KT&G branches out of cigarette biz

Korea’s largest tobacco company, KT&G, is aggressively diversifying its portfolio after the dominant market share it once held in the cigarette business has shrunk over the past decade.

Since the former state-owned tobacco company privatized in 2002, KT&G’s market share in the cigarette market has fallen from a near monopoly.

In 2000, 90 percent of the cigarettes sold in Korea were made by KT&G. That went down to 78.9 percent after its privatization.

But with competition from foreign brands such as Philip Morris, manufacturer of Marlboros, and British American Tobacco, which makes Dunhills, its market share is now a little less than 60 percent.

National nonsmoking campaigns and stricter regulations on the tobacco industry have also contributed to its declining fortunes. KT&G’s revenues from tobacco once accounted for more than 90 percent of the total, which has now fallen to slightly below 65 percent.

KT&G’s most recent diversification was the launching of KT&G Life Sciences, a pharmaceutical unit.

Last December, the company spent 30 billion won ($26.7 million) to acquire the bio start-up Mazence, which it renamed KT&G Life Sciences.

The new pharmaceutical unit plans to focus on developing drugs to treat cancer, osteoporosis and diabetes.

“With the launch of KT&G Life Sciences, we can build a balanced business portfolio of tobacco, health care products, cosmetics and biopharmaceuticals,” said a company official.

In 2003, KT&G bought Yungjin Pharm, which specializes in health drinks and medical products.

In 2010, KT&G relaunched KGC Life & Gin, a health food product unit that was mostly focused on ginseng products and then expanded into other products including cosmetics.

Kim Sang-bae, president of KGC Life & Gin, said the company will aim to become a leader in the health and beauty industry by 2015.

Through KGC Life & Gin, KT&G took over Somang Cosmetics last June.

As KT&G diversifies, its stock has been moving upwards. Although it fell from the 80,000 won it traded at last month, the shares continue to trade in the 70,000 won range, up from 50,000 and 60,000 won last year.

That is exceptional growth considering that stock was traded at 15,000 won a decade ago.

“KT&G is changing its business structure for future growth,” said Woo Won-sung, a Kiwoom Securities analyst. “Although it will take time, the new businesses ranging from health foods, medical drugs and high quality cosmetics will undoubtedly contribute to expanding KT&G’s revenue.”

Yet the contribution of the non-tobacco sectors is still limited. Yungjin Pharm’s contribution to KT&G’s total revenues in 2011 was 3 percent at 112 billion won, while Somang Cosmetics’ contribution accounted for 3.3 percent at 119.7 billion won. KGC Life & Gin accounted for the smallest: 0.6 percent, or 20 billion won.

Korea Ginseng Corp. accounts for 25 percent of its revenues, and dominates the local ginseng market.

By Lee Ho-jeong [ojlee82@joongang.co.kr]