KT&G’s Impact Domestically and Globally

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In the 1980s, one company alone dominated the world’s 12th largest tobacco market. The protected South Korean tobacco industry held no serious competitors, and homegrown giant KT&G, or Korea Tobacco and Ginseng, had it pretty good. They controlled manufacturing and distribution in a market that consumed 80 billion-plus sticks per year.

By Josh Doyle

The “monopoly” in Korea’s tobacco market crumbled when the US Trade Representative pried open the market to foreign competition in the late 1980s. KT&G lost a massive chunk of its market share to mostly US competitors, as did other Asian tobacco monopolies in Japan, Taiwan, and Thailand. 

Learning from US rivals, KT&G’s response was to turn their focus outwards, pivoting from a small domestic market to a transnational tobacco company that would enter and succeed in markets around the world. Today, KT&G is the fifth-largest seller of cigarettes in the world, with manufacturing facilities around the globe and a growing footprint in electronic cigarettes.

Global footprint, local feel

The drive to succeed globally has prepared KT&G for the bumpy road of competing in unstable markets abroad such as in the Middle East.

“Regardless of the political instability taking place in the Middle East and Central Asia when we were starting out, Esse is now positioned as the top super-slim cigarette product due to thorough localization and luxury-only strategies,” said an official from KT&G.

Globalization has been a key ingredient in KT&G’s success. But, equally important has been the brand’s ability to localize its offerings with tailored marketing and products that speak directly to a region’s consumers, tapping into unique flavors in places like Indonesia and Central Asia.

“KT&G’s global brand strategy is based on the development of localized brands that fit the market environment, with shorter Esse mini-slims in the Middle East and Central Asia, and cigarettes with clove in Indonesia,” a KT&G spokesperson told Tobacco Asia.

Their approach seems to be working, as Esse continues to snatch up large market shares especially in Russia, the Middle East, and Central Asia, where it either leads or comes runner-up among slim products. 

And while plenty of production still happens in South Korea, KT&G also stacked manufacturing duties in nearby Indonesia, where more than half of the company’s nearly 4,000 employees currently work. 

Korean market heating up for heat-not-burn

Tight regulations in the Korean market may have swung public opinion against smoking and limited domestic growth for brands like KT&G, but the country’s hunger for hi-tech products has helped warm up the market for the heat-not-burn (HNB) segment. 

In November last year, KT&G launched their ‘lil’ series, including the ‘lil-HYBRID’ in two sleek metallic colors. The cleverly designed products are grabbing eyes and awards, having won two awards at Germany’s iF World Design Guide in 2019.

The Korean company has improved on past offerings by lowering the heating temperature of the lil products to 160 Celsius, over 100 degrees lower than previous similar products. They have also boosted the amount of smoke the unit can produce, resulting in bigger, more luxurious clouds for their users. 

Tobacco makers in South Korea keep their market share figures under wraps, but US brand Phillip Morris’ IQOS is still estimated to be taking the largest slice of Korea’s HNB market with some 50-60% of sales. With their new designs and award-winning products, KT&G hopes to usurp the US competitor. 

But, the Korean government isn’t so welcoming of the HNB movement. Last June, Seoul’s Ministry of Food and Drug Safety said they had found up to five cancer-causing substances in the heated smoking devices, and a level of tar discovered in two products which exceeded that of regular cigarettes.

Philip Morris Korea Inc., whose IQOS was among the products the study called out, filed a lawsuit against the South Korean government, demanding access to information on the tests they used to determine the tar and carcinogen levels.

Despite the cold shoulder from South Korea’s government, an interest in tech and some competing research that supports HNB as a healthier alternative to traditional cigarettes are expected to help the HNB market flourish in South Korea in coming years, as KT&G and its competitors push forward attractive innovations and design.

Keeping it slim

KT&G built itself into a global heavyweight in part by increasing its quality to compete with Western brands, a move that could pay off as it asks for bigger investments from tobacco users for electronic tobacco products. 

Esse, its flagship brand of slim cigarettes, leads the way in exports for KT&G, surpassing exports of 248.2 billion cigarettes in 2017. Esse helped KT&G seek higher profits through premiumization. KT&G sought to increase the value of Esse and carve out space for it in overseas markets as a luxury brand.

This helped the company maintain high revenue despite declining sales numbers over the years, according to data from Euromonitor International. By upping the price-per-pack of offerings like Esse Renewal and Esse King Size, KT&G bumped up the proportion of sales it gets from higher-priced products, helping KT&G establish itself as a quality over quantity brand — hopefully softening a transition into the HNB category and its higher price tags.

Taking care of the homeland

But in their quest to go global, KT&G hasn’t forgotten about their home market, where they’re still dominant.

“Despite fierce competition from foreign tobacco companies after the opening of the tobacco market, KT&G has maintained its No. 1 position in Korea with a share of about 63%,” a spokesman told Tobacco Asia, citing numbers from the first quarter of 2019.

The company continues to launch new and limited-edition products in order to maintain its edge in the Korean market, where it has a long history and deep understanding of its home base. 

The company also champions social responsibility at home and protecting the livelihood of the local farmers behind it. The company still buys local tobacco grown by Korean farmers, even when it soars to two or three times the cost of internationally grown leaves. The company also invests 2% of sales into social causes — the most of any conglomerate in Korea. Earlier this spring, KT&G pitched in huge on relief funds and hands-on help after a wildfire ripped through South Korea, destroying homes and damaging a strip of tobacco farms along the way. 

Despite a backlash to globalization, open markets continue to spell opportunity for those companies brave enough to take on the risk. KT&G proved that a deep understanding of the market and the willingness to adapt are key to success, whether that’s in the home field or today’s chaotic but profitable emerging markets.