The Imperial Tobacco Group was formed in 1901 via the merger of 13 British tobacco companies which came together to prevent a takeover by their American competitor, the American Tobacco Group. Since 1973, the Imperial Tobacco Group diversified into a number of other markets, including financial services, restaurants and electronics. However in 1996, the group decided to concentrate its activities on tobacco products. Today, the firm is the world’s fourth largest tobacco company and the largest in terms of share of the UK market.
Global Share % Imperial Tobacco manufacturers a vast amount of popular brands, including Lambert ; Butler, Richmond (Superkings and King Size), as well as more high-end brands such as Embassy and Davidoff; thus ensuring that the group caters to all sectors of the market.
Government anti-smoking initiatives and changing social attitudes have led to a decline in smoking rates in mature Western markets, although growth continues in the emerging markets of Asia, the Middle East and Eastern Europe. In the UK, the tobacco industry has progressively reduced its workforce as a result of increasing mechanisation and lower demand.
A simple 5 Forces Model can be set out to identify the factors which affect Imperial Tobacco’s competitiveness. Porter’s 5 Forces Model . Currently Imperial Tobacco is Britain’s 2nd largest tobacco company in terms of production, with its main competitors being ‘Gallaher LTD’ (now owned by Japan Tobacco) in the UK market and ‘British American Tobacco LTD’ in international markets. Together Imperial Tobacco and Gallaher control approximately 80% of the UK market. 1 The oligopolistic nature of the market has allowed for abuses within the industry.
In April 2008, Imperial Tobacco, alongside Gallaher, was investigated by the OFT for engaging in collusive behaviour alongside 11 retailers, including Sainsbury’s and Tesco, for fixing cigarette prices. The decline in smoking rates within mature markets has made it difficult for Imperial Tobacco to acquire additional sales without taking away market share from its competitors, thus increasing the extent of competitive rivalry in the industry. Legislation brought forward in the EU in 1991, banning the advertising of tobacco products, has made it more difficult for Imperial Tobacco to promote brand differentiation.
As a result, the danger of product switching by consumers has grown as a threat, as cigarette manufacturers find it more difficult to hold onto their customer base. This further increases the extent of competitive rivalry. The existence of high exit costs, in the form of non-transferable fixed assets, such as manufacturing plants and cigarette rolling machinery means that the large players in the tobacco industry will compete fiercely to maintain their market share and would likely remain in the market, even if profit levels are low.
High exit-costs work in favour of Imperial Tobacco in that they deter potential new entrants from entering the market. Imperial Tobacco has grown to an extent that it now benefits from economies of scale, whereby they have been able to invest in an automated internal supply chain, thus increasing their efficiency and production rate. As is stated on their website; “our investment in product design and innovative processing techniques continues to make us one of the world’s lowest cost producers of tobacco products.
“For a new entrant to be able to survive in the tobacco industry, they must be able to provide a wide range of tobacco products. Such economies of scope from the Imperial Tobacco Group make it difficult for new entrants to enter the market and compete. 3. As with all businesses, the Imperial Tobacco Group depends on suppliers to some extent. The main suppliers to Imperial Tobacco are tobacco cultivators, although the group relies on other non-tobacco supplies, including polypropylene film, aluminium foil and filter rods.
On their website, the Imperial Tobacco Group states that they “source [raw tobacco] from over 40 countries, including Brazil, China, India, EU member states and Tanzania, purchasing around 140,000 tonnes in 2007″4. Though no substitute exists for the product that tobacco farmers supply, the abundance of suppliers of tobacco leaves (as is indicated by the above statement) results in the relative bargaining power of individual suppliers being low. The Imperial Tobacco Group can switch easily from one supplier to another, at a low cost.
Since most suppliers come from poor, agricultural lands, suppliers are in large part heavily dependent on the custom of large tobacco companies to survive, thus reducing their bargaining power. In recent years, Imperial Tobacco has engaged in a strategy of ‘tapered vertical integration’, thereby partially integrated the company with earlier production stages; growing tobacco, providing agronomy assistance, technical support and training in places such as Morocco, Laos and Madagascar.
By doing this, Imperial Tobacco is able to use the threat of growing more tobacco itself to ensure that independent suppliers do not exploit their supply position, thus further reducing their bargaining power. 4. Buyers of tobacco products include supermarket retailers, wholesalers and local grocers. Larger supermarket retailers such as Tesco, Asda or Sainsbury’s, which sell a large portion of total sales of tobacco products in the UK, may be able to exert more buyer power than smaller retailers.
The ban on advertisements of tobacco products (which makes it harder for Imperial Tobacco to differentiate its products) makes it is easier for powerful purchasing companies to switch to a suitable alternative product from another supplier. However, since it is difficult for a purchasing company to start cultivating tobacco themselves and since the costs of setting up cigarette-rolling machines and factories are high, a buying company cannot easily perform backward integration, to become their own supplier.
Therefore by definition, the buying company will always be dependent on the tobacco manufacturers. 5. The threat of substitutes to the products of Imperial Tobacco is low but includes products such as nicotine gum, denicotinized cigarettes and nicotine patches. Fortunately for the tobacco industry, purchasing companies do not promote these items as alternatives to tobacco and therefore they do not pose a threat to this industry.