International Business Provides Moderate Positives in Japan Tobacco Interim Results

In the context of elevated levels of domestic competition and contractions in some of its major international markets, Japan Tobacco’s results for the quarter and year up to September 2014, released on the 30th of October were broadly positive albeit in so far as significant volume decline can ever be so described. The results clearly indicate the impact of excise increases in Japan, the company’s reliance on Russia and the trend to lower value products in many markets, also referenced by both BAT and Imperial in recent results.

Domestic struggles for Japan Tobacco

It is a testament to the continuing decline in importance to the company of its domestic market that a set of group results, of which a 10% volume decline in Japan formed a part, can still be characterised as positive. An overarching industry contraction in Japan prompted by the April 2014 excise hike and a tough competitive environment in which Japan Tobacco is having to graft for every basis point of share contributed to a 10% sales volume decline between April and September 2014. Difficult pricing meant that the company had to rely on cost reduction to marginally mitigate volume loss to just over 7% operating profit decline.

In the international business, the company pointed to a moderate increase in revenue as a result of price/mix improvements outweighing volume declines. Total shipment volumes declined 4.9% in the 9 months year-to-date, with the trend having improved slightly in the 3rd quarter to 3.6%. In the 9 months to date, RYO shipment volumes grew 10%, mainly in the European Union, indicating that cigarette price rises are once again beginning to bite in markets such as France, Benelux, Ireland, the UK and Italy. (Although the excise restructuring in Spain which has led to a diminution of RYO’s price advantage there fed an 11% decline in volumes).

Russia the key international market

While cigarette volume growth in Korea, Malaysia, the Middle East, Turkey and Spain was partially cancelled out by declines in Italy, Poland, Kazakhstan, Taiwan and UK the majority of the volume loss seen in the quarter and year-to-date is attributable to contraction in the Russian market caused by excise increases and ongoing cost of living impairments and increased competition at the lower end of the market. In the 3rd quarter the company states that total shipment volume in Russia declined by 15%, dragging down total volumes. However, improved price/mix in Russia drove a 9% growth in revenue.

Japan Tobacco’s Global Flagship Brand volumes increased 1% to just over 71 billion sticks in July to September 2014 meaning that GFBs accounted for 67% of total volumes (a 3 percentage point increase on the same period last year). However two of Japan Tobacco’s main international brands, Winston and Mevius struggled in the quarter with the former impacted by the Russian difficulties and price competition in Turkey and the latter from downtrading in Taiwan. In general terms, Mevius has notably failed to make inroads in international markets since its much vaunted relaunch in late 2012; however, it is expected that the company will be pushing heavily to expand the brand into non-Asian markets in coming quarters. The company did see success with Camel in Turkey during the quarter, albeit arguably at the expense of brand equity as the brand was re-positioned down into the burgeoning lower value segment of the market contributing an additional 2.4 ppt of share to JTI’s almost 28% share of market.