Tobacco Strategy Review Team
The teorh meer'-n; of the Tobacco Strategy Re~~iew
--. was he.1d on 31st
0 c:ooer 1988.
?resent: Mr. F. Sheeh7, Mr. E.A.A. Bruell, 1r. .0-
Bramley,
U. Herter, :ir. -
Mr. R.J. Pritchard, Mr. '.J. Saboia e Silva,
Dr. R. Salter (Secretary)
M r -3.P. Carraway, Mr. R.F. Frigon, Dr. H.
Erichsen and
Mr. P.J. Rombaut also atteaded the meeting.
Mr -A.L. Heard was present for items 11 to Z5
inclusive.
I. Introducing the meeting, the Chairman said that
the membership of the team
had been extended to include the Chief Executives
of the Tobacco
businesses in 3A-,Co., BATUS, BATIC and Souza Cruz
with Mr. 3ruell
representing the Associated Companies, Imasco and
Amaril".
2. Reviewing the terms of reference. it was noted
that the principal aims
of the team would be to ensure that the Croup
mounts a coherent strategic
thrust in Tobac~o, that there is effective
technical and marketing
co-operation between the Group's Tobacco
businesses and char there is a
unified ao-)roach on Smoking Issues.
,he ceam -oult ~e concerned with major new
initiatives and wi:h removing
structural and other obstacles to effective
marketing or technical
co-operation. :: was not intended that it should
be concerned with
=ouitorin; prog-ess in areas where co-operation is
already proceeding
satisfac:cril7 or with issues which are specific
to only one Operating
Group. 3cwever, it may be used as a means for
sharing information in
cases where this appears to be appropriate (e.g.
where a development in
one compar! could be of wider interest).
3. The minutes of the orevious meeting, held on
5th Noje=be: 1937, were
agreed.
4. Cm Smoking Issues, Mr. 37amley reported chat
the su=ry compendium
would be timile:ed in November and it is hoped to
be able to launch it by
the end of the year.
5. Following on from :his, it is hoped to be able
to comple:e and launch a
more detailed ca.pendi-, which will be directed at
the scientific
communitv, in March 1989. .
6. It was noted that the major public conference
on lo-risk epidemiology,
covering a range of other subjects as well as
Tobacco, W3S still scheduled
to be held in Cermany in March 1989. Philip Morris
were organising their
own conference in Februar-y but this would be
limited to Tobacco. It was
unfortunate that the two conferences were being
held so close together and
Mr. Bramley was monitoring the situation to ensure
that any possible
adverse effects were aLinimised.
7. ne Chairman emphasised the importance of
maintaining pressure on Smoking
Issues. He believed that the two compendiums vould
be useful in this
respect and stressed the need to have them
translated into German, Spanish
ad Portugese.
:
t was suggested chat while maintaining presaure at
the national level,
articular emphasis should be given to organisiag
representations at
municipal level, using local people as much as
Possible.
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8. 1: as noted that work sponsored by the Tobacco
industry in the USA on
Environmental Tobacco Smoke (ETS) -as being funded
jointly by Philip
Morris and R.J. Reynolds rather than by the
Tobacco Institute. Br-
Willia=son had put money Into privately funded
projects at the University
of Kentucky and was active in promoting work on
'sick-buildiags' to
research the degree to which radon and air
conditioning systems were
important contributors to environmental health
hazards.
9. Mr. Herter reported that BATCF had organised a
conference on ETS jointly
with the Austrian Tobacco monopoly. They were also
co-operating with
wholesalers in ensuring that the iadustr7 position
was represented
effectively to government both at local and
national level.
10. Mr. Saboia reported that Souza Cruz were also
active in this respect in
Brazil where there was a trend towards more
restrictive legislation (e.g.
regarding 7_75 in non-vencilated enclosed spaces).
11. Mr. Heard reviewed Research and Development.
Total Group ex?enditure
on Tobacco-related R&D was L30 million. The
majorit7 Of this was managed
and funded locally but there was a co-ordinated
programme of Group
Strategic R&D accounting for around 10Z of total
expenditure. Total
expenditure in 1988 had been b~dgecced at E3.3
aillion split as follo-s:-
(a) Sooking Issues Research (External) EO.3 illioc
(b) -,jndam-tal Research (mainly BAT'J'K&Z) iZ.0
mi:lion
(c) ?:-o4ec: Greendot (BA7,TJTK&Z) fo-5 million
(d) ?7-_~ect Airbus (3row~n & Williamson) LC-5
i2lion
12. Smoking :SSUes Research comprises a group of
projects by medical and otter
scienri-ic departmencs of universities, by
hospitals and by ocher
reputable institutions identified and agreed with
CAC companies. The -.zst
of these projects is split equall-7 between the
CAC cormpacies, excluding
Brazil. I: was noted that the same system of
Eunding would be retaized in
1989 but -chat the overall level of e_x?enditure
would be Increased by I'D'-
--is as a lo-er level than the original proposal,
which had been for ar.
i.cre.se of 25Z.
13. It was noted that the Fundamental Research
programme divides into projects
responding to regulator-7 issues (such as
Eaviro~ntal Tobacco Smoke) and
those a-'=ed at improvement of product quality.
Important elements of this
work are pro.ects to reduce specific products from
smok-ing to defined
levels, projects to measure the degree to which
certain chemicals persist
in enclosed environments and the development of
In-vitro, tests applicable
to tobacco products. Consideration is given to
publishing work wherever
this is judged to have scientific merit. Product
developments include a
fire-safe cigarette and flavour developments in
Souza Cruz. It was noted
that a 151' Increase in expenditure on fundamental
research to L2.3 million
was proposed for 1989.
14. Project Creendot hag the specific aim of
developing a cigarette with very
low tar content but normal nicotine delivery. The
aim is to move from a
current 10:1 to a 2:1 Tar/Nicotine ratio aver a
five year programme of
development which will include modifications both
to the Tobacco and to
the design of the cigarette itself. It was agreed
that in viev of the
importance of this project, efforts should be made
to accelerate the
development programme. The proposed level of
expenditure in 1989 is ED.75
million, which is a 50Z Increase on 1988.
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15. ?roject Airbus is a more radical approach to
deveioo a product which hag
some sl_=ilaricies to the recently launched R_JR
ier, but which relies
on an alternative system based on developments
--!Its and Hughes,
patented by BAT.
16. It was noted that RJR had now launched Premier
in two States in the USA.
While it was too early to be able to gauge the
response of the market, the
initially unattractive taste and aroma and the
technical problems
associated with the difficulties in lighting the
product, the variations
in length and a shelf life limited to five months
were all identified as
significant problems that would need to be
overcome. It was also noted
that even the status of Premier as a fire-safe
product depended on a
narrow technical definition of the tesc applied
and was critically
dependent on the orientation of the product when
tested.
17. in addition, there is the more fundamental and
still unresolved question
as to whether the product vill be classified as a
drug delivery system
rather than a cigarette and thereby fall under the
jurisdiction of the
'FDA.
18. Despite the uncertainties about Premier, it
was agreed that this was a
significant development in which there was a high
level of public interest
and which could not: be ignored. It was also noted
that although Philip
Xorris had not made any public statements on the
R.JR development, they
were though: to have developed a similar product
which they were holding
reserve fcr a ?ossible launch as a competitor to
Premier.
19. With the exception of Switzerland, where new
regulacicns vould effectively
preclude the launch cf this type of product, mo6t
count-.ies were adopting
a similar attitude to --nat in the TIS in taking
at least a neutral stance.
No
N restrictloas were expected on sales of the
product in Brazil and in
Germany, the authorities were generally supportive
of a develop=ent which
was seen as being positive on public health
grounds. However, it was
still thougn-. tha: if there was a decision in the
US that the product
should be classified as a drug del.'ver7 system,
attitudes ould be
reversed worldwide and RJR themselves have said
that tf the product were
be placed under the jurisdiction of the FDA, it
wo~,ld be wizhdrawn.
20. It was agreed that ;>-ending clarification of
the regulato" situation and
further evaluation of the impact in the market of
the ICR prr~~duct, the
development of Airbus should continue.
Z.. it was noted that since the design of the
product involves some combustion
of the Tobacco, it has a greater claim than
PresLier to be classified as a
genuine cigarette. However, it might still
encounter the same
difficulties as Premier if this was classified as
a drug delivery system.
22. It was also noted that there ere still
technical difficulties to be
overcome and it had not yet been possible to
develop a protOt7pe of a
satisfactory Airbus product. The current aim vas
to complete this phase
of the project by March 1989.
23. It was noted that it was proposed to increase
the expenditure on the
project from LO.5 million in 1988 to E3.88 million
in 1989. However, in
view of the =certainties both about Airbus and
about Premier, it was
agreed that before going beyond the prototype
stage, the pro.1,ect should be
reviewed again in the light of the progress
achieved in the project itself
and in relation to the situation with regard to
the RJR product. It was
agreed that this review should be held in March
1989.
BATCO C014FIDENTIAL - CATEGORY 1:.NIINNESOTA
TOBACCO LITIGATIO,"'.
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24. It was suggested that the expenditure on the
Fundamental Research, on
Greendo: and on Airbus should be funded on a
similar formula to that
applied in 1988 giving allocations as follows:-
L=
BATCo.
Brown & Williamson
BATCF
ITL
Amatil
TOTA.L
1988 1989
0.75 L.73
0.90 2.08
0.57 1.32
0.57 1.32
0.21 0.48
T-.00 6-93(a)
Note (a) Z3.38 million of the additional
expenditure is accounted for by
Airbus and is subject to a favourable review of
that project in
Karc.h '1989.
I
25. On Tobacco ftDansion--
(a) Mr. Bramley reported that the APEX development
is held up pending
the com-pletioa of toxicity tests -here there have
been problems in
f'-ndin,g suitable laboratories who have the
capacity available to
undertake this work. The costs of install-Ing the
plant are also
being ajeried. However, this is still considered
to be an excellent
product.
(b) I: is inteaded to close tne D1Z_T plant in
Berlin and to sell this tn
Austra:_~a.
(c) :: was noted that G13 is still in use in
Singapore and the Chairman
under-14ned the need to implement the polic7 to
eliminate processes
using Fluorocarbons throughout the Group.
26. On Leaf Buvina, Mr. Bracley reported that the
co-ordination between
BATCF and BATC0. was progressing and would be
fully operative by end-1989.
More genera'-'.7, it as noted that greater
co-ordination of leaf buying
would enable stocks to be reduced throughout the
Group and it -as asked
that Mr. Bra=.ley should arrange for Mr. Davis to
produce a review report
for the next =eering, showing the impact of
co-Drdinatec' leaf buying in
reducing durations.
27. Reviewing the progress with BarclaT and CAPri,
it was noted
that:-
(a) Capri was now national in the USA where it had
an 0.452 market
share. The 120mm product had been launched and the
Chairman
suggested that this version was a particularly
clear statement of
uhat the product stood for.
(b) Elsewhere, Capri had been launched in 68
markets and while the
progress of this product and of the competitive
product Vogue had
been limited in Europe it had made more progress
in the Middle
East.
(c) Mr. Herter reported that there was no real
interest in Ultra-thin
products in Germany and larclay was still having
Limited
success. However, the brand was being maintained
and further
attempts would be made to develop it in 1989.
(d) Mr. Bramley reported that Barclay was still
progressive in
Holland. Belgium and Finland and was holding share
In
S - i t z e r !a n d .However, there was no
interest In Denmark.
BATCO, C0,14FIDENTIAL - CATEGORY 1: N11,NESOTA
TOBACCO LITIGATION.
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(e) Mr. Pri 'chard reported that despite the ~: :
3cks by Philip Morris ,
Barclay was still doing well in the Xid--'. - --st
and was progressive
in other export markets.
(f) Although Callahers had shown no interest Ln
licencing Barclay or
Capri, Tabacalera had shown a more positive
interest and further
talks on this were scheduled for November. It was
also intended to
negotiate ith the Swedish monopoly in 1989.
The Chairman reiterated the importance of keeping
up the pressure in
developing the markets for Barclay and Capri and
asked for a further
review of progress to ~>e prepared for the next
meeting of the team.
.8. Regarding the
work to prepare for the Single Rarovean Market
scheduled
for completion by 1992, the paper summarisiag tbe
current position on the
project to push ahead with Manufacturing
Rationalisation was noted.
29. Mr. Sramley reported that Mr. Heywood was
chairing a team, including
representatives from BATC?, which had set up study
groups to prepare
proposals on each of the key aspects of the
Group's activities which were
likely to be affected by the development of the
single market.
30. On Tax Harmonisazios, 3A7 were trying to
persuade the Com=ission to move
from their current proposal of a specific tax of
19.5 ecu and an ad
valorem tax of KZ to 31.7 ecu plus 40Z ad valorem.
This was felt to be
more realistic than the position adopted by the
other Free Znzer?rise
Tobacco companies which were still pursuing a
policy of pressing for a
100'. specific tax, in direct opposition to the
Monooolies who were
pressing for ICCZ ad alorem.
31- ne study gr3up ~;ere also considering the
problem of Ro-'! Y:,;r Own (RYO)
and -were for-=ulatlag apprcpriate proposals.
32 - The Chairman emphasised the im:)ortance of
coming to a firt: decision on the
optimum BAT posizion on the tax issues including
RYO, as a preliminary to
pursing this as effec:iely as possible on a
political rather t.-lan merely
a technical plane. 3e also suggested that further
emphasis should be
given to strengthening the political approaches
being made ~)oth to the
ComnLl.ssiou and to iodiv'-~-~al 4onopolies and
CompacLies in at attempt to
influence them -,z)wards ou- point of view.
33. Mr. 3ramley reported that a position paper was
being prepared on marketing
issues arising from the single market and this
would be completed by the
end of the year. -'his, and the other aspects of
the European Single
Market, including the effect on the Duty Free
trade, were continuing to be
given a high priority within BATCo.
34. Following a discussion of Cigarette F-xvorts,
it was agreed that a
separate study should be set up to review the
criteria applied by each
of the Tobacco companies in deciding both the
extent to which exports
should be pursued and the way in which each market
should be sourced.
In the latter case, one of the factors to be
considered would be the
need to ensure that the activity provided an
acceptable return on the
funds employed in the business, taking both fixed
assets and working
capital into account.
Subsequent to the meeting, it was agreed that Mr.
Pritchard would be
responsible for co-ordinatiag this study.
C3
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13
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35. It was noted that in certain markets,
tom?etitors -ere offering cigarette.
at very low prices, thought to be sour=ed from
Brazil. The Chairman
thought tha: this might be classified as dumping.
He asked the Secreta-T
to Investigate further whether this is so and, if
it is, what action might
be taken against the companies concerned.
36. On the develoi:)ment of new markets and the
co-ordination of =.Jar
initiatives to Improve market share (e.g. in
Japan, China, Thailand,
Turkey, etc.), it was agreed to defer discussion
until the next meetin;-
37. Regarding Skaodinavisk, it was noted tnat no
further action was
possible at present to increase the Croup's
shareholding in the compaa7.
38. Regarding representation in Ital~r, Mr. Bruell
and Mr. Pritchard
reported that after reviewing the position they
had decided that there was
no real alternative to continuing with the current
agent. However, there
would be continuing efforts to find ways to
improve the effectiveness of
this representation.
39. On Management DeveloDment, the Chair=an
emphasised the need for the
managers in the Tobacco business both to take an
active interest in the
Tobacco courses at Chelwood and to suggest
improvements where these were
felt to be appropriate. One of the ad,antages of
having industry specific
courses -as that they provided an opportunity to
cover subjects which were
Important to the industr,7 and which maaag~rs
ougnt, to know about as par:
of the general background to their jobs. As an
example of this, evervc=e
should be informed about excise s,7ste=s and their
Importance to 'obacc~
companies. if Chelwood did oot incl,de this as a
sub.'ec: on their To*---zco
courses, 1: should be suggested to tthe.= that
they should.
40. Inter-comr,anv transfers of managers ;e:e an
important as?ect of
management development and it was suggested that
progress on this shou__~
be actively =onitored by :he tea=. Subsequent to
the meeting, Mr. Br----Iev
was asked z::~ co-ordimate this and zo re-r: back
on the arrangements
had been set up.
41. The c~rren: developments at RZR/Nabisco were
noted and it was agreed
that the information on the current status of
their overseas Tobacco
operations should be updated so that BAT could
move quickly I!
opportunities or threats emerged as a result of
changes in direction ~7
RJR. Mr. Bruell. agreed to co-ordinate the
collection of this Information
on the current market position, :he physical
facilities and the estimated
values of ?_'R's overseas operat'lons. It is
intended that this review -411
be completed by the end of November when I: will
be discussed by the C?C.
42. It was noted that the next meeting of the team
is likely to be held in
6 months' time in March/April 1389.
RS/DJA
23 rd November 1988
BATCO COiNFIDENTIAL - CATEGORY 1: M1',Nr:.SOTA
TOBACCO LITIGATION.
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BATCo document for Province of BritiSh Columbia 26
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