In UK, turnover increased 1.9% to £3,680m (2003:£3,611m). This increase largely reflected price increases ( UK government duty and Gallaher’s price increase) and the phasing of trade sales, partially offset by customers downtrading to cheaper products and the effects of lower volumes in the cigarette and cigar markets. UK operating profit was £ 291 m (2003:£267m) – this increase was a result of trading improvements together with lower UK exceptional charges in 2004 of £ 9m (2003:£18m). Other positive indicators are noted in the segmental Review. (See Table 2)
Having analyzed the annual report and financial statements 2004, the Gallaher Group appears to be financially sound.
2. MARKET OVERVIEW
2.1 THE INDUSTRY
The cigarette and tobacco industry in the UK is dominated by two firms, Gallaher and Imperial Tobacco, who between them controls around 80 % of the market. One other major firm, British American Tobacco (BAT), manufactures cigarettes in the UK but sells almost all of them abroad.
2.2 SEGMENTATION OF THE MARKET
Gallaher has catered to the working class and the upper social class. The organization has produced products that are marketed to various segments. They have established a premium sector to accommodate the upper class which accounts for 37.1 % brand market share. A mid-price sector to facilitate the middle class which accounts for 9 % brand market share and a value sector which is the most profitable and substantial segment as this accounts for 53.9% brand market share.
3.MACROENVIRONMENT INFLUENCES (PEST FACTORS)
3.1 POLITICAL/ LEGAL
The global tobacco market is subject to significant regulatory influence, including the levying of substantial tax and duty charges. There are also imposed restrictions on advertising and marketing; displaying larger health warnings and statements of tar, nicotine and carbon monoxide smoke yields on product packaging; regulations on the smoke yields of cigarettes; the provision of tobacco ingredients information to regulators; the prohibition of certain descriptors such as ‘light’ and ‘mild’ ; and increased restrictions such as the prohibition of smoking in many public places and raising the ages at which cigarettes may be purchased.
3.2 ECONOMIC
In the UK, tobacco duty was raised in line with inflation in March 2004. The impact of high taxation in the UK cigarette market, resulted in high prices, which led to reduced annual industry volumes, greater price competition and trading down by consumers to lower-price cigarette brands.
3.3 SOCIAL
There is a reported decline in the number of adult cigarette smokers from 2003 as oppose to 2004. This is partly due to the fact that people are becoming educated and more aware of the “dangers” associated with smoking and as a result lifestyles are changing as people are becoming more health conscious.
3.4 TECHNOLOGICAL
Changes in tobacco processing technology have included the widespread use of both reconstituted tobacco sheet and expanded tobacco, as well as additives of various kinds. Lowering tar and nicotine yields has been the main plank of product modification policies aimed at reducing the heath risks of cigarettes.
4. MICROENVIRONMENT INFLUENCES (SPICC FACTORS)
4.1 SUPPLIERS
The group deals primarily with three suppliers. They continue to maintain amiable relationships with their suppliers. Creditors are paid on a timely basis, which periods vary, according to the type of product and territory in which the suppliers operate.
4.2 PUBLIC
The organization is cognisant of the issues surrounding tobacco products and is committed to being a good corporate citizen and behaving responsibly. The group has embarked upon a number of corporate responsibility programs such as community development programs where they have donated money to charitable foundations.
4.3 INTERMEDIARIES
Gallaher supplies their tobacco products primarily to distributors and retailers. The organization does not supply directly or indirectly to members of the public.
4.4 CUSTOMERS
Gallahers caters to a wide range of customers ranging in ages 18 – 65 +. There are different brands to accommodate the various social classes.
4.5 COMPETITION
There are three main contenders in the tobacco industry that can be considered to operate on the same scale as Gallaher. They all have factories that are located in the prime business areas in the UK.
5.Mc KINSEY’S EIGHT (8’s)
5.1 STRATEGY– the organization is currently focused on markets that offer opportunities for sustainable growth. It is centered on growing brand equity and profitability.
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SYSTEMS – Gallaher’s systems are technology geared as they have recently installed a new primary processing line which has increased the organizations efficiency and flexibility.
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STRUCTURE – the group has a functional structure. There is good ‘vertical’ communication. Responsibility, authority and control systems are clear.
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SKILLS - The organization is committed to attracting and retaining people of the highest quality and integrity.
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STYLE – The organization believes that companies are judged not only by their financial performance but also by their corporate behaviour as a result business is conducted in a superior manner.
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STAFFING – The organization is customer service oriented as they are strongly committed to responsible behavior and upholding high ethical values in the way in which they conduct business.
5.7 SHARED VALUES – Committed to excellence in all that they do demonstrating a sense of responsibility and responsiveness to issues relating to smoking and health.
5.8 SUSTAINABLE COMPETITIVE ADVANTAGE – Perceived skill, know how and reputation which has developed over the years
- THE 4 P’s
- PRODUCTS
The organization manufactures cigarettes, cigars, handrolling tobacco and pipe tobacco.
- PRICE
All goods are sold at Gross Price, plus the appropriate amount of Value Added Tax. Wholesalers are allowed discounted prices for orders exceeding 6,000 outers or more of cigarettes, cigars and / or tobacco for a single delivery.
- PLACE/DISTRIBUTION
Goods are delivered directly to the premises of or to any other agreed suitable secure UK address.
- PROMOTIONS
Promotions are done via TV and Newspaper advertisements with compliance to the legal and regulatory environments ensuring that its consumer marketing activity is directed at adult smokers.
- “GALLAHER’s” SWOT ANALYSIS
- STRENGTHS
Gallaher has provided an environment for their employees to maximize their potential. Their staff is enthusiastic, loyal and dedicated to achieving the organizations objectives and mission. The organization is a multi-product tobacco company which allows them to respond rapidly to evolving market dynamics and to build brand and market share. Gallaher has also capitalized on recently acquired technological equipment which has enhanced their efficiency. The organization is still capitalizing on the benefits of the Benson & Hedges heritage.
- WEAKNESSES
The most critical issue identified which has contributed to this factor is the legal regulatory restrictions imposed on the organization on the promotion of their products. The organization has to take into consideration the times at which their advertisements can be run on television. Images cannot be too suggestive in that women should not be exploited in their advertisements. As a result the organization is very cautious when promoting their products and from analysis, advertising is not done at the scale at which it should be done.
Another weakness identified is that there has been a growing trend that employees are leaving the tobacco industry. This could have a negative impact on not only Gallaher but the industry on the whole.
- OPPORTUNITIES / THREATS
The organization has various markets which they could employ new strategies. This is also a threat as competition could do the same. There is opportunity for trial offerings in one market which reduces the risk of failure.
- COMPETITION SWOT ANALYSIS
Imperial Tobacco Group Plc is Gallaher’s major opponent in the UK cigarette and tobacco industry. Imperial has been steadily increasing their market share and has recorded an increase in international sales for 2004 which accounts for 54 % of the Group’s operating profit. Like Gallaher, Imperial tobacco enjoys the benefits of having highly motivated and efficient staff. Imperial also caters to every smoker as they have also developed products to suit various social classes. Imperial has adopted a diversification strategy in that they are producing in the cigarette paper industry where they are also competitive in that market. Imperial tobacco, like Gallaher must also adhere to the legal and regulatory environment when promoting and marketing their products.
WHERE DO WE WANT TO BE
- MARKETING OBJECTIVES
a) To increase shares of the growing value cigarette sector, and to defend the leading positions in the premium cigarette and cigar sectors – achieving an appropriate balance between sales volumes and the margins achieved on those volumes. The direct relationship must be made between sales volume and profit margins, with a positive relation maintained between change in sales volume in relation to change in profit margin. This process will take several phases and should come into effect incrementally over these phases within the next three years.
b) To overtake Imperial tobacco as the number one UK based tobacco company. Gallaher presently controls approximately thirty-nine percent of the UK market, a close second behind Imperial which controls approximately forty-one percent. With the chosen strategy I expect this would take three to four years.
- STRATEGIES
10.1 MARKETING PENETRATION (Short-Term Strategy)
Ansoff’s Market Penetration strategy is the most applicable as Gallaher’s short-term strategy. According to Kotler and Armstrong Market Penetration is “a strategy for company growth by increasing sales of current product to current market segments without changing the product.” ( Kotler and Armstrong 2001). The strategy would be focused on place and price with some minor research.
The first step entails conducting surveys throughout the UK, identifying the geographic locations that Gallaher products are not favoured, and the reasons for such. The next step involves communication with retailers and intermediaries as the case may be. This communication must outline the details of price promotions to the ‘middle man’ to be passed onto the customers. The idea is that the ‘middle man’ should serve the role as a sales representative for Gallaher promoting their products over other similar ones. These profit margins would be affected by these discounts given to intermediaries, but must not fall beyond an established point of tolerance. The main focus is to capture markets which may have been neglected in the past.
10.2 PRODUCT DEVELOPMENT (Medium-term Strategy)
According to Kotler and Armstrong Product Development is “ a strategy for company growth by offering modified or new products to current market segments.” ( Kotler & Armstrong 2001).The concept of this strategy requires intense research and development, price restructuring and heavy advertising.
Initially a research and development plan must be set to start production within two years. When the final product is conceptualized, an advertising campaign must then be implemented. During the first year, the advertising would be delivered so as to evoke conversation and curiousity. As the product comes nearer to completion, the advertising would be more informative and revealing, the frequency would increase as well. The envisaged final product would be one triggered by the latest trend in the market, ie. the mid-priced customers switching to the value market.
The final product after research and development will be a hybrid cigarette between the value cigarette and mid-priced cigarette. The mid-priced cigarettes would be discontinued, as the quality would be embedded in the revolutionized product. The value cigarette would also be discontinued, as the price of the developed products would be similar in nature to their present product. There would now be two major sectors, the premium sector and the ‘mid-value’ sector.
11. FORECASTING & BUDGETING
A – (actual) F – (forecast)
Sales increase by 1.5 % annually on base sales. In addition to these base increments the following are added to the years projections as follows.
- In the first year forecast I am expecting to yield a £20m increase as a result of the short-term strategy.
- In the second year I am expecting to generate £25 m also from the short-term strategy and an additional £20 m from the medium term strategy.
- In the last year I am expected to maintain a £25m from the short-term strategy and an expected £30m from medium term strategy.
Cost of sales as a relation to sales is approximately 86%. Distribution, Advertising and Selling costs is 4 % of sales and Administrative cost is 2.4 % of sales.
Research and Development cost projects as follows:
- Year 1 £70m – (£60 m toward medium term strategy and £10 m short-term)
- Year 2 £40m – towards medium strategy.
- Year 3 £10m – towards medium strategy.
Profits:
Gross Profit is equal to Sales – Total cost of Sales
Retained profit is approximately equal to 8.5% of Gross profit.
12.MONITORING & CONTROL
Systems should be put into place to analyse and forecast how the new marketing strategies are performing. This can be accomplished by comparing actual sales reports on a monthly basis and continuously assessing the profitability of the strategies.
13.CONTINGENCY PLANNING
Gallaher could explore contracting more suppliers to deal with the expected increase of activities to meet the demands in an efficient manner.
14. CONCLUSION
Gallaher’s performance for 2004 has demonstrated the strength of the Group’s strategy and the platform for growth it has created. Gallaher grew volumes, revenues and earnings and continued to make progress with its ongoing drive to increase efficiency.
In the face of the challenging conditions Gallaher remains confident and totally committed to continuing to maximize returns and obtain a sustainable competitive advantage.
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