Current Issue

Brand power

Unless you work in one of the world’s few remaining centrally planned economies, manufacturing is about creating things that are worth more than the sum of their parts.

If the supply chain functions as intended, each link passes on to the next a product that is slightly more valuable than before. Farmers nurture tobacco plants to grow aromatic leaves, merchants manipulate green tobaccos so that they can be processed in cigarette assembly equipment, and cigarette manufacturers convert papers, filters and cut rag into a smokable product.

By making cigarettes available in convenient places, distributors add value, too—just imagine the hassle if every purchase of, say, WInston cigarettes involved a trip to Winston-Salem.

Yet, while agronomical insights, engineering prowess and logistical dexterity are essential to cigarette manufacturing, they contribute a surprisingly small share to the product’s final value. That’s because the true value creation takes place in the marketing department. Before a company stamps its brand name on the product, a cigarette is merely a package of paper, filter tow and tobacco flakes—more valuable than those components unbundled, perhaps, but not nearly as valuable as the trademarked product.

Branding is a powerful tool: It allows tobacco companies to distinguish between premium and economy brands and to charge for them accordingly. While a premium cigarette typically contains more-expensive tobaccos and materials than does a nonpremium cigarette, that difference seldom fully explains the price gap between the two brand types. The balance, of course, comprises the extra money consumers are prepared to pay for the perceived additional value of their brand.

The power of trademarks also explains why health activists have consistently targeted tobacco branding. By restricting advertising, banning product displays and requiring tobacco companies to sell their wares in plain packaging, they hope to not only reduce the appeal of smoking but also make the tobacco business less lucrative. Trading commodities, after all, is seldom as rewarding as trading branded goods.

Highlighting their strength, tobacco brands have withstood the assault remarkably well. Brand Finance reports that, even in today’s hostile environment, more than 80 percent of tobacco brands are still growing in value. The world’s best-selling cigarette, Marlboro, achieved a record value ($32.4 billion) in the consultancy’s most recent index.

While plain packaging and other restrictions are likely to affect trademarks in the long run, the enduring strength of tobacco brands is encouraging for tobacco manufacturers. Despite the mounting restrictions, branding will continue to add significant value to the product for the foreseeable future.

To read all of our articles and more, subscribe today. Click here for details.