For KT&G, the nation’s top tobacco maker, this year will be a turning point in its growth as the company’s overseas sales are expected to surpass its domestic sales for the first time.
“As the domestic market has taken its toll due to various reasons, including the falling number of smokers, (we) are seeking stronger overseas sales,” KT&G said in an email interview with The Korea Herald.
“The experts inside and outside KT&G agree that this year will be KT&G’s turning point for its overseas sales to top the home sales.”
In 2014, KT&G’s domestic-to-overseas sales ratio stood at 6:4. Its cigarette export posted 533.1 billion won, up 30.2 percent from 2013.
KT&G officials consult international buyers at InterTabac, the world’s leading trade fair for tobacco products and smoking accessories, in Dortmund, Germany. (KT&G)
“Currently our focus is on the Indonesian market, which has twice (a) larger tobacco market compared to (the) Korean market,” KT&G stated, on strong expectations of “the potential rise in demand for tobacco products due to the economic growth and open market policy.”
Indonesia’s logistics advantage and higher brand preference for made-in-Korea products are also among the promising factors, it added.
“The Middle Eastern market, on the other hand, is more challenging in terms of political stability, the unpredictability of which can affect the operation.”
KT&G said it plans to set up additional overseas operations and facilities, potentially in Africa and Central and Latin America, where it does not have local bases yet. It currently has four overseas production facilities in Russia, Iran and Turkey.
The company’s first overseas plant was built in Izmir, Turkey, in April 2008, with an annual production capacity of 2.6 billion pieces of cigarettes as of 2013.
The tobacco maker’s shift to exports has been particularly accelerated to cushion the impact of the tobacco tax hike.
The new bill, which took effect Jan. 1, raised tobacco prices from the average 2,500 won ($2.21) to 4,500 ($3.96) per pack. The government is slated to continue the tax hike in accordance with the country’s inflation level, with KT&G likely to keep the overseas portion of the sales pie larger than the home portion.
KT&G’s major export of tobacco products began in 1999 with Middle Eastern counties and the Russian Federation, with total annual sales reaching 2.6 billion pieces of cigarettes, or $14.8 million. The volume has increased 34 fold over the past 15 years, according to KT&G’s data.
KT&G’s overseas sales market consists of “the traditional market,” represented by the Middle Eastern and Russian niche markets, and “the new market,” comprising the Southeastern Asian and the U.S. markets. As of 2014, KT&G’s overseas sales in the old market grew 38.9 percent, while the new market increased 19.5 percent.
Out of the total annual sales size in 2014, the Middle Eastern market took up 41 percent; China-Southeast Asia 28 percent; Central Asia-Russia 17 percent; the U.S. 7 percent; and Europe-Africa 7 percent.
In 2011, the company acquired a 60 percent stake in Indonesia’s sixth largest tobacco manufacturer Trisakti Purwosari Makmur to become the major shareholder. With production capacity of 5 billion pieces a year, the factory manufactures the major brands Esse, Win Mild, GT and Pencil.
However, it is not easy for the company to increase its presence in foreign countries due to diverse languages and culture, different price ranges and regulatory environment and more complicated distribution process, according to company officials.
Despite the challenges, KT&G voiced hope regarding the Chinese tobacco market, where the regulator has a strict quota on imported cigarettes.
KT&G said it is seeing scope for “localization”, regarding concerns that China’s market open-up may lead to tougher competition with the big three global tobacco makers, Philip Morris, British American Tobaco and Japan Tobacco International.
“The Chinese market is not likely to swing to (an) open-door policy overnight, but we intend to keep knocking because we believe the market will open up in the long run,” the company said.
By Chung Joo-won (joowonc@heraldcorp.com)