Smoking culture in South Korea has seen a great change in the past decades. Smoking indoors and in public areas have been banned, and the number of smokers has been decreasing amid rising health consciousness.

New preferences for flavored cigarettes and less smelly products are proving popular, as well as technologies developed to introduce new ways of using the tobacco leaves, by heating and not burning.

Still, one thing in Korea remains the same. Korean people are loyal to Korean cigarettes, even after over 30 years have passed since a nationwide ban on imported cigarettes was lifted.

KT&G, the country’s tobacco giant, maintains the largest market share of over 60 percent here, and has never ceded its top position.

According to Euromonitor International, KT&G took a 62.9 percent share in the conventional cigarette market in 2019, beating out globally prominent rivals.

The runner-up Philip Morris Korea lagged far behind the Korean company at 16.9 percent, while BAT Korea posted 12.5 percent. Japan Tobacco International was fourth, with 7.3 percent. 

Monopoly?

For one, the strong foothold KT&G has in the Korean market is based on its roots, formerly as a state-operated company that played the role of a fruitful source of tax revenue for the government.

Tobacco business in Korea was strictly managed by the government from the late 1940s under the Monopoly Bureau of the Economy Ministry. Selling, purchasing and consuming foreign tobacco products was banned entirely under the government’s policies to protect the domestic economy. Violations grabbed headlines in those times.

It was not until September 1986 that the ban on imported cigarettes was lifted, when the government was pressured to open the market to foreign competitors by the US.

Reorganized as Korea Tobacco and Ginseng Corporation in 1989, the country’s tobacco company was privatized in 2002 and became the current KT&G.

Meanwhile, global tobacco companies expanded their presence in the country with their cigarette brands. In 2017, the major global players together grew to grab 40 percent of the market share.

Over three decades have passed since the market opened, and the foreign companies are still not able to cross the 50 percent threshold against KT&G.

The rivals claim barriers remain, and that KT&G still has dominance in the industry, managing to monopolize distribution channels such as expressway service areas and the military.

”We do not know how KT&G does it, but it is true that we never win a supply contract in some retail shops,“ an official from a global tobacco company told The Korea Herald.

The Korean company enjoys the advantage of almost an exclusive supply of its cigarettes to the Korean military. South Korea has a conscription system mandating all able-bodied men serve the military.

Only in 2016, Philip Morris’ Marlboro Gold and JTI Meuvius LSS Wind Blue won the bid opened by the Ministry of Defense Welfare Agency for the first time as foreign cigarettes to be supplied in the military‘s post exchanges.

Similar to the military post exchanges, the retail shops in the service stations on public highways operated by the Korea Expressway Corporation only sold KT&G cigarettes.

But both the expressway operator and KT&G deny any influence-peddling.

”We do not intervene in supply contracts and what product these retailers sell,” an official at the Korea Expressway Corporation said.

Numbers, meanwhile, show that expressway sales contribute little to KT&G’s buoyant revenue.

Cigarette products sold in the highway service areas account for less than 0.5 percent of total annual sales, according to the tobacco maker. It also added that the company has taken steps to correct malpractices so that such cases do not occur anymore.

Flavors for Korean palates?

When Ji Jeong-hyeon started smoking in her early 20s, it was Marlboro she picked as her first cigarette, as it was the best-known cigarette brand in the world. And she enjoyed the image and reputation that came with it.

In a couple of years, however, she changed to KT&G cigarettes that are lighter and more flavorful.

“Before, the brand appeared to matter a lot, and Korean cigarettes had an old image. Now, Korean cigarettes come as trendy with good flavors, lighter,” Ji, 28, told The Korea Herald.

Since privatization, KT&G surely lost a lot of its customers to foreign competitors compared to the time it monopolized the market.

Still, the company says it has been able to maintain its dominance in the market with continuous efforts to develop new technologies and products.

To compete against world-famous cigarettes with great brand power, KT&G said it established a brand division in 2002. It took the strategy to introduce as many new brand products as they could, and put them up for internal competition.

“KT&G’s core strategy has been to develop and introduce new products consistently, to gain competitiveness against the foreign cigarettes that gained brand power for decades,” KT&G said.

“As the total number of our product brands increased, strong brands survived and it led to overall growth of sales.”

KT&G also explained its efforts and investments for technology development, increasing its budget for research and development every year. In 2017, KT&G said it spent 15.9 billion won for R&D, then 17.8 billion won in 2018 and 23 billion won in 2019.

As a result of the investments, the company was able to expand its technology patents, from registering 43 patents in 2016 to 431 in 2019.

Keeping up the efforts, the company was able to attract smokers like Ji with its flavored conventional cigarette products and less smelly conventional cigarettes.

KT&G’s technological development is also making progress in heat-not-burn e-cigarettes.

When PMI launched the world’s first heat-not-burn e-cigarette, Iqos, in Korea in June 2017, the company garnered 75.9 percent of the market share for the device, as late-movers BAT’s glo and KT&G’s lil trailed with 13.7 percent and 6.2 percent, respectively, in the year.

In the following years, KT&G quickly turned the tables, and though behind Iqos, KT&G accounted for 35.6 percent of heat-not-burn e-cigarette devices sold in 2019. Iqos took 44.3 percent, while BAT’s glo sold 8.2 percent.

By sales of tobacco sticks used in the devices, PMI posted 87.4 percent in 2017, while KT&G sold 2.5 percent.

Last year, PMI sold 61.8 percent of the tobacco sticks, while KT&G sold 29.1 percent.

By Jo He-rim (herim@heraldcorp.com)