JAPAN TOBACCO INTERNATIONAL TO EXPAND ITS PRESENCE IN THE ARMENIAN TOBACCO MARKET

ARKA
17/06/2009 15:04

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Japan Tobacco International (JTI) is the international division of
Japan Tobacco Inc. – third largest tobacco products manufacturer with
the market share of 11 per cent and market value of around $32 bn. The
sales volume of Japan Tobacco International in 2008 amounted to 452 bn
cigarettes, while the company’s net revenue reached $10.6 bn. Martin
Braddock, JTI’s Regional President, CIS, Romania and Adriatics,
told ARKA agency about the company’s operations on the Armenian market.

ARKA – Mr Braddock, how successful are JTI operations in the Armenian
market? What accomplishments has the company reached in Armenia in
the course of its operations?

M.Braddock – Our parent company Japan Tobacco Inc. is the world’s
third largest tobacco company listed on the Tokyo Stock Exchange. In
the long term Japan Tobacco Inc. intends to become the largest tobacco
company in the world.

The sales of JTI products in Armenia started in the year 2000,
and since then we have been able to build a strong business in the
country based on the four leading brands – Sobranie, Winston, Camel
and Monte Carlo. At present, the share of JTI products in the market
is estimated at 12-13%, whilst the sales volume growth in the past
year was in double digits. We have 43 employees in the country.

JTI operations in Armenia have generated significant tax revenues: in
2008 JTI’s importer Arsoil paid about USD 11 million in excise taxes.

Our presence in the Armenian market is quite substantial, and we are
interested in strengthening our positions further. Besides that, in
Armenia we also work with regulatory authorities to solve the issues
related to taxation, and, in particular, with excise. We understand
that the excise tax will continue growing, but we would like to see
the growth dynamics in the long run over the next three years.

The most important issue for us now is the existence of
different excise tax rates for domestic and imported products in
Armenia. According to WTO principles, there should not be such a
difference, and the reduction of this difference in Armenia should
be carried out gradually in the long term, so that towards January 1,
2011 these rates would become equal.

ARKA – What is your estimate of the tobacco products market in Armenia,
and what is its growth dynamics? How swiftly does JTI’s market share
grow in Armenia, and who are your main competitors on the market?

M.Braddock – We estimate the Armenian market at 4.4 bn cigarettes
with annual profitability of $45 mn. The market is quite stable, and
the changes are mainly within the market shares between the companies
operating in the market.

0A In comparison with the other countries of the region, it should
be noted that neither Georgian, nor Azeri markets are large in
terms of volume. For instance, the Georgian tobacco market stands
at 7 bln. cigarettes, while the Azeri market is estimated at 10
bln. cigarettes. The Armenian tobacco market is the smallest among
the Caucasus nations, which is in the first place due to the number
of residents.

The share of our company in the Armenian market currently stands
between 12-13% and is growing steadily. In Q1 2009 it has grown by 2.7%
year-on-year. It’s worth noting that JTI has imported over 530 mln.

cigarettes into Armenia in 2008.

All key international players are present in the Armenian market –
Phillip Morris, British American Tobacco, Imperial and Karelia. Our
main competitor among the international companies in Armenia is
Phillip Morris.

ARKA – Which of your cigarette brands is selling best on the Armenian
market, and how does this reflect the global demand?

M.Braddock – The best selling and fastest growing brand in Armenia
is Winston which is the second best selling brand in the World.

ARKA – What kind of difficulties does your company face on the
Armenian market?

M.Braddock – The key issue in Armenia is the difference in taxation
rates between imported and domestic products, which prevents us from
full-fledged competition with domestic products. Owing to thi s, we
are not represented in the lower price segments, and have to content
ourselves with operating in the mid and high price segments.

Surely, we perfectly understand that the issue can only be solved by
the Armenian government. In order to solve this issue we’d like to see
a roadmap covering a span of 2-3 years that outlines the realignment
of Armenian legislation with WTO requirements, to which Armenia has
been a party since 2003.

ARKA – Is it possible to talk about JTI entrance to lower price
segments? What are JTI perspectives in the Armenian market?

M.Braddock: As I said currently we import Sobranie, Winston, Camel and
Monte-Carlo to Armenia, which are premium and mid-price segments. Due
to existing tax system it would be not profitable for us to import
cigarettes in lower segments. In the near future we will continue
investing behind our brands presented in the Armenian market and in
the near future they lines will be extended.

Our strategy is that we want to become the largest tobacco company
in the World some time and we also will continue investing in our
employees, in their training and development. We will continue
working with authorities to ensure JTI positions are heard when it
comes to industry regulation, when it comes to taxation. All in all
we plan to continue our growth and increase our market share in the
Armenian market.

ARKA – How the World fin ancial crisis has affected the company
business?

M. Braddock – For sure due to the crisis all international companies’
sales decreased specifically in rural areas. To some extent sales
has decreased in Yerevan as well. In rural areas sales have decreased
by 60% comparing to 2008, while in Yerevan less than 10%. Crisis has
impacted both international and local companies.

ARKA – Does JTI plan to start local production in any of the Caucasus
countries?

M.Braddock – Currently we have factories in more than 25 locations
worldwide. We have recently announced consolidation of our production
facilities in the UK, Austria, Japan, Ukraine and the trend is for
less, not more.

We do not have manufacturing facilities in Armenia, and there are no
plans to start production in Armenia, Georgia or Azerbaijan. It would
be economically not viable to have local production for such a big
company as ours. The choice of a factory location is determined by
the size of the market, tax and investment regimes in a given country
and existence of international agreements.

A factory in Ukraine manufactures cigarettes for Armenia. This
operational mode has been in part motivated by existence of the Free
Trade Agreement between Armenia and Ukraine.

ARKA – Do you plan any programs related to smoking prevention?

M.Braddock – We do have plans to engage in dialogue with
non-governmental organisations to wor k out activities aimed at
reducing smoking among youth as well as to participate in retail
access prevention programs.