NO COPIES MAY BE MADE 9 1 C I I T
Tobacco Strategy Review Team
A meeting of the Tobacco Strategy Review Team was
held on 2ad December 1991.
Present : Sir Patrick Sheehy, ~!r. M.F. Broughton,
Mr. B.D. Bramley',
Mr. R.J. Pritchard, Ar. U.G.V. Herter, Mr. A.
Monteiro de Castro,
hr. J-L. Mercier, Dr. R. Salter (Secretary).
Minutes of the Previous Meeting/Matters Arising
1. The minutes of the meeting held on 6th
September -ere agreed.
2. 1.T. in Selling Seminar : ~!r. Pritchard
reported that a seminar an the
application of I.T. in selling had been arranged
for 13th-14th February in
Lauis~ille.
Marketing Issues
3. November Marketing Seminar : Reviewing the
results of the marketing
seminar held in Orlando, immediate reactions were
that:-
The formula proposed *5v Mr. Dunt should be
applied to calculate
values for key brands ;cross the Group. The
implications of the
values obtained shou'd then be considered in the
reviews of plans for
1993-1997.
(b) 7he strateg;: analysis of competitors should
be improved, with
particular emphasis an the collection and use of
infor--acion oti cost
structures and other factors u-hich were likely to
be significant in
e the abil-:-7 and motivation of competitors
either to react
d ng
to at--ategies proposed by BAT companLes or to
initiate strategies of
their own.
(c) Achieving and --intaini-ng su?er:-or product
quality was a vital
pre-condition for building a suc=e s3ful marketing
strateg7. This
should continue to be given the highest priority.
4. The Chairman asked for the results Of the
seminar to be reviewed again at
the next meeting, to provide a more measured view
both of t-. e moat
significant issues to have emerged and of other
action which might
usefully be taken to pursue these.
5. Marketing Information Systeu : Mr. Bramley
presented a paper outlining
the proposals for implementing the iMDroviim-ents
to
information system which had been agreed. It -as
noted that every eff.)rt
would be made to accelerate the implementation of
the new system, aiming
to have this complete by end-1992.
6.1 It was suggested that it might be helpful to
use consultants to assist in
the choice and implementation of appropriate
software and s,items. Mr.
Bra.ley will consult with ocher members and will
then select an outside
firm with relevant expertise to provide assistance
on this project.
7. Competitor Analysis - Philip Morris : It was
noted that Philip Morris
were still in the process of re-organisation
following the appointment of
Mr. Miles as Chair-can. There appeared to be a
continuing trend towards
simplification and cost-reduction but no
diminuation in the pressure to
expand volumes and shares of the Marlboro brand
worldwide. A key strategy, CD
appeared to be to plan on a regional basis and to
concentrate manufacture r"i
in plants with a minimum capacity of 5 billion
cigarettes p.&.
CJ
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8. It was noted that Philip Morris was now
profitable in Brazil and had
increased their equity share of their Argentinian
company. However, their
ability to exploit the potential of the Indonesian
market was constrained
by not owning the Marlboro trademark in this
market. .
9. Market share and profits -ere still progressive
in Cermany but there had
been changes in the top management which appeared
to have weakened the
company. It was noted that there had been some
reduction in the proportion
of the total promotional spend allocated to Europe
with more emphasis now
being given to the Far East.
10. It was agreed that it would be worthwhile to
carry out in-depth consumer
analysis, to assess the strengths and weaknesses
of Marlboro in Europe and
to determine whether the Marlboro cowboy was
beginning to lose him appeal.
Hr. Herter will design an appropriate
questionnaire and will recommend to
the Chai-.=an how this enquiry might be
progressed.
11. R.J. Reynolds : It was suggested that although
the recent financial
restructuring moves by R.J. Rey-nolds had been
well received by the market,
the business itself was still under considerable
pressure with declining
market shares in zhe US, Canada and a number of
other key markets. Despite
'further cost-cutting, profi:abili:v was thought
to be declining, especially
within the international business.
12. It appeare,_4 that a response to the market
share problem had been to
increase loading. It was suggested that 4r.
Broughton should consider
bringing this to the attention of the appropriate
market analysts.
13. There was also ar, iadicarian chat RJR might
be prepared to sell the rights
to market their br-ands in certain ove-zseas
markets. Mr. Pritchard was
asked to 7-eoarL an update for the next meeting of
his previous report,
assessing the price at whic"n the pur:hase of
de-Eimed elements of RJR's
overseas .business might be worzhwhile.
14. RDtb=ns : 1c as noted that in Ge-man-,,
Brinkmanns was losing share,
with Golden Amerizan failing to sustain its early
progress in the New
Lands. Rot'tmans ~as also losing share in Canada
where the response had
been to =:ve to unusual prod~ucts such as
'sticks'.
15. It was noted that the recent improvements in
profitability shown in
Rothmans' accounts had been favourably received by
the market. However, it
was believed that this was largely due to plant
rationalisation in Europe
and that the Underlying trends were less
favourable. -ne7tr1Ftr-mafi--askic1_-
the Secretary to prepare an analysis of Rothmans'
profits and to assess
whether the analysts' favourable view of Rothmans'
results is justified.
16. American Brands : It was noted that American
Brands continued to show
good results based on the success achieved with
Montclair and Misty Slims
in the USA and with Callahers in the UK. However,
Silk Cut had failed to
make an impact as an international brand and
Callaher International now
reports in to the UK.
17. Lorillard/Liggetts : There was some evidence
that Lorillard might be
contemplating a re-entry to the international
market, possibly with
Heritage. Liggett have said that they rill
re-launch Eve, Chesterfield and
L&M as full-revenue brands but both this and early
negotiations an a joint
venture in the USSR are thought to be largely
aimed at boosting the value
of the tobacco business ahead of a possible sale.
18. JTI : It -as noted that volumes of JTI exports
appear to be increasing,
especially at the low-price end of the market. The
Secretary was asked to r".)
check with Mr. Chalfen whether there are grounds
for initiating Ul
anti-dumping action in respect of this trade. ___4
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Kev Markets
19. Eastern Europe : Mr. Herter reported that
sales to the region remained
progressive despite the war situation in
Yugoslavia and the economic
problems in Bulgaria which had restricted sales to
these -countries.
20. It was noted that sales to Russia were
continuing but only where
payment was assured. This contrasted with some
competitors who had
supplied on extended credit and were now said to
be worried by their
exposure. The Chairman suggested that it might be
worthwhile to reassure
bankers that BAT was not exposed in this way.
21. Conditions in Romania were chaotic. However,
Kent was still
progressive and progress was also being made with
Kim and Kim Menthol.
Sales to Czechoslovakia were increasing slowly and
the contacts
established in the country should lead to an
acceleration in this trend.
22. Poland showed an encouraging increase
including sales by Souza Cruz
and exports from Cyprus offsetting a reduction in
direct sales from Brown
& Williamson. BATCF sales were largely HB, of
which some were being
re-exported to Germany.
23. Hungary : It was noted that the investment in
Pecs was in the final
stages of negotiations with :he SPA. It was hoped
to complete the
purchase in February, at which time BATCo. would
take over ".he
responsibility, for managing the investment.
24. A review meeting has been arranged for
10th-11th December ac which the
object'ves and strategies fcr further expanding
the Group's interests in
Eastern Europe and he former USSR will be agreed
coumt~ry by country. It
was noted that it is intended that the evaluation
of investment
opportun;:ies, the oreparation of prroposals and
the subsequen:
negotiat,-ons w-ill 'De brought under direct B.A.T
industries' control.
25. China : it was noted chat the new organisation
for supplying the China
market -would become operative from the Ist
January.
26. South Come : It was noted that the current
view is that the Mercosul
will be established during the 1990s, although not
necessarily by the 1995
target date. It -as agreed chat Mr. Castro would
take over the
responsibility for the study group set up to
consider the implications for
B.A.T Industries and to rec=mend appropriate
action. He was asked to
report progress to the-Tea. an a regular basis.
27. CoLombis : ~x. Prizchard reported that sales
to Colombia were
progressive. The next meeting of the group set up
to co-ordimate BAT
sales to the market is due to be held early in
December. The results of
this meeting will be reported at the next meeting.
28. Thailand : Mr. Pritchard reported that
requirements for retailers to
obtain new licences in order to sell imported
brands had restricted sales,
which were below plan. However, pressure would be
maintained and progress
was already being made with SE:555, Lucky Strike
and Kent.
29. A visit to Turkey by the Chairman and Mr.
Pritchard had established
that market domination by Tekel and Philip Morris,
combined with laws
which rendered investment unattractive, severely
restricted the
opportunities for profitable participation in the
market. The Turkish
Government would be told that, under these
circumstances, BAT would not Ln
wish to pursue its interest in the market.
U*1
Co
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30. It as noted that studies were still underway
in Baran and a paper was
being prepared, recommending the strategy for
Vietnaxa. BATCo. and
Brown & WiLliamson were continuing to monitor the
situation in Xe3tico.
US International Brands
31. Overall Perfor=nce : ?x. Pritchard reported
that although Bales to
date of US International Brands were still 4.5Z
below budget, this was
largely accounted for by a shortfall in Duty Free
exports from Hong Kong
and by the temporary closure of some Middle East
markets. The forecast
for the full year was that sales would be only
0.5Z below budget.
32. Kent volumes we're improving after a poor
first half which was largely
attributable to the dut-7 increase in Hong Kong,
interruptions in
re-exports from Hong Kong and Singapore, and the
effects of the Gulf War.
Initial results from the test market in Germany
had been disappointing but
a full evaluation of the test was not due until
the second quarter of
1992. The Chairman emphasised the need to review
Kent sponsorship on a
worldwide basis and to ensure that this had the
necessary high profile.
33. Luck7 Strike continued :o make good progress
but although volume Van
11% higher than 1990 this was still nearly 10Z
below budget. It van noted
that Lucky Strik: as thought to be comparable to
Harlboro in smoking
quality while th Ligh:i -version -as believed to
be superior to the
corresponding Marlboro product. However, it was
also noted that Marlboro
Medium continued to build share in the USA and
might be introduced
internationally, providing a new element of
competition.
34. It was agreed that expanding sales of Lucky
Strike should continue to be a
priority objective, especially in Brazil and
Europe where there should be
concinuing emphasis on positioning the brand at
the higher end of the
marke: through quality, pricing and strong
advertising. ne launch of
Lights versions should also be pursued, aiming to
keep ahead of Marlboro.
35. Talisatan - Mr. Broughton reported that a
meeting had been arranged for
15 th January, to discuss further the
possibilities for obtai=ing the rights
to the Lucky Strike trac~emark in markets where
these were still owned by
American Brand '.
36. Barclay : Mr. ?ritchard reported that Barclay
was progressive in most
markets and relatively stable in Norway and the
Saudi Croup but bad
declined in Turkey due to changes in the pricing
structure in the market.
37. It was noted that the new deliver-,
classifications would be introduced in
Belgium. The Ultra version will be introduced.
first. as., agreed but the
:ubsequent launch ill follow shortly afterwards
rather than after the 3
onths' interval which had been planned initially.
38. The Chairman accepted the need to push ahead
with the launch programme in
Belgium but emphasised the need to monitor the
results very closely- It
was also important that' in other markets, the
timetable initially agreed
should be adhered to, with a 3 months' interval
between the launch of the
Ultra version and the completion of the
re-positioning.
39. Other International Brands : Mr. Pritchard
reported continuing good
progress with Hilton, Capri/Finesse and Viceroy,
which was
useful as a lo-er price international brand. There
was also evidence of a
growth in demand for Menthol brands, especially in
the Far East and Middle
East, which could support the further expansion of
Kool. Mr. Pritchard
will report more fully on these brands at the next
meeting.
Z~.
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UX international Srands
40. Overall Performance : Mr. Bramley reported
that sales of UK
International Brands to the end of September were
7.4% ahead of the
corresponding period in 1990 but were still 2.1%
below budget. Sales of
SZ555 had been particularly good, offsetting a
reduction in Benson &
Hedges. Players Gold Leaf and JPS were both about
8Z ahead of last year
but JPS gales were nearly 12% below budget.
41. Benson & Hedges : It was noted that although
there were continuing
problems with Benson & Hedges in Australia and
Malaysia, domestic sales
in South Africa were progressive with the mild
variants doing
particularly well. Export sales were nearly 10%
below budget with sales
to French West Africa being adversely affected by
political disturbances
and T.E.I. licenced manufacture while European
Duty Free sales were
affected by the reduction in tourism.
42. The Chairman scressed the need for tighter
managemnt of the brand,
overcoming the long-standing quality prroblems
(e.g. spotting in the
Middle East) and ensuring that the blend was right
before the Golden
Mild/Lights launch scheduled for Ist Quarter 1992
im Greece and France
wag activated.
43. It was also i=portant that BATCo. should be
clear -.-hat they wished Benson
& Hedges to scand for in the medium to long term
and should ensure that
the blend, pack design, advertising and
sponsorship -as consistent with
the image which they wished co project, worldwide.
44. S1555 : It was noted chat SE555 had very
strong latent goodwill in a
n=ber of markets. This should be nurtured,
building out fr= positions
of strength and pricing the band correccly ia eac
.:-. market. The Chairman
also suggested that the brand concept might
usefully be redefi.ed,
especially in respect of the characteristics of
the blend.
45. Players Cold Leaf : The Chairman suggested
that i= defining the
strategy for PGL, more emphasis should be given to
product qualit7 as a
key factor to be controlled from the centre. He
-as also disappointed
%rith the relatively low rate of growth projected
_-~r the five vears to
1996 and asked that this should be reviewed.
46. John Player Special : It was agreed that the
potencial of JPS should
be reviewed, with a view to deciding by the end
of. 1992, whether it
should continue to be promoted as an'
Unternational brand.
47. Quality : Mr. Bramley presenced a paper
outlining specific targets
and proposed programmes of action to effect an
overall improve=ent in the
quality of UK International Brands. It as agreed
that he would report
back in December 1992, on the progress achieved in
meeting the targets
which had been set.
V1
V1
co
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Research and Development
48. Policy/Organisation : Mr. Bramley reported on
discussions held with the
other members of the team, the object of which was
to consider whether
there should be a change of emphasis in the
Group's Research and
Development with a greater proportion of the
effort being applied to
consumer-led research aimed at developing better
cigarettes.
49. In the discussions, it had been agreed that
although members believed that
it was advantageous to continue to centralise work
on regulatory issues
within the Funda3Dental Research Centre (FRC),
this work should be
sustantially reduced from 57 man years in 1991 to
10 man year@ in 1992,
covering work on Bioassays, Additives/Materials,
Interuational Standards
and Smoking Issues on17.
~r
=
50. At the same time, the range of work in ~'I
e
pe tive development
laboratories should be increased; by _L8 an years
in BATCo. (BTC); by 14
man years in Brown & ';illiamson; and by 7 man
years in BATCF.
51. Mr. Mercier noted that Imasco supported the
strengthening of product
development but also emphasised the importance of
continuing fundamental
research on a Group basis.
52. It was agreed that the change in emphasis
-which had been proposed should be
implemented. ?6x. Bramley was asked to prepare
detailed plans and proposals
for the scaling-down of FRC and for the transfers
or reductions in staff
which would be involved. He was also asked to
consider further, whether
he post of Research Co-ordiriacor should be
retained. ~-_. Bramley will
t
epor: progress to the next meeting.
r
53. Y-1 Tobac=o : It was noned that there had been
encouraging progress in
the USA, UK and Germanny where cigaretteg
incorporating Y-1 tobacco had
performed well in test3. However, Souza C:uz had
not found any advantage
from incorporating Y-1 while Imagco foul_^ that
T-I incorporation appeared
to increase the harshness of Vi7ginia-zy-pe
cigareztes. Further progress
will be reported at :he next =eeting.
54. Reconstituted Stem . 7he Chairman stressed
that in consider-.Ug the
incorporation of reconstituted stem and in
deciding how this component
should be produced, the overriding consideration
should be to enhance the
quality of the final product, not to cut costs. It
VR3 also suggested that
in addition to testing the potential for
incorporation in Benson & Hedges,
BA16o.-should also com-gider-the potential for
incorporation in SE555. It
was noted that BATCF and Souza Cruz -will prepare
papers for the next
meeting, assessing the potential for producing and
using reconstituted stem
and considering the capital expenditure
implications.
Leaf
55. : Mr. Pritchard reported that a Leaf
processing
Leaf Processing Seminar
.
seminar had been arranged for 9th-12th December.
Twenty-six delegates from
around the Group were expected to attend. The
seminar had a full programme
which included a visit to Wilson.
56. Leaf Purchasing : It was noted that there had
been a number of cases
where the prices agreed with farmers for the
purchase of Leaf had been too
high, with consequent adverse effects on the
Group's profits, especially
where the Leaf -as subsequently sold to
distributors. Mr. Broughton was Lri
as ked to formulate with Mr. Pilbeam, guidelines
on the pricing of Leaf CD
which could be applied round the Group to overcome
this problem. It was r1i
also noted that B.A.T Industries' Legal Department
was reviewing the Ul
contracts for Leaf supply to distributors with a
view to recommending __J
whether or not these should be changed (e.g. to
eliminate exclusivity co
clauses).
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57. Leaf Exports : It was noced that although
there had been same
improvement in the supply of Burley, the current
crop in the USA was not
expected to be sufficient to rescore durations.
The situation for
flue-cured tobacco was easier and fire-cured was a
weak market with a high
degree of volatility.
58, Although there had been some easing of the
leaf supply situation, it was
believed that there were still good opportunities
to increase Leaf exports
from Group companies, provided chat costs were
contained.
59. It was noted that BATCo. were planning to
increase Leaf exDorts from
44,000 tons to 91,000 tons over a five-year
period, reprement3.ng an
increase in sales from $128 million to $400
million. On current
estimates, this could represent an increase in
profits from $40 million in
1991 to around $120 million in 1995. The fixed
asset i nvestment required
co achieve this would be of the order of $90
million and additional
working capital of $60-S75 million would also be
required. A paper
outlining the overall plan, which included a
proposal to upgrade the
central management of Leaf was due to be presented
to the CPC before the
end of the year.
60. Souza Cruz also plannec: to increase Leaf
exports, following the
acquisicion of Dobra, which allowed a more
integrated approach to Leaf
manage.ent.
RegulatorT Issues
61. Environmental Policy, : ~!r. Broughcon
reported that following the B.A.T
Industries Board review of the Group's
environmental poli:7 statemenc,
this had been modified. A copy of the modified
scatement had been
circulated with the papers for the meeting. It was
noted that the person
at B.A.T Indust:ieg responsible for the
co-ordination of environmental
polic7 within the Group as now ~trr. D.D. Read.
62. Environmental Tobacco Smoke : It was agreed
that recent developments
in the USA, Canada and :he UK had strengthened the
view that ETS was a
political rather than a scientific issue. This led
co the conclusion that
although data should continue to be collected, it
was umlikely that
scientific arguments would be ef-fective in
altering the trend towards
increasing rescrictions on the right to smoke
inside public buildings.
63. Advertising Restrictions : it was noted that
there was also strong
prasaure for -i-ncreased restrictioms on
advertising, although here there
were some signs in Canada and Europe of more
resistance f-.= bodies
concerned with personal liberty, allied to media
whose commercial
interests are threacened by reductions in the
total volume of advertising.
It was noted that the Social Affairs Unit, a
right-wing research and
educational trust in the UK, had recently produced
two pamphlets an the
adverse effect of advertising bans. The Secretary
was asked to circulate
copies of these to Team members.
64. Fire-Safe Cigarettes : Mr. Pritchard reported
that although the US
Safe Cigarette Act of 1990 calls for a final
report from the Technical
Advisory Group by August 1993, recommending a
suitable form of
fire-propensity testing, the evidence to date was
that this was unlikely
to be achievable. Brown & Williamson will continue
to monitor
developments and to report an any that are
significant.
V1
Ln
--.4
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Management Development
65. Reviev Uport : Mr. Broughton presented a draft
report outlining
proposals for a complete overhaul of the Group's
management training and
development processes. This separated management
training into 4 levels
with the CPC responsible for top management
training, the TSRT responsible
for the training and development of senior
management; Operating Group
companies responsible for business training and
development; and Functions
responsible for functional training and
development. It was noted that
4 r. David Stevens would take over the
responsibility for the further
development of these proposals, replacing Mr.
McBeath.
66. Discussion centred on the proposals for
functional training and it was
agreed that:-
(a) Functional courses should be aimed at everyone
who joins a function
at a managerial level.
(b) In the first instance, courses should be
designed for Marketing,
Production, Finance and Leaf only.
(c) As previously agreed, 3ATCF should be
responsible for the courses in
Marketing, with Brown & Williamson responsible for
Production, BATCo.
for Finance, and Souza Cruz for Leaf.
(d) The respective members of the TSRT would be
responsible for
drawing-up proposals for appropriate courses,
having agreed the form
of these with the other Operating Companies.
67. It was agreed thac -agement training should be
reviewed again at the
next meeting when Mx. Broughton would report
progress on the development
of the new arrangements.
68. Inter-Company Transfers : Xx. 3ramley reported
that 24 trans!erg had
been arranged and that there were a further 39
vacancies under
consideration. 1: -~as suggested that it might now
be possible to extend
the system to cover more junior posts and further
consideration would be
given to this. There would also be a review of the
terms and conditions
offered to people ho -ere transferred to ensure
that these -ere
appropriate.
Future Meetings
69. Dates arran.ged- F- -he_ eetings in 1992 are
Wednesday, 26th February;
Friday, 29th Mav; Ihursdav, 3rd September and
Wednesday, 2nd December.
RS/DJS
9 th December 1991
BATCO CONMENTIAL - CATEGORY I: MINNESOTA TOBACCO
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