Japan Tobacco: Choking at Home

Cigarette

By Peter Harris

As the anti-smoking movement gains momentum, Japan Tobacco draws up its battle plans.

Australia banned it in 1999, Belgium, Germany and the UK banned it in 2007. Croatia plans to ban it in 2009 and there is a European Parliament committee proposal underway to see a EU wide smoking ban by 2025.

Smoking bans in public is a global trend that is taking off everywhere—or everywhere except Japan, one of the world’s most smoker friendly nations. In a controversial new move, summer 2008 saw the Japanese government consider a threefold tax increase on cigarettes. The proposal submitted to the tax commission would see cigarettes reach prices of 1,000 yen a packet, up from the 300 yen ($3) a pack it is today. Compared to other industrialized nations, tobacco in Japan is sold at an astonishingly low price—cigarettes in Canada, the UK and Norway cost at least $10.

The reaction to the government’s suggestion from the tobacco industry was predictably heated. At a press conference in July, Shigeru Matsui, Chairman of the Japan Tobacco Federation told reporters that he feared such a tax would hurt elderly shopkeepers by driving away customers. Additionally, Tsugiyuki Saisho, the head of the Japan Tobacco Growers’ Association, warned of “a fatal impact” on farmers and reduction in land allotted for tobacco farming in Japan. But most agitated of all, was Hiroshi Kimura, President of Japan Tobacco (JT). Kimura splashed his disdain all over the media, decrying the tax hike as disastrous and unfair. In an interview with Bloomberg, he suggested that the government would do better to sell its 50 percent stake in the company than raise taxes and accused them of disproportionately penalizing smokers. Kimura is understandably a worried man—JT’s operating income fell by 9.4 percent this year. But is he being disingenuous when it comes to the tax hikes?

Tax benefits
Although a tax hike that pushes the price of cigarettes in Japan to 1,000 yen a pack would likely drive down sales in the near term, as well as cut back on the number of new smokers, the price rise could actually help increase the profit margins on each sale. In other markets, such as Russia, tobacco is subject to a regular annual tax increase on a specific day, and many tobacco companies take advantage of this occasion to add on their own increase. In countries where cigarette prices are high, popular perception is that price rises are the result of the government taxation policy and with a higher price tag, small but significant rises pass under the consumer radar with more camouflage.

Smoking Japanese womenJT’s biggest domestic consumer growth sector is Japanese women.

This may also explain JT’s open disdain for its majority shareholder—the Japanese government. If it didn’t have the political ties, JT would be able to blame the government much more easily when it comes to health and taxation issues. The government also hampers JT’s commercial operations by controlling its supply issues, such as forcing it to buy tobacco leaf domestically. An industry expert told us that JT actually paid farmers to go into early retirement so that they could import cheaper tobacco from abroad.

So is the government likely to sell? Global trends suggest that it will. Since the 1990s, France, Poland, Bulgaria, South Korea and many more governments have sold off all or part of their tobacco industry interests and the Japanese government already sold off 14.4 percent of its shares back in 2004. Since the Koizumi era, privatization of major industries such as transport and banking has speeded up and it is really a question of when, not if, the government finally relinquishes its hold on JT.

Pressure is already getting stronger and given that a growing number of politicians and civic groups are getting more vocal about tobacco control measures, there is likely to be a growing unease about the conflict of interest in the government holding JT stock. Dr. Hiroshi Kitagawa from the Department of Respiratory Medicine at the University of Tokyo Hospital told us that he thinks the Ministry of Finance should sell its stock because this is the main reason why Japanese smoking control measures are so relaxed. He perceives that the Ministry of Finance is structurally in control of an area of policy that should be the prerogative of the Ministry of Health, Labor and Welfare. Ironically, the anti-smoking campaigners are arguing for the same thing as the tobacco companies.

Anti-smoking shifts
In fact, the anti-smoking lobby has already made some progress. Kanagawa Prefecture has announced plans to implement a public smoking ban while the Taspo ID card system has been brought in to control underage use of cigarette vending machines. The latter innovation has been good news for tobacco-selling convenience stores, with both FamilyMart and Lawsons experiencing significant sales jumps since July. The Taspo cards help to restrict juvenile access to tobacco and is also symptomatic of the change in mood towards tighter tobacco control. Campaigners and academics such as Kitagawa are open about their desire to see bans on smoking in public places as well as higher prices, both of which would hit the tobacco companies hard.

Partly in anticipation of this change, JT has been expanding its overseas operations while also doing its best to maximize its strength in the precarious domestic market. According to its annual report, JT’s market share for 2008 has increased by 0.1 percent up to 64.9 percent (although its sales declined by 1.6 percent). Structurally, the company has adapted to more difficult conditions in Japan by integrating its international arm, Japan Tobacco International (JTI), with JT, therefore widening its range of brands. Kenji Nakanishi of JT’s planning department was quoted in Tobacco Asia as saying that “among JT brands, sales of Pianissimo Menthol One [a new product from former JTI brand Pianissimo] are doing well.” Salem Pianissimo was specifically designed for Japanese young female smokers by RJ Reynolds and was subsequently acquired by JT back in 1999 when it took over a range of Reynolds’ product lines. It appears that JT is trying to take advantage of Japan’s biggest tobacco consumer growth sector—young women. However, the competition in this area is intense, with Philip Morris’ Virginia Slims constantly coming out with rival products such as its latest cigarette ‘Noire,’ a must-have accessory for many of the young professional women around Tokyo’s most trendy areas.

Outside of Japan, JT’s $15 billion acquisition of the UK-based Gallaher Group has illustrated the recognition of the growing need to focus on the global market. The transaction lifted them to the rank of third largest tobacco company in the world and it also set the company up to profit nicely from the Russian market where over 60 percent of men smoke. However, Moscow has recently begun making noises about foreign tobacco company operations in Russia and it is possible that the tide might be changing there too.

The other strategy JT came up with to cope with the shifting climate at home is its diversification into foods, something which has been much less successful. The poisoned gyoza scandal that erupted early 2008 concerned frozen dumplings imported by JT’s food subsidiary (aptly named JT Foods). The reputational fallout from the scandal was enough to kill a proposed deal between JT Foods, Katokuchi and Nissin Foods. JT has also just sold off Hans Continental Smallgoods, a food business it owned in Australia famed for its pineapple chunks and salami. Although a relatively small transaction, this shows the difficulties of diversification, particularly in market conditions that urge conservatism. Perhaps JT is slowly trying to build up some funds to smash its way into the Indonesian tobacco market where it has a notably low profile.

As the domestic market becomes an increasingly awkward home turf, worryingly, JT’s future will almost certainly depend upon its ability to push it products in industries in developing countries. JI

PHOTO COURTESY OF Ruben Frosali

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