TOKYO -- Japan Tobacco has been aggressively pursuing global expansion through mergers and acquisitions. Yet international tensions with Russia over Ukraine are hitting the company's tobacco sales there, although the decline is narrower than that of the overall Russian market, according to President Mitsuomi Koizumi.
In a recent interview with The Nikkei, Koizumi also talked about his company's strategy to cultivate a still-untapped region in a bid to become the world's biggest tobacco company.
Excerpts of the interview follow.
Q: Given the Ukraine crisis, what is your view on the economies of Ukraine and Russia?
A: Russia's domestic demand was already showing signs of faltering, so I had expected the economy to grow 1-2% in real terms in 2014. But if the situation in Ukraine worsens or (the West) slaps major additional sanctions, I would say the Russian economy could fall into contraction.
Ukraine's public finances are hard-pressed and it is a challenging market for the tobacco industry.
Q: How do those developments affect your tobacco business in Russia?
A: Total cigarette sales this year in Russia are expected to drop 8-10% from last year. In January, Russia raised its tax on tobacco and has introduced a ban on smoking at restaurants and cafes this month. Thanks to strong sales of the Winston (a Japan Tobacco brand) the decline in our company's sales volume is not so steep as that of the overall market.
Compared to mature markets such as the U.K. and France, there is still some room for raising prices in Russia, so I feel there is growth potential in terms of profitability.
As the Russian economy is going to slow down, consumers who have smoked higher-end cigarettes will switch to mid-range products such as Winston. Given this trend, I hope we will maintain a share of more than 36% of the Russian market in fiscal 2014.
Q: What about economic outlooks for other regions?
A: Europe is shifting from export-led economic recovery to domestic demand-led one. But the region's high unemployment is unlikely to improve quickly, leaving uncertainty over our European business.
For now, the most promising market is Africa. Over the last decade, the continent has seen an annual growth of 5-9%. The region's high population growth means a big potential (in tobacco demand). We have made strategic inroads into the continent as we acquire companies in such countries as Sudan and Egypt.
Q: Will you continue actively seeking mergers and acquisitions overseas?
A: Our overseas business can grow about 10% in the next few years. After that, we plan to explore "frontier" markets around the world. At the same time, we aim to expand the scope of our products, to such new items as electronic tobacco. To that end, we intend to pursue M&As aggressively as long as they make economic sense.
We are still number three (tobacco manufacturer) in the world. But we are aiming to become the number one.
Q: How is cigarette consumption in Japan being affected by the sales tax hike to 8% from 5% in April?
A: In March, people rushed to buy tobacco ahead of the tax increase. In response to this rush, our sales volume dropped in April 30% from a year earlier. Our past experiences show the decline will taper off by June.
Given that a majority of smokers are aged between 20 and 64 and their numbers are shrinking, we have predicted that our sales volume will fall by 3-4% this year. The volume has so far been at levels within our expectations.
Interviewed by Nikkei senior staff writer Shigeru Seno