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Morningstar | Japan Tobacco Dominates Japan's Combustible Cigarette Market

Japan Tobacco aims to achieve mid- to high-single-digit profit growth through global expansion, e-cigarette investment, and optimization of global manufacturing footprint over the mid- to long run. Regaining share at home by expanding its e-cigarette presence while continually increasing its overseas presence through combustibles will be key to attaining its target.Japan Tobacco International, generating more than half of group profits, will remain the growth engine. Along with continued initiatives in brand-building and investment in seeding markets and emerging products, JTI plans to expand its geographic footprint, mainly in emerging markets, through acquisitions. Recent deals have included acquisitions of local players in Ethiopia, Indonesia, and the Philippines. Potential targets include brands and cigarette manufacturers with distribution capabilities or technologies in emerging products that complement JTI’s existing brand/product or geographic portfolios.Price hikes will serve as a key profit growth driver. In the developing countries to which JTI has extensive exposure, there is ample room to raise cigarette prices and a good likelihood that consumers will trade up along with rising disposable income. JTI intends to introduce higher-margin global flagship brands to replace low-priced local brands. In Russia, its largest overseas market, JT has resumed the price hikes that were interrupted by rivals’ price wars.JT owns a dominant 60% share in Japan’s combustible cigarette market, which has suffered a double-digit volume decline after heat-not-burn cigarettes gained popularity in Japan. JT will fire up all cylinders to market PloomTech tobacco vapors when the product makes its nationwide debut with a marketing budget of JPY 10 billion in 2018. We think the nearly odor-free feature, with competitive pricing and a compact design, could help it recover some of the share gained by rivals.Despite tightened regulatory changes and continuous volume declines in major markets, JT has maintained its cost edge through plant closure and consolidation, while building new factories in markets where it sees opportunities to reduce costs and save tariff duties.