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As people in Japan smoke less, Japan Tobacco’s new CEO looks abroad for growth

by

Bloomberg

Japan Tobacco Inc.’s Masamichi Terabatake is in the hot seat.

The 52-year-old started off 2018 by taking the helm of the world’s third-largest tobacco company. While the view from his new Tokyo office may be different than the one from his previous stint at the international unit in Switzerland, the obstacles the company faces will look familiar to the 28-year veteran: tighter global regulations, slowing cigarette demand and competition to offer high-tech smoking devices.

Terabatake, who becomes the fifth head of Japan Tobacco since it was privatized in 1985, has already spoken about some of the issues he’ll have to grapple with. When appointed in November, Terabatake said he wanted to focus on taking more market share in developed countries, entering new emerging markets, and further developing the company’s next-generation tobacco products.

Japan Tobacco’s geographic footprint is primarily focused on its home market, Russia, and Europe, with about 70 percent of its sales volume coming from those regions. Terabatake will have to diversify that footprint to find growth — most likely through smaller deals, as opportunities for larger acquisitions are limited following consolidation in the industry.

Japan Tobacco has already been busy snapping up assets in emerging markets, including Karyadibya Mahardhika, a clove cigarette maker in Indonesia, and Philippines’ No. 2 cigarette maker Mighty Corp.

As Japan Tobacco’s international presence widens, Terabatake will also have to confront the new regulatory attitude toward tobacco products. The industry was rocked last summer by the U.S. Food and Drug Administration’s plan to mandate nicotine cuts in tobacco products to non-addictive levels. Although Japan Tobacco was largely cushioned from the market impact as it has a smaller presence in the U.S., the announcement prompted speculation that more countries around the world will become stricter on tobacco as well.

Health concerns and tighter regulations are part of the reasons for declining global demand for cigarettes.

Faced with dwindling demand, global rivals are aggressively positioning for a future without traditional cigarettes. Philip Morris International Inc. and British American Tobacco PLC have introduced heated tobacco devices, which have pushed down demand for cigarettes in Japan Tobacco’s domestic market.

Philip Morris’ IQOS device holds 12 percent of the country’s tobacco market as of the end of September while Japan Tobacco’s own heated device, Ploom Tech, has lagged behind in availability and sales.

Sales of heated devices are expected to grow rapidly in the next few years.

Japan Tobacco said it is currently working on developing another heated device more similar to IQOS and BAT’s glo.

Shares in Japan Tobacco fell 5.5 percent in 2017, compared with a 20 percent gain for the benchmark Topix index.