Gallaher Foothold in World's Largest Cigarette Market

Gallaher, the maker of Benson & Hedges and Silk Cut, hopes to spark off opportunities in the world's biggest cigarette market after signing a joint venture deal with China's Shanghai Tobacco Corporation.

The British firm will make, distribute and sell its Memphis brand in the far eastern country in return for marketing Shanghai's Golden Deer brand in Russia.

All the leading western tobacco firms have been looking at ways to break into China. The country has started to dismantle its commercial boundaries since it joined the World Trade Organisation.

Gallaher said the arrangement with Shanghai would not generate a large number of sales in the short term. "Its real value is the long-term relationship it will develop leaving us well-positioned in two to three years," explained a company spokesman.

Gallaher signed a letter of intent with Shanghai 12 months ago and yesterday's confirmation will enable Gallaher cigarettes to be sold from the first half of 2004.

Annual sales of tobacco "sticks" in China have reached 1.7 trillion and it now accounts for one-third of the world's total. Gallaher has been selling its Sobranie brand in China under an import licence for the last five years and sales rose 60% last year but domestic brands still dominate the wider market with a 98% share.

Shanghai - a subsidiary of state-owned China National Tobacco Corporation - is the second largest tobacco company in China and is keen to counter market liberalisation at home with expansion abroad.

Russia is the world's fifth largest market with sales of 300bn cigarettes, of which 63bn were supplied by Liggett-Ducat, a subsidiary of Gallaher, for the last three years.

Since its stock market flotation in 1997 Gallaher has been keen to expand into foreign markets to reduce its reliance on the static British market.

Interim pre-tax profits at the tobacco company fell from £188m to £162m, partly as a result of the UK cigarette market falling 5% in the first half of the year.

Gallaher blamed the reduction in consumer spending on the government's decision to allow holidaymakers to bring in 3,200 cigarettes instead of 800 as previously.

It also said smuggling was as bad as ever.

City analysts welcomed the China connection and its shares rose 1.5% to 600p.