Karelia Tobacco Company Inc.

Athinon Street
Kalamata, 24 100
Greece
Telephone: (+30 2721) 6900-2
Fax: (+30 2721) 6908-0
Web site: http://www.karelia.gr

Public Company
Founded:
1888
Employees: 539
Sales: €916.71 million ($1.05 billion) (2017)
Stock Exchanges: Athens
Ticker Symbol: KARE
NAICS: 312230 Tobacco Manufacturing; 424940 Tobacco and Tobacco Product Merchant Wholesalers

Karelia Tobacco Company Inc. is one of the world's largest independent and family-owned producers of cigarettes and other tobacco products. From its historic base in Kalamata, Greece, Karelia Tobacco has developed a major international presence, through flagship brands such as Karelia Blue, Karelia Slims, Omé, Wellington, George Karelias and Sons Excellence, American Legend, and Leader. Karelia Tobacco is the leading tobacco company in Greece. Nonetheless, exports represent more than 85 percent of the company's revenues, and its products are distributed to more than 65 countries. Most of the company's production is carried out at its Kalamata headquarters, which boasts some of the world's most modern cigarette production equipment, churning out more than 15 billion cigarettes per year. The company also has sales offices in Athens and Thessaloniki, as well as in Sofia, Bulgaria, and London. The founding Karelias family owns more than 90 percent of the company's shares. Victoria G. Karelia is the company's chairwoman, and Andrew (Andreas) G. Karelias is the company's managing director.

FOUNDING: 1888

Although tobacco had been introduced to Greece shortly after it was first brought back from the Americas in the late 16th century, pipe smoking was to remain the most predominant form of tobacco use until as late as the early 20th century. Tobacco was first introduced as an import product by French merchants in Thessaloniki, before domestic cultivation began in the Vardar River valley. Nevertheless, Greece's early history with tobacco was a turbulent one. Under the rule of Sultan Murad IV, a prohibition was placed on tobacco use, and violators were put to death. Tobacco smoking was also responsible for a rash of fires, including one that destroyed much of the city of Sérrai in the 18th century.

The tobacco trade became a royal monopoly under the reign of Sultan Mustafa III, who ruled the Ottoman Empire between 1757 and 1774. Originally a luxury product, the increasing availability of tobacco in the 18th century led to the spread of its popularity throughout much of Greek society. This in turn spurred a growing industry of pipe craftsmen, as the pipes themselves became a symbol of one's wealth and social status.

COMPANY PERSPECTIVES

Our Company's corporate ambition is to grow our presence in world markets, continuing to deliver unique brands of high quality. Our commitment is to generate long-term value for our shareholders and employees, delivering positive financial results, year after year.

The growing adoption of tobacco smoking in Greece encouraged brothers George and Efstathios Karelias to found their own tobacco products business in their hometown of Kalamata, in the Messinia region of the Peloponnese Peninsula, in 1888. The company started out by selling paper packets of pipe tobacco. Although tobacco later emerged as a major agricultural crop in the Messinia region, the brothers at first imported their tobaccos from Greece's main growing centers in Thrace, Macedonia, as well as from outside of the country.

The introduction of the first hand-rolled cigarettes represented a major milestone in the history of the tobacco industry in general. In the United States, commercial sales of cigarettes started during the Civil War period but took off especially after James Bonsack's invention of the cigarette-making machine in 1881. Although this machinery was slow to reach Greece, demand for cigarettes themselves grew steadily into the turn of the century. The Karelias brothers responded to this demand, expanding its workforce of cigarette makers. Each cigarette maker, working with an assistant, was capable of producing as many as 3,000 cigarettes per day.

ENTERING THE MACHINE ERA: 1916

In the years leading up to World War I, the Karelia factory became a prominent supplier of cigarettes and other tobacco products in the Messinia region. By that time the company had come under the direction of George Karelias's four sons, Andreas, Ioannis, Konstantinos, and Efstathios. With Andreas Karelias taking the lead, the company purchased Greece's first automatic cigarette-making machine in 1916.

The acquisition of the machine met with strong resistance from the company's workforce, as the machine's production capacity of nearly 30,000 cigarettes per hour far outpaced their hand-rolled output. Nonetheless, the company persisted in its modernization, allowing the company to grow into one of Greece's major cigarette manufacturers in the interwar period. In Greece, as elsewhere, the new machinery not only made large quantities of cigarettes available for the first time, it also brought about significant reductions in the cost of cigarettes, sparking a new boom in cigarette demand. Greece soon emerged as one of the largest tobacco markets, per capita, in Europe, and more than half of the population continued to smoke cigarettes well into the end of the 20th century.

Karelia's steadily expanding production was matched by its growing reputation, as its sales extended throughout the Peloponnese Peninsula through the 1920s. The company incorporated as G. Karelia Bros. Co. in 1925, and sought broader expansion. This effort was successful, raising the company from a position as Greece's 29th-largest cigarette producer in 1929 to its 9th largest in 1932.

Karelia's expansion into a national leader took place especially after World War II, with the launch of a number of successful brands, including Extra Karelia, Eklekta, Rex, Lux, Rekor, and Lithi. As a result, the company took a place among Greece's top-five cigarette producers by the end of the 1960s. To pursue further growth, the company built a modern factory on the outskirts of Kalamata in 1971.

The Karelias family reincorporated the company as a limited liability company, Industry G. Karelia Bros. S.A., in 1962. In 1976 the company went public, listing its shares on the Athens Stock Exchange. The Karelias family remained the company's dominant shareholders, and continued to hold top positions in its management as well. The public offering corresponded with a new extension of the company's business, contract manufacturing, as it won the rights to produce and distribute R.J. Reynolds' Winston cigarette brand in the Greek market. In 1981 Karelia added the Camel brand to its portfolio as well.

BRAND REVAMP

Throughout much of its history, Karelia Tobacco's production had focused on Turkish and other brown tobacco varieties. Into the 1980s the company sought to capitalize on the growing demand for U.S.-style blond cigarettes among Greek smokers. In 1980 the company launched a new, highly successful brand, American Legend. While popular in Greece, the American Legend became especially successful on the export market, and played a major role in Karelia's later international expansion.

KEY DATES
1888:
Brothers George and Efstathios Karelias found a tobacco products company in Kalamata, Greece.
1916:
The company installs the first automatic cigarette-making machinery in Greece.
1976:
The company goes public on the Athens Stock Exchange.
1991:
The company changes its name to Karelia Tobacco.
2017:
Karelia's export sales reach 85 percent of its total revenues.

Karelia also expanded into other Western European markets, adding an office in Belgium in 1995. Beyond tobacco sales, the company put into place its own logistics and shipping platforms, acquiring ship-chandler Meridian Duty Free Specialists that year.

During the decade the company also revamped its brand catalog, launching popular brands Karelia Lights and Karelia Special in 1992. The following year, the company introduced a luxury brand, George Karelias and Sons, as well as Karelia Ultra. These were followed by low-tar brands Karelia Ultra Low, Karelia Slims, and Karelia Rex Lights, in 1995. In 1996 the Karelia brand family was extended to include a menthol version. This was joined by a premium product, Karelia Royals, in 1999. The successful rollout of these brands enabled Karelia to consolidate its position as Greece's cigarette champion into the next decade.

The decision to revamp and extend the company's brand lineup proved a strategic one after Japan Tobacco Inc. acquired the non-U.S. operations of R.J. Reynolds in 1999. The following year, Karelia Tobacco ended its long-term partnership for the Winston, Camel, and other R.J. Reynolds brands, in order to pursue the development of its own brand portfolio.

INTERNATIONAL EXPANSION

Karelia Tobacco began gearing up to take on the global cigarette market. The company launched the largest investment in its history, spending €17 million to build a new state-of-the-art factory in Kalamata. The factory, equipped with industry-leading cigarette machinery capable of producing as many as 16,000 cigarettes per minute, was completed in 2003. As a result, the company's production expanded from fewer than 9 billion sticks per year to more than 12 billion. Further investments at the Kalamata facility enabled the company to raise its total production to 15 billion sticks per year by 2005

Karelia added a U.K.-based sales subsidiary in London in 2003. From this base, the company gained greater access to markets in Africa, the Middle East, and Asia. Africa in particular became an important market for Karelia Tobacco's export sales during the decade. These were growing significantly, by as much as 60 percent per year. By 2005 exports already accounted for nearly 75 percent of Karelia's total revenues, which neared €157 million. By that time, the company's products already reached nearly 70 countries.

Karelia Tobacco added to its international operations elsewhere. The company replaced its office in Bulgaria with the creation of a full-fledged subsidiary in 2007, after that country's entry into the European Union. The following year, the company added a subsidiary in Turkey as well.

Part of Karelia's success came from further extensions of its brand families. The company launched a new hand-rolled version of its luxury George Karelias and Sons brand, along with similarly branded rolling papers, in 2006. In that year, the company also expanded its bestselling international brand, Karelia Slims, with a lighter version, Karelia Slims Blue, while the company also introduced menthol versions of other popular brands, including American Legend and Karelia Family. In Greece, the company had a new bestseller product with the launch of its Leader brand. This brand was then launched onto the exports markets in two versions, the original Red and a light version, Leader Blue.

NEW PRESSURES

Karelia continued rolling out new cigarette brands, in part to shore up its slipping fortunes in Greece, as cigarette consumption began a slow decline. In 2009 the company launched the popular U.S.-styled Omé Superslims range, starting with two versions, Omé, with a tar content of 6 milligrams, and the lighter Omé Yellow, with 3 milligrams of tar. The success of the launch led Karelia to introduce a third in the line, Omé Menthol, in 2010.

The Omé Superslims brand became a new best seller for the company, particularly in France and other European markets. Sales of Omé in Western Europe reached 179 million sticks in Western Europe, including nearly 35 million sticks in France alone, in 2012. This represented an increase of nearly 500 percent over the previous year. Karelia followed this success with the launch of a new hand-rolled brand, Oriental Mist, launched as a sub-brand to the George Karelias and Sons luxury line, in 2015.

In the meantime, Karelia received a more dubious honor, as its American Legend brand became one of the bestselling of the so-called illicit whites brands, the name applied to cigarettes sold on the black market in order to circumvent the stiff taxes applied on cigarettes sales by France and other European Union countries. Successive tax increases, which were expected to raise the price of a package of cigarettes to €10 by 2020, helped drive the market for contraband cigarettes. In the case of American Legend, sales of the brand tripled between 2015 and 2016 after tax increases imposed by the French government.

Karelia also faced pressure at home, as rising cigarette prices, a floundering economy, and government-imposed austerity measures combined to reduce the number of Greek smokers. By 2018, only 27 percent of Greeks continued to smoke on a daily basis, down from 36.7 percent as recently as 2012. The country's total cigarette consumption had also declined significantly, dropping from 35.1 billion cigarettes in 2007 to just 17.9 billion in 2016.

Karelia's future lay in its export sales, particularly to Asian and similar markets in which the numbers of smokers remained high, with few expectations of a decrease, at least in the short term. As a result, the percentage of exports in the group's total sales rose above 85 percent by the end of 2017. Karelia hoped to continue its 130-year tradition as a leading Greek tobacco products producer into the next decade and beyond.

M. L. Cohen

PRINCIPAL SUBSIDIARIES

GK Distributors EOOD (Bulgaria); Karelia Bulgaria EOOD; Korealia Belgium SA; Karelia Tobacco Company (UK) Ltd.

PRINCIPAL COMPETITORS

Altria Group, Inc.; British American Tobacco P.L.C.; China National Tobacco Corp.; Imperial Brands PLC; Japan Tobacco Inc.; Philip Morris International Inc.; Vietnam National Tobacco Corp.

FURTHER READING

Alloush, Abed. “Karelia: Most Employee-Friendly Company in Greece.” Greek Reporter, January 2, 2014.

“Karelia Cigarettes. History and Review.” CIGSSpot.com , September 11, 2017. Accessed July 20, 2018. https://www.cigsspot.com/2017/09/karelia-cigarettes-history-review .

“Karelia Tobacco Company FY 2017 Net Profit at EUR 54.7 Mln.” Reuters, April 27, 2018.

Morgan, Colleen. “Ten Easy Pieces: Meet Karelia Tobacco Company ‘Voice’ Joanna Kamarinopoulos.” Moodie Davitt Report, April 26, 2017. Accessed July 20, 2018. https://www.moodiedavittreport.com/ten-easy-pieces-meet-karelia-tobacco-company-voice-joanna-kamarinopoulos .

Pentol, Andrew. “Karelia Adds Oriental Mist to Portfolio.” DFNI, June 18, 2015.

Smith, Helena. “Greece Stubs Out Its Cigarette Habit in Record Numbers.” Guardian (London), January 20, 2018.

“Top 10 Most Expensive Cigarette Brands in the World 2018.” Improb. Accessed July 20, 2018. https://improb.com/most-expensive-cigarette-brands .

Vidalie, Anne. “Contrebande: Le Boom des Marques Clandestines de Cigarettes.” L'Express, July 12, 2016.