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Maximizing production capacities as much as possible is important for investment-heavy cigarette manufacturers; and OEM is a handy tool to achieve just that.
By Thomas Schmid
Apart from the largest multinationals and sheltered state monopolies, almost every cigarette company engages in OEM (a.k.a. contract manufacturing), not only making their own products but also manufacturing cigarettes for other brand owners. The practice is sound. Expensive machinery ties up substantial investments and is costly to maintain. It therefore should be utilized as much as possible instead of having it sitting idle. Besides, OEM provides welcome additional income that helps keep a cigarette firm in the black – and workers in their jobs. While the focus primarily may be on proprietary brands, OEM can contribute anywhere from a few single-digit percentage up to as much as half of annual revenue.
KT International (Bulgaria)
Bulgaria’s KT international (KTI) was established in 2008 after the privatization and break-up of the former state monopoly enterprise. “Even though a relatively young company, we are proud of our heritage and expertise that can be traced back to 1872,” explained KTI’s corporate brand manager, Milena Stoyanova. Alas, not only expertise was inherited from the state monopoly but also “very old and outdated facilities.” It took the company a couple of years and a multi-million euro investment to construct a new production complex and update aging machinery. That at first put OEM a little on the backburner.
“Although we had OEM clients from the beginning, we didn’t really pursue that business segment very vigorously,” Stoyanova recounted. “Our initial focus was on developing and modernizing the plant and establishing our own brands, ‘The King’ and ‘Corset’, in the market.” The OEM aspect only took on a more pronounced role once the new factory had become fully operational by 2014. “The expanded capacity that came with it allowed us to crank up our OEM business; and certainly our growing reputation for customer service and quality production also assisted us in attracting credible clients,” she said.
That new-found economy of scale plus better capacity utilization were solid enough reasons to venture out in that direction, Stoyanova explained, even prompting KTI to set up a dedicated OEM division. “More business means more revenue, it’s quite simple, really,” she said. The company’s well-developed supply chain and its rising reputation as a trusted independent and flexible partner with extensive experience are other factors that came in most handy. Stoyanova claimed that in 2019 a not so shabby “20% of our annual [production] volume was derived from contract manufacturing.” She also disclosed that all of KTI’s current OEM clients are international, the majority of them based in western and eastern Europe. “But we also work with some clients from MENA and Asia.”
Companies approaching KTI for OEM services appreciate the company’s straight forward sense of doing business. “Some of them are private label brand owners who do not have their own production facilities,” Stoyanova divulged. Still others contact KTI to manufacture specific cigarette formats which their own facilities are not set up to produce. “We offer eight different pack formats including the world’s first fully TPD2-compliant shell pack super slim format,” Stoyanova said, adding that KTI’s strict adherence to international and European regulations, track and trace, and international quality standards is another reason that has made the company “a contract manufacturing partner of choice”.
“Clients are attracted by our expertise in working with multiple raw tobacco grades and our in-house master blender, who has over 40 years of experience developing blends to customer specifications,” Stoyanova said. That also ties in nicely with the aspect that KTI is a major tobacco buyer. This, according to Stoyanova, enables the firm to purchase the desired grades right at source and worldwide. Moreover, KTI offers OEM clients a comprehensive set of supplementary services ranging from brand and packaging development and design to shipping, customs documentation, insurance and warehousing. And, to ensure product consistency and consumer value on the filter side, a dedicated cigarette filter facility was installed last year, producing not only standard filters but also capsule and flavored thread filters.
“I also should mention that as far as logistics and transportation are concerned, Bulgaria’s location is very favorable, connecting western and eastern Europe, as well as Europe and the Middle East,” Stoyanova added.
Yet, KTI would of course not just accept any random client without vetting them first. Thorough background and legitimization checks are necessary practice in order to ensure that all OEM customers are credible, legal and sustainable business partners. “We require from our OEM clients quite a list of documentations, such as (business) licenses, certifications, and trademark registrations, for example” Stoyanova pointed out. The company’s legal team would then validate all supplied documents while also ascertaining that the prospective OEM customer meets all financial requirements.
“Our commercial negotiations with potential OEM customers can be rather intensive before we reach an agreement beneficial for both parties,” Stoyanova said. These talks naturally also revolve around payment and delivery terms. ‘We typically would request a 100% advance payment and ex-works delivery terms particularly for new clients,” she added. “However, we do offer flexibility as far as regular customers and frequent sizeable volume commitments are concerned.”
BMJ Industries UAE
The United Arab Emirates have matured into quite the hub for tobacco products manufacturing owing not only to a perfect geographical location with easy access to Asia, Africa, and the Middle East. Established in 2000, BMJ Industries FZE (BMJ) is one of the country’s largest privately owned cigarette companies, according to the firm’s sales manager, Malik Warrayat. ”We became involved with OEM manufacturing quite a few years back when we received increasingly frequent inquiries from other companies who wanted the same quality production for their own brands that they had recognized in ours,” he recalled.
However, Warrayat insisted that OEM was more of a by-line than a major revenue stream, as BMJ’s focus was and still remains its broad range of proprietary brands. “We only engage in OEM business with clients who already are in our business network and we regard contract manufacturing more as a general support aspect rather than it being a defining part of our business strategy,” he said. As such, the OEM segment currently constitutes for only around 5% of BMJ’s annual production output, the lion’s share of 95% being contributed by the firm’s own brands. Warrayat also disclosed that all of the company’s current OEM clients are located “outside of the UAE”. He added that “most of them don’t have production facilities on their own, which is why they approached us in the first place.”
Warrayat claimed that his company’s particular strength was advanced, popular formats such as Fresh Pack and capsule cigarettes, “all of which are produced in-house, including single and double capsule filters.” For development and design the company has partnered with a media agency lending creative talent. Within Dubai’s Jebel Ali free port zone, BMJ furthermore operates a fully-staffed logistics center to facilitate exports.
The company’s OEM customers are a diverse lot, too. Some already have well-established brands and prefer to either furnish BMJ with all raw materials needed for production or expedite meticulously detailed specifications. “They have a brand image to uphold and want to ensure that we manufacture exactly to their established standards, not veering off even an iota,” Warrayat said. But then again, there also are those whose erstwhile brands have been “dead” (as Warrayat put it) and who ask BMJ to revive and re-design them, including “developing new tobacco blends.”
Even though BMJ’s capacity is considered quite large, the company sometimes is forced to outsource “to other factories” in order to produce its own brands – but of course under close supervision from BMJ’s quality control team. Expanding the existing capacity just to accommodate OEM contracts is out of the question, firstly because BMJ regards OEM merely a service rendered to existing customers, and secondly because “order quantities are generally limited and the profit margin is low.” Payment security is an important issue for BMJ as well, the company insisting that full payment be made in advance. “However, we sometimes may agree to an arrangement of 50% upfront payment and 50% prior to shipment,” Warrayat revealed.
But how about unwittingly playing part in the illicit cigarettes trade? Warrayat resolutely dismissed the notion that this could ever happen. “For BMJ this is a solid red line we never cross,” he asserted. “We follow strict due diligence procedures to ensure that the products we manufacture on behalf of customers are distributed and sold legitimately in the destination market. For this, the client must provide us with trademark registration both in the UAE and in the destination of the shipment, documentation proof of tax payments and customs declarations.” Prospective customers unable to show such documents are outright rejected. In any case, the company’s policy of primarily focusing on OEM business from long-term customers serves as an additional filter to keep out unethical parties. “About 80% of our OEM business is derived from long-term customer,” Warrayat said.