JAPAN TOBACCO INTERNATIONAL (JTI) IN BRAZIL CASE STUDY Japan Tobacco International SA (PLC) is a subsidiary of Japan Tobacco Inc. which was formed in 1999 when Japan Tobacco Inc. bought the non-US (international) tobacco operations of R.J Reynolds Tobacco Company for $7.8 billion. It is headquartered in Geneva, Switzerland. The main products of Japan Tobacco International are cigarettes, rolling tobacco, snus, cigars and reduced-risk products. Being one of the “BIG TOBACCO” companies along British American Tobacco, Philip Morris International, Altria Group and Imperial Brands, Japan Tobacco International (JTI) has a global market share of 9% as of 2020, ranking it 3rd with only Imperial Brands below JTI with a global market share of 4%. They are currently operating in 130 countries/regions and producing over 100 brands worldwide. In 2009, Japan Tobacco International entered the Brazilian market by acquiring two companies active in the tobacco business, Kannenberg and Kannenberg, Barker, Hail and Cia Tabacos Ltda (KBH & C Tabacos Ltda). To elaborate the acquisitions- what did JTI gain after acquiring these two companies? The answer: established channels from which they got a constant supply of tobacco leaves, required production facilities- processing plants to process the leaves, warehouses for storing and packaging and assembling factories from which the products are forwarded to the distribution channels, an extensive distribution network and the existing customer base. They also got the suppliers of non-tobacco raw materials and resources that were already associated with the two acquired companies and the existing offices to regulate the process. However, Japan Tobacco International knew that just acquiring these two companies would not fuel their global success and the objectives Japan Tobacco Inc. (parent company of JTI) had set when they formed Japan Tobacco International. They wanted to establish themselves as the leader of the South American tobacco market and increase their market share in South America, thus increasing their global market share in the tobacco industry. And for that, they had to take big steps because there was already a major player from the global tobacco industry in Brazil- Philip Morris International as Philip Morris Brazil since 1973. Rather than just moving capital to the existing assets to generate revenue, JTI focused more on investing more in its products and services to gain an upper hand and competitive advantage over its competitors which started initially with the acquisition of a major distributor, Fluxo Brasil Distribuidora de Produtos SA in 2015 and then establishing its first factory on September 2018 in Santa Cruz do Sul of Central Rio, and then started producing their Camel and Winston brands for the local market. To ensure that their market share and the value of their products and services keep rising, they invested heavily in their logistics, operations, service, marketing, and sales by improving their company infrastructure, management, research, development, and procurement. The company’s infrastructure in Brazil consists of a tobacco processing plant, a cigarette factory, four processing lines working in three shifts, procurement units, and a national distribution center. And to flexibly operate there has to be a strong management team in place to oversee the inbound and outbound logistics, manage over 2000 employees (half of them working during the harvest period) and make informed decisions from the suggestions based on data from the individual departments of the company to run its operations effectively and efficiently. JTI also has an R&D center to improve their product and packaging, also working on innovation for further progress. The tobacco leaves go from directly contracted farmers and third-party merchants to leaf storage warehouses for storing from where it goes to the processing factories where the tobacco leaves are processed to be put together to produce the final product in factories where it is packaged and sent to warehouses and then to distribution channels. To be exact with numbers, JTI has over 945 permanent employees, 1200 temporary employees, 13000 tobacco suppliers and 13 distribution branches which are all part of the whole process of a tobacco leaf turning into a tobacco product. COVID-19 had some negative impacts in the operations of JTI, the whole world was affected by COVID-19 so JTI didn’t have any faults of its own in the slowed down operations as it had to follow the instructions of the government. JTI chose Brazil to expand its business in the Americas because Brazil, being the largest country in South America (a massive market) and the leading exporter of unprocessed tobacco, was an unpolished gem in the tobacco industry for JTI. They thought that heavily investing inside the country (20.7 million USD for the factory established in 2018) will help them get more output at lower costs of production and then they can increase the scale of production, helping them achieve greater economies of scale. But they were wrong as JTI had to face some critical challenges which hampered their growth in the South American region. Brazil being a mixed economy had some advantages of a market economy like prices being determined by market forces and private property rights of individuals and businesses, but also had disadvantages of a command economy like interventions by the government, protectionism through high tariffs, subsidies and harsh regulations, high level of corruption which heavily affected the operations of JTI, creating a toxic environment for JTI to generate the estimated revenue for which they had to fall behind in the race with the already established and heavily backed companies operating in the market. Economic mismanagement by the Brazilian government has resulted in a recession from 2015-2016, followed by economic stagnation in 2017 and 2018 where the economy had a growth rate of 1.32% and 1.78% respectively. The first quarter in 2022 reported a growth rate of 1.69% only a 0.4% increase compared to the first quarter of 2021. This shows the overall performance of the Brazilian government which leads to higher unemployment and makes it more difficult for businesses to operate, especially businesses like JTI, for whom the restrictions are much harsher. Japan Tobacco International has been challenged by Brazil when it became a party to the WHO Framework Convention on Tobacco Control on February 4, 2006, after which Brazil banned smoking in enclosed public places and workplaces, in any vehicles or aircrafts, banned advertisement of tobacco, required companies to label properly and banned certain ingredients from being used to make certain tobacco products, required companies to make people aware of their products’ risks and banned retail sale of electronic cigarettes (no vaping). In response, JTI has become more transparent about their products, making people aware of the associated risks, the ingredients they put into their products and limiting youth from getting access to their products. Earlier we discussed why and how JTI came to Brazil to become a very important player in the tobacco industry while Philip Morris International has been here for a very long time, now we are going to see whether JTI was able to compete with PMI and other tobacco companies in Brazil or not. JTI has a transnational strategy while competing in the Brazilian tobacco market as the pressure for local responsiveness is very high due to government demands for the companies in the tobacco industry to meet certain requirements and follow some strict laws. The economic inequality also plays a huge role to push JTI take a different approach in their marketing strategy in which the products are distributed and marketed according to the different socio-economic conditions in different regions. Responding to such factors, the cost of production (unit cost) increases automatically, so they invested in having their own production facilities and factories to reduce the cost of production to achieve 1. greater economies of scale- the unit cost decreases, so if JTI is able to target their audience properly and increase their production, the overall cost of production decreases (more money is saved) and achieve 2. location economies- when they invested on building their own infrastructures because Brazilian real (Brazilian currency) depreciated, so it was less costly for JTI to build such infrastructures in Brazil, thus helping them to compete in the market through lower and steady prices for their products. JTI also had established channels connecting to its facilities in other countries to gain comparative advantage (JTI can move required resources from the U.S. to Brazil easily if that benefits them and helps in achieving lower costs of production). JTI aimed to lower costs in their production process and operations, and have a global network of channels to move resources so that they can easily compete in the Brazilian market through lower prices for their products. But as it stands, the market share of Japan Tobacco International in the Brazilian tobacco market is only 0.9%, which is very low compared to British American Tobacco and Philip Morris International with market shares of 71.7% and 22.1%, respectively. According to the 2021 earnings report, even though revenue increased by 11.1% compared to the COVID19 impacted year, 2020’s revenue, but is forecasted to decrease by 0.4% in 2022. Despite proper planning and calculation, JTI failed to achieve its goals and objectives of becoming a major tobacco company in Brazil due to economic mismanagement and tough political environment created by the Brazilian government and competition with big and heavily backed international tobacco companies. Even though JTI failed to put a greater impact in the South American and Brazilian tobacco market, it is still a major international tobacco company in the world and considered to be one of the “BIG TOBACCO” companies. References Japan Tobacco International - Wikipedia. (2018, September 12). Japan Tobacco International - Wikipedia; en.wikipedia.org. https://en.wikipedia.org/wiki/Japan_Tobacco_International The first in South America | Japan Tobacco International – a global tobacco company. (n.d.). Japan Tobacco International – a Global Tobacco Company; www.jti.com. Retrieved August 25, 2022, from https://www.jti.com/americas/brazil/first-southamerica?fbclid=IwAR3q57r9cmsCeCeExWlOlLv7QQyyzNzUGmh6Q-kyTDN8OKx2q43fBNS5s8E JTI to Aquire a Brazilian Leaf Tobacco Supplier Group | Japan Tobacco International – a global tobacco company. (n.d.). Japan Tobacco International – a Global Tobacco Company; www.jti.com. 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Japan Tobacco International – a Global Tobacco Company; www.jti.com. Retrieved August 25, 2022, from https://www.jti.com/jtiopens-its-first-south-american-cigarette-factory From seed to pack | Japan Tobacco International – a global tobacco company. (n.d.). Japan Tobacco International – a Global Tobacco Company; www.jti.com. Retrieved August 25, 2022, from https://www.jti.com/news-views/seed-pack Who Is ‘Big Tobacco’? - STOP. (2022, July 8). STOP; exposetobacco.org. https://exposetobacco.org/news/who-is-big-tobacco/ Our six core principles | Japan Tobacco International – a global tobacco company. (n.d.). Japan Tobacco International – a Global Tobacco Company; www.jti.com. Retrieved August 25, 2022, from https://www.jti.com/about-us/our-business/our-six-coreprinciples JT Group 2021 financial results & 2022 forecast | Japan Tobacco International – a global tobacco company. (n.d.). Japan Tobacco International – a Global Tobacco Company; www.jti.com. Retrieved August 25, 2022, from https://www.jti.com/jt-group-2021financial-results-2022-forecast Brazil Details | Tobacco Control Laws. (n.d.). Brazil Details | Tobacco Control Laws; www.tobaccocontrollaws.org. Retrieved August 25, 2022, from https://www.tobaccocontrollaws.org/legislation/country/brazil/summary Latin America and Caribbean Region - TobaccoTactics. (2021, November 1). TobaccoTactics; tobaccotactics.org. https://tobaccotactics.org/wiki/latin-america-and-caribbean-region/ What is JTI’s response to COVID-19 | Japan Tobacco International – a global tobacco company. (n.d.). Japan Tobacco International – a Global Tobacco Company; www.jti.com. Retrieved August 25, 2022, from https://www.jti.com/what-jtis-response-covid-19 What’s gone wrong with Brazil’s economy? - BBC News. (n.d.). BBC News; www.bbc.com. Retrieved August 25, 2022, from https://www.bbc.com/news/business-48386415
