Development of New Tobacco: Key Focus for International Tobacco Giants

The development of new tobacco has become an important focus for major tobacco companies overseas, with the top four international tobacco companies shifting their primary research and strategic focus to this area.

KT&G considers its new tobacco products to be an important strategic product in catching up to the four major tobacco companies.

Table 1: Partial Product Brands of KT&G and the Four Major Tobacco Companies

Image source: created by 2FIRSTS graph makers.

Heating non-burning products: Global market PMI remains dominant, while Korean market KT&G has a slight advantage.

The market for non-burning heating products is growing at an unprecedented pace, but competition is fierce. In addition to the four major multinational tobacco companies, South Korean-based company KT&G has also launched a series of new products.

After the international success of Philippines-based company lQOS, products such as Glo from British-American Tobacco, Ploom Tech from Japan Tobacco, Pulze from Imperial Tobacco, and Lil from South Korean company KT&G are all entering the market competition. This trend marks a shift from the traditional cigarette market to the heated-not-burned product market.

KT&G, a South Korean tobacco company, has identified its heated tobacco product as the driving force behind its core growth and has secured the number one position in the local market.

KT&G, South Korea's largest tobacco company, ventured into the electronic cigarette and heat-not-burn tobacco business in 2017.

Photo source: KT&G official website.

In January 2022, KT&G expanded the global reach of their heat-not-burn product, Lil Solid 2.0, and its Fiit tobacco sticks, with the introduction of new products in Central Asia and Southeast Europe. This expansion was made possible through a partnership with FIMO International and saw the company establish a presence in four EurAsian countries.

On September 7th, KT&G partnered with the golf equipment brand "Volvik" to launch a limited edition heated non-combustible product called "Reel Hybrid 2.0 Volvik Edition Round 2".

On November 16th, KT&G unveiled its latest heat-not-burn tobacco device, the lil Aible. The product maximizes consumer convenience and product differentiation.

The Head of KT&G's NGP division, Lim Wang-seop, expressed confidence during the November Lil Aible product launch event. He stated that heated tobacco products are the core driver of KT&G's growth, with Lille Hybrid accounting for over 80% of sales. In Q1 of this year, they held the top position in the Korean heated tobacco market. They anticipate no issues maintaining this position until the end of 2022.

Image source: Tobacco Online.

On its home turf, KT&G appears to have a better understanding of South Koreans' preferences by releasing new products based on local trends. The company plans to solidify its position as the leader in the South Korean market by leveraging these new products.

KT&G has achieved product differentiation through continuous independent research and development in the global market. Based on this, the company actively seeks cooperation with PMI through complementary products to better meet consumer demand and accelerate the overseas expansion of KT&G products.

Phimo International: Dominant HNB player globally, Second in the South Korean Market.

PMI's most popular electronic cigarette product is IQOS, which is known for its heat-not-burn feature. However, the company has not been launching new products frequently enough in the Korean market and is struggling to keep up with KT&G's pace of releasing new products in NHB in Korea by 2022.

In June 2017, international tobacco company, Philip Morris International (PMI), launched their IQOS electronic cigarette product in South Korea, quickly dominating the country's electronic cigarette market by selling approximately two million units in the first year and capturing an 80% market share.

On October 25, 2022, after a three-year hiatus in releasing new products, PMI's Korean subsidiary launched the "IQOS Illuma" series of new products. Different from previous products, this new product's main features include no need for cleaning, leaving no residue in the cigarette device, and automatic heating without the need to press a button. It is understood to be an upgraded version of the existing model rather than an entirely new product.

At present, the electronic cigarette market in South Korea no longer consists solely of IQOS products. In addition to KT&G's new product series, BAT's Glo product series has also entered the Korean market competition.

According to market research data in South Korea, in the first quarter of 2022, KT&G's Lil product held 45% of the South Korean market, PMI's IQOS product held 43% of the South Korean market, and BAT's Glo product held 11% of the South Korean market. As a tobacco giant in South Korea, KT&G has managed to defeat both PMI and BAT.

Although PMI's market share has rapidly declined from 80% in the early years to 43%, the company is still only 2 percentage points behind KT&G. PMI continues to hold a significant position in the Korean market with its IQOS product.

Philip Morris International (PMI) has invested over 300 billion Korean won in the Liangshan factory in Gyeongsangnam-do, South Korea to expand production of non-combustible products. This investment will be used to manufacture all non-combustible products sold in the country, with only a small portion being sold abroad. PMI's focus on the non-combustible market in South Korea is apparent from this investment.

In the global market for heated non-burning products, PMI still maintains an unshakable position with its IQOS product. It is now available in 71 countries and regions, with a user base of 21.2 million, representing a 20% increase from the previous year. Notably, 15.3 million users have switched from traditional tobacco products to IQOS and successfully quit smoking.

PMI aims to have at least 50% of its net sales revenue come from non-combustible products by 2025.

British and American Tobacco: Korean factory serves as core export base, ranks third in Korean market.

South Korea is a crucial market for British American Tobacco's glo products. The company's share in the South Korean market for non-combustible tobacco products has increased from around 6.04% in 2017 to approximately 12% as of June 2022. This marks a 1% rise from the first quarter of 2022, which saw the company's market share at 11%.

In 2018, British and American tobacco companies launched an upgraded line of heated non-combustible tobacco products called Glo Series 2, along with tobacco sticks called Neo specifically designed for the Glo device.

In 2019, British and American tobacco companies launched new heated not burned products under the name glo-pro in the domestic market of South Korea to meet the demands of adult consumers for such products. Later that same year, they also introduced a new mixed electronic cigarette product called glo sens in South Korea.

In the following years, British and American tobacco companies released more than ten different products in the glo series in South Korea. British and American tobacco have invested over $488 million in South Korea, including a factory located 440 kilometers south of Seoul in Sacheon City, which has been the company's primary export base since 2018.

In addition, the Siheung factory in South Korea primarily supports glo's sales growth, making Korea an important export hub for British American Tobacco in Asia, and leading the global and local markets for traditional and heated tobacco products.

Furthermore, the glo series of products is an important brand that has facilitated the rapid expansion of British American Tobacco globally. In May 2022, the company launched its glo hyper+ heated tobacco product in the Cypriot market. The latest addition to its product line, the glo hyper X2, was released in Japan in July.

Currently, products from British American Tobacco are available in more than 180 countries and regions worldwide. glo products are sold in 16 global markets, and the Epen3 product has also performed well after being launched in new markets such as France and New Zealand.

Japan Tobacco Inc. has reported that their domestic market share is less than 10%, due to the impact of foreign products.

In July 2019, Japan Tobacco Korea announced the launch of Ploom Tech, the world's first vapor product that utilizes a hybrid technology and does not burn tobacco. However, the quality issues with Ploom Tech have hindered its success and slowed down its market penetration in Korea.

In addition, Japan Tobacco places a high value on its domestic market. Traditional and new types of tobacco make up a total of 60% of the Japanese tobacco market. Japan Tobacco understands the demands of local consumers and has launched two types of electronic cigarettes with low and high temperatures, continuously strengthening its position in the domestic market.

PloomS, a new product line from Japan Tobacco, has been released in both regular and menthol pod types with limited flavor options. The product operates by heating in a circular motion, with heat being dispersed to the smoking apparatus, resulting in lower heat efficiency. The regular pods have a less pronounced taste due to the low heating temperature, while the menthol pods offer a mild cooling sensation and a moderate throat hit.

However, with the expansion of IQOS and glo products in the Japanese market, the Ploom series products of Japan Tobacco now hold less than 10% of the local market share in Japan.

In October 2020, Japan Tobacco moved its manufacturing operations from Ireland to Poland in the global market. In August 2021, Japan Tobacco invested $3 billion to acquire two Southeast Asian cigarette manufacturers, with the goal of expanding its share in emerging markets and diversifying its business in response to declining sales in Japan.

Imperial Tobacco Targets European Market with Emphasis on Both Traditional and New Tobacco Development

Empire Tobacco's products are primarily focused on the markets of the United States, Germany, the United Kingdom, Australia, and Spain. The revenue from combustible tobacco products in these markets constitutes 72% of their overall revenue from combustible tobacco products.

In 2019, Imperial Tobacco's product Pulze was launched in Japan. Pulze comes in two modes- high temperature and low temperature, and can last for up to 20 pod refills on a single charge.

In 2021, Imperial Tobacco saw a significant increase in sales in the United States, United Kingdom, and Australia markets, while experiencing a decline in sales in the German and Spanish markets.

Currently, the Pulze and iD product lines have been released in five European countries. Imperial Tobacco is focusing on a new tobacco strategy layout and will primarily concentrate on the European market with no plans to expand to other markets at this time.

According to the financial report for the third quarter of 2022 by Imperial Tobacco, their heated tobacco product brand iD has achieved market shares of 4.20% and 2.80% in the heated tobacco markets of Czech Republic and Greece respectively. During the same reporting period, Pulze and iD products were further launched and sold in Italy (Europe's largest heated tobacco market), Portugal, and Hungary.

According to the development strategy of Imperial Tobacco, the company aims to cater to two markets simultaneously. On one hand, it intends to focus on the combustible tobacco products market to enhance its product portfolio's market value. On the other hand, the company aims to continuously explore new tobacco product markets.

Summary

In 2022, KT&G's heated tobacco products may have a stable hold on the top market share in Korea. However, their exact global market share remains to be seen as there is less than a month left until the end of 2022. We eagerly await the results.

Author/Luna Lv

Related Reading: Can KT&G Overtake Its Competitors in the Turbulent Year of 2022? - Market Competition Between KT&G and the Big Four Tobacco Companies.

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