Japan Tobacco taps smoker-heavy zones as rivals go high-tech

[TOKYO] While most tobacco companies have embraced smokeless products to survive ever-tightening controls, the Japanese maker of Winston and Camel cigarettes is pressing ahead with a more low-tech strategy: selling smokes to emerging markets.

Japan Tobacco Inc, whose domestic market is predicted to shrink 27 per cent in the decade through 2021, announced Tuesday plans to buy a second Southeast Asian rival to expand in a region where cigarette prices are lower, smoking rates are higher, and the population is growing.

The US$1.6 billion that the Tokyo-based company said this month it will spend on acquiring traditional cigarette makers is at odds with a global industry shifting away from such products. The US Food and Drug Administration said last month it intends to regulate the level of addiction-causing nicotine in tobacco products. Japan Tobacco, which has fallen behind in the market for next-generation alternatives, is betting emerging markets will take longer to respond to global efforts to prevent tobacco-induced harm, providing opportunities for growth.

"We want to establish ourselves in markets like Brazil, Bangladesh, Indonesia, Philippines, and grow sustainably to strength our business foundations," spokeswoman Kana Miyauchi said via phone Tuesday, when it announced its largest Asian deal yet: paying about US$936 million for Mighty Corp, the No 2 cigarette maker in the Philippines. That followed the purchase earlier this month of Indonesia's PT Karyadibya Mahardhika for US$677 million.

"The purchases in Indonesia and Philippines are consistent with the strategy," she said.

Japan Tobacco was little changed to close at 3,741 yen in Tokyo trading Wednesday. The stock has declined 2.7 per cent this year, compared with a 5.4 per cent gain in the benchmark Topix index.

The tobacco industry has been consolidating over the past few years amid declining smoking rates. After large deals like British American Tobacco Plc's US$49 billion buyout of Reynolds American Inc, there are few big targets left. Smaller deals in Asia, the Middle East and Africa may offer the company better opportunities for growth.

Emerging markets have been attractive investments for cigarette companies as they have higher smoking rates and fewer restrictive regulations on sales. Typically, their cheaper packs of cigarettes means lower profit margins.

The operating profit margin for Indonesia's Gudang Garam Tbk, for example, was 13.2 per cent in 2016, much less than Philip Morris International Inc.'s 40.5 per cent and Japan Tobacco's 27.4 per cent.

Indonesia has the highest smoking prevalence in Asia, and the Philippines has the third-highest, according to market research firm Euromonitor International. The market researcher predicts that tobacco sales in developing markets, such as the Middle East and Africa, will expand at almost twice the pace of Western Europe in the next five years.

Owen Bennett, who tracks tobacco companies for Jefferies International Ltd., said he is positive about Japan Tobacco's efforts to build a presence in emerging markets, though he'd like to see more deals in the Middle East and Africa.

At the same time, he said, "they need to put a lot more focus on offering reduced risk and improving their ability to compete in the US."

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