Britain's Imperial Brands has formed a joint venture with state-owned China National Tobacco (CNTC) following in the footsteps of PMI and BAT pursuing a piece of the world’s largest cigarette market with volume sales in 2015 of 2.5 trillion cigarettes despite a fall of 2.4% compared with the previous year according to Euromonitor International. Making money selling goods to the Chinese in China is among the more difficult challenges which the world of commerce has to offer to global FMCG companies but the opportunity to reach a smoking population of some 300 million, growing year on year due to raw population growth despite marginal falls in prevalence, is too tempting to forego.
The joint venture is called Global Horizon Ventures Limited (GHVL) and will be based in Hong Kong. Imperial Brands (IB) will work with the CNTC subsidiary Yunnan Tobacco, which accounts for over one-fifth of the Chinese market, which, at approaching 500 bn sticks, is almost as big as the Russian and US cigarette markets combined. According to IB the joint venture will concentrate on growing sales of IB's West and Davidoff brands in China, and of Yunnan's Jade and Horizon brands internationally. According to IB, ‘Further tobacco and next-generation product launches, as well as potential M&A opportunities, will also be evaluated by GHVL’.
Consumer utopia
The road to China via the joint venture path with CNTC is well trodden though as yet it has not led to the promised land of billion dollar sales in Chinese consumer utopia for any tobacco company thus far. Philip Morris Companies Inc was first to try. In 2005 the company concluded an agreement whereby Marlboro cigarettes would be produced legally for the first time in China. Under the agreement, made three years prior to the floating off of PMI from Altria, the joint venture would also try to sell Chinese cigarette brands globally and export tobacco products and tobacco materials from China. At the time Philip Morris had the advantage that, unlike other international flagship brands, Marlboro cigarettes had already been imported legally into China, as well as being, along with other global flagship brands, being familiar to some Chinese smokers through illicit trade, though this was a two edged sword as many of the illicit Marlboro’s on sale were counterfeit and not of the quality of the real thing.
The ten-year duration JV agreement of 2005 gave PMI a license to make Marlboro cigarettes in China, the brand being positioned in the mid-priced band alongside local brands such as BaiSha and Hongtashan. It is not clear whether this is the company’s own strategy or one that was insisted on by CNTC. At the time, Marlboro Gold was expected to take advantage of the staggered imposition of tar caps in China. The first non-Chinese cigarette brand specifically created for Western markets was RGD, which achieved some success in Eastern Europe, particularly in the Czech Republic and Slovakia due to its low price positioning. The joint venture also offered RGD RYO tobacco. In May 2011, China’s STMA announced that Chunghwa, ZhongNanHai and Golden Deer, Chinese brands which already had a presence in the global market via duty free, were to be promoted as international brands.
BAT also has a joint operation, CTBAT, with subsidiaries of CNTC. CTBAT International Limited, a joint investment of subsidiaries of CNTC and BAT incorporated in Hong Kong,was set up in 2013 in accordance with the Joint Venture Agreement signed by both companies. It’s raison d’etre was to own and manage worldwide international cigarette trademark State Express 555 as well as the worldwide rights outside China to the leading brand Shuang Xi, better known outside China as Double Happiness. Shuang Xi was the sixth largest brand in China with annual sales in excess of 112 billion sticks in 2015, while State Express 555 is a significant brand by its own right with total global sales of some 16.9 billion sticks including 13.3 billion sticks in China. Despite inauspicious precedents, CTBAT will hope that it can successfully internationalise the domestic appeal of Shuang Xi and BAT, in particular perhaps, will hope that State Express 555 can build a greater presence in the Chinese market.
Perhaps for reasons of the troubled historical relationship between the two countries, not helped by ongoing disputes over the South China Sea, JTI does not enjoy a joint venture agreement with CNTC although the company has stated that it plans to invest some 50 billion yen (US$481 million) building factories in Japan and China, with the objective of producing 10 times as many e-cigarettes as at the initial launch of Ploom in Japan, by sometime in 2017.
Top of the hitlist
Should the widely forecast new tidal wave of tobacco company consolidation set in motion by BAT’s outright purchase of RAI actually come to pass, Imperial would be top of the hitlist. The general view is that the boost to Imperial’s US business as a result of buying the brands Winston, Salem, Kool and Maverick and the vapour product blu from RAI in 2015 following the latter company’s acquisition of Lorillard made IB a more attractive target, especially in view of the sudden shift from pariah to messiah status for the US market. According to Nicandro Durante, BAT chief executive, the company only needs to sell two packs of cigarettes in the US to bring in the same net revenues as six packs in other developed markets or 13 packs in emerging markets. Although China is in the latter category and despite the fact that neither of the existing joint ventures have thus far achieved sales large enough to be worth reporting in a company annual report, the Chinese market, by virtue of its size and smoking culture, remains a glittering prize for tobacco companies and Imperial’s new presence there is likely to enhance its appeal as a takeover target.