Industry history: JTI

• Tobacco International (1999) – JT expand through JTI: sales of cigars became main source of revenue • large profits but sales decline • 2007: expansion through acquisition of Gallaher Group • 2008: 1st and 2nd leading tobacco business in 11 major markets • 2009-2010: contribution to net profit →1.67 billion USD history: JTI

• Tobacco Manufacturing System: – Step 1. Domestic leaf tobacco→ threshing → drying → packing into a case → storing – Step 2. International leaf tobacco → blending → cutting → flavoring → rolling → packaging – Step 3. Retailer – Step 4. Customer Domestic and International Market

JT’s Domestic Market Share

The Japanese domestic tobacco business established a stable business foundation as the JT Group's core source of profits as it has secured a 64.1% share of the Japanese cigarette market . Global Market Share of Tobacco Companies (Continued)

Source:http://topforeignstocks.com/2010/11/14/a-review-of-the-global-tobacco-industry/ Domestic Market Tactics

•Cigarette sales in Japan are declining

•Shifting sales and marketing from vending machines to convenience stores -2008: Japan implemented the TAPSO vending machine system -people purchasing ->identification cards -vending machine sales dropped: 44 percent of cigarette sales in Japan to 25 percent Domestic Market Tactics

•Revamping of market leader

—Mild Seven- JT → October 2010 tobacco tax increase

—Revamp of Mild Seven → increase in sale price designed to offset the more than 30 percent tax Increase Domestic Market Tactics

•November 2010 — new look was released → make the brand more attractive to consumers & encourage them to buy the higher priced cigarettes Domestic Market Tactics

•Launching new variants to meet the demand for menthol products - 2009: menthol cigarettes-21 percent of cigarette sales in Japan - 2009 & 2010: JT launched at least four different menthol cigarettes variants Domestic Market Tactics

•Marketing filter technologies and“low-tar products” to → health conscience consumers —health conscious population→ new filter technologies and lower tar products domestically.

Eg. Mild Seven Impact One Menthol, 2009: Seven Stars Black Charcoal Menthol Domestic Market Tactics

•new charcoal filter: “utilizes a special membrane technology that inhibits the menthol component of cigarettes from being absorbed before being smoked” International Market Tactics

•JT’s profits rely on sale of tobacco products internationally

•Many of the marketing techniques created and perfected by JT/JTI →used in markets where regulations are weak.

•continues to focus on its Mild Seven brand especially in Asian markets → uniquely positioned in markets that ban misleading descriptors (cigarette packaging) International Market Tactics

•Thailand: Mild Seven cigarettes were exempt from the 2006 misleading descriptor ban

•Taking advantage of Mild Seven’s strong positioning, JTI launched two new variants of the brand in Asia

•Mild Seven LSS (less smoke smell) cigarettes

• Mild Seven Equalizer International Market Tactics

•expanded its Winston brand

•launch of Winston XS Blue and Winston XS Silver with a new charcoal filter

•use of images of filters, use of “charcoal filter”→ mislead consumers →new technology →products less harmful International Market Tactics

-mass marketing campaign to launch Winston XS in Russia Marketing to Women

•JTI launched the Glamour brand

•Glamour cigarettes -line of super slim cigarettes -launched first in Russia, Ukraine, and Kazakhstan Marketing to Urban Elite

• November 2009

• JTI launched a new line of Sobranie cigarettes in Russia – sleek packaging is designed to “highlight the premium modern positioning” of the brand – Sobranie Black, Blue, and Gold air-coal filters – the packaging’s international feel are attractive to up and coming urban adults. Marketing to Young Adults

• uses exclusive music events • promotional giveaways • brand stretching  Done to make its tobacco products more attractive to younger demographics Top Importers of Cigarettes

• Japan vs US – Japan: top importer of cigarette

• Brief History – JTS → state monopoly – Japan allows imported cigarettes to only 1.4% – 1980-1987 → liberalization (tariff reduction)

Source: http://tobacco.health.usyd.edu.au/assets/pdfs/AssuntaPhD.pdf Top Importers of Cigarettes

• Justification: Japan imports (2/3) raw materials (tobacco leaves) from US

• After liberalization – Japan’s consumption of foreign cigarettes ↑ – Sales ↑ as well – Market share of foreign TTCs increased to 10% – 1988 → 94% of imports market (American TTCs)

Source: http://tobacco.health.usyd.edu.au/assets/pdfs/AssuntaPhD.pdf Top Importers of Cigarettes

• “...with import duty now removed, we’ll be able to compete on a more equal footing. We’ll concentrate on marketing . This year we will spend more on this in Japan than in any other International market.” -Philip Morris Tobacco Leaf Importers

• US → primary source of high quality leaf → surplus of domestically produced leaves • 1986 → JT incentivize Japanese farmers who would stop producing • Imported leaves → cheaper • JT → obliged to adapt a more cost efficient way of leaf production Tobacco Leaf Importers

• Japan → US’ top importer of tobacco leaves • 1968 → demand for “milder tasting cigarettes” • Imports → “mild tasting and richly aromatic” • 1988 → 65% of total imports • All the ASEAN countries (except Brunei and Singapore) → grow tobacco → cheap leaf for JT/ JTI Trade Liberalization

• The removal of or reduction in the trade practices that to ease the flow of goods and services from one country to another.

• Reduced high-tariff and non-tariff → increase in tobacco use in many low-income and middle- income countries. Trade Liberalization

• Reasons why international trade in tobacco and tobacco products:

1. Inability to produce tobacco products domestically; does not meet domestic demands. 2. Differences in prices in different countries 3. The importing of unmanufactured tobacco (used for tobacco production → exports) Trade Liberalization (Continuation)

• Multilateral treaties – Agreement among countries to ease the flow of trade. • World Trade Organization multilateral agreements: – GATT (General Agreement in Tariff and Trade) “reduce its tariff on cigars by 50%, on European cigarettes and other manufactured Union tobacco products by 36%, and on unmanufactured tobacco by 20% ” GATT “eliminate its tariffs on cigar wrappers (1994) and reduce its tariffs on cigar filler and United binder tobacco, cigars and most cigarettes by 55%, on tobacco stems States and refuse by 20% and on other manufactured and tobacco by 15% “

Source: World Bank; http://siteresources.worldbank.org/INTETC/Resources/375990-1089904539172/343TO364.PDF Trade Liberalization (Continuation)

• Regional trade associations – include: NAFTA, the European Union (EU), the Association of SE Asian Nations (ASEAN), the Common Market of East and Southern Africa (COMESA), the Economic Community of Western African States (ECOWAS), and the Organization of American States (OAS) Trade Liberalization (Continuation)

• Incentives for in ASEAN: – Rapid Industrialization of the ASEAN – Constraints on the availability of domestic resources in Japan → export to “offshore production”. – All the ASEAN countries (except Brunei and Singapore) → grow tobacco → cheap leaf for JT/ JTI – ASEAN countries like to have Japanese economic relations, to provide most Japanese investment and aid. – 1980s → ASEAN countries → biggest recipient of Japanese technology transfer. Heckscher-Ohlin Model

• Japan Tobacco International – Build plants in other countries • Labor intensive • Get their raw materials (tobacco leaves) from countries in which it can be purchased at a cheaper price Excise Tax

•To reduce the demand for tobacco, excise tax increases

• Resulting higher prices

—proven effective → government can use → strategy of tobacco control —induce some smokers to quit —reduce consumption —prevent others from starting —reduce the number of ex-smokers who resume Excise Tax

•Empirical studies have found that

—10% cigarette price increase will reduce consumption by 4 percent in high-income countries

—8 % in low- and middle-income countries, as people with lower incomes are more responsive to price increases (World Bank, 1999)

Excise Tax

• future of the company will depend on such foreign markets as cigarette sales in Japan continue to plummet.

• Excise increases. - excise tax increase in mid -2006 -resulting price increase only accelerated the decline of cigarette sales

•JT, PM and BAT, increased cigarette prices due to a cigarette excise tax hike in July 2006 Excise Tax

•All tobacco products sold in Japan are subject to the national tobacco excise tax

•2006 - national tobacco excise tax, previously ¥ 3,126($ 25.96) per thousand units, increased to ¥3,552 - local tobacco excise tax was also raised ifrom ¥3,946 to ¥4,372 per thousand units

•Japan Tobacco raised the prices of all 116 of its domestic tobacco brands Excise Tax

•96 brands were increased ¥1 per cigarette •13 brands increase ¥1.5 per cigarette •six brands increased ¥0.5 per cigarette. Excise Tax

•Taiwan •1999: Hsieh et al •price elasticity of demand for cigarettes in Taiwan is −0.6 •effect of increasing taxes might reduce cigarette consumption more significantly in Taiwan

•new tax law imposed NT$11.8 tobacco tax per pack plus an additional Health and Welfare tax of NT$5

• excise taxes on a pack of 20 cigarettes averaged NT$16.8 Excise Tax

• raising the prices for imported cigarettes and domestic cigarettes → NT$6 increase for imported cigarettes and NT$10 increase for domestic cigarettes

•Results from the study of Lee, Liao, Ye, Liao •showed that the price elasticity of imported cigarettes was −0.822, and −0.644 for the domestic cigarettes

• price increase of NT$6 for imported cigarettes and NT$10 for domestic cigarettes Excise Tax

•the price elasticity estimates imply that: —consumption of imported cigarettes would be reduced by 7.51 packs per capita —consumption of domestic cigarettes would be reduced by 15.21 packs

• NT$5 tax has been enforced for more than two years, and a significant reduction in cigarette consumption has been shown to date. Plain Packaging

• Features – Remove: colors, brand imagery, corporate logos and trade marks – Mandated size, font and place (brand print) – Legally mandated product information • Health warnings, toxic constituents, tax-paid seals, package contents – Standard cardboard texture Plain Packaging

– Regulated size and shape of the package and cellophane wrappers – Monitor packaging interior and cigarette length and other gauges – Banned: perfuming and incorporation of audio chips – Standard appearance of all cigarette packages and cigarettes

Source: http://tobaccofreeunion.org/tech-guide/Packaging%20Implementation%20Resource/Linked%20Documents/Plain%20Packaging/Plain%20packaging%20Freeman%20et%20al.pdf Plain Packaging

• Objectives 1. Plain packaging → change smoking behavior → reducing levels of smoking (and exposure to smoke) 2. Reduce a ttractiveness of tobacco products 3. Make health warnings more noticeable 4. Avoid misleading consumers brought about by packaging 5. Removal of any ability to “ advertise” on packaging http://www.yourhealth.gov.au/internet/yourhealth/publishing.nsf/Content/BFF5028DE0F8235ACA2578CC00189A9C/$File/Japan%20Tobacco%20International.pdf Plain Packaging

• History – 1989: New Zealand department of health's toxic substances board → cigarettes be sold only in white packs with simple black text and no colors or logos . – 1992: Australia in the Centre for Behavioral Research in Cancer → "regulations be extended to cover the colors, designs, and wording of the entire exterior of the pack. – 1994: Canada: government's Standing Committee on Health → legislation be implemented pending the outcome of the government sponsored research on the likely effectiveness of plain packs

Source: http://tobaccofreeunion.org/tech-guide/Packaging%20Implementation%20Resource/Linked%20Documents/Plain%20Packaging/Plain%20packaging%20Freeman%20et%20al.pdf Plain Packaging

• Framework Convention on Tobacco Control (FCTC) – “any form of commercial communication, recommendation or action with the aim, effect or likely effect of promoting a tobacco product or tobacco use either directly or indirectly" – Requires that each country shall "undertake a comprehensive ban on all tobacco advertising, promotion, and sponsorship." Plain Packaging

– Governments →extensive areas of packs → mandatory health warnings. – Largest appropriations • Australia and New Zealand • Warnings covers –30% of the front –90% of the back Plain Packaging

• Several nations (Norway, Iceland, Ireland, Thailand, and regions of Canada) – banned the open display of tobacco products in retail locations • Reason → high visibility and eye catching effect → present unavoidable spill of promotional imagery to “vulnerable consumers” (young people). Plain Packaging

• Experimental studies of plain packaging: – plain packs have never been legislated → possible impacts → comes from experimental studies. – plain packs → "dull and boring", cheap and reduce the appeal – “health warnings on plain packs were seen as being more serious suggesting that brand imagery diffuses the impact on health warnings.” Plain Packaging

• Industry Response: – General Findings: • “Tobacco is a legal product and effective communication of the health risks of smoking can and should be achieved without having a disproportionate impact on legitimate competition, consumer choice, intellectual property rights and protected freedoms (JTI, 2011)” • Smoking → adult choice and JTI believes → openness and transparency . • Packaging: not a predictor of smoking • Plain packaging → companies would be forced to compete on price alone → cigarettes → more affordable for young people Plain Packaging

• Industry Response: – Supporting Arguments A. Packaging Role : –Brand identity through brand logos, colors , fonts, pictures, packaging materials and shapes. –Packaging differentiates brands »Cigarette is a homogeneous brand • Makes packaging more important Plain Packaging

B. Economic Implications if packaging is no longer distinctive : – Competition: distorted – Consumers: less able to identify their choice of product – Product: less likely to be sure of the origin and quality – Packaging sector: there would be job losses among printers and packaging Plain Packaging

C. Legal Objections (Intellectual Property) • violate the minimum obligations for the protection of intellectual property rights – TRIPS, NAFTA, Paris convention for protection of industrial property 1883)

• TRIPS: lay down minimum standards for the protection of the intellectual property rights including trademarks, patent law and copyright law . Smoke Bans

• Australia • Ireland • UK • Bhutan • Italy • India • Canada • Lithuania • Iran • China • Montenegro • Kenya • Estonia • Netherlands • Singapore • Finland • Norway • Tanzania • France • Portugal • US • Germany • Spain • Venezuela • Greece • Sweden Smoke Bans

• What did JT do? – “Zerostyle Mint ” • Smokeless tobacco product • Can be used in places wherein smoking bans are implemented • Cartridge → tobacco leaves – “Camel Snus” • Sweden Advertising Bans

• Advertising – Direct – Indirect → sponsorship & product placements – Increase tobacco consumption/sales – Encourage smoking – Brand switching Advertising Bans

• Ban of advertisements – Decrease consumption – Study conducted by Marc C. Willemsen and Boudewijn de Blij – Advertising expenditure and tobacco consumption Advertising Bans

• Results show: advertising bans → decrease in consumption

Source: http://www.globalink.org/en/advertising.shtml Advertising Bans

• JT on advertising bans – Impedes exchange of information and product development • JT’s Advertising Codes (brand, switch, inform) – “Ensuring that our brand marketing has no particular appeal to youth; – Restricting youth exposure to tobacco marketing; – Ensuring that adult smokers are appropriately informed about the risks of smoking; – Recognizing that it is right to restrict our marketing activities, given the nature of our product; – Encouraging other tobacco companies to join with us.” Source: http://www.jti.com/cr_home/cr_positions/cr_positions_advertising/?Culture=id-ID Display Ban

• Australia → 28% ↑ on illicit tobacco • Canada & Norway → illegal cigarette market • Ireland → no effect • England – Health Act of 2009 → banned display of tobacco • JT’s side – Effect on small retailers – Existence of illegal market