Consumer

Shelly Banjo is a Bloomberg Gadfly columnist covering industrial companies and conglomerates. She previously was a reporter at Quartz and the Wall Street Journal.

As he prepares to take the reins as CEO of Japan Tobacco Inc., Masamichi Terabatake said this week that the world's fourth-largest tobacco seller had become too inward-looking and pledged to take more risks.

That's a good call. But it's hard to believe the kind of reckoning this century-old giant needs will spring from the 51-year-old, who has worked at Japan Tobacco for 28 years and still smokes a pack a day of what was originally known as Mild Seven and later renamed Mevius.

Flame Out
Shares in Japan Tobacco have lagged those of other global cigarette makers
Source: Bloomberg

Being a company man isn't a problem, per se. It's that Terabatake was party to many of the decisions that led to Japan Tobacco's revenue dropping for eight out of the last nine quarters.

Smoked
Japan Tobacco's revenue has slipped in eight of the last 9 quarters as consumers switch to e-cigarettes
Source: Bloomberg

The company has been late to a monster shift in consumer habits fueled by technology that provides a nicotine fix without all the smoke and tar. Japan Tobacco has kept its focus at home while competitors planted flags globally. It's held to ancillary sectors such as food and pharmaceuticals that have little to do with the core business.

As the industry consolidates and tobacco giants like British American Tobacco Plc and Philip Morris International Inc. grew larger by scooping up smaller players around the world, Japan Tobacco's market share slipped from third to fourth place. The Japanese cigarette maker has been buying, but they've been smaller, bolt-on acquisitions such as the Philippines' Mighty Corp. and Indonesia's Karyadibya Mahardhika PT.

Strike a Match
More than 80 percent of global cigarette sales are concentrated among just six companies; M&A is likely to consolidate the industry further
Source: Euromonitor International
Note: British American Tobacco reflects recent purchase of Reynolds American.

Most recently, Terabatake headed the company's international division, where he developed a reputation as a dealmaker. But simply adding smaller cigarette sellers hasn't moved the needle much: Japan Tobacco still derives around half its revenue and operating income from international markets, where sales have flat-lined since 2014.

A widely speculated acquisition of Imperial Brands Plc, the U.K.'s No.1 cigarette maker and the fifth largest globally, has failed to materialize. Meanwhile, the prospects for other M&A targets are dwindling. 

In addition to his international post, Terabatake had stints managing a food business that's gone sideways. And then there's the golf enthusiast's time managing emerging products and corporate strategy, corporate speak for inventing new stuff beyond traditional cigarette packs.

Terabatake was in a position to help lead Japan Tobacco into e-cigarettes, vaporized nicotine, and other tech-infused products early on. Instead, Philip Morris leapfrogged the company with its Iqos device, a cigarette alternative that heats tobacco instead of burning it and now commands 12 percent of the Japanese market. 

Japan Tobacco didn't launch its own heat-not-burn device until two years after Philip Morris, acquiring patents from a San Francisco-based startup to develop its Ploom Tech products. It faced major supply chain malfunctions early on but is now expanding distribution from Japan to Switzerland. (Philip Morris's Iqos products are already available in more than 25 countries). 

Sure, Terabatake could have just been overruled by superiors. Once he's in charge he might be able to lead real change at Japan Tobacco. But right now, his pledges to push through bigger deals and move faster with cigarette alternatives to regain market share just look like more smoke, not fire.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Shelly Banjo in Hong Kong at sbanjo@bloomberg.net

To contact the editor responsible for this story:
Matthew Brooker at mbrooker1@bloomberg.net