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LIMA-For 25 years here, Peru's smokers knew there was only one game in town: Tabacalera Nacional's Hamilton cigarettes. Hamilton's lock on the market gave Tabacalera a virtual monopoly.

But in mid-1993, Philip Morris Cos. and B.A.T muscled in. Instead of panicking, Tabacalera studied the multinationals' marketing, doubled its ad budget to nearly $1 million and added new promotional tactics that managed to maintain its overwhelming market share.

Until President Alberto Fujimori lifted import barriers in 1990, Tabacalera had virtually no marketing strategy: Its brands never needed to reach out to consumers.

"We'd done the same thing for 25 years and made money at it," said Jose Talledo, Tabacalera's new corporate marketing director. "But things have changed-there's competition here now. You can't have change without two elements: leadership and crisis. We lacked crisis."

The situation was more of impending crisis in mid-1993 when Philip Morris' Marlboro, already with a 5% share of the estimated $145 million cigarette market through black market sales, decided to go legal. In 1993, PM struck a deal with local candy and ice cream distributor Donofrio for Peru.

The share for PM's brand, smuggled in from Chile, was astounding because it depended entirely on informal street vendor sales from 60 street corners around the Peruvian capital.

Tabacalera, meanwhile, held an 80% to 85% share of the market, led by its flagship Hamilton brand which itself comprised half of Tabacalera's share.

The multinationals had good reason to come to Peru. Despite increasing government regulations controlling cigarette packaging and advertising-on TV, for example, marketers can't advertise until after 10 p.m.-Peru remains a country of smokers. More than 50% of Peruvian adults smoke, and more than 70% of young adults between 18 and 25 light up regularly.

The encroachers positioned themselves as U.S. brands, a proven selling tactic in Peru for everything from jeans to washer-dryers, and adapted international campaigns to Peruvian TV, print and outdoor.

Ads for Marlboro, by Publicidad Causa/ Leo Burnett, depict highways meandering through Nevada deserts and stone monoliths, while B.A.T's Lucky Strike ads from ProPeru broke grammatical rules with a "Spanglish" slogan: "Un Americano Original." Lucky Strike moved to Grey Peru in November but no new ads have been released.

To separate itself, Tabacalera decided to retain its positioning as a Peruvian original.

Tabacalera's knowledge of the local market gives it an edge, said Ricardo Winitsky, director of Publicitas Asociados, Hamilton's agency for the past decade.

Tabacalera reasoned that Marlboro's and Lucky Strike's fantasy lifestyles are irrelevant to Peru, where a gaping chasm stands between upper and lower classes, Mr. Winitsky said. "Hamilton has market share at all levels of society-a strong middle class does not exist." Many Peruvians believe they can't achieve as much as Americans can, he said, so Hamilton's marketing emphasizes everyday achievement with a dash of the surreal.

B.A.T took a more promotional approach. Peru Tobaco, the local distributor of Lucky Strike and Lucky Strike Light, started consumer contests last spring in nightclubs here, sponsoring such activities as basketball free-throw contests. The company also offered free branded T-shirts and lighters and established special Lucky Strike cigarette racks for stores, along with point-of-purchase advertising at 5,100 locations.

Tabacalera, which had done virtually no point-of-purchase or consumer promotions, responded with similar racks and storefront signs for Hamilton. The cigarette also became lead sponsor of Peru's biggest off-road auto race, the Caminos del Inca.

The company decided to further capitalize on its local advantage by introducing Oro Negro cigarettes, a harsh unfiltered brand made with black tobacco. The niche smokes are aimed at young males in the Peruvian Andes and rural communities and also at a limited consumer base in larger cities.

The approach worked. Marlboro went from a 5% share during its black market days to 6%; B.A.T. also ended 1994 with a 6% share. But the share came at the expense of small local companies: Tabacalera's share stayed at 80% to 85% last year.

This year, the company is looking to grow the category, noting that Peru's percentage of smokers is still less than that of Argentina, Brazil and Colombia.

"This business hasn't grown enough. Peru is lagging behind its neighbors. Miles and miles behind," Mr. Talledo said.

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