Japan Tobacco international to expand its presence in the Armenian tobacco market

Japan Tobacco International (JTI) is the international division of Japan Tobacco Inc. – third largest tobacco products manufacturer with the market share of 11 per cent and market value of around $32 bn. The sales volume of Japan Tobacco International in 2008 amounted to 452 bn cigarettes, while the company’s net revenue reached $10.6 bn. Martin Braddock, JTI’s Regional President, CIS, Romania and Adriatics, told ARKA agency about the company’s operations on the Armenian market.

ARKA – Mr Braddock, how successful are JTI operations in the Armenian market? What accomplishments has the company reached in Armenia in the course of its operations?

M.Braddock – Our parent company Japan Tobacco Inc. is the world’s third largest tobacco company listed on the Tokyo Stock Exchange. In the long term Japan Tobacco Inc. intends to become the largest tobacco company in the world.

The sales of JTI products in Armenia started in the year 2000, and since then we have been able to build a  strong business in the country based on the four leading brands - Sobranie, Winston, Camel and Monte Carlo. At present, the share of JTI products in the market is estimated at 12-13%, whilst the sales volume growth in the past year was in double digits. We have 43 employees in the country.

JTI operations in Armenia have generated significant tax revenues: in 2008 JTI’s importer Arsoil paid about USD 11 million in excise taxes.

Our presence in the Armenian market is quite substantial, and we are interested in strengthening our positions further. Besides that, in Armenia we also work with regulatory authorities to solve the issues related to taxation, and, in particular, with excise. We understand that the excise tax will continue growing, but we would like to see the growth dynamics in the long run over the next three years.

The most important issue for us now is the existence of different excise tax rates for domestic and imported products in Armenia. According to WTO principles, there should not be such a difference, and the reduction of this difference in Armenia should be carried out gradually in the long term, so that towards January 1, 2011 these rates would become equal.

ARKA – What is your estimate of the tobacco products market in Armenia, and what is its growth dynamics? How swiftly does JTI’s market share grow in Armenia, and who are your main competitors on the market?

M.Braddock – We estimate the Armenian market at 4.4 bn cigarettes with annual profitability of $45 mn. The market is quite stable, and the changes are mainly within the market shares between the companies operating in the market.

In comparison with the other countries of the region, it should be noted that neither Georgian, nor Azeri markets are large in terms of volume. For instance, the Georgian tobacco market stands at 7 bln. cigarettes, while the Azeri market is estimated at 10 bln. cigarettes. The Armenian tobacco market is the smallest among the Caucasus nations, which is in the first place due to the number of residents.

The share of our company in the Armenian market currently stands between 12-13% and is growing steadily. In Q1 2009 it has grown by 2.7% year-on-year. It’s worth noting that JTI has imported over 530 mln. cigarettes into Armenia in 2008.

All key international players are present in the Armenian market - Phillip Morris, British American Tobacco, Imperial and Karelia. Our main competitor among the international companies in Armenia is Phillip Morris.

ARKA – Which of your cigarette brands is selling best on the Armenian market, and how does this reflect the global demand?

M.Braddock – The best selling and fastest growing brand in Armenia is Winston which is the second best selling brand in the World.

ARKA – What kind of difficulties does your company face on the Armenian market?

M.Braddock – The key issue in Armenia is the difference in taxation rates between imported and domestic products, which prevents us from full-fledged competition with domestic products. Owing to this, we are not represented in the lower price segments, and have to content ourselves with operating in the mid and high price segments.

Surely, we perfectly understand that the issue can only be solved by the Armenian government. In order to solve this issue we’d like to see a roadmap covering a span of 2-3 years that outlines the realignment of Armenian legislation with WTO requirements, to which Armenia has been a party since 2003.

ARKA – Is it possible to talk about JTI entrance to lower price segments? What are JTI perspectives in the Armenian market?

M.Braddock: As I said currently we import Sobranie, Winston, Camel and Monte-Carlo to Armenia, which are premium and mid-price segments. Due to existing tax system it would be not profitable for us to import cigarettes in lower segments. In the near future we will continue investing behind our brands presented in the Armenian market and in the near future they lines will be extended.

Our strategy is that we want to become the largest tobacco company in the World some time and we also will continue investing in our employees, in their training and development.  We will continue working with authorities to ensure JTI positions are heard when it comes to industry regulation, when it comes to taxation. All in all we plan to continue our growth and increase our market share in the Armenian market.

ARKA – How the World financial crisis has affected the company business?

M. Braddock – For sure due to the crisis all international companies’ sales decreased specifically in rural areas. To some extent sales has decreased in Yerevan as well. In rural areas sales have decreased by 60% comparing to 2008, while in Yerevan less than 10%. Crisis has impacted both international and local companies.

ARKA – Does JTI plan to start local production in any of the Caucasus countries?

M.Braddock - Currently we have factories in more than 25 locations worldwide. We have recently announced consolidation of our production facilities in the UK, Austria, Japan, Ukraine and the trend is for less, not more.

We do not have manufacturing facilities in Armenia, and there are no plans to start production in Armenia, Georgia or Azerbaijan. It would be economically not viable to have local production for such a big company as ours. The choice of a factory location is determined by the size of the market, tax and investment regimes in a given country and existence of international agreements.

A factory in Ukraine manufactures cigarettes for Armenia. This operational mode has been in part motivated by existence of the Free Trade Agreement between Armenia and Ukraine.

ARKA – Do you plan any programs related to smoking prevention?

M.Braddock – We do have plans to engage in dialogue with non-governmental organisations to work out activities aimed at reducing smoking among youth as well as to participate in retail access prevention programs. -0-