KT&G’s brand portfolio retains a 63% of market share in Korea.
Its major brands include: Esse cigarettes (17% market share), The One (6.9%), Raison (6.0%), This Plus (5.1%), This (2.2%), Season (1.9%), Time (1.8%) and Bohem (1.7%). The company controls 80% of the super slim segment, 67% of the slim and 40% of the king size segments.
Domestic manufacturing is carried out at four high-technology KT&G factories in Korea producing 140 billion pieces of cigarettes annually, and these factories account for 50% of the world’s super slim cigarettes.
The addition of new cigarette factories in Turkey, Iran and Russia (to be opened this year), along with the constant process of automation and facility upgrades will strengthen KT&G’s production capacity globally.
Packaging is an important medium for Korean consumers and manufacturers strive to create striking and effective solutions to appeal to customers. Cigarette packaging reflects this preference in Korea, and KT&G has made great efforts to create appropriate packaging for its brands.
“A lot of special packaging or edition products with various design and function, have been already introduced in the market,” a KT&G spokesperson told Tobacco Asia. “Special edition products are often offered in metal packaging to enhance a premium image. Also, the slide pack was introduced in year 2003 for the Zest brand, a major innovation over previous pack design. With regards to developing packaging, since it is most important for us to source materials that are suitable for the concept and which contribute to the desirability and value of each brand, we do not put importance on where materials are coming from. They could be either produced in-house or outsourced.”
Korea’s domestic market has shown a growing preference for super slim and low tar products, and KT&G is strong in both these segments. Demand for both super slim and low tar products will most likely keep on growing, which will help KT&G to maintain its lead.
“Since the segment grew fast from the beginning on account of health concern and the perceived well-being of Korean smokers, we anticipate that the super slim and low tar segment will enjoy steady market expansion,” KT&G told Tobacco Asia.
KT&G has not been slow in developing and embracing new technology to further the growth of its brands.
Innovations that have been introduced recently include the development of various types of filters with specific inherent function, such as the tube filter, a bamboo charcoal filter, the three-layered cavitec filter and so on.
Research and development of ultra low tar brands (cigarettes with tar levels as low as 0.5mg or even 0.1mg) and innovative less smoke smell (LSS) cigarettes is well under way, and we can expect to see initial offerings in these segments presented quite soon, according to the company.
“There are several steps for new products to be launched in market,” KT&G said. “Various surveys are performed prior to launching, and marketing strategies that are developed in accordance with 4P mix are articulated in order to create smoker/market-oriented products.”
Distribution and suppliers
KT&G operates it own direct sales distribution force all across the country covering various channels, and it has developed a formidable domestic supply chain.
“Regardless of type of material, high quality is the most important thing we look for in any supplier,” the company said.
The company sources much of its leaf tobacco domestically, with flue-cured leaf sourced primarily in the Chunbuk, Kyungbuk region and burley from the Geonnam, Geonbuk area.
“KT&G deals with farmers directly and it is the exclusive buyer from the farmer,” the spokesperson told us. “Farmers try their best to produce good leaf quality and meet KT&G’s standard for tobacco leaves. KT&G supports Korean tobacco farmers through various training programs.”
Rules and regulations
The Korean government has various programs regulating tobacco production, sales and consumption, including the Tobacco Business law, the Health Promotion law, and a Youth Protection law. Recent legislation has expanded smoke-free areas and most buildings are divided into smoking and non-smoking areas. Some buildings have been declared smoke-free areas in their entirety. Health Promotion Funds, levied on tobacco, are utilized for non-smoking education, to finance stop smoking campaigns and no smoking ads. Most recently, warning messages on cigarette package have been expanded to list potentially cancer-causing ingredients.
“Korea ratified FCTC in 2005 and has been participating very actively on its implementation since then,” according to our source. “Korea is known as one of the countries with a strong smoking ban policy. The obligatory and advisory articles in FCTC were already implemented in domestic law before the agreement was signed. Since FCTC ratification, the national assembly as well as executives have been paying attention to anti-smoking policy and proposing various bills related to non-smoking and health.”
The Korean government has announced that it believes that raising taxes on cigarettes will serve to reduce the country’s smoking rate through price control.
An tax increase of KW500 (US$0.45) per pack was introduced in December, 2004, and an additional hike was planned. However, there were protests over the sudden price increase of cigarette, and so far the plan has not yet been executed.
“KT&G is expecting a fair decision on reasonable tax increases that conform to a timely schedule that considers the opinions of other producers and consumer resistance, and KT&G will abide by governmental policy to decide the price of its products,” the spokesperson said.
Exports are a growing factor in KT&G’s growth, and it has enjoyed notable success with several of its products in various overseas markets. The largest market for KT&G cigarettes currently is the Middle East region, including Iraq, Iran and Afghanistan.
“We have also enjoyed rapid development in the CIS region where Esse cigarettes was accepted very well by female smokers,” we were told. “Esse is our global flagship brand and has enjoyed wide success all across the world. The super slim segment will most likely keep expanding its influence and KT&G plans on developing its Esse brand globally and becoming a household name for super slims.”
Esse is certainly well on the way to achieving this goal as it has already proved itself to be a potent brand.
“Esse is a major success for KT&G and it has targeted a very specific segment of the market, the health-oriented and premium image category,” KT&G told us. “Esse has taken advantage of its position as the first super slim brand in the market in various regions. Esse has enjoyed high performance and has become well-accepted by female smokers, particularly in the CIS and Russia.”
Esse’s success owes perhaps as much to the ground work done assessing the potential market and preparing the product to meet the relevant criteria as anything else.
“Prior to launching products, a consumer survey is always done in order to measure the suitability of the product in a specific market,” the company said. “A brand is developed and tailored for certain markets; it could be adjusted in terms of blending and packaging for different regions.”
KT&G is looking forward to introducing its brands to new consumers elsewhere in the world, building on the success of its efforts in existing markets. According to the company, new market development will be focused on Europe and South America.
“KT&G will have its third overseas manufacturing facility soon as its factory in Russia is finished in 2010,” the company said. “Operating a factory in Turkey has made it easier for us to reach out to smokers in Europe where KT&G hasn’t made a breakthrough – yet.”
To ensure the maximum potential for success, it is critical that the right distributor is selected, a process that KT&G takes great care to assess candidates based on its own experience in the domestic market.
“It is critical for KT&G to keep good relations with distributors since they manage and are in charge of our overseas distribution in different regions,” KT&G said. “We have worked closely with several distributors ever since we started global operations. Without a direct sales force in overseas markets, we wish to continue working closely with distributors to reach out to global consumers. It is important that KT&G and its distributors should be able to exchange information about market and to discuss the issues concerning marketing activities in specific regions. However, most important qualification, and an overriding condition in the selection and appointment of any overseas KT&G distributor, is credibility.”