Market Reports

Vending machines have long been the primary purchase point for smokers in Japan. But new machines requiring the use of age identification cards are propelling smokers away from machines and into convenience stores. The rate of acceptance of these cards among adult smokers has been low—only 32 percent.

This “has resulted in a significant switch in consumer purchasing behavior to convenience outlets,” said Louis Camilleri, chairman and chief executive officer of PMI, addressing investors in November at the Morgan Stanley Global Consumer & Retail Conference in New York. “The competitive battlefield is now switching from vending to C-stores.” In August last year, convenience stores accounted for a whopping estimated 62 percent of PMI sales in Japan, compared with only 40 percent in March.

Taspo

The new machines were introduced nationwide in Japan on July 1, 2008. The goal of the program is to reduce underage smoking. Customers using the new vending machines are asked to provide proof of age with the use of a pre-issued ID Card (“taspo”).

            Kicked off in 2001, the program is an initiative of the Tobacco Institute of Japan (TIOJ), the Japan Tobacconist Federation and the Japan Vending Machine Manufacturers Association. The project was carried out at the behest of the Ministry of Finance.

            Despite smokers’ halfhearted acceptance, the card appears to be meeting expectations in preventing youth smoking. “The introduction of vending machine age verification has been successful in curbing youth access from vending machines. Also it has led to a large change in the purchase behavior of adult smokers with less people using vending machines and opting to purchase products in the convenience store,” says Naoko Goma, manager of communications for Philip Morris Japan K.K.

Decline

There are not only fewer smokers using vending machines in Japan—there are also fewer smokers in general. The rate of decline in smoking here is steady; it has been continuously dropping for more than a decade. In recent years, the rate of decline has increased from around 3 percent to 4.5 percent annually.

In 2008, Japan had about 26.8 million smokers, down from 27 million the previous year, according to a survey carried out in May by Japan Tobacco, which has been conducting annual surveys since 1965.

            The survey was conducted using a stratified two-stage sampling method, mailed to 32,000 adult men and women nationwide. JT collected 20,000 (63 percent) valid responses.

            The number of male smokers was down from 20.16 million in 2007 to 19.84 million in 2008, while the number of female smokers was up from 6.84 million to 6.96 million. According to the survey, 39.5 percent of men smoke, down from 40.2 percent in 2007, while 12.9 percent of women smoke, up from 12.7 percent.

            “Total cigarette demand continues to decline due to factors such as the aging of Japanese society, growing health consciousness, increase in excise, and the tightening of smoking-related regulations,” says Ryohei Sugata, manager of Japan Tobacco’s media and investor relations division.

            According to the TIOJ, total cigarette demand in Japan was 285.2 billion sticks for the fiscal year that ended March 31, 2006, 270 billion for the fiscal year that ended March 31, 2007, and 258.5 billion for the fiscal year that ended March 31, 2008. The latest figures, for the six-month period between April and September 2008, reached 127.8 billion sticks, down from 132.6 billion compared with the same period the previous year.

            Thus far, the global recession does not appear to be affecting sales in Japan. Companies say they have not seen any impact to sales, but time will tell. “In response to the current economic downturn, we continue to monitor consumer behavior carefully. We must wait to see the impact on cigarette sales in Japan, which will be reflected in our third-quarter financial results,” says Sugata.

            Market shares remain fairly steady, although JT did achieve its first upturn in market share on a full-year basis in Japan since its privatization in 1985, during the full fiscal year that ended March 31, 2008. The company recorded a market share of 64.9 percent, up 0.1 percent point compared with the previous year. The company attributes the shift to its strong commitment to enhance brand equity, centering on the Mild Seven brand.

            PMJ’s market share for 2007 was 24.3 percent, slightly down from 24.7 in 2006.

Menthol

Meanwhile, the menthol segment continues to boom. “The Japanese adult consumer has a keen interest in new product offers and therefore a continuous pipeline of new products is critical for success. Two of the key segments that are growing are menthol and 1 mg products,” said Camilleri.

            According to the TIOJ, the market share of the segment increased in Japan 1.9 percent point to 19.3 percent for the fiscal year ended March 31, 2008, compared with the previous year. The segment continued to grow during the six-month period between April and September 2008, increasing in market share to 20.1 percent.

            An increasing number of consumers are expressing their preference for stronger menthol flavor. Trying to keep up with this trend, companies have introduced a wide range of new products into the menthol segment over the past few years.

Taxes and regulations

The Japanese market has not been subject to any excise tax increases since 2006. At that time, companies raised prices to cover the hike.

            The ruling party is not recommending a tobacco excise increase this year, says Goma, but this will not be finalized until the budget passes the parliament on April 1.

            Camilleri said, “[A] key issue and opportunity in Japan is the ongoing debate around cigarette taxation and pricing freedom. We expect that the government will decide the tax issue in the framework of its March budget deliberations. We believe that the current debate could present an opportunity to reform the Japanese excise tax and price control regime in a way that would allow the government to implement more regular, moderate tax increases and the industry to offset volume declines through higher prices and unit margins.”

            The number of regulations restricting smoking has continued to increase, such as smoking bans on the street by local governments, in addition to a nonsmoking movement by railway companies, hospitals, schools, local government buildings and more, says Sugata.

            “Following the ratification of the FCTC in 2005 there were a series of changes in regulations. This included an increase in size of the health warning on packs, restrictions on use of descriptors and various advertising restrictions,” says Goma. “Since then, there have not been too many regulatory changes”—apart from the vending machine changes.

Continued decline

Cigarette companies expect the market to shrink further over the coming years. “We expect the size of the tobacco market to continue to decrease due to factors such as increasing health consciousness, the aging of Japanese society, tobacco price increases and increased public place smoking regulations,” says Ryosuke Tsuji, head of regulatory and public affairs for British American Tobacco Japan.

            The real action here will be watching companies compete with each other for smokers. Goma says, “While we see that the market volume will continue to decline, we believe we can further grow our business by offering innovative and exciting products to Japanese adult smokers. We are confident that we can grow our business through getting those who smoke the competitors’ brands to choose our brands.”

Sidebar

Company updates

In response to the preference for stronger menthol flavor, JT launched Salem Alaska Menthol in Japan in December 2008. JT also introduced Seven Stars Black Impact in Japan in early February 2009. This year marks the 40th anniversary of the Seven Stars brand.

            The D-spec (reduced odor) category continues to grow steadily. The market share for D-spec products reached 4.59 percent for the full fiscal year that ended March 31, 2008, up from 4.04 percent compared to the previous year. The segment’s market share between April and June 2008, and July and September 2008, was 5.1 percent and 4.82 percent, respectively.

            BAT has launched several new products in 2008, notably, Kool Boost 5 mg and Dunhill Fine Cut. “We are focusing on offering premium brands using our sophisticated technology and cutting-edge innovations in order to best serve our customers,” says Tsuji.

            In 2008, PMJ launched five new products. Marlboro Black Menthol Box, Marlboro Filter Plus One and Lark Menthol KS Box were all launched nationwide, while Lark Classic Milds KS Box and Philip Morris Peppermint One KS Box were launched in limited areas.

            Marlboro Black Menthol has performed well since its launch in August 2008 and has become the most successful launch in PMJ’s history.