Seeking Alpha

Joergens'  Instablog

Joergens
Send Message
I am a private investor located in East Asia. My investment strategy is long term with strong focus on dividend income. I am primarily interested in consumer stocks such as Nestle, Colgate Palmolive, Philip Morris International and I frequently conduct grasroot level research pertaining to the... More
View Joergens' Instablogs on:
  • Philip Morris International BIG IN JAPAN

    Inspired by the positive feedback I received for my post on Transnational Tobacco Companies in China, I have decided to briefly summarize my findings from my 5 day stay in Japan, February 2012, as a special Thank You for my followers on Seeking Alpha.

    I made this trip because Philip Morris International (PMI) has been gaining increasing market share in Japan.

    This is quite important as each percentage point market share in Japan or in other industrialized nations is usually worth more in terms of revenue and profit than in China or in similar developing nations.

    Unlike my previous posts, this Japan post is kept very short and in bulletin form. The content is based mainly on my personal observations that I randomly made in one major Japanese city; Osaka and in a small town Nara.

    Both cities are part of the Kansai agglomeration that also includes the cities of Kobe and Kyoto.

    I have added my own thoughts and conclusions to these observations.Occasionally, I have set hyperlinks and made references to other sources to complement my observations.

    List Of Random Observations During My Trip To Japan

    • Marlboro is the substitute brand when Japan Tobaccos' products are not available.

      On international flights to Japan, Japanese customers mostly resort to Marlboro if Mild Seven or other JT brands are not part of the onboard Duty Free selection.This was the case during my flight from Beijing to Osaka. The Japanese stewardesses confirmed my observation that in such a case Japanese passengers usually buy Marlboro.

      Moreover, from PMI's reports and presentations, e.g. CAGNY February, 2012 presentation, we know that PMI reached a market share high of 42% in Q2 2011 (from 24% in the preceding quarter) when Japan Tobacco had supply side problems at its domestic factories due to the Fukushima disaster. It further proves that Marlboro is a widely accepted substitute for Japan Tobacco brands amongst Japanese consumers of all ages.

    • In Japan, the minimum legal age to purchase and consume cigarettes or tobacco products is 20. This is in line with Japan's legal drinking age and also with the voting age.
      An interesting anecdote is that a police officer stopped and searched two teenagers for cigarettes in a popular hangout area in downtown Osaka during noon time.
      I have never seen this happen in the United States or in Western Europe.

      I imagine that the relatively high age requirement and the unusually rigid law enforcement might encourage significant curiosity and temptation for smoking amongst Japanese teenagers.
      This may subsequently elevate the status of smoking as a tool for expressing disagreement with/ rebelling against societal norms.I further imagine that these young people will preferably smoke a different brand than their parents or what is commonly smoked by the "establishment". That would be a foreign brand, some of which traditionally link cigarettes with freedom or individualism in their marketing efforts.

    • Vending machines are a very important sales channel in Japan, which are not limited to but do, of course, include the sale of cigarettes. Cigarette vending machines are omnipresent and so are their advertisements.
      PMI's marketing is huge and is definitely more than just competition. Like in many other countries, sales stores are in the typical PMI design.
    • In convenience stores one finds many packages that contain cigarettes with a freebie, such as lighters or key-chains.
      Or, if individual packs are bought from the shelf, the stores hand out freebies for each package sold.
      According to a Japanese friend, this only happens during promotions.
    • In addition to Marlboro and its brand extensions such as Menthol or Ice Blast, the brands Lark and Parliament are also prominent.
      Customers that purchased Marlboro tended to be young and in most instances fashionably dressed; two buyers were very tellingly wearing artificially worn out jeans and boots.
      It proves that the image of (supposedly) Western lifestyle, Western product prestige and brand value strongly impact certain young consumers in Japan. Middle to senior aged customers mostly bought Japan Tobacco brands such as Mild Seven, Pianissimo, and Caster.
    • I have noticed a fair amount of women smoking or buying cigarettes. Thus I assume the prevalence of female smokers is much higher than the numbers mentioned in surveys. See also my instablog post Big Tobacco Cashing In On Oriental Women for further reading. My personal estimate is that 20-25% of Japanese women above the legal age smoke which would be double the statistics I usually read about. However, some of the women who bought cigarettes may have bought them on behalf of their husbands. I have tried to verify this and was told by a Japanese friend that it happens but it is not very common.
    • Not only have I seen women of all ages buying cigarettes, I have also seen a fair amount of women smoking in public.
      Some of these women smoked together with males and in one particular and perhaps extraordinary instance a woman smoked in front of her child, next to a river in Shinsaibashi, a busy shopping district.
      In my opinion, all this indicates that a significant change in values may have taken place in Japanese society. It appears that female smoking is socially accepted and quite common now. Unlike Korea, nobody raises an eyebrow anymore.
    • Both Japan Tobacco and PMI have cigarette brands specifically targeted towards the female market.
      I have noticed Japan Tobacco's Pianissimo as well as PMI's,
      Virginia Slims Rose and Virginia Slims Duo.
      Interestingly, the advertisement for Pianissimo cigarettes featured a Caucasian (!) woman and the slogan "Naturally Me", thus making references to a. Western lifestyle (female smoking as a common thing/ as popular lifestyle/natural habit) and b. to individualism (the concept of me).
    • Still there are many popular venues such as eateries, restaurants, bars, coffee shops, gambling halls, and gaming halls where smoking is allowed but without designated smoking rooms.
      Consequently people are exposed to second hand smoke with possible increased vulnerability to smoking addiction. Very likely, quitting smoking will be more difficult as constant reminders; second hand smoke, seeing others smoking as well as the opportunity to smoke, all facilitate a fall back into old behavioral patterns.

      I was quite surprised to find such a liberal smoking environment as the government has been trying to reduce smoking and has persistently raised tobacco tax as major means to cut down on smoking.
      However, I think the relationship between politicians and the tobacco industry is somewhat blurred as the Japanese government is still the major shareholder of Japan Tobacco, holding approximately 50 percent of its shares.

      To report objectively, I did not notice many non-smoking restaurants although I managed to find two and also the hotel restaurants I ate at were non-smoking localities.

    • I noticed two meat vendors smoking at their stall as well as other shop owners in their own stores. This I found particularly interesting given the Japanese fetish for cleanliness in general. "Japanese smoking" has been defined as "clean style smoking" where one rarely sees cigarette butts on the ground as many Japanese carry portable ash containers with them.

      Obviously there exists a big discrepancy between the Japanese people's self-perception as clean people and the actual reality pertaining to smoking. In other words, many Japanese do not seem to care about second or even third hand smoke.

      Thus it seems when smoking is deeply embedded in a culture its dirty (ashes) and unhealthy (smoke) side effects are tolerated by the majority.

    • Lastly, for those believing in the Big Mac Index, according to the Big Mac sign I have spotted, one Big Mac costs 200 Yen whereas most of the cigarette brands sell for 410 to 440 Yen.

    All in all smoking is alive and kicking in Japan.

    Unlike the United States and many Western European countries smoking is widely accepted by the Japanese.

    Admittedly, Japan is an ageing society and a declining market due to government tax increases aimed to curb smoking.
    But my overall conclusion is that the prospects for PMI in Japan are still very promising, as it is continues to take over market share from Japan Tobacco.

    Before this trip, I considered that PMI might buy out Japan Tobacco in twenty to thirty years' time.
    Actually, the Japanese government is considering putting more of its shares on the free market to cover for the repair costs related to the Fukushima disaster.

    Now I am convinced that a buy out will not be necessary for PMI.

    With the help of PMI's broad brand portfolio, Marlboro's wide acceptance as substitute for Japanese cigarettes, and PMI's enormous marketing that particularly appeals to youngsters, PMI will most likely overtake Japan Tobacco in market share in another ten to twenty years.

    In fact, I see strong analogies to Turkey.
    In Turkey PMI grew its market share between 1991 and 2005 from 13.2% to 41.4% and became market leader that year.
    At the same time the state monopolist TEKEL lost ground, and declined from 84.7% (!) to 37.1% market share. [1]

    On the other hand, BAT was left with the faltering state monopolist and decided to buy TEKEL from the government in 2008.
    By 2008, TEKEL's market share had fallen to 25.8%, and TEKEL and BAT combined had a market share of 34.6%, still trailing PM.

    This analogy is quite telling as it demonstrates how PMI does business, and how PMI is able to capitalize from its broad product portfolio and the strength of its brands.

    Reference:

    [1] PMI Investor Presentation Turkey, June 2009, to be retrieved from its website

    Disclosure: I am long PM, MO.

    Additional disclosure: This article is for informative purpose, only.

    Mar 29 7:30 AM | Link | 4 Comments
  • Big Tobacco Cashing In On Oriental Women

    Introduction
    In this article I welcome all readers interested in smoking trends amongst females in East Asia, either for investment purposes or the purpose of anti smoking efforts.In the course of the article I describe my findings about a striking difference
    between my own observations pertaining to female smoking prevalence in East-Asia versus the portrayal in the media, and statistical data found in relatively recent books about smoking.
    The article provides explanations for this difference by closely examining
    the situation in South-Korea, mainland China, and Vietnam.
    Moreover, I also mention smoking aspects in other countries such as Japan and Indonesia.
    Throughout the article a special focus is put on the role of Transnational Tobacco
    Companies (TTCs) - in increased female smoking uptake in East Asia.
    And I further elaborate on these multinationals' business success, in particular Philip Morris Interntational's, in the following abbreviated as PMI.

    Own Observations vs Media Coverage and Data from Books
    Having lived in China and Hong Kong for almost two decades and having traveled in East Asia extensively I have made a remarkable observation in recent years.
    I have seen more and more East Asian women smoking in public.
    Female smoking seems to have changed from a taboo into a very common habit.
    It is not surprising to find a whole crowd of female sales staff smoking outside a mall or a whole group of young people, males and females, smoking together while
    on a weekend outing in Hong Kong. They are almost exclusively smoking PMI's brands such as Marlboro Menthol.

    However, this smoking trend seems to go unnoticed by the media and, perhaps, even by local and foreign health officials. (Another possibility could be that the government might want to play down the problem of rising smoking uptake
    of its young, female population.) Both of which might mislead investors into
    cigarette stocks and might trigger wrong investment decisions.

    An excerpt from Hong Kong's leading English newspaper South China Morning Post particularly caught my attention. On September 25th's cover page article
    "Hong Kong on Track To Become First Smoke Free City" Dr.Judith Mackay
    - a senior policy advisor to the World Health Organization (WHO) - says:
    "One reason for the low smoking rate is that it combined relatively low male smoking rates similar to Western countries with extremely low female rates of 3 percent to 5 percent- common to Asian countries"

    In my opinion, this is a positive stereotype as well as a significant misinterpretation of the actual situation. First of all, Asia is far too big and too diverse a continent to make any generalizations on so called "Asian countries".

    Secondly, the book "Global Efforts to Combat Smoking: An Economic Evaluation"
    (Goel et al 2008) gives a worldwide overview on female smoking rates, using data from the year 2001.
    The book states that the smoking prevalence amongst females in Israel and Turkey is around 24 percent.
    Moving from Western Asia a little bit further east there is Pakistan with 9 percent, Nepal with 29 percent, and Bangladesh with 23.8% percent
    If we look at East-Asia then there is Myanmar with 22.3 percent,
    Mongolia with 25.5 percent, Japan with 13.4 per cent and the Philippines with 11%.
    This is to mention a few countries which have defied Dr. Mackay's assessment already in 2001.

    However, when only judging by the data from the 2008 book, there seem to exist a few countries in East-Asia that are within the 3-5 percent range mentioned by Dr. Mackay, most notably South-Korea (4%), P.R. China (4.2%), Vietnam (3.5%),
    and Indonesia (3.7%).
    But I am afraid the low numbers in these countries are somewhat misleading,
    to the extent that they create a false image of the good and morally superior East-Asian female. This is not entirely acurate as the following examples will reveal.

    Example South-Korea
    The paper "The strategic targeting of females by transnational tobacco companies in South Korea following trade liberalisation" is a very informative reading to gain an understanding of the actual situation, as it also mentions the high possibility of underreporting.
    In the Discussion section that starts on page 7, it is stated: "Data from the Korean National Health and Nutrition Survey (Table 2) suggests female smoking rates have fluctuated significantly between 1980 and 2003, with variations within age groups by year that are difficult to explain", which is followed by: "There is a particular need to take account of substantial underreporting in a country where social stigma against female smoking remains strong". Later in the paragraph it is mentioned: "A study by Gallup Korea (omission) in 2007 finds 83.4% of Koreans believe that females should not smoke and that, perhaps unsurprisingly, 54.3% of Korean female smokers try to hide their behaviour. This suggests substantial underestimation of female smoking prevalence, believed to be around 17% [28]"

    The estimate of 17% is a substantial difference to the 4% mentioned in the 2008 book and also from Dr. Mackay's implied 3-5% range.
    What strikes me even more is Dr. Mackay should know about the significant discrepancy between surveys and reality as she writes as early as 2004:
    "However, surveys may significantly underestimate smoking prevalence among women in these countries as, due to religious and cultural reasons, women may be reluctant to admit to their smoking." See note1.

    The estimate of 17% for Korea is also closer to the data we find in the 2008 book for Japan, namely 13.4% ( which is also possibly understated).
    In this regard it is to note that Japan, due to its early prosperity, has had a significant impact on Korean adolescents' lifestyle choices.
    From what I have heard, most significantly it is through TV shows from Japan.

    Dr. Mackay writes in 2004:" A recent survey found that smoking among Japanese women in their twenties more than doubled between 1986 and 1999, from 10% to 23%." See note 2.
    This was exactly the time period during which TTCs entered Japan and unfolded their marketing plans.
    What a difference foreign TTCs made in appeal over Japan Tobacco's long running monopoly to adolescents is described in the reserach paper
    "How Philip Morris unlocked the Japanese cigarette market:lesson for global tobacco control" from 2004.
    The research paper highlights that - apart from brand switching - the smoking rates increased among teens and young adults, especially women.
    In addition to that, the total national cigarette market grew approximately by 15%.

    The visitor to Korea might wonder where to find all these Korean women as smoking on the street is virtually non existent.
    The answer to this question is given in "The Grand Narrative The Gender Politics of Smoking in South Korea part two", in which the author citates a reader's comment that says:" It would be interesting to look into the correlation between the development of coffee shop culture in Korea and that of the growth rate of female smokers. I've seen maybe five women smoking on the street in my nearly two years in Korea, and at least three of those were ducked into telephone booths or alleys. However. When I sit in the smoking rooms of cafes (which I do quite often), they are often (omission) overflowing with groups of young women smoking."

    Like in HongKong, I have observed that these young women predominantly smoke Marlboro but also Korean brands such as Esse Menthol Slim made by Korea Tobacco & Ginseng Corp.

    Example China
    To get a good overview on the latest development pertaining to female smoking uptake in China, I strongly recommned the research paper "Smoking among rural and urban young women in China" which contains a survey amongst high school and college girls which was taken in 2008.

    The research paper starts out by mentioning a Chinese survery from 1996 according to which 66.9% of men and 4.2% of women smoke.
    After that, the author of the research paper emphasizes that recent studies reported experimentation rates among young women to be increasing.
    Therefore, I think the survey from 2008 should give us a good idea of
    current adolescent female smoking prevalence in China which sets the path for the near to medium term future.

    The result of the survey from 2008 is that 20.1% of high school and college girls fall into the category of Ever-Smoker of which 4.9% are either established or current smokers.

    I would also like to highlight that of all participents 7.2% have tried cigarettes that are marketed specifically to women. In fact, TTCs and the state owned China National Tobacco Company (CNTC) have both launched cigarettes that are specifically aimed at women.

    The research paper further refers to other studies' findings which indicate that smoking rates among young working women may be even higher than those of students.

    In summary, in China low female smoking rates are at the upper edge of the 3-5%
    range disputed here. The same applies to female adolescents, who in addition exhibit a high cigarette experimentation rate (20%).
    China National Tobacco Corp. is copying TTCs' business practice by specifically targeting Chinese women.
    On the other hand, TTCs still face market entrance restrictions, although Philip Morris International's products are manufactured uncer license in two Chinese factories since 2008 in modest quantities. PMI's shipments in China have reached 1.5 billion sticks in 2010.
    This number is very modest for such a vast and populous country but shipments are on pair with Hong Kong - a Marlboro stronghold - so that the investor has a good comparison of current consumption levels in mainland China.

    Example Vietnam
    Although I have not been to Vietnam, however, I have conducted some online research on female smoking in Vietnam. My findings are based on the following two documents; "Prevalence of and Susceptibility to Cigarette Smoking Among Female Students Aged 13 to 15 Years in Vietnam, 2007" and "Smoking among Girls and Young Women in Vietnam"

    The first document contains the result of the 2007 Global Youth Tobacco Survey (GYTS) that was conducted in 9 provinces in Vietnam in which a total of 8,391 female students aged 13 to 15 years participated.
    The prevalence of cigarette smoking among girls of this age range was 1.2%.
    Interestingly, the 2007 results were lower than the results of the same survey taken in 2003 (1.5%). Thus it seems there is a decline in female adolescents' smoking prevalence, at least in this specific age range.
    However, a strong alert is given by pointing out that the country is already affected by tobacco companies' girl-specific cigarette-promoting campaigns.

    The second document which I have perused is about a survey conducted by HealthBridge in 2008 and it includes a study population of 2,951 schoolgirls and female university students in the age range of 13-25 years. This is a much broader age range than we had in the first document and perhaps for our purpose the data from here is even more useful. The finding was that 3.2% of females were classified as current smokers. A finding which is also in line with the 2001 book's number of 3.5% of female smokers in Vietnam.

    In summary, indications are that female smoking rates are at the lower edge of the 3-5% range discussed here. The same applies to the age group of very young females (13-15 years) with numbers actually decreasing!
    TTCs presence in Vietnam is still very limited although I know that PMI has licensed the manufacturing of its flagship brand Marlboro in Vietnam.
    Girl-specific cigarette-promoting campaigns have already set in and their impact on future female smoking trends must not be underestimated.

    As I could not find any suitable documents about Indonesia online I don't discuss this important Asian country in great detail.
    My personal estimate is that low urbanization and economic development, the sheer size of the country and its geographical defragmentation are all factors that have somewhat shielded the majority of Indoenesian women from increased smoking uptake. Despite the fact that TTCs are already well established and have secured a very significant share of the total Indonesian cigarette market.
    PMI is a top player with a market share of approximately 30%.

    The following newspaper excerpt from May 2010's Jakarta Globe substantiates my estimate: " Before the reform era, the stigma associated with females who smoked was so strong that a woman could be labeled as 'wild' if she smoked, he said.
    Now, Sonny said, Eastern values were no longer as binding in urban areas as in rural ones. That is why there are more female smokers in big cities; people in urban areas tend to be more permissive".

    Summary & Conclusions
    High (defined as 10% or higher ) Female smoking prevalence amongst women under the age of 30 is already a well established fact in many East Asian nations, most notably Japan, Korea, Hongkong, Taiwan, and Philippines, were women smoking in public is nothing uncommon anymore.

    According to my findings, this increase in young female smoking prevalence has mainly been caused by the entrance of TTCs into the market place since the late eighties and early nineties and their specific targeting of women.

    In some countries women's new lifestyle is still somewhat concealed, e.g Korea and to a certain extent also in Japan, due to a strong desire by society as a whole to uphold a long lasting traditional image.

    In reality, there are only a few countries left that actually still have a traditionally low female smoking prevalence in the range of 3-5%, e.g. China, Vietnam and Indonesia, mainly due to still existing market barriers for TTCs.
    That being said, as to China it seems that the path to increased female smoking uptake is already set.

    The increase in female smoking prevalence in East Asia is also not reflected in
    books as recent as 2008, as some books might contain outdated survey results.
    Instead one must look at more recent research papers - which for some countries are readily available online - to obtain and view the real numbers.

    It seems that WHO - despite knowing it better - is still working with the old numbers (3-5%) to downplay the actual situation in East Asia and to convey a false image to the public; that of the flawless Oriental female. Personally, I think this is a very dangerous approach. The attempt to downplay the situation and to use moral as a tool to manipulate women might have exactly the opposite effect.

    My advice for investors into cigarette stocks is to be very prudent about smoking rates stated in the media and in books about smoking.
    The rates stated might lead investors to wrong investment decisions, such as not investing at all or scaling down the investment.
    As my own research has revealed, foreign tobacco companies have already altered the market place and are in fact cashing in on women in East-Asia.
    From my experience, most prominently Philip Morris International with its flagship brand Marlboro.

    How else can investors profit from my findings?

    I think it is important to realize the significant geographic and the gender shift that have taken place since the mid 1980s.
    These shifts have changed TTC's profit source.

    Many investors probably are very concerned about the crisis in Europe and that it might negatively affect TTCs' earnings, however, they seem to not realize that smokers in East Asia are more than compensating for it.

    Likewise, a good number of investors might overly worry about declining male smoking rates in East-Asia, e.g. Japan where the government's anti-smoking efforts have achieved notable succes, not realizing that Japanese females are partly making up for the decline in male smoking rates.

    Lastly, this essay provides some pointers as to when and why China might become the next big contributor to TTCs' earnings.

    Disclaimer: This article is for informational purpose only and shall not be construed to constitute investment advice. Nothing contained herein shall constitute a solicitation, recommendation or endorsement to buy or sell any security.

    Note 1: Smoke-Science, Policy and Public Health, by Peter Boyle 2004

    Oxford University Press
    Chapter: Tobacco And Women - by Amanda Amos and Judith Mackay
    page 334

    Note 2: ibid,page 342

    Additional disclosure: I have no plans to initiate any positions in BTI, JT,or KT&G within the next 72 hours. I receive no compensation to write about any specific stock, sector or theme.

    Disclosure: I am long PM, MO.

    Feb 26 10:37 AM | Link | 1 Comment
Full index of posts »
Latest Followers

Latest Comments


Posts by Themes
Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.