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TOBACCO STRATEGY MM TRAM
A meeting of the Tobacco Strategy Review Team was
held on 30th May 1991.
Present: Sir Patrick Sheehy, Mr. M.F. Broughton,
Mr. B.D. Bramley,
Mr. R.J. Pritchard, Mr. U. Herter, 4r. A. Monteiro
de
Castro, Mr. J-L. Mercier, Dr. R. Salter
(Secretary)
In Attendance : Mr. T.J. Wylie, Mr. E. Kohnhorst
1. The Chairman welcomed Mr. de Castro as a member
of the team in place
of Mr. Rombaut, who is retiring as President of
Souza Cruz.
Minutes of Previous Meeting/Matters Arising
2. The minutes of the meeting held on 27th
Febr-,;.ary 1991 -ere agreed.
3. Matters arising from the minutes were:-
(a) JTI : It was noted that there had been
continuing monitoring
of JTI as competitors. Although they c-.ntinued to
be active in
Far Eastern markets, there was no evidence of
dumping. There
was also no evidence that they were co7peting
actively for
business in Eastern Europe or the USSR.
(b) Overseas Travel : There had been no pr:~lems
in implementing
the proposed reduction in frequency o.- 7echnical
Liaison
meetings. The Chairman emphasised the need to keep
a strict
watch on travel overall, ensuring thar, :he same
rigorous
criteria were applied in justifying overseas
visits by
individuals.
(c) Export Training in Souza Cruz : It was noted
that training
in BATUXE was being arranged for the Brazilian
Export manager.
However, it had not been possible to ;rovide a
BATUKE manager to
work in Brazil. The Chairman stressed the benefits
in
transferring expertise through secondiseats of
staff and asked
I
Mr. Bramley to consider further whether it would
be possible to
make someone available for secondment --o Brazil.
(d) R&D Funding Arrangements : Mr. Broughc3n
reported that the
details of the arrangements for chargi:,.g out the
costs of the
centrally funded research in the most
:ax-efficient way had not
yet been finalised. Mr. Mercier suggested that for
Imperial
Tobacco the moat acceptable method for charging
might be based
on a fixed fee plus a percentage of turmover. It
was also noted
that following some relaxation of the 3razilian
regulations
relating to payments for technical assistance,
Souza Cruz might
be able to contribute to the costs of central
research.
.1 r. de Castro was asked to investigate and to
let Mr. Broughton
know the current position on this.
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November Marketing Seminar
4. The progress report on the arrangements for the
seminar due to be held
in Orlando, Florida from 19th to 23rd November -as
noted.
5. It was also noted that the Chairman would send
out invitiations early
in June and that Mr. Ec~=ann would then follow-up
--rith delegates on
the detailed arrangements for the seminar.
6. The managers to be invited would be as
follows:-
Brown & Williamson Sandefur, Whitehair,
Schoenbachler, Fitzmaurice
Souza Cruz Castro, Andrade
Imperial Tobacco Brown, Lee
BATCF Schweitzer, Tomat
BATCo. Brookes, Hazel, Wattertan, Ross,
Bruce-Miller,
Grant, Tandrup, Viner, Wurmser, Arnold, Laax,
Edmunds, Chugh, Borloz, YcDowell, 11atamoros,
Rahn, Dunt, Taylor, Adams, Rembiszewski.
7. Additions compared with the list agreed in
Februar7 were Dunt, Taylor,
Adams and Biszewski. Of these, Taylor replaces
Freire and the last
two are recent recruits to the BATCa. Board, who
are due to join the
company in the summer, from Pepsi-Cola and
Suchar~s respectively.
8. ne Chairman, Hr. Broughton, Mr. Bramley, Mr.
Prit--'-iard and Mr. Herter
will also attend the se.imar and it will be made
clear to everyone
that this is an important event to which they are
expected to give
appropriate priority in ensuring attendance and ia
preparing for the
meeting.
9. Reviewing the programme, it was agreed that
Brand Cood%rill, Excise
Structures, Cost-Effectiveness of Promotion,
Competitor Analysis and
Distributor/Trade Relationships were the key
issues which should be
discussed. However, it was suggested that, subject
to the
availability of the outside speaker, the proposed
order of the
programme should be changed, starting with Brand
Goodwill and Excise
Structures on the first day and then going on to
Cost-Effectiveness of
Promotion on Day 2.
Smoking Quality,
10. The Chair-man proposed that improving the
smoking quality of the
Group's products should be a key strategic thrust
for 1991-1992. He
suggested that companies needed to develop
improved measures of
smoking quality which related more directly to
consumer preferences.
They then needed to have improved programmes,
usiag these criteria
both to evaluate new products and to monitor how
existing products
stood relative to competitors. It was important
that there should be
an increased consciousness throughout the Group of
the importance of
smoking quality and of the need to exchange
experience on the beat
techniques for measuring this.
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11 . Mr. Kohnhorst described the evaluation
techniques used in Brown &
Williamson. He stressed the importance of bridging
the gap between
internal tests and the commitment to a test market
in a way that gave
added confidence that the test market would be
successful, without
involving the need for extended periods of
inter-mediate testing. This
had been achieved through the use of an external
(Dupont) panel whose
characteristics had been recorded in a way which
enabled markets to be
simulated on a small scale. This had enabled Brown
& Williamson to
cut down significantly on the cycle-time and cost
for testing new
products.
12. Mr. Mercier stressed the importance of
differentiating qualities
required by different consumer groups. In Canada,
certain qualities
which were a plus for Players smokers would be a
substantial negative
for du Maurier smokers and vice-versa. JPS, which
in theory was the
best cigarette Imperial made, appeared not to
appeal strongly to any
group and had a very low market share.
13. When Imperial made changes to the composition
of du 4aurier (e.g. to
reduce tar levels), care was taken to have each
new variant tested by
the established du Maurier panel of smokers.
14. It was noted that BATCF place a high priority
on both the physical
characteristics of their products and also smoking
quality, which is
monitored against competitors on a regular annual
basis. In cases
where BATCF products are found to be inferior,
appropriate development
programmes are initiated.
15. Although Marlboro has shown a steady
improvement year by year, Lucky
Strike is still thought to be superior on BATCF's
criteria. HB is
judged to be inferior but some apparently 'bad'
qualities may make the
cigarette more attractive to older smokers.
16. BhTCF will consider whether the Dupont
techniques might be adopted in
developing Improved tests.
17. It was noted that smoking quality was still a
problem in Souza Cruz
and improving this would be given a high priority
in 1991-1992.
18. Within BATCo. , OMEGA testing panels were
being established and were in
place in most companies. However, it was
recognised that smoking
quality still needed to be given a higher
priority. Current
initiatives included improved training programmes.
Consideration was
also being given to the need to upgrade the
function of quality
controllers so that this became more of a job in
Its own right rather
than a staging post for developing managers.
19. It was suggested that further consideration
should be given throughout
the Group to reducing the numbers of blenders and
to increasing the
status of the few really expert blenders that a
company required in
order to be able to develop and maintain product
quality.
20. It -~as noted that another key element in
achieving and maintaining
quality was the way in which the tobacco was
processed. In Brown &
Williamson, a change in the re-drying process for
burley had been
identified as the cause of a sharp fall in smoking
quality in repeat
tests on a product whose composition had
apparently been unchanged.
The quality of Marlboro was also thought to depend
more on their
process than on the quality of the Tobacco used in
their products. C3"\
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21. was agreed that the Chairman would organise a
meeting with
.1 r. Kohnhorst, M Andrade and representatives
from BATCo. aad BATCF
:o consider what should be done:-
'a)
To establish a better interchange of experience on
quality
testing within the Group.
(b) To improve the effectiveness kith which
smoking quality is
measured and monitored.
22. It was agreed that smoking quality should be
given a higher priority.
and that each company should be asked to include
in their plans a
section on improving the measurement and upgrading
of smaking
quality.
Marieting Issues
23. Marketing Information System : Mr. Bramiley
reported that the work
.o develop a common information base of marketing
data, accessible by
all Operating Groups, was almost complete.
However, there were still
a fe- issues to be resolved on the type of data to
be collected (e.g.
shipments or end market sales), on the
arrangements for access and on
the costs of setting up and maintaining the
system. Mr. Bramley will
se: up a meeting to resolve these issues and will
make recommendations
to the next meeting of the team.
24. Sponsorship : It was noted that the Lucky
Strike sponsorship, of
'Aotor Cycle facing appeared to be fulfilling its
objectives. However,
the cost-effectiveness of sponsorship associated
with the Group's
other international brands needed further review:-
'a)
The programme for Benson & Hedges will be reviewed
by the
new marketing director for BATCo.
I) The programme for SE555 needs better definition
and a more
effective use of sales of peripheral products
closely associated
with the main sponsoship.
Cc) The Kent programme is thought to be too
fragmented and to
lack a strong central theme.
Hr. Bramley and Mr. Pritchard will report back to
the next eeting on
the results of these reviews.
25. it -as noted that German TV way refuse to
televise Motor Sports on the
3 rounds that they are sponsored by Tobacco
companies. It was agreed
that Mr. Herter would check on this and find out
whether the motor
Sports themselves -ere opposing this ban. In the
eantime, the
possibility of a ban should be taken into account
when sig:iing any
contracts.
26. Trade Mark Diversification : It was agreed
that companies should
keep within the spirit as well as the letter of
the law in any
prz-zotions of non-Tobacco products carrying
Tobacco trademarks.
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International Brands
27. US international Brando : Mr. Pritchard
reported that US export
and contract sales were'2 billion below budget for
the first quarter.
Ho-~-;er, after reviewing the situation with
regional managers, it had
been agreed that the budget was still achievable
and might be exceeded
by ;? to 2 billion.
28. For Kent, it was noted that while shipments
were below budget,
it-aarket data suggested that final sales to
consumers were holding up
we-. Deviations from the standard specifications
for the brand Were
being eliminated progressively but it was noted
that there was a
continuing problem in South Africa. It was agreed
that if Kent could
no:: be produced to the US specification, the
brand should be withdrawn
fr~~z the market.
29. Lucty Strike continued progressive but there
was still a need to
i2 ~rove distribution in Spain. A problem in some
markets was that the
br=-.id had been introduced before ammonia
treatment was specified as an
essential part of the manufacturing process.
Companies without
s-_Staless steel equipment in their primary
departments were still
uzable to introduce this treatment as a standard
part of the process.
'~*zewhere, there had been progress in upgrading
quality, including
-::her
- reductions in the use of local leaf in Spain.
30. Pricing : Lucky Strike was designed to compete
directly with
Y.;71boro and it was agreed that the basis for
this should be to
a:-ieve parity in quality while offering the
consumer an incentive to
by positioning the brand up to one price point
below the Philip
M=rris brand. As an alternative, it might be
possible to compete at
a~ equivalent price on the basis of better smoking
quality. What
9-ould be avoided is positioning the brand two
price points below
Y.a7lboro. This degraded the image and might
actually be inhibiting
sa"es in some markets (e.g. Malaysia). In cases
where Lucky Strike
--as positioned more than one pcice point below
Marlboro, there should
1,2 an aim to increase the price to the target
level by end-1992 at the
latest. Ztr- Pritchard was asked to monitor
progress towards this
-arget.
31. Barclay : It was noted that the agreed
strategy for Barclay was to
"aunch the 2mg (Ultra) version as soon as possible
in all markets,
a'lowing this to become established for at least 2
months in
distribution before the standard version reverted
to a 5og rating.
.e timing for the subsequent introduction of the
lmg (Ultra) version
is less critical.
32. Secause of the (Borgward) testing regime in
Benelux, the Ultra product
-4-ill only achieve a 3mg rating in these
countries. However, it -as
;greed that it should still be launched in the
same way and to the
same timetable as for the 2mg product in other
markets.
33. MB : Mr. Bramley reviewed progress in UK
International 3rands
3 nd it was noted that there -as a plan to upgrade
the blend for
?layers Gold Leaf (PGL). It was suggested that
there was a need to
-evitalise SE555 and PGL, both of which were felt
to have a greater
-otentiaL than was being realised at present.
There was continuing
:_-oncern that SES55 should be targeted at a
younger -market and that the
~comotional spend might be too low. The target
market for PGL was
.ilso thought to be too 'highbrow' in relation to
the brand's loage. (71
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34. France : The Chairman was disappointed that no
paper had been put
forward discussing options for acquiring the
rights to Lucky Strike in
France. Mr. Broughton was asked to follow-up on
this. The Chairman
also asked Mr. Pritchard to give further
consideration to the
possibility of licencing Barclay to SEITA.
Eastern Europe/USSR
35. Mr. Herter reported that, excluding the
special sales to the USSR and
even after allowing for the change in status of
the East German
market, the sales increase In the Eastern European
markets had slowed
considerably as a result of the difficult and
volatile economic
situation in these territories. He also noted that
although sales in
Yugoslavia were holding up -ell, there as a switch
from exports to
licenced sales with a consequent reduction in
profits.
36. Mr. Pritchard and Mr. de Castro reported that
Brown & Williamson and
Souza Cruz were also experiencing difficulties in
selling to the USSR
and Poland but were continuing to seek
opportunities where these
arose.
37. Hungary : Mr. Bramley reported that
negotiations were continuing
with the SPA on the possibility of moving to a
majority holding in the
company in Pecs.
38. Poland : Mr. Herter reported that talks were
continuing with the
ministries of privatisation and agriculture in
Poland regarding the
factory at Augersdorf and auditors were currently
valuing the company.
A draft letter of intent would be discussed with
the Chairman within
the next few days prior to submission for approval
by the CPC.
39. USSR : Mr. Herter reported that an office had
been set up in
Moscow and that the recruitment of staff was in
hand. It -as noted
that the Chairman would visit the USSR in
September for a meeting of
the Anglo-Soviet Round Table.
40. The Czechoolovak:Lan market had btaen
researched and a report would
be available for the next meeting.
41. Romania had also been researched but Mr.
Pritchard reported that
the :3arket -as in a state of disorder. A further
study of the
industry structure and potential opportunities for
investment would be
put in hand. Mr. Herter had also provided the name
of a potential
candidate to provide representation in the market.
42. Mr. Herter also reported that a representative
had been appointed in
Bulgaria and that it was intended to replace the
representative in
Yugoslavia.
Other European Markets
43. It -.;as noted that Brown & Williamson's
representative in Greece
had -.3oved into the BATUKE office, that the
representative in
Portugal had moved Into the BATCF office and that
the
representative in Sweden had moved into the
Tiederman's building
in 5tockholm.
44. In 7urkey, it was hoped that the distribution
of cigarettes would
be :privatised but importation would still be
subject to restrictive
leg:sLation. It -as intended to open a liaison
office in Istanbul. (:D
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Latin Anerica/Caribbean
45. Mexico : Mr. Pritchard reported that the US
Congress had agreed to
extend the 'fast track' authority to the
negotiations for the
extension to Mexico of the North American Free
Trade Area. Brown &
Williamson ill press to have tobacco products
included in any
agreement. Although the Group would prefer to wait
until it is known
what the new trade regime will be, formal
applications to be allowed
to import cigarettes will continue to be pursued
and opportunities to
manufacture will also be evaluated. Mr. Pritchard
will also confirm
that the FTA would not open the Mexican market to
exports of Kent from
Lorillard.
46. Colombia : It was noted that a meeting had
been held to
co-ordinate the efforts to exploit the
opportunities arising from the
opening of the Colombian market.
47. South Cone : Mr. Bramley was asked to set up a
working party to
report back on the implications for the Group of
the projected 'South
Cone' common market.
48. Caribbean Representation - The Chairman asked
Mr. Bramley and
I
,ir. Pritchard to give further consideration to
the possibilities for
rationalising the Group's representation in the
Caribbean, in order to
improve the cost-effectiveness of selling in the
region.
The Far East
49. It was noted that efforts were continuing to
penetrate the market In
Thailand and De La Rue were printing Tax Stamps
for use there.
However, the authorities were still placing
barriers in the way of
Imports. Negotiations -ere continuing in Burma and
Vietn".
50. China : It was noted that following a meeting
on 29th April of the
people directly concerned, Mr. Bramley -as
proceeding with the
rerruitment of the key personnel required to head
up the companies
which it had been decided to form in order to
provide a more effective
thrust in the China market. The Chairman asked for
a note to be
prepared for the CPC as soon as possible,
confirming what is proposed.
It was also suggested that setting up the new
companies could pre-date
the appointment of the respective CEOs.
Manufacturing
51. Mr. Kohnhorsc presented a review of the
Group's manufacturing
facilities. It -as noted that this showed a
reasonable level of cover
for expected sales up to 1993 but possible
shortages of capacity
towards the middle of the decade. Mr. Kohnhorst
-as asked to extend
the study and to identify where additional
machinery orders needed to
be placed to provide a capacity 15% greater than
the sales forecast to
1995.
52. Other conclusions from the review were that:-
(a) The capacity increases should be concentrated
in Brown &
Williamson, BATUKE and BATCF rather than in the
smaller Un
companies. (:-I
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'b)
The ability to produce high quality International
Brands remains
paramount and there should be an aim to increase
the ability to
transfer production from one factory to another.
(c) Upgrading the standard of the production
facilities in Brazil
remains a key requirement and further
coasideration should be given
to the Feasibility of importing second-hand
machinery from the
USA.
53. Yx. Broughton presented a paper comparing the
contributions from
different ma rkets and from brands produced in
different locations. It
-as agreed that this had been a useful exercise
but it was felt that it
-.ras better to carry out studies of this type
ad-hoc rather than setting
~p a system to collect this data on a continuing
basis.
54. 1.: was agreed that Mr. Kohnhorst should be
asked to recommend a
consistent scheme for measuring and comparing
production costs,
group.ide. (I
55. 1: was also suggested that further thought
should be given to possible
transfers of production in order to improve net
profitability (i.e. after
taking into account the effect of taxation and the
ownership of the
zompany producing the cigarettes). Transferring
contract manufacture to
Southampton would appear to be particularly
advantageous from this point
of view.
56. BATCF : It was noted that Mr. Herter had
produced a paper for the CPC
outlining the options for expanding capacity in
Germany. This was
presented to the team for information. It was
noted that capacity in
~armany could be expanded to 50 billion p.a.
without major structural
additions or changes to the existing facilities.
Leaf
57. Leaf Rationalisation : Mr. Pritchard reported
that the classification
scheme introduced last year -as working
satisfactorily. The Chairman
asked for a further review of the impact of the
scheme in rationalising
juying (e.g. had it resulted in a reduction In the
number of trips to buy
tobacco in Brazil) and in reducing stocks. Mr.
Pritchard .-ill report on
this at the next meeting.
58. Supply Situation : It was noted that Burley
tobacco could be in short
supply in 1991-1992, especially if RJR and Philip
Morris, who have been
running do- stock,,, .,gain become major buyers.
It was again emph..i.ed
that companies must ensure that they have security
of supply for the
types of tobacco they require.
59. Exports : It was also suggested that Leaf
exports could represent a
significant opportunity for the Group. BATCo. and
Souza Cruz ere asked
,o give increased emphasis in their plans to
building up a 10-year plan
For expanding exports.
60. Leaf Co-ordination Meeting : It was agreed
that since the Leaf
specialists within the Group meet at least once a
year, there was little
justification for organising an extra
co-ordination meeting of the type
which had been suggested by Souza Cruz.
61. However, it was noted that Leaf processing was
a key element of the
manufacturing process which was not understood
sufficiently well and
where it ight be advantageous to exchange
expertise. Mr. ?ritchard was
asked to outline a proposal for setting up a
meeting to discuss this
topic.
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9 -
Managemet: Development
62. Traia-ing and Development Review : Mr.
Broughton reported progress
on ~"_. Ross' project to consider possible
improvements to the training
and 4evelopment of managers in the Tobacco
businesses. He also
conf-_rmed that the project was on track for
completion by end-Jul7.
63. Disc--saing the progress report, it was
suggested that the final re-.ort
sho,--'3 be related to a single population of
managers and that it
sho---'d be assumed that the expatriate pool would
be phased out.
64. It uns also suggested that although movements
between functions could
be a.~,zantageous later in a manager's career, the
first priority in
tra--'::ing and development should be to improve
managers' effectiveness
withf-i their functional specialisations.
65. It -as noted that the Chairman and 'it.
Broughton would agree kith
Mr. Loss, the headings for his final report.
66. Inte:-Coupany Transfers : Mr. Bramley reported
that there had been
con::--::uing progress in arranging inter-company
transfers. A revie-.r
meet:.ng would be held in June and he would
present a formal repor::,
revisving progress over the year, at the meeting
arranged for
Sept-!mber.
67. Rec-.-itiseut : Mr. Herter reported that the
team set up to consider
pos-ble problems in recruiting staff to support
the projected
expamsion in Eastern Europe had met and had made
significant progress
in cs-ining the teams.
68. It a3 noted that the project team for Poland
was largely drawn f--=
BATZ-7 while the team for Hungary was largely from
BATCo. While it- was
appriciated that this was a historical accident,
it was suggested :hat
thert should be a positive effort to make future
teams internatiom&L
in cmposition.
Trading Results
69. It -as noted that a key feature of the results
for the first quarzar
had ---een the 51 tnerease in volume relative to
last year. However,
the f-.Ul year forecast was for a volume increase
of only 3k%.
70. It was noted that the current forecast for the
Group shows profits
slig~_tly lo.er than 1990 at the half year. It is
important,
therefore, that results equal to the budget are
achieved in the second
quar-er. Mr. Broughton will be in touch with
individual Operating
Grou:s on this in the near future.
Regulator- Issues
71. Environmental Charter : It as noted that none
of the Tobacco
com?z--iies wished to sign the charter proposed by
the ICC. However,
there may need to be further discussion on this
before and during :.he
envi--.)amental policy review by the B.A.T
Industries Board, due in
octo'er. U1
72. Smoklag Compendium : Mr. Brawley reported that
a revised version C__
of tnt Smoking Compendium would be available for
distribution
shor--'-y.
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73. Envirousental Tobacco Smoke : Mr. Pritchard
reported that
discussions on the EPA report were continuing.
74. Fire Safety : He also reported that there had
been no further
progress oa the proposal to develop tests for a
'fire-safe'
cigarette.
75. Additives Register : Mr. Bramley reported that
the Additives
Register would be available for distribution later
in the year.
Production/Process Development
76. It was agreed that the discussions of
Sidestreas Smoke, Y-1
Tobacco, Decomposition Products of Ammoniated
Tobacco and the
use of Reconstituted Stem should be held over the
next meeting.
Next MeetinR
77. The next 3eecing will be held on Friday, 6th
September- Key subjects
for discussion at this meeting will be the
competitive position in
technolog? (the Chair-oan'3 letter dated Ist May
refers) and the
Research ;riorities for incorporation in the R&D
programme.
RS/DJA.
6 th June 1991
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BATCo document for Province of BritiSh Columbia 25
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