The Booming Development of South Korea's New Tobacco Market.

The market for new types of tobacco in South Korea has experienced a thriving growth trend in recent years. According to data from South Korean statistical agency Euromonitor, the market for new types of tobacco, specifically heated but not burned tobacco, exceeded 2 trillion won ($1.7 billion USD) in 2021, reaching 2.413 trillion won ($2.1 billion USD). It is expected to reach nearly 2.5 trillion won ($2.2 billion USD) by 2025.

According to a survey conducted by the South Korean Ministry of Strategy and Finance, the market share of tobacco electronic cigarettes in the domestic tobacco market has increased from 2.2% in 2017 to 14.8% in the first half of 2022. HNB products have become a major growth area in the Korean tobacco market in recent years.

KT&G, a South Korean domestic enterprise, dominates 48% of the market with its product Lil, followed closely by PMI's IQOS at 42%, and BAT's Glo at 10%. Meanwhile, two other large international tobacco companies, Imperial Tobacco and Japan Tobacco, have largely been absent from the Korean market.

Especially KT&G and PMI, as the two largest producers of HNB products in the Korean market, are engaged in a "competition" in the Korean market and a "cooperation" in the global market that requires compromises to be made for their respective interests.

KT&G: The dominant player in the Korean market.

KT&G is the largest domestic tobacco company in South Korea, with a 2022 operating profit margin of 30% and a market share of 48%, making it the number one company in the Korean market.

The products under KT&G have a dominant market share in Korea, with their flagship product being Lil. Since its release in 2017, Lil has been a major competitor in the HNB category of the Korean tobacco market.

The image is sourced from Lil's blog.

After dominating the South Korean market, KT&G extended its reach to international markets outside of Korea. However, unlike its advantage in the domestic market, KT&G does not have a distribution advantage in foreign markets and its overseas business is still in its early stages.

Analysts were not surprised by KT&G's decision to expand overseas. As the fifth largest cigarette manufacturer in the world, 70% of its total sales come from South Korea. However, with the shrinking traditional cigarette market, Korean smokers are turning to new tobacco products, causing the proportion of cigarettes in KT&G's performance to continuously decrease. To gain a larger market share, KT&G is increasing its focus on next-generation tobacco products and turning its attention to the global market.

During the 2023 investors' conference, the CEO of KT&G, Baek Bok-in, stated...

By 2027, we plan to increase our share of the global market to 50%, and increase our sales of NGP and healthy functional foods to 60%.

Photo credit: KT&G - CEO Bae Ok-ryun of KT&G.

According to an analysis by South Korean media outlet Inews24, KT&G's expansion into the global market has been slow and lacking. The company's sales department in South Korea is extensive and well-staffed, with a distribution network and intensive marketing efforts throughout the country, which has been instrumental in capturing the domestic market.

The most concrete data on this distribution network is that KT&G has 14 regional headquarters, 102 branch offices, and 11 subsidiary companies under its sales headquarters in South Korea.

Compared to its advantage in domestic distribution network, KT&G has a smaller scale of overseas distribution network. Its overseas subsidiaries and branches only amount to 10, with 3 in Indonesia, 2 in Russia, and 1 in Turkey, the United States, Iran, China, and Taiwan respectively.

This has become a disadvantage that restricts KT&G's participation in international competition. The challenge facing KT&G is how to turn this disadvantage into an advantage and continue expanding its overseas market.

KT&G has chosen to work with the world's leading tobacco company, PMI.

Previously, the two parties had signed a three-year contract, in which PMI will begin selling KT&G's HNB products in the global market from 2020 onwards.

In February of this year, the two parties renewed a long-term contract for an additional 15 years.

According to disclosed information from both parties, KT&G's HNB products will be sold in 70 countries or regions where PMI conducts business globally.

Why would PMI accept KT&G's products into their distribution network? PMI provided the following comment in response:

PMI is confident that even with KT&G's growth in the global market, it will not reach a level that threatens the company.

PMI market shows signs of recovery.

PMI's confidence stems from the global success of its products, with an estimated 25 million IQOS users according to the company's 2022 annual report.

PMI was not absent from the earliest competition for HNB products in South Korea.

In 2017, the same year that KT&G released Lil, PMI's IQOS product was officially launched in South Korea, reaching sales of KRW 800 billion, and capturing the top market share in the industry.

IQOS | Image source: PMI official website.

In the same year, PMI's contract factory in South Korea began operations. Over 300 billion Korean won has been invested to produce non-combustible heating products, meeting the demand of the Korean market.

However, by 2019, its sales had dropped to KRW 500 billion and its market share had also decreased, still ranking second with a 42% market share.

In 2022, after experiencing four years of decline in performance, PMI's IQOS product in South Korea saw a 21.5% increase in sales revenue to KRW 686.7 billion, accompanied by a 16.27% growth in operating profit to KRW 80.6 billion.

This month, PMI has decided to replace executives in South Korea. Former CEO of the Australian subsidiary, Yoon Hee-kyung, will now become the CEO of the South Korean subsidiary.

Photo credit: www.sedaily.com

Analysts suggest that the increase in sales for PMI Korea in 2022 gave the company a boost and served as a shot in the arm. PMI is planning to implement new strategic measures and replace some of its executives in order to achieve greater market share.

In February of this year, PMI launched a new product, IQOS Illuma One, in South Korea to expand the coverage range of its product line.

Previously, KT&G also launched a new product called Lil Able, intensifying competition between these two companies in the Korean market.

However, they still chose to renew this 15-year contract in January.

The third largest participant in the South Korean market, BAT, is currently seizing the HNB market by launching new products.

BAT employs a low-cost strategy to unlock the market.

In 2022, BAT held approximately 10% market share in the HNB product market in South Korea, making it the participant with the smallest market share among major players.

Despite facing some challenges, China's big three tech giants, Baidu, Alibaba, and Tencent (BAT), have not lost confidence in the South Korean market. It appears that BAT is pursuing a low-price strategy to gain a foothold in the market by launching their latest product, the "Glo Hyper X2" in South Korea recently.

Photo credit: glo official website.

The product is priced at 40,000 Korean won, while the recently launched IQOS ILUMMA ONE in Korea is priced at 69,000 Korean won and KT&G's lil AIBLE is on sale for 99,000 Korean won. BAT's low-price competition strategy in Korea indicates its strong intention to expand into the market.

However, according to sales data, its performance is not ideal, and glo's market share has not shown a significant change.

The government is considering imposing taxes on HNB products.

The market growth of HNB products in South Korea has provided smokers with more choices. Additionally, as cigarette sales have continuously declined in recent years, the South Korean government sees the potential for increased tax revenue from HNB products.

From 2020 to 2022, cigarette sales dropped from 3.2 billion packs to 3.09 billion packs, indicating a new turning point when HNB products are poised to become the growth engine of the South Korean tobacco industry.

Currently, the South Korean government imposes a tax of 3,004 Korean won on non-combustible cigarettes, which amounts to 90.4% of the tax imposed on regular cigarette products.

The South Korean government is seeking changes to taxation policies.

During a national assembly in South Korea in April 2023, the ruling party proposed levying cigarette-like taxes on HNB products. However, this was quickly met with public criticism. The public believed that this was an attempt to boost declining tax revenue by imposing more taxes.

The Minister of Economy and Finance, Qiu Qinghao. | Image Source: Internet.

After facing opposition, the South Korean government has abandoned its decision to impose taxes on HNB products.

Shortly after the decision was withdrawn, KT&G is about to announce its first-quarter performance, but securities firms predict that its first-quarter earnings will fall short of market expectations.

According to research conducted by the Investment Securities Institute of Shinhan, KT&G recorded a sales revenue of 1.39 trillion won and operating profit of 295.4 billion won, representing a year-on-year decrease of 0.9% and 11.3%, respectively.

The HNB market in South Korea may have new possibilities for the future.

2FIRSTS will continue to monitor and report on developments in the South Korean HNB market. Stay tuned for updates.

Further reading:

The price of South Korean heat-not-burn devices is twice that of Japan.

KT&G and PMI Compete for Market Dominance in South Korea

According to the latest report, the PMI for the South Korean market has experienced a significant increase in business profits, with a growth rate of 163%. However, major players in the industry, such as BAT, have seen a decline in profits of about 12%.

ELFBAR, the official representative in South Korea, has reported an increase in initial orders. The goal for this year is to sell two million pieces in the country.

South Korea may abandon HNB tax hike, which currently has a tax rate of 90.4% compared to regular cigarettes.

References:

Kim Eun-ji, representative of Batrosman's, stated that while cooperative agreements with competitors may have a limited impact on the Korean market, they will continue to focus on increasing their market share.