations is not effective since all tobacco products are consumed regular basis. Demographic region include segment of different ages and social class. Psychographic region include segment on life style and taste. Age group of 19 to 25 and 25 to 30 have characteristics of putting brand image more important than practical use of the products. Many of these groups admire western culture. Group of age between 30 to 50 and 50 onwards share opposite characteristics from younger group. They are royal to the brand based on their personal favour of the taste of the cigarette. Social classes are divided into upper class, middle class, working class and low class. Upper and middle classes are followers of trend and obtain constant income whereas middle and working classes often influenced by environments such as decreased income, economic recession. Life style groups in Korean tobacco market are divided into patriotic personal group, trend setter group and low price follower group. Patriotic group would prohibit foreign products. They tends limit their choices only to KTG products whereas trend setter group has no limit on the choices. As its name represent low price follower group limit their choices to low price cigarette. Characteristics of both life style group and age group are interlinked. The types of tobacco tastes are mild taste, strong taste and special taste. Mild taste group favours low tar cigarette products and strong taste group favours high tar products. Special taste usually refers to group favouring menthol flavour products and rarely strawberry, banana and other fruit flavour also exist. Targeting BATs marketing strategy in Korean tobacco market starts with targeting correct segments. BAT has been operated globally as a high quality premium cigarette producer and premium brand market is their expertise. They will gain advantages by selecting target market where the premium brands work effectively. BAT has a phrase representing their target segment of ‘ASU30 which stands for adult smoker under 30 and age group of 19 to 25 and 25 to 30 suits into this category. Their characteristics of following brand image and admiring western culture comply with BATs product image. In order to comply with their premium brand the social class need to be focused to upper and middle class. The nature of the cigarette product contains consumption behaviour of continuance purchase and this requires constant income to maintain the behaviour. For segments in taste of the cigarette, BATs DUNHILL-light brand complies with those who favour mild taste. With the increasing health concern, smokers are switching from strong taste cigarette to mild cigarette which contains lower tar rate. While the international rival PMI focuses on strong taste high tar market (Marlboro), BAT can also be benefited by weak competition. Positioning In Korean tobacco market, BAT has targeted ‘age group of under 30s, ‘upper and middle social classes, ‘trend setter group and ‘mild low tar favourers. The positioning strategy which would successfully comply with the targeted groups would be implanting the image of ‘BAT produces high quality premium tobacco. This is achieved through prestige pricing, package design, promotion on company reputations and strict quality measures. Defining 4Ps (Product, Promotion, Price and Place) identifies the products position on the marketing mix. Product BATs forefront brand DUNHILL-light has 84mm length and charcoal filter blended. The design of its package is a key driver to image of the premium brand which consist with unique bevel edged style and octagonal shape. As mentioned in the strengths section, BAT conducts over 300 quality checks during production process insuring customer satisfaction. Promotion BAT often uses promotion method of image positioning than product positioning. Rather than appealing with product itself, image positioning focuses on implanting ambiguous image of product. BATs promotion of DUNHILL-light delivers image of luxurious and conservative. However as BAT targets young consumers under 30s, image re-positioning is vital. The rival companies promotion strategy aiming for young consumers threatens DUNHILL-lights market position. PMIs Marlboro-light obtains active image and JTIs Mild Seven has liberal images. Price BATs current pricing strategy contains prestige pricing which ensures its premium brand image. However as identified in threats part, current economic recession decreases the consumer loyalty to its brand. Correct pricing strategy is required which will satisfy both side of the issues. Place BAT has its unique distribution structure over competitors in the market. They are only tobacco manufacturer which runs own sale system of dealing directly with their retailers. Also by conducting monthly survey on retailer BAT can get to its customers more closely. Chain of 500 salespersons and 7,200 retailers are key success to BAT. Analysing marketing strategies of BAT in Korean tobacco market has helped understanding of how strategies adopt to different marketing environments. BATs current strategies are not only identified but evaluated with suggestion of possible improvements to be made. On the whole through the analysis work, strategy which led industrys continuous growth is identified. Finally applying the BCG (Boston Consulting Growth) model, BAT is a Star company in Korean tobacco market which currently enjoying high market share with high industrial growth. In order to become a Cash Cow, BAT should apply passive marketing strategies increase investments to secure its market share.