British American Tobacco in South Korea

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Case Details:

Case Code : BSTR254
Case Length : 22 Pages
Period : 1998-2006
Pub Date : 2007
Teaching Note : Not Available
Organization : British American Tobacco
Industry : Tobacco
Countries : South Korea

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"BAT Korea and Samsung Tesco can be seen as two of the biggest overseas successes. They realized the importance of localization as the main key to success in the Korean market at an early stage and acted upon it, instead of insisting on operating based on business strategies that would only work elsewhere."¹

- Na Hong-suk, Senior Analyst at Good Morning Shinhan Securities², in 2006.

Introduction

For the year ending December 2006, UK-based tobacco company, British American Tobacco Plc. (BAT) was the second largest company in the South Korean tobacco market behind the local player Korea Tobacco & Ginseng Corporation (KT&G), which had a market share of over 70%. The South Korean operations contributed significantly to BAT's profits in the Asia-Pacific region for the nine months ending September 2006. According to BAT's management, "In South Korea, profit grew impressively with a strong growth in market share, driven by Dunhill and Vogue, and cost savings. In addition, volumes were significantly higher, reflecting volume distortions last year as a result of the excise increase at the end of 2004."³

In the year 2005, BAT had a share of 15.7% in the South Korean Tobacco market, selling more than 13 billion sticks. The market was valued at 11,514 billion Won⁴ in 2005 and was estimated to grow to 13,212 billion Won by 2010.

Though the market was estimated to grow in value terms mainly due to an increase in prices, in volume terms, it was estimated to go down to 77.4 billion sticks in 2011 as against 87 billion sticks in 2005.

The reduction in volume was attributed to the rising taxes and widespread advertisements advocating the dangers of smoking and consuming tobacco. BAT entered the South Korean market in the year 1998, in the aftermath of the Southeast Asian economic crisis. After the crisis, the South Korean government could no longer say no to privatization and it allowed foreign companies to operate in the country.

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1] Park Hyong-ki, "Tesco, BAT Represent Success Story in Korea," The Korea Times, May 25, 2006.

2] Formerly known as Good Morning Securities Company Limited, Good Morning Shinhan Securities is based in Seoul, South Korea. The company is involved in investment and securities brokerage including underwriting of equities, bonds, and other financial products.

3] "Quarterly Report for the Nine Months Till September 30, 2006", www.bat.com.

4] As of February 01, 2007, 1 US$ = 937 Won.