By Thomas Schmid
Tobacco Asia has talked to KT&G Corporation about its aspiration to become the world’s fourth-largest tobacco company by 2025 and how it plans to achieve that lofty goal.
When South Korea’s former state tobacco monopoly was privatized in 2002, it provided the company with a completely new outlook on business. While previously primarily concentrating on defending and developing its market share at home, it now began to increasingly focus on global expansion. This, along with an official name change from the erstwhile “Korea Tobacco & Ginseng” into “KT&G Corporation,” saw the Korean firm quickly advancing to become the world’s fifth largest tobacco company. Then, in 2017, KT&G announced its “Global Vision” strategic plan, designed to secure the fourth rank among the world’s largest tobacco industry players by 2025. This new master plan rested on four pillars:
Pillar 1 - The expansion of global sales coverage by actively pioneering new markets. At the time of the “Global Vision” announcement, KT&G had exported to approximately 50 countries. That number had more than doubled to over 100 countries by 2020. A company spokesperson told Tobacco Asia on condition of anonymity that more markets would be added in the run-up to the big 2025 goal.
Pillar 2 - Bolstering marketing capabilities by funneling more investments into distribution networks as well as the marketing infrastructures in key markets, particularly KT&G’s overseas subsidiaries in the US, Indonesia, Russia, and Turkey.
Pillar 3 – Stronger focus on building brand competitiveness in individual markets by developing market-specific brands customized to the needs and preferences of local consumers.
Pillar 4 – A wholesome restructuring of KT&G’s global business model by expanding direct management operations, including investments in overseas subsidiaries and manufacturing plants.
So far, so good – but now the hard part starts
According to the latest available research from Euromonitor International, KT&G’s very structured and concerted marketing efforts approach have helped the company to hold on to its no. 5 ranking for years.
Annual sales reportedly have clocked in at more than US$4 billion worldwide in 2019. And despite considerable competition pressure from other multinationals, the company also managed to secure itself a rather comfortable 64.9% market share at home as of the third quarter of 2020. So far, so good.
But, from here on things are likely going to be quite a bit more challenging. With a mere four years to go until the 2025 deadline, KT&G will now have to take on the cream-of-the-crop of the world’s tobacco industry players, and it’s not going to be a walk in the park. Moving up from fifth to fourth rank will inevitably mean that the company must displace at least one of its co-competitors. Common logic would suggest that it could be the company presently occupying the fourth rank; and that, according to the Euromonitor International report, is Imperial. But even Imperial’s global market share (7.8%) is still a not-so-shabby – 5% ahead of KT&G’s current 2.8%. The company is nevertheless adamant that a multi-pronged approach under its “Global Vision” scheme might just do the trick.
Acquisitions, frontier markets, and custom brands
Take acquisitions, for example. In 2011, KT&G acquired Indonesia’s sixth-largest tobacco manufacturer, Trisakti, which allowed the company to benefit from Trisakti’s well-established sales network and kretek production. And, further takeovers might well be in the picture. “Acquisition is not unprecedented for us and we will thoroughly assess [such opportunities] in the long term,” the KT&G spokesperson told Tobacco Asia. Then there is the pronounced territory-specific brand diversification drive designed to create an overall stronger brand presence in overseas markets. It was this strategy that led KT&G to taking the top spot in Mongolia in the first half of 2020, representing 34.2% market share, according to a report released by Mongolian market research firm YNR in September this year.
Meanwhile, Latin America and Africa are considered “frontier markets” that hold great potential for further shoring up the global share figure. The company spokesperson divulged that it would be market-specific brands and products that are the keys to unlocking these “frontier markets”. “For instance, KT&G launched Esse Compact Black and Esse Edge in Nigeria, both of them ultra-slim cigarette products in compact-sized packs,” the spokesperson said. “The products were custom-designed to appeal to Nigerian consumers, who smoke [their cigarettes] quickly due to the country’s prevailing high temperatures and air humidity.” The spokesperson also cited the case of Guatemala, famous for its coffee-growing industry. Accordingly, “KT&G launched the coffee-flavored [cigarette] products Bohem Cafe Colada, Bohem Irish Café, and Bohem Espresso Summer there in 2019,” the spokesperson explained.
In fact, the number of KT&G’s overseas market-specific brands has skyrocketed dramatically since KT&G first announced its Global Vision plan. From “only” 211 brands in 2017, the figure had jumped to a staggering 419 by the end of 2019. That proliferation probably also had something to do with the company establishing – in the mid-2000s - marketing teams devoted to pioneering new markets and developing overseas brand portfolios. These teams were continuously expanded as global business grew increasingly important over time, improving on KT&G’s “capability of diversifying both its global brand portfolio and executing localization strategies at the same time,” as the spokesperson put it.
“A lil is a lot”
Although conventional cigarette products continue to be the principal driving force of KT&G’s rise to the top, company president, Baek Bok-In, is strongly invested in creating “an ambidextrous organization by expanding beyond KT&G’s flagship traditional tobacco business,” the spokesperson pointed out. “Hence, while making steady improvements to its cigarette brand portfolio, KT&G is also committed to making innovative breakthroughs in the heat-not-burn sector as well,” the spokesperson said. Following literally years of concerted r&d, this resulted in KT&G rolling out its very first heat-not-burn (HNB) product, lil 1.0, in 2017, the brand name factually being an acronym of the marketing slogan, “a little is a lot” . “The slogan highlights the ‘minimal’, ‘simple’, ‘user-friendly’ yet ‘sophisticated’ qualities that lil imparts,” explained the spokesperson.
Since its launch, lil not only has succeeded in establishing itself as “an influential next-generation tobacco brand” in South Korea itself but also has earned “wide recognition abroad.” Today comprising the products lil Solid, lil mini, and lil HYBRID, the latter two even received awards for product design at the ‘iF DESIGN AWARDS 2019’. In addition, the lil range was introduced at a number of international exhibitions in 2019, meeting with considerable interest among “buyers from all around the world,” according to the company spokesperson.
The unthinkable has happened!
Intriguingly, in January 2020, KT&G accomplished the unthinkable, a bold feat unprecedented in the industry. The company signed an agreement with one of its actual main competitors, PMI, to handle the distribution of lil in all markets outside of Korea. Thanks to this strategic collaboration, KT&G expects “to achieve full-fledged overseas expansion [for lil], benefiting from PMI’s extensive global sales network and substantial know-how in the world market,” the spokesperson told Tobacco Asia. The agreement is valid for an initial three years and royalty-based. The distribution contract also extends to Fiit and MIIX consumables (i.e. cartridges), which are compatible only with lil devices.
Although KT&G declined to divulge concrete business projections due to the agreement’s non-disclosure terms, the company spokesperson was at liberty to say that “the two companies share a common interest in expanding the [international] market footprint of lil.” It certainly shows. KT&G and PMI rolled out lil Solid and Fiit consumables (as Fiit Regular, Fiit Viola, and Fiit Crisp) in Russia and Ukraine in August and September 2020, respectively. Just one month later, in October, the two partners introduced lil HYBRID 2.0 and its MIIX consumables (as MIIX Regula”, MIIX Mix, and MIIX Ice) in Japan. “The collaboration with PMI [is] a crucially important milestone for KT&G in staking out its presence in the global heat-not-burn market and securing a distribution network for lil,” the spokesperson asserted.
Strengthening ESG Values
Numerous studies show that companies with strong ESG (environmental, social, and governance) policies generally enjoy positive financial results and stronger business performance in the long term. KT&G has embraced this concept wholeheartedly, too. As a result, in 2020 the company obtained an A rating in an ESG evaluation carried out by Morgan Stanley Capital International (MSCI). “This was meaningful for us, since KT&G scored higher [in that evaluation] than the global top three cigarette manufacturers did,” the company spokesperson claimed. The score also represented a great improvement on the BBB rating KT&G had been accorded by MSCI only one year earlier.
All aspects considered, the tobacco company appears to have set up the right conditions to indeed reach its Global Vision goal. Who knows, if everything proceeds well, this could possibly happen even before 2025 comes around. After all, despite being faced with an extremely competitive business environment at home, KT&G still managed to defend its leadership position there. Plus, its forceful push out into the wide world with a balanced portfolio of market-specific cigarette brands and an apparently well-accepted range of HNB devices likewise has panned out beautifully so far. We wonder if there is going to be a boisterous celebration party with free beer and finger food. Please count us in.