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#20 - JRL 7059
Wall Street Journal
February 12, 2003
Tobacco Firms Scramble To Build Russian Brands
By ERIN WHITE
Staff Reporter of THE WALL STREET JOURNAL

LONDON -- Tobacco companies are scrambling to build their brands in Russia, while they still can.

As tobacco restrictions gain traction around the world, tobacco advertisers are focusing their efforts on markets with fewer barriers. Russia is one of the most appealing markets, though it may not be open to tobacco advertising much longer.

Russia is expected to ban tobacco ads in 2004. Once a ban goes into effect, it becomes harder to build the image of a brand, especially one sold on prestige rather than price. It's hard to convince customers that a new cigarette label is glamorous without some sort of advertising. So tobacco ad-spending often rises sharply just before a ban is instituted; analysts expect that to happen this year in Russia.

For the moment, Russia still allows tobacco ads in posters and print, and its smokers are acquiring a taste for pricier cigarettes. To woo that status-conscious smoker, Gallaher Group PLC, the United Kingdom tobacco company now preparing for an advertising ban in its home market, is rolling out a new Russian campaign for its high-priced gold-tipped cigarettes, the Sobranie Black Russian.

"In Russia, people who have done very well out of the resurgent economy clearly want to make a statement as to what they can afford," said Christopher Hill, group head of brand marketing for Gallaher.

In mature tobacco markets, such as the U.S. and many countries of the European Union, cigarette sales volumes are declining. And while the U.S. market is big, at about 390 billion individual cigarettes sold annually, tobacco companies -- hamstrung by advertising restrictions -- are increasingly forced to compete on price there. The discounts eat into profits.

That leaves the companies to concentrate their advertising in countries like Russia, where analysts estimate volume is growing at about 2% annually, with about 280 billion individual cigarettes sold last year. Greece is another place cigarette makers can still pitch their product: Tobacco advertising is allowed in outdoor and print-media advertising, and was the country's second-largest overall ad-spending category in 2001, at 107 million ($114.9 million). That was up from 96 million and fourth place in 2000, according to ZenithOptimedia, a research and media-buying agency owned jointly by Publicis Groupe SA of France and Cordiant Communications Group PLC of Britain. In Spain, which also allows outdoor tobacco ads, tobacco companies spent 26 million on outdoor ads in 2001, up from 24 million the year before.

Tobacco is the biggest category in outdoor advertising in Russia -- where outdoor represents 40% of all ad-spending, compared with 5% world-wide. In 2001, tobacco advertisers spent $49 million on outdoor ads in Russia, up from $21 million in 2000, according to ZenithOptimedia.

Russia has another advantage: As consumers recover from the 1998 financial crisis, the market for more expensive cigarettes is growing. To tap that affluence, Gallaher introduced a line in Russia last year called Sobranie Classic to compete in the so-called "premium" category against relatively prestigious brands like Altria Group Inc.'s Marlboro. "Classic" is lower-priced than the Black Russian, which belongs to the "super premium" category, but classier than the loads of cheap smokes sold in Russia. The expensive Sobranie Black Russian is unlikely to generate huge sales volumes, but since they're so distinctive, Gallaher hopes new ads for the luxury cigarettes will confer more prestige on the Sobranie Classic line. It's like BMW advertising its top-end car to make the whole range seem cooler.

"There is a halo effect," Mr. Hill said. "Sobranie Classic is the more accessible product." A pack of Black Russian sells for about 80 to 85 rubles ($2.52 to $2.68 or 2.35 to 2.50); a pack of Sobranie Classic costs about 30 rubles.

The new Black Russian campaign seeks to create a classy image. One print ad shows a Black Russian cigarette against a black background. The eye is drawn first to the gold trim, which makes a viewer think it's a picture of a gold bar. On closer inspection, people can see it's a cigarette. The tagline: "The finest quality since 1879."

A spot breaking in the next month or so will feature a black chess set against a black background, where a gold cross on the king stands out. The chess imagery is meant to evoke Russian identity, luxury and intellectualism, says Graham Mills, executive creative director for Arc London, a Publicis Groupe unit that worked on the campaign.

Russia prohibit tobacco advertising on television and daytime radio but allows it on radio at night, on the inside pages of magazines, and in posters on sites that aren't within 100 meters (330 feet) of a school, according to ZenithOptimedia. Britain by contrast is instituting a ban on print and poster advertising this month; it already bans tobacco ads on TV. The European Parliament recently endorsed a ban on most tobacco publicity as well.

"Russia, relative to other European markets, is the Wild West in terms of what's permitted in advertising and promotion," says Martin Steinik, a tobacco analyst at J.P. Morgan Chase in London.

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