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Towards the end of today’s Imperial Tobacco Group preliminary results presentation for the full year 2015, CEO Alison Cooper explicitly drew out the three themes of the company’s current operating bias – simplification, focus and effectiveness. They are themes which the company’s management are eager to press home (the first ten pages of the results press release contains a combined 40 mentions of the words ‘focus’, ‘complexity’, ‘transition’ and ‘effective’) and they are manifest in the year’s key developments – brand migrations, US expansion and the ongoing progression of Imperial’s growth brand portfolio (to which is linked margin improvement).
Imperial’s portfolio was (and still is to a large extent) a sprawling one so the emphasis the company is putting on the migration programme on which it is engaged in is unsurprising. Migrations allow the company to transition consumers into its strongest equity brands and allow for the operational and cost simplicity to which the management constantly refers (for more please also see Don Hedley’s recent opinion piece on the topic of brand migration). Imperial has thus far completed 21 migrations with apparently close to 100% retention of consumer base (including high profile migrations such Fortuna into News in France and Ducados into JPS in Spain) with a further 20 in progress.
As much as the current migration programme is necessary and beneficial there is (to adulterate the words of Beckett in the service of a baser goal) an echo of Estragon’s vital question in Waiting for God – ‘What do we do now, now that we are happy?’ – waiting at its end. Once migrations and delisting have increased its growth brands share of group volume from its current 50% to closer to say, 65 or 70% then what evidence is there that the this key portfolio will be able to generate share stability and revenue growth?
The experience of 2015 is cautiously positive in this regard. Excluding Iraq and Syria (where normal service has in effect, been suspended) growth brand volumes were up nearly 14% (although clearly migrated sales play a big part in this) with the portfolio’s share up to 6.6%. JPS is the most dynamic performer, growing on its leading status in Australia and strong position in several European markets (indeed, Imperial itself points to Australia and Germany as markets where its strategy of ‘growing the head’ is most well advanced, with commensurately impressive results).
The company also cites gains for Davidoff and Gauloises, on the one hand, but slower momentum for Bastos, Fine and West, in Taiwan. This difficulty for Bastos and Fine in particular (which is unmitigated by gains elsewhere) only goes to emphasise that the company’s Growth portfolio is not an international one and that it needs to address the absence of a handful of brands with cross-regional, mass market resonance (although arguably West, JPS and Gauloises are closest in this regard).
Of course, the company does now own one of the largest cigarette brands in the world, albeit only in its US incarnation. Moving into its first full year of expanded presence in the US, Imperial has stated that it expects to see its operations there contributing upwards of 20% of group revenue. It is starting in this mission from a share of 6.6% with Winston and KOOL added to its stable of growth brands. There is a strong sense that Winston is, if not a sleeping giant in the US, certainly substantially under-indexing against its potential given its heritage and name recognition. In a crude sense, one feels that it is capable of 6.6% share of the US market for itself and Imperial have committed to investing in price promotions, retail visibility activities and pack redesign in order to progress its share.
In the same deal in which they acquired Winston, Imperial were also bequeathed arguably the world’s most recognisable e-cigarette brand, blu. Perhaps unsurprisingly given the emphasis on simplicity, focus and cost control in the rest of the business the current approach to their e-cigarette activities appears to be ‘steady as she goes’. It is rolling out a new blu plus+ system in the US – a hybrid cig-a-like/closed tank offering which may have one eye on upcoming FDA and TPD regulation but is a couple of steps behind the latest developments in the market. The company speaks of a ‘measured approach’ to the vapour category, which is understandable but fundamentally uninspiring. In a scenario in which it has closed the door to a heated tobacco brand, sooner or later Imperial will need to be more proactive in making the technological weather when it comes to the delivery of liquid nicotine.