Marketing Strategy of the UK Cigarette Industry, Communicaton

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Introduction

I’m looking at this issue for unit communication.The subject of this report is “Marketing Strategy of the UK Cigarette Industry”.It would cover the information about the main manufacturers such as “Imperial Tobacco”, “Gallaher Group Ltd” and “British American Tobacco” in the UK. The whole point of this report is aimed at talking about marketing strategies that the tobacco manufactures are using for staying in the market. Three of the world’s five largest tobacco companies are based in the UK. BAT, with 11% of the global market, is the world’s second largest tobacco company, after Philip Morriswhich has 18%, while Imperial Tobacco and Gallaher hold fourth and fifth places respectively

Imperial Tobacco

Imperial Tobacco Group is the world number four in the cigarette manufacture and distribution sector. Its brands are divided into several ranges so as to reach a wide a market as possible. They include Embassy and Regal, Davidoff (so-called "luxury" cigarettes), SuperKings and John Player Specials (mid-priced), and Lambert & Butler (more cheaply priced). However the group's business does not focus just on cigarettes. Imperial Tobacco also produces cigars, pipe tobacco brands, and is also the world leader in hand-rolling tobacco with the Drum brand. Not to mention RIZLA, making the firm a giant in the cigarette paper market too (in 1997 Imperial Tobacco bought Rizla, the hand-rolling cigarette paper company).

Imperial’s share of the UK cigarette market has been steadily increasing in recent years and now stands at 44.9%.In 2004 the company reported overall operating profits of Ј1,218 million, of which Ј454m were derived from UK sales.In 2002 it acquired the German tobacco company Reemtsma. Imperial also has a 43% stake in the Swedish snuff producer, Skruf.

British American Tobacco

British American Tobacco (BAT), the world's second largest tobacco company, is based in Britain.

It is the world's most international tobacco group, with brands sold in 180 markets around the world.

STRAT

The tobacco industry as a whole is suffering from growing awareness of the health risks of smoking and aggressive anti-smoking legislation, particularly in developed markets. The tobacco companies have managed to offset declines in developed markets by expanding to underdeveloped markets and in the short to medium-term at least, falls in volumes in developed markets will be offset by increases in underdeveloped markets.

Tobacco stocks are thus far from the greatest growth story around; however, what they do offer investors is fairly strong cash flows and dividends. Years of working around the anti-smoking lobby and government legislation have kept the industry on its toes; tobacco bosses stand accused of many things but sloth and inefficiency are not amongst them; which is good from an investor’s point of view.

The company says that a combination of good operational performance, effective cash management and a continued focus on reducing costs, leaves it well placed to build on this positive momentum - sentiments that we are inclined to agree with.

We and several other tobacco companies, including the other two largest international companies – Philip Morris and JT International–have worked together to develop new, globally consistent International Marketing Standards for the appropriate promotion and distribution of tobacco products world wide. They represent a ‘raising of the bar’, and establish a benchmark for the industry world wide.

Launched in September 2001 and building on our existing principles, the International Marketing Standards set down detailed guidance on all aspects of tobacco marketing, from print, billboards and electronic media to promotional events, packaging and sponsorship.

We believe the Standards will have a real impact in many parts of the world where restrictions on tobacco marketing are lower, for example, than in the UK or western Europe. We areinviting more tobacco companies to subscribe to the Standards, and we aim to work with regulators to see them incorporated into laws or agreements that ensure effective local implementation.

Central to the Standards is our long held commitment to ensuring that no marketing activity is directed at, or particularly appeals to, youth. For example, the Standards make it absolutely clear that our marketing activities should not appeal to youth or suggest that smoking enhances popularity or sporting,sexual or professional success.

New baseline
Our companies’ adherence to the Standards is covered by a continuous review cycle involving audit committees, internal audit and local management.

In many parts of the world, existing laws or voluntary codes fall short of the Standards. We have now established a common basis for clearly understood marketing practice. It sets a new baseline for acceptable tobacco marketing worldwide that significantly ‘raises the bar’. Of course in any countries with even tighter restrictions, we will abide by the laws and restrictions those countries set.

The new Standards are part of our commitment to supporting, and helping to deliver, balanced tobacco regulation that meet society's expectations, while ensuring that adult consumers can continue making informed choices about a legal product.

Dialogue
In January 2000 we proposed a Partnership for Change, with 20 practical suggestions for building constructive dialogue amongst the industry, government, public health groups and others on tobacco issues, including marketing.

We aim for the Marketing Standards to be a further basis for building constructive dialogue. We seek to consult with stakeholders on the Standards and welcome their views, including on how best to monitor adherence.

Strategies

So dominating the tobacco market, Imperial Tobacco pursues an aggressive expansion strategy. Other than its large European market, the group has taken over the Horizon, John Brandon and Peter Stuyvesant brands, which has taken it into the Australian and New Zealand markets, and bought out Tobaccor, the second biggest cigarette producer in Sub-Saharan Africa, giving it a firm foothold on the African continent and in Madagascar.Finally, Imperial Tobacco acquired the licence to distribute Marlboro (Philip Morris group) in the United Kingdom and in 2002 it took over the German cigarette firm (the world's fourth biggest manufacturer) Reemtsma, thus strengthening its position in Central and Eastern Europe.

Gareth Davis, chief executive of the biggest tobacco manufacturer in Britain, Imperial Tobacco, predicted yesterday that there would be no reduction in the number of people smoking in England and Wales following the partial ban on smoking in public spaces, planned by the government for the summer of 2018.

Mr Davis said smokers "were resilient and adaptable" and would "quickly learn" the lessons from a smoking ban introduced in Ireland last year. While he attacked proposed restrictions on smoking in public places in England and Wales contained in the health bill, Mr Davis welcomed the government's decision to provide some consumer choice through exemptions for pubs that do not serve food and for the countries' 20,000 private members' clubs.

Profits rise by 11% at Imperial Tobacco as chief dismisses ban

· Davis says new law will not stop people smoking
· Closure of factories helps raise productivity by 15%

Simon Bowers
Wednesday November 2, 2005

"It is clear that smokers will continue to smoke," Mr Davis said. "There may be an initial dip in consumption but this will diminish over time."

He was speaking after Imperial posted an 11% rise, to Ј1.1bn, in underlying pre-tax profit for the year to September 30 on turnover that was 4% higher at Ј3.1bn - in line with analysts' expectations. Three factory closures over the year helped raise productivity by 15%, with further cost-cutting announcements, including the closure of the Rizla factory in Treforest, south Wales, made in September. Shares in the group closed down 5p at Ј16.15.

In Britain, where Imperial has 44.5% of the market, the group's Lambert & Butler brand kept its leadership with a 16% share. Richmond, another budget brand launched by Imperial six years ago, grew its share by 1.5 percentage points to 14.7%.

Mr Davis, who does not accept that smoking causes lung cancer, repeated claims that the available scientific research on passive smoking does not suggest it is a major health risk. "If there is a risk, it is very small," he said.

Mr Davis also pointed to "the most credible of all surveys", conducted by the Office for National Statistics, which had found that 71% of those questioned to be opposed to an outright ban on smoking. He said it was disappointing that politicians in Scotland, where a total ban will come into force next year, had not paid greater heed to the survey. "Public opinion [in Scotland] seems to have been ridden rough-shod over."

He said: "Bans of this sort affect consumption by between 1% and 2%." Pointing to the Republic of Ireland, Mr Davis said Imperial sales had experienced a 5% drop in the initial months of the ban. "But by the time we got to the year-end, it was a 2% reduction, and now it is slightly rising." Imperial believes the number of smokers in Ireland has not dropped and remains at 29% of the adult population - slightly above the proportion in Britain.

Mr Davis said a "litigation overhang", which had depressed the value of tobacco stocks for more than 15 years, especially because of claims brought by dying smokers in the US, "had dissipated". However, he insisted the company would not abandon its policy of avoiding exposure to US markets without "extensive consultation with our shareholders

The tobacco industry

Gallaher Ltd, Imperial Tobacco Ltd and Rothmans (UK) Ltd are the main manufacturers supplying the UK market and are increasing their export trade. British American Tobacco (BAT), the world's second largest tobacco company, is based in Britain.

Following the completion of the merger of BAT with Rothmans, the combined company will have a global market share of 16%, just behind the US company Philip Morris which has 17% of the world market.

Gallaher produces three of the four top-selling UK brands: Benson and Hedges, Mayfair, and Silk Cut. Imperial Tobacco produces the leading UK brand Lambert and Butler.Other brands produced by Imperial include Superkings, Regal, and Embassy.

Sales

Sales of duty-paid tobacco products in the UK amounted to 62 billion cigarettes, 2.7 million kg of hand-rolling and pipe tobacco, and 1 billion cigars in 1999.

This figure is declining as bootlegging and smuggling increases.In 1998, BAT, one of the largest companies in the UK, made a profit of Ј1,011 million.

Value

The value of domestic sales for all the tobacco products listed above amounted to Ј12.1 billion.

Tax

Cigarette taxation in the UK is the highest in the world, making cigarettes, on average, more than twice as expensive as elsewhere.People in the UK spend about 12 billion pounds on cigarette products of which nearly 10 billion is tax.

Advertising and sponsorship

Tobacco sponsorship of sport in the UK is worth about Ј7.5 million a year.In 1998 a European Union Directive to ban tobacco advertising was agreed, resulting in a gradual ban on tobacco advertising and promotion.Point-of-sale advertising will remain subject to domestic legislation (1998 European Union Tobacco Advertising Directive). By 2006 there will be a complete ban on all tobacco advertising and sponsorship throughout the EU.

Government funding to stop smoking

In England and Wales the Government has set aside Ј110 million to help change public attitudes about smoking and reduce its health toll.

Revenue

The UK Government earned Ј10,305 million in revenue from tobacco duty and VAT in 1997 - Ј8,390 million in excise duty and Ј1,915 million in VAT.

Subsidies

The UK contributes to the EU's subsidised tobacco industry.In 1997 the EU spent Ј998 million ECU (Ј735 million), Ј5,370 for each of the 135,000 tobacco growers.A high proportion of tobacco grown in Europe is unmarketable and is sold at give-away prices to Eastern Europe and Africa.

http://www.tobaccopapers.com/pressrelease/index.htm

. These show specific tobacco marketing strategies undertaken in the UK – highlighting industry aims and methods. They cover topics including sponsorship, the marketing of tobacco to young people and discount brands

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