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Japan Tobacco targets emerging markets with fewer health controls as rivals go high-tech

by

Bloomberg

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 percent 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 $1.6 billion (about ¥174 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 U.S. 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 strengthen our business foundations,” said spokeswoman Kana Miyauchi via phone Tuesday, when the firm announced its largest Asian deal yet — paying about $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 $677 million. “The purchases in Indonesia and Philippines are consistent with the strategy,” Miyauchi said.

The tobacco industry has been consolidating over the past few years amid declining smoking rates. After large deals like British American Tobacco PLC’s $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 percent in 2016, much less than Philip Morris International Inc.’s 40.5 percent and Japan Tobacco’s 27.4 percent.

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 U.S.”