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Lots Of Puffing But Less Profit In New Markets Overseas


The Corporation

LOTS OF PUFFING BUT LESS PROFIT IN NEW MARKETS OVERSEAS

On the streets of Bucharest, it's not unusual to see people paying taxi fares with Kent cigarettes. In China, it's good form to greet friends by passing around a pack--preferably Marlboros. In Warsaw, nearly every bus is a moving billboard for U.S. smokes.

Western cigarette makers hope the emerging markets of Eastern Europe, Asia, and Latin America will cushion them from troubles in established markets, such as the U.S. Business overseas is brisk, indeed. On Apr. 20, Philip Morris Cos. reported international tobacco income in the first quarter jumped 18%, to $675 million on a 17% revenue increase. London-based cigarette marketer BAT Industries PLC and R.J. Reynolds Tobacco International Inc. expect similar gains. No wonder Reynolds International Chief Executive Dale F. Sisel says he looks ahead "to unbounded opportunities in a growing world market."

Overseas opportunities don't necessarily spell an instant profit windfall. "A lot of the bulls were hoping the international side would offset the slide in the U.S.," explains Gary D. Black, a tobacco analyst at Sanford C. Bernstein & Co. "But when you put pencil to paper, it's not there yet." At Philip Morris, for example, domestic tobacco accounted for only 47% of 1992 cigarette sales but more than 70% of profits. Domestic tobacco accounted for almost 80% of Reynolds' cigarette profits. Price wars will lower domestic earnings this year. But average profits of 10 per pack overseas still won't match an estimated U.S. profit of 25 to 30 per pack.

Tobacco companies face challenges in both developed and new markets. Western Europe and Japan, two hot markets for Philip Morris and Reynolds, are starting to show their age. Excise taxes are high, population growth is about flat, and antismoking ordinances are starting to multiply. Government monopolies are fighting back with American-style cigarettes

or discount brands. So market-share growth for the U.S. companies will probably moderate.

The emerging markets are more promising in terms of sales, but not profits. In the former Eastern bloc, analysts figure Philip Morris and Reynolds make a profit of 2.5 a pack. Huge upfront investments in manufacturing and marketing are needed. And with disposable income low, big price increases are tough to pull off.

Despite the drawbacks, none of the tobacco giants is staying on the sidelines. BAT wants to build on its dominance in Brazil. Philip Morris wants to widen its lead over Reynolds, which is playing catch-up by further developing a worldwide market for Camels. All three are buying market share in Eastern Europe. By acquiring Czech cigarette maker Tabak, Philip Morris snapped up 55% of the market. BAT last month bought 65% of Prilucky Tobacco Factory, which supplies 20% of the Ukrainian market. In Hungary, Reynolds purchased the Satoraljujhely cigarette factory, which already claims a 20% market share.

AD BANS. The simple strategy the multinationals are following--grabbing as much share as possible--is drawing fire from alarmed health officials. In Hungary, officials forced Reynolds to remove Camel ads from 22 public trams. Already, Hong Kong and China have banned television ads after protests led by activist Judith Mackay. Other Asian governments have sought Mackay's advice, and networks of activists have sprung up to oppose smoking's growth, especially among women and teens.

But even Mackay recognizes the power of the tobacco companies. "Global sales will go up for the next 20 to 30 years," she says. Recently, on Hong Kong's famous Nathan Road, smartly dressed young women pressed Camel cigarettes and lighters on passersby. Similarly, Shanghai's gleaming new subway has yet to open, but four completed stops already sport giant backlit cigarette billboards. It's a sure bet that sales of Western cigarettes will soar in such places. But whether the profits will ever prove as sizzling as they have been in the U.S. is far from certain.Paula Dwyer in London, with Maria Mallory in Atlanta, Dave Lindorff in Hong Kong, and bureau reports


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