Given that the transition phase will no doubt be a relatively slow process, this is perhaps a good time to review Bentoel’s fundamentals and its current status, both domestically and overseas, to gain a better understanding of what attracted BAT to the company in the first place.

The market share of kretek in Indonesia has continued to grow at the expense of white stick sales. BAT has suffered in recent years as tax increases and the increasing popularity of mild, lower tar, filtered kretek products continue to erode its brand’s market shares.

Low tar and nicotine kretek brands such as Sampoerna’s A-Mild, Bentoel’s Star Mild and Class Mild, and Djarum’s LA Lights and continue to see their sales growing as more consumers are attracted to them .

Meanwhile, annual tax increases appear to be the norm, and, as Tedjawidjaja pointed out to Tobacco Asia, "the holiday is now over." In Indonesia’s multi-tiered tax system with its 37 tiers based on various criteria including production volumes, even a modest tax increase can spell instant success or disaster for a brand as smokers trade down in reaction to price increases.

Over recent years, Bentoel, which has a complete portfolio covering virtually all the segments in the market, has been luckier – or cannier – than some others with its product development and pricing strategies. The company’s best-selling brand nationwide is X-Mild, while Star Mild is its highest selling brand in Jakarta.

Its white stick brands also enjoy moderate success in this predominantly kretek market. Bentoel’s Country white stick brand in particular is able to hold its own against the Likes of international brands such as Pall Mall and Marlboro. Country is the number one local white stick brand in Indonesia.

"Bentoel is the only local company successful with non-clove – white – cigarettes," said Tedjawidjaja. "The other players are not quite there yet."

The government is currently seeking to introduce a more "rational" approach to tobacco taxation, reducing the number of categories and tiers and simplifying rates.

No one can predict exactly when the tax tier restructuring will be implemented. Currently the major categories are for white sticks, hand-rolled and machine-rolled kretek. Each segment is divided into tiers based on production volumes. The tax assessment is divided into ad valorum and specific tariff. It is predicted that the government will shift more towards specific tariffs within the next few years. The timetable is not set in stone, but most industry insiders expect to see some tangible changes by 2012.

Around INR42,000 billion tax collection on an estimated annual consumption of 240 billion sticks was targeted for tax income in 2008. The industry estimated that in 2009 there would be a 6%-7% increase on overall taxes. This has proven to be an accurate guesstimate so far.

"We would like the government to consider all the stakeholders, meaning tobacco companies, workers and farmers," said Tedjawidjaja. "Tobacco consumption issues also need to be carefully considered. FCTC is still not ratified, but the government appears to be moving closer to it.

"Getting there is likely to be tough and will no doubt be at the expense of smaller cigarette manufacturers," according to Tedjawidjaja. "The top ten manufacturers probably have enough advertisement and promotion budgets to allow them to build or at least sustain brand equity. An increase in excise every year can still be passed off without too much impact on volume. But smaller companies suffer as the government continues to raise excise. Specific taxation hurts smaller players. The cost of production is going to get bigger and bigger, and if the product has no brand equity it is very difficult to compete. The end result is likely to be fewer larger companies dominating the market. Once we are there, it becomes a fight for brand equity and consumer loyalty and product quality," Tedjawidjaja said.

And this is a fight that Bentoel seems well-placed to fight.

"Bentoel allows no compromise for quality. That is one of the reasons the company has survived," said Tedjawidjaja. "Even at the hand-rolled market place Bentoel’s packaging and the cigarettes themselves are of high quality, often significantly better than some of its competitors."

This fact seems not to have escaped the fans of Bentoel’s products. Currently hand rolled and machine rolled kretek at the medium price levels are growing faster than the rest of its portfolio.. Bentoel’s iconic Biru is seeing increased sales, due perhaps to a rejuvenated appearance incorporating metalized packaging, and a slim variant has been introduced to attract younger smokers. The original Bentoel Biru was the first machine-rolled kretek product ever made. The current variant is a proud descendant of an esteemed lineage.

"Products have evolved to encompass consumer demands," according to Tedjawidjaja. "The mild segment is the fastest growing segment in the industry. The trend appears to be that products that are not priced over INR6,000 (US$0.63) are likely to succeed. Most products launched these days are in that price segment, one of the most competitive segments in the market today."

However, perhaps because of the ongoing economic problems affecting the domestic market, some premium products are starting to get hit.

"Volumes are starting to be eroded," Tedjawidjaja admitted. "Sales volumes for Sampoerna’s A-Mild, which is priced at between INR9,000-9,500, are in decline, and Bentoel’s X-Mild, priced at between INR 7,700-8,000, is also suffering."

Bentoel has learned to be very careful to develop brands that do not compete with each other.

"We have a ‘war map’ on which strategy is evolved," according to Tedjawidjaja. "We consider as many aspects as possible, and If we decide we cannot achieve a top three position in the segment, we would be unlikely to invest in that product. Spending is more focused on products we believe are more likely to succeed based on extensive research."

"One of our competitive edges is that we never leave quality behind," Tedjawidjaja said. "Even in our value-for-money brands the quality is high above that of our competitors. The primary and secondary factory machinery is constantly rejuvenated. New machines have recently been installed including new Hauni Protos Mark 9 cigarette makers so our standards are extremely high and meet international specifications."

Bentoel’s new GLT plant, with an 8-tons per hour capacity, is currently undergoing trials, so all domestic tobacco used in Bentoel products will be processed in-house once this facility comes online. The majority of tobacco used in Bentoel’s products, about 95%, is sourced in Indonesia. Some oriental leaf is imported. The company pays a fee to appointed agents to source its tobacco requirements. Once sourced the tobacco is kept for six months, then Bentoel regrades it and pays the agent based on the results.

"In this way, some of the risk is transferred to the agent," Tedjawidjaja explained. "The agent is typically familiar with the farmers, the regional variations and so on, so the chance of being duped is reduced."

In 2003, Bentoel initiated a strategic scenario, laying out a long-term plan for the company including digitalized production. SAP was introduced as the main infrastructure. It incorporated the B1 system, an umbrella system covering sales and distribution sales staff. All data is uploaded and downloaded daily by PDA. All inventory, sales and revenue data is transmitted daily, allowing all directors and relevant management personnel to have access to appropriate information. Sales managers can see the track of the business over time. Competitors’ results are also available as salespeople input market intelligence in real time. This system has proven to be an invaluable tool.

"Bentoel’s success over the last few years has been achieved through very good data management, by integrating SAP end-to-end and by having good, professional and dedicated people in the right positions," according to Tedjawidjaja. "Added to this is the fact tat Bentoel has good R&D, and a good portfolio – Bentoel has brands in every tier and every segment."

Mindful of its responsibilities to the agricultural communities on which it depends for its tobacco and workforce, Bentoel has undertaken a number of initiatives to serve the communities on which it depends. The Bentoel Medical Center – a polyclinic in Malang – initially served 20,000 Bentoel employees. The facility has now been opened to the general public .

"Whenever there is a disaster anywhere in Indonesia, doctors and support staff, ambulances and so on are dispatched to the area to assist," said Tedjawidjaja. "This is part of Bentoel’s corporate responsibility efforts." The company remains active in social and legislative processes though its association with GAPRI, the kretek-manufacturer’s association and Malang-based GAPEROMA, a local pressure group representing over 10 manufacturers allied with GAPRI, utilizing the associations’ primary lobby thrust rather than involving itself in direct efforts to influence government policies and strategies with regards to the tobacco industry..

Malaysia is the only country to which Bentoel currently exports significant volumes of kretek as there are a lot of Indonesian workers there.

"We do a small kretek trade to Australia, but for the moment we manufacture kretek locally in Indonesia and export to Malaysia," said Tedjawidjaja. "The importer sends us the tax stamp and we place it on the pack during manufacture. The importers are pushing products in the market, and sales are increasing year-on-year.. The biggest selling brand is Star Mild. Proportionately we see the same product split as in Indonesia."

The products are the same as the Indonesian kretek, but the packaging has been changed to reflect Malaysian specifications.

Other kretek markets that interest Bentoel include the Middle East and possibly India.

"Korea and Taiwan have not proven to be good markets," Tedjawidjaja admitted. "We are looking for places with Indonesian expat workers, so the Middle East, Dubai, and so on, are obvious places to introduce Bentoel products. Kretek is a niche market, one of the advantages for Bentoel is the fact that only Indonesian manufacturers can manufacture kretek and many are not willing to try exporting. But we are still looking for the right partners to introduce kretek to non-Indonesian smokers."

Another of Bentoel’s advantages is its expertise producing white sticks. It was a licensed Marlboro manufacturer for 14 years, from 1984 to 1998

"White cigarettes are very saleable to Taiwan," said Tedjawidjaja. "Our local distributor is doing a good job. We have received a few inquiries to export to China, there is a possibility of developing the market. Kretek may also be something Chinese consumers may warm to, but they don’t like the sweetness. We need to develop less-sweet flavor profiles."

Malaysia is another market Bentoel’s white sticks have already penetrated, and the company has received lot of inquiries from other importers for OEM products. Asian markets, particularly AFTA members, are an obvious target for export activities.

"Geographical and tax agreements such as the AFTA free trade agreement make Indonesian products a very attractive option, so if we have a buyer from Malaysia, Korea, the Philippines or Thailand, manufacturing in Indonesia makes sense as the tariff is lower."

The contract manufacturing side of the business is another area where growth is likely to occur as Bentoel has a great deal of experience as a successful third-party manufacturer.

Now that BAT is about to call the shots, Bentoel is likely to see its fortunes continuing to grow domestically and overseas.

• Established in 1930’s

• Pioneered machine-rolled kretek in the 1970’s

• Experienced financial difficulties in the 1990s, new investors stepped in and the company was restructured. By 1997, all debts had been settled

• Star Mild was introduced in 1996, growth helped Bentoel to roll back into profitability

• In 2000 the company went public though a "backdoor" listing and continued growing

• Currently 4th largest cigarette manufacturer in Indonesia

• Only domestic manufacturer with product in all four segments of the market (hand-rolled kretek, machine-rolled kretek, machine-rolled kretek mild, white sticks)

• Sales in 2008 reached 17.5 billion sticks, the highest sales volume in Bentoel’s history.