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Tobacco Cigs Brand Marketing News

R.J. Reynolds Tobacco Holdings, Inc.

Excerpts from 2001 Annual Report

Doral. Innovation.

Continuing to deliver on its promise of "Imagine Getting More," in January 2002, Doral launched a comprehensive brand upgrade.
The revitalized Doral features an enhanced tobacco blend on key styles, contemporary new packaging and impactful new advertising.
The improved blend incorporates higher-quality tobaccos blended in a special double-blending process. The result is a smoother, more flavorful and premium-tasting Doral.
New packaging that reinforces the high-quality product inside is also being introduced. Boldly blended colors designate full-flavor, lights, ultralights and menthol styles, all within a modern, geometric design. Doral's icon, the crown, is modernized with two blended Ds.
Doral's new advertising campaign illustrates the brand's new Splendidly Blended product while maintaining a fun and friendly image. It features both strong graphic word messages, such as "New Better Blended" and "You Gotta Taste This," with Splendidly Blended'" image ads.
By upgrading its product, packaging and image, Doral is strengthening its position as the No. 1 savings brand in the country. The upgrade reflects the brand's promise to give adult smokers more for their money - a premium taste at a popular price.

Doral's new advertising illustrates the brand's new Splendidly Blended product while maintaining a fun and friendly image.

New packs of Splendidly Blended Doral reinforce the high-quality product inside. Boldly blended colors designate full-flavor, lights, ultralights and menthol styles, all within a modern, geometric design.


Cigs and Tobacco History

A lucky strike?

China, the world?ˆ™s biggest cigarette market, holds the promise of long-term growth for international cigarette manufacturers, but being a monopoly, it remains secluded and restrictive. The approval for BAT?ˆ™s joint venture plan may change the way tobacco business is conducted in the country.

When British American Tobacco (BAT), after years of negotiations with Beijing, announced on 16 July that its intended major investment in China for the manufacture and nationwide sale of cigarettes had been approved, the news came as a surprise. Indeed, in an exclusive interview with Tobacco Journal International two months ago, BAT?ˆ™s chief operating officer Antonio Monteiro de Castro had been confident that the company?ˆ™s joint venture plans would soon materialise (see TJI 3/2004). But BAT?ˆ™s intention to build the first foreign factory in China, which had been announced in May 2001, was blocked by a central government ban on foreign investments in August 2002, and there were no signs that this policy was going to change soon.

BAT?ˆ™s final win of approval for its big China deal did not long remain unambiguous and uncommented then. Only days after the announcement came through, the Chinese tobacco monopoly denied having approved the project, claiming on its website that it had not authorised any foreign tobacco company to invest in any cigarette factory inside China. BAT spokespeople, however, replied that they had approval from the highest levels of the central government. At the time TJI went to press, the question if the deal had been definitely cleared could not be answered.

If the permission for the joint venture is upheld, the ambitious project is going to change the tobacco landscape in China through its size and nature. BAT plans to establish a green-field factory together with China Eastern Investments Corporation, a Hong Kong firm that has been BAT?ˆ™s distributor in China for two years. The site will have an eventual capacity of 100 billion cigarettes. The company would thus become the first foreign firm to produce its cigarettes in mainland China, and its site could be the country?ˆ™s biggest cigarette factory.

According to BAT, the planned capital investment is around ?? 800 million for building the site and getting the route to market sorted. Although BAT had signed a land deal with the provincial government of Sichuan three years ago allowing it to build a facility on a 96-hectare site in the city of Mianyang in southwest China, the final location of the joint venture has not been decided upon yet. ?ˆ?In the time that elapsed from getting the land use rights for Mianyang until now other possible sites have presented themselves,?ˆ? BAT spokesman David Betteridge said in interview with TJI. ?ˆ?We have a number of options.?ˆ? He admitted that having the approval of the central government in Beijing was only the first step: ?ˆ?We still need to formally agree the distribution set-up. Further details of the project, including dates and joint venture arrangements, will be announced in due course.?ˆ?

The British cigarette manufacturer has not determined the exact percentage shareholding with its JV partner yet, but it is being assumed that BAT will be the majority owner, a fact that also sets the deal apart from other similar projects.

Two international co-operations

Currently, there are only two co-operations between western companies and the Chinese tobacco monopoly, but they are on a much smaller scale and consist of cross-licensing agreements with existing regional Chinese tobacco groupings. In January 2004, Chinese tobacco giant Hongta began producing Imperial Tobacco Group brand cigarettes. Imperial, the world?ˆ™s fourth-largest tobacco company, reportedly will invest US$ 8.4 million annually over ten years in the venture, which aims to sell 10 million of its West brand cigarettes a year in China eventually. Hongta executives declined to comment on the details of the deal, saying only that production started at the end of 2003 and West cigarettes would go on sale in Shanghai and the south-western city of Kunming.

The second agreement was signed in November 2003 between UK tobacco company Gallaher Group and Shanghai Tobacco Group Corporation, to produce and market select cigarette brands for each other in China and Russia. Shanghai Tobacco has been licensed to produce and sell Gallaher?ˆ™s Memphis brand cigarettes in China, while the British firm has the permission to make and sell the Chinese Golden Deer brand for the Russian market via Gallaher?ˆ™s Russian unit Liggett-Ducat. Since this May, mid-priced Memphis has been available in Red and Blue variants in the Shanghai municipality, whereas Golden Deer has been launched in full flavour and lights versions across Russia in cities including Moscow.
Having carefully been termed ?ˆ?co-operations?ˆ™, the two British-Chinese projects emphasise the restrictive nature of the Chinese tobacco monopoly.

The State Tobacco Monopoly Administration?ˆ™s (STMA) denial to have approved the BAT deal is in accordance with the country?ˆ™s law on tobacco monopoly which makes the STMA the sole authority on licensing joint venture tobacco plants in the country. These have been banned since 1993, as an STMA official pointed out, hinting at the country?ˆ™s excess tobacco capacity. The STMA is currently streamlining its vast but fragmented tobacco production, having cut the number of domestic cigarette manufacturers down to 80, including 36 key factories, from 185 a few years ago and is shutting down or merging many smaller plants.

A promising market

The Chinese tobacco market, with 310 million smokers and annual sales of around 1.78 trillion sticks ?ˆ“ about 30 per cent of all cigarettes sold world-wide ?ˆ“ the biggest cigarette market in the world, is an enormous lure for international cigarette manufacturers, holding the promise to be one of the last opportunities for long-term growth in an otherwise mostly stagnating global market. ?ˆ?China is the biggest growth opportunity for international tobacco companies over the next ten to twenty years,?ˆ? tobacco analyst Michael Smith from JP Morgan said in an interview with TJI (see TJI 1/2004).

In 1999, to restrain the further penetration of foreign companies, the government tightened controls on representative offices of overseas tobacco manufacturers. Only companies with an average of US$ 10 million in cigarette and cigar exports to China over the preceding two years were allowed to set up a third local representative office. In addition, only firms with authorised technical co-operation with domestic cigarette makers are allowed to set up more than two offices. Even companies that meet the requirements are not allowed to have more than ten representative offices.

Control of promotional activities by foreign firms also became more stringent. ?ˆ?Amidst this background, the multinationals?ˆ™ presence is accordingly comparatively negligible,?ˆ? says Zora Milenkovich, manager global market research at Euromonitor International. ?ˆ?JTI?ˆ™s share of the market is barely 0.1 per cent of total volume shares and the remaining multinationals?ˆ™ individual share hovers around the same, if that.?ˆ?

The Chinese market involves a lot of uncertainties for foreign companies. ?ˆ?Cigarettes are commonplace in China, and pricing is low,?ˆ? observes credit analyst Vincent Allilaire of Standard & Poor?ˆ™s. ?ˆ?Current tariffs do not allow for the development of a sizeable import category. Thus, joint ventures or co-operation agreements with indigenous companies are a good way for western companies to enter the market, and increase their brand awareness, without committing a lot of capital.?ˆ?

?ˆ?Some of the multinationals are finding it more difficult,?ˆ? says Jonathan Leinster, tobacco analyst at UBS. ?ˆ?Philip Morris is still finding it quite difficult, as is Japan Tobacco, to find a local ally. But it has to be said that all of these plans are for the long-term future. Nobody really makes any money in China at the moment, and probably making decent profits there will be some way off.?ˆ?

Return after exile

While the question of final approval remained open at TJI?ˆ™s editorial deadline, industry sources pointed out that a deal the size of BAT?ˆ™s proposal may well require the okay from the highest body of the government in China, which is the state council, headed by premier Wen Jiabao. The aim behind this policy, one tobacco analyst suggested, could be that the central government wants to shake up the monopoly and accelerate its restructuring; in particular, he said, it could shake up distribution systems and break provincial protectionism and the graft which goes with it ?ˆ“ something that the monopoly itself has been trying for a while.

If approval for BAT?ˆ™s joint venture indeed came from the state council, this would mark a major turnaround in government policy towards the tobacco industry, opening it up for competition.

?ˆ?Through our partner China Eastern Investments, we currently are the biggest foreign cigarette importer into China,?ˆ? says Mr Betteridge. ?ˆ?We sold well over one billion sticks in 2003, mainly State Express 555, and we are ahead of that this year.?ˆ? Unlike its competitors Imperial and Gallaher, BAT is not looking at the mid-price segment with the portfolio of its envisaged joint venture: ?ˆ?We are aiming at the premium segment which is currently 12 or 13 per cent of the market and growing. To begin with we?ˆ™ll build on State Express 555 and Kent and look to add others later.?ˆ?

The proposed factory would mark BAT?ˆ™s return to China after an exile of over 50 years, triggered by the communist revolution in 1949. It is a step that would also bring the British company closer to its declared goal to become the world?ˆ™s number one cigarette manufacturer. But which risks and uncertainties will be involved in the deal? The following interview with tobacco analysts sheds more light on this and other aspects involved.


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