You are on page 1of 4

Global Tobacco WESTERN-EASTERN EUROPE AND RUSSIA (WEAR)

Shaun Tullidge
Have the latest Usage and Attitudes Tracking Study (U&A) results been received yet? I dont
care if the Global Team commissioned the research; these are results for Russia, and I should
have them first; if I dont have them before the Debenhams Global Steering Team (DGST)
meeting next week, consider your career gone! Shaun Tullidge yelled at his market
research manager. Yarub Costani, the Global Debenhams Director had commissioned that
piece of research to track new Debenhams relaunch expansion from Moscow to the top 10
cities in Russia. Shaun was sure the results would be positive, as they had been in Lebanon.
After all, he had been promoted after Lebanon for implementing the same relaunch and now
lead the largest volume region for Debenham after his Lebanon stint. He now looked at 20
markets in total. He hated excuses, especially in cases of poor performance. He was on
track to make it to the Board in 5 years time, so all he needed was to ensure all of Russias
targets were achieved. Prioritising his initiatives was the key to success
The Western-Eastern Europe and Russia region (WEAR)
This was a relatively new Region within GT structure. Top Management had decided to
cluster Western and Eastern Europe with Russia four years ago. The renewed focus on
Russia, and the expected growth, would balance the declining sales and profits (Table 1)
Europe had been severely affected by the many public place smoking bans, communication
restrictions and heavy duties applied to cigarettes. Europe (both Western and Eastern), had
previously been the strongholds for GTs operations, with brands such as Debenham,
Johnston Special, Vanity and Mentholeum, on top of their Roll Your Own (RYO) and Pipe
Tobacco range. It still held the market leadership in most markets, but Smith Jones
Tobaccos (SJT) brands Gringo Cowboy (Premium) and Pure (Mid-Priced) had slowly started
to make inroads in the declining markets (Table 1).

On the contrary, SJT was the market leader in Russia; GT had decided to enter the market 10
years ago to distract SJT from its operations in Europe. This had been a costly exercise, as
Russia geographical structure required a lot of funds. The portfolio had been limited to three:
Debenham, a global focus brand; Fresh, a regional brand in Asia and Rowapova, a low priced
brand. Their performance had been slow and painful (Table 2).

Brand Support Expenditure (BSE) was always an issue in Russia. Given the size of the
country, a simple promotional activity could cost millions. The recent relaunch in Moscow of
Debenhams blend from B12 to M45 had required GBP$10million, whilst the aggregate
activities in Top 10 markets would add up to GBP$25million (Table 3). He had been able to
fund this through three sources: a) as the restrictions in Western and Eastern Europe, had
freed money for Russia; b) M45 blend was cheaper than B12 and c) the DGST had prioritized
funds from other Regions into WEAR; The region most affected by this prioritization had
been Australia, Asia Pacific (AASP) region, headed by his former colleague, James
Meinoupolis.

The Blend portfolio


He was looking to speak to James Meinoupolis at the DGST. Fresh was the strongest brand in
AASP, and the second largest in Europe. However, it used an Oriental blend of tobacco,
which was more expensive than the USB blend that was being pioneered in Russia with
Debenham. Based on Freshs volume sales in Asia (Table 4), if the brand also transitioned to
a USB blend, the manufacturing cost per mille for Debenhams would be reduced by
achieving economies of scale. This in turn, would allow reinvestment of manufacturing costs
into marketing and distribution activities.

As simple as this sounded, the idea had its detractors. Oriental blends were the leaders in
the western states of Russia. In St. Petersburg, Fresh was the market leader with 21.5%
market share. Transitioning the brand to USB, could not only put at risk this volume, but also
turn the GT-Russia portfolio to USB, but also mainly to M45, providing little to no
differentiation in each price segment.
SJTs had a portfolio with an Oriental blend. While Cowboy Gringo used a USB product, its
largest mid-priced brand Pure, was Oriental. To defend their leadership in Russia, they had
started a campaign against Debenhams. They had spread rumours amongst the trade
stating that the changes in Debenham had been a lowering quality; they had also managed
to stall the delivery of the required tobacco at the Port for 3 months and to top it off, were
conducting consumer engagement in 200 outlets across the country for Pure and Cowboy
Gringo. Emergency BSE had been used to counter these intiatives.
Fresh is refreshed
Changing the Freshs blend also had its issues. He was aware that new packaging was
planned for next year. Actually, James Meinoupoulus was the lead of the revitalization of
Fresh packaging design to modernize, standardize its image, but also allow for recent
requirements faced by several markets to allow for a 50% front and back pictorial health
warning. Australia, as the market with the most strict laws in packaging and consumer

communication, was the first market to adopt this packaging change mid next year, so it
could be very convenient to adopt the blend change alongside the packaging change.
Once launched in Australia, the pack could be modified to fit Russias requirements and be
ready for launch by Quarter 4 of next year, coinciding with the second wave of Debenhams
expansion from Top 10 to Top 20 cities. He could take advantage of the temporary sales
personnel already earmarked for Debenhams, but still, additional funds of GBP$8millions
would be required. This would mean the highest ever marketing expenditure and personnel
for Russia. Its current cycle plan was already approved (Table 5), but would need to be
modified to include these other initiatives.

Sourcing
Another potential initiative to lower costs of Debenham, was sourcing. By changing the
manufacturing for Debenham, traditionally in Moscows Red Square plant, to a cheaper
location, such as the Phillipines, Syria or Vietnam, could bring a reduction of between 10 to
18 pence per mille of manufacturing costs (Table 6). This saving could be reinvested into
marketing. The change though, would need to be carefully managed. He considered four
factors of the move:

1)

The minimum 51% local content requirement needed to be assessed. If this


percentage was not achieved, reprinting of printed boards for boxes needed to be
written-off, and reprinted with the new source.
2)
The pack would need to indicate the new source to Russian consumers, and a
marketing and communication campaign would need to be launched. While none of
these countries had a good image amongst Russians, Shaun believed that local
consumers did not really understand where these countries were located. He had done a
small-based research study to demonstrate this. (Table 7).

3)

Transferring the volume to another country would mean overcapacity at Red Squares
factory. Potentially, one whole shift of employees twenty would need to be made
redundant. Luckily, the Labor Union in Russia was still not operating as effectively as
they could, so the move could be done relatively swiftly.
4)
Lastly, if the volume was to be transferred to an Asian factory, it would bring benefits
to the AASPAC region; this argument could also be used as a leverage point with James
Meinopoulus to transition Freshs blend. He had drafted an overall project plan (Table 8),
and the project could smoothly be implemented in one years time. To transition the

manufacturing into an Asian market, a minimum retooling investment of GBP$2million


would be required to increase capacity.

Shaun was wondering whether he should change Fresh to a USB blend at all. Was it possible
to have this with the big task of rolling Debenhamss nationally? Would Asia be willing to
move Fresh first? He needed to put forward his best position at Mondays meeting

You might also like