Recently, according to a report from South Korean media outlet "Today's Economy," British American Tobacco (BAT) Korea has cut the price of their new heated but not burned product by half, within two months of its launch. The move is an attempt by BAT to boost sales of their pod product by offering lower prices. However, with decreasing profitability, the market is becoming increasingly skeptical about the long-term viability of this share-focused strategy.
Starting from April 17th, BAT is selling Glo Hyper X2 at a 50% discount off the original price. Although it is promoted as a sales campaign, it will continue until June 8th, which is essentially a price reduction.
Comparison of prices for non-burning products in the South Korean market | Graphic by 2FIRSTS.
BAT is increasing its market share through continuous promotional activities.
In 2021, the company offered a 90% discount on the price of the product Glo, selling it for 9,500 Korean won during a three-week pre-sale period. Subsequently, the company continued to sell the product at the same discounted rate throughout the year through several promotional events.
The "Glo Pro Slim" continued the promotional campaign when it was subsequently released.
KT&G and PMI Korea dominate the heated tobacco products market in South Korea with approximately 40% market share each. However, BAT's low pricing strategy has led to an increase in their market share. According to BAT, their market share has jumped from 6.04% in 2020 to 11.72% last year.
South Korean financial media outlet "Today's Finance" believes that the strategy of BAT is to generate actual revenue by introducing exclusive replacement pods. They initially used universal pods, but now have launched promotion-specific pods that are not compatible with other non-combustible heating products under their umbrella.
The idea is that the more users a product has, the greater its pod sales volume will be.
Dual Decline of Profits and Profit Margins
However, analysts have stated that this strategy is leading to a deterioration in the profitability of BAT.
Last year, South Korean BAT companies saw a 14.3% increase in revenue, reaching 539.8 billion Korean won, but operating profits decreased by 11.9% to 44.6 billion Korean won. Operating profit margins also declined from 10.7% to 8.3%. However, as the company did not disclose the performance of its South Korean subsidiary, Rothman's SpiceVibe, the specific amount of losses is still unclear.
The tobacco industry believes that the price threshold for low-end heated non-burning products is between 30,000 and 40,000 Korean won in order to maintain profit margins.
Once the selling price drops below this price, it means a loss in terms of cost.
An industry expert states:
This is a nascent market that only holds a 15% share of the entire tobacco market, hence a product expansion strategy may prove effective.
However, "BAT (Baidu, Alibaba, and Tencent) will find it difficult to continue bearing the losses generated by promotions and low-priced products.
Regarding this matter, a spokesperson for BAT stated, "We will focus on product sales in order to establish our position in the heated non-combustion market.
Related Reading:
PMI (Philip Morris International) teams up with KT&G (Korea Tobacco & Ginseng Corporation) to seize the global market, as BAT (British American Tobacco) aims to attract Korean customers through low pricing strategies.
KT&G and PMI compete for market leadership in South Korea.
The PMI profits of the South Korean market have increased by 163%, while BAT has experienced a decline of 12%.
ELFBAR, a South Korean agent, has reported an increase in initial orders and is aiming to sell 2 million units in South Korea this year.
South Korea may abandon the tax increase on HNB, which currently has a tax rate of 90.4% of regular cigarettes.
Reference/source:
Half-price just two months after release...How long will BAT's e-cigarette expansion strategy continue?
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