An analysis of japans tobacco company

Japan Tobacco is the world’s third-largest tobacco company. It is part of the Nikkei 225 index. In 2009 the company was listed at number 312 on the Fortune 500 list. The company is headquartered in Tokyo. JT’s domestic tobacco business continues to maintain a significant competitive position in the Japanese market, and the international tobacco business is delivering remarkable performance as the driver of profit growth for the JT Group. As future pillar businesses, the pharmaceutical business pursued strategic licensing to world-leading pharmaceutical companies such as Merck, and the foods business continued to expand profit levels steadily.

Corporate History

JT used to be a public firm owned by Japanese government and dominated cigarette market in Japan. In 1985, Japanese government sold its 50 percent of shares and JT was privatized. At that time, government abolished monopolies i.e. Japanese cigarette market was opened for global competitors, such as Phillip Morris and British American Tobacco. So competition in Japan market became very keen. In addition, demand was declining continually. In fact, in 1985, number of total cigarette consumption in Japan was 310 billion sticks and JT’s share was about 98 percent. However, in 2006, market size decreased 20 percent and competitors grabbed 35 percent share from JT. In this back ground, Japan tobacco have taken globalization and diversification strategies.

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Corporate Vision

Japan Tobacco’s corporate vision is “A global growth company that develops diversified value-creating businesses.” Presently, JT operates all over the worlds. The exhibit 2-1 shows the results of JT’s globalization and diversification strategies. With regard to cigarette business, JT sell its products more than 120 countries. It operates cigarette manufacturing factories in 15 countries. JT’s core markets are Japan, Spain, France, Italy, Russia, Taiwan etc. Especially, in Japan, Taiwan and Russia market, JT has a no.1 position. As for pharmaceutical business, although it does not generate profit at the present time, it has some strong potential pipeline that was made in research laboratory in Japan and United States. Also, JT food business has some subsidiaries in Asian counties, such as China, Thailand and Australia. It focuses on processed frozen food, beverage and seasoning.

[Exhibit 2-1]

(Source: Japan Tobacco’s annual report 2007)

Historical Strategies

The time period from 1993 to 1999 is the stage for progress of diversification. In 1993, JT started pharmaceutical business. Then, in 1998, JT also started food business by acquiring two food business firms. And in this year JT also acquired Torii pharmaceutical co., ltd., leading medium-sized pharmaceutical enterprise listed on the first section of the Tokyo Stock Exchange. In 1999, there was one of biggest event for JT. It has agreed to purchase the international tobacco business of RJR Nabisco Holdings for 7.83 billion US dollars to become the world’s third-largest tobacco producer. The purchase is the largest acquisition price ever paid by a Japanese company.

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Next stage from 2003 to 2005 was restructuring phase for Japanese cigarette market. JT struggled with decreasing cigarette demand in its mother market. Therefore, Japan tobacco decided to close its 15 cigarette factories in Japan and layoff more than 4,000 employees that are almost half of total Japanese employees.

These strategies came good. This is because JT’s operating profit has been increasing steadily since 2000 (See Exhibit 2-2).

[Exhibit 2-2] Operating Profit

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(Source: Japan Tobacco annual reports)

SWOT Analysis

Strength (Core competencies)

Strong brand portfolio

JT own 3 of top 5 worldwide brands, Mild Seven, Winston and Camel. The tobacco product marketing has distinctive style as below:

Tough guidelines applicable to advertising tobacco products

Restrictions on sponsorship

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All promotional activities are limited to verified adult smokers etc.

These means creating new brand and strengthening brand would be more difficult than other products i.e. Cigarette brand value is sustainable. Therefore, strong brand portfolio is core competency for JT.

[Exhibit 2-3] Top 5 Brands by Sales Volume Worldwide

Abundant cash

In general, tobacco business is a cash cow business i.e. tobacco firm generate steady cash flow. As for JT, it generated around 200 billion yen per year during 2002 to 2006. As a result, JT had 1,186 billion yen excess cash and D/E ratio was only 0.11. This financial strength means JT already prepared to acquire new targets.

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Successful post M&A experience

JT has a successful post M&A experience. After acquisition of RJR, consistent application of core strategies results in 6 consecutive years of double-digit EBITDA growth. JT analyzed the successful factors and applied them to the integration plan for Gallaher as below:

Commitment

JT separated 50 integration projects and delegate each project to business executives with outcome accountability.

Motivation

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JT announced “Fair and equal treatment of all employees, irrespective of company of origin”. Then, JT interviewed all employees.

Simple

JT establish 10 Integration Principles to simplify the communication for the integration (See Exhibit 2-4).

[Exhibit 2-4] Integration Principles

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(Source: Japan Tobacco’s presentation (November 27, 2007))

Weakness

Reliant heavily on domestic tobacco business

In 2006, about 70% of operating profit is generated by domestic tobacco business i.e. JT still heavily depended on Japanese cigarette market that is decreasing continually (See Exhibit 2-5).

[Exhibit 2-5] Percentage of Operating Profit in 2006

(Date from Japan Tobacco’s annual reports)

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Opportunity

Strategic acquisitions

Through strategic acquisitions, the integration of the complementary business geography and operations of both groups will expand JT’s business scale, and will reinforce its technology and distribution infrastructure. In addition, integration of the businesses will enable JT to realize important synergies which will improve its top line and reduce costs through improved business efficiency. Integration process has been establishing to ensure the prompt and optimal realization of these synergies.

Threat

Declining demand in Japanese market

JT still heavily relied on Japanese cigarette market. Nevertheless, aggregate cigarette demand will continue to decline at 3 percent per year in the domestic tobacco market as a whole (See Exhibit 2-6).

[Exhibit 2-6] Japanese Market Size

(Source: Japan Tobacco’s annual report 2007)

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Potential lawsuit

JT is being sued in Japan and overseas for allegedly causing smoking-related health problems. There is a risk that JT might be held liable for such health problems in these lawsuits.

Strategic Options

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