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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
  • Philip Morris International BIG IN JAPAN 4 comments
    Mar 29, 2012 7:30 AM | about stocks: PM, MO, BTI, JAPAF

    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.

    Themes: tobacco, cigarettes Stocks: PM, MO, BTI, JAPAF
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Comments (4)
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  • Thanks for the great article. I have been in Japan off and on for the last 10 years and know many current and former smokers.

     

    With regards to the overall market I'd say that volumes should be pretty flat or slightly down each year; I vaguely remember PM's investor presentation from a couple months back showing this. The tax increases and overall poor demographics / negative population growth are hurting far more than any kind of trend or attitude toward smoking; frankly I haven't seen any evidence of this at all and smoking is probably as cool as ever. I would compare the market to the US in the 90's; anti tobacco ads and restrictions are starting to pick up but starting out they are ineffective and may even encourage more kids to smoke. I'd also note that health risks have never been a real focus.

     

    PMI has really ramped up advertising and products aggressively in Japan which no doubt has led to their increased market share. I don't smoke personally but was very impressed by the campaign they've been running for their Marlboro Black product, really is one of the more impressive tobacco ad campaigns. Practically every vending machine has the Black ad running, billboards are everywhere, and it's just a really cool image. Traditionally menthol is not really a male product so you have to give them credit there. JT's Winston campaign is also pretty decent and they are getting some good traction with that product from what I have seen. Finally there are a ton of new products out targeting women smokers although that's not a new trend. For a while "clean" or "smokeless" products were the rage but I haven't seen much of that in the last couple years, ads seem to be more focused on image which is probably good for PM.

     

    Overall am super long PM but the stock is probably a little overheated right now as are all tobacco stocks really.
    2 Apr 2012, 11:58 PM Reply Like
  • Author’s reply » Hi Ron, many thanks for your input, information from people who have actually seen the country ( and observed the cigarette market ) is always very valuable.
    PM is strong in advertisement, indeed.
    Most valuable brand ever, I would say, investors just don't relize as they are after Apple like they were after Texas Instruments in the 1950s.
    3 Apr 2012, 10:17 AM Reply Like
  • Great article! Now if only you can visit China and Indonesia as well and post a review of Phillip Morris' situations over there! :)
    3 Apr 2012, 04:19 AM Reply Like
  • Author’s reply » Thanks, I have written about China, check out my instablog, I have 3 Instablog articles and one published article.
    3 Apr 2012, 10:19 AM Reply Like
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