NO COPIES MAY BE MADE
Tobacco Strategy Review Team
A meeting of the Tobacco Strategy Review Team was
held on 17th September 1990.
Present: Mr. P. Sheehy, Mr. M.F. Broughton, Mr.
B.D. Bramley,
Mr. R.J. Pritchard, Mr. U. Herter, Mr. L.J. Saboia
e Silva,
Mr .J-L. Mercier, Dr. R. Salter (Secretary)
Mr. P.J. Rombaut and Mr. T. Wylie also attended
the meeting
Mr. A.L. Heard attended for items 36-42.
I. The minutes (3f the meeting held on 18th May
were agreed.
(a) It -as noted that no problems had arisen on
the proposals for Leaf
Grade Rationalisation and that this was due for
review again in
May 1991.
(b) Mr. Pritchard had circulated his review of RJR
in June. He provided
a further update of Competitive Strategies which
was circulated
at the meeting.
Growth Strategies Eastern Europe
2. East Germany Mr. Herter reported that following
monetary union on
Ist July, a full union of East and West Germany
would be completed on 3rd
October, several months ahead of the original
timetable.
3. Western brands currently accounted for around
50% of the East German
cigarette market and this appeared to vindicate
the Group's strategic
decision to supply the market from the West rather
than buying capacity in
the East. BATCF had an 11% share of the total East
German market with
Pall Mall as the leading brand.
4. The sales force in the East had been scaled
back from 210 to 120 but was
still being maintained well above the planned
level of 70. This would
help in overcoming weaknesses in the distribution
system in the East,
which had led to problems in keeping retail
outlets fully stocked. There
were also fears that some wholesalers would be
unable to cope with the
changed conditions and would go out of business.
Payments were up-to-date
but the situation would continue to be monitored
closely.
5. A side effect of opening the borders had been
increased sales in West
Germany which were running ahead of budget. There
had been some
dislocation of the selling effort while the sales
force was diverted to
the East but recruitment there was going ahead
well and this problem was
being overcome.
6. Exports to Eastern Europe concinued to show
significant gains compared
with 1989 but a problem had arisen in Poland where
draconian increases
in import duties and in turnover tax had resulted
in punitive price rises
for imports sold through the hard currency retail
outlets. One solution
to this as to import lower priced cigarettes from
developing countries
(e.g. Brazil and Cyprus) whose products were also
subject to a much lower
rate of import duty. This option -as being pursued
and an order for
9 million cigarettes had already been placed with
Souza Cruz.
7. An alternative option for supplying the Polish
market would be through a
joint venture investment and with this in mind,
Mr. Herter had looked at 3
factories. A report would be written for the CPC
who would then decide
whether this opportunity should be followed up by
the investment team
which had been set up in BATCo. under Mr.
Watterton.
CC)
00
r1 i
BATCo document for Province of BritiSh Columbia 25
October 1999


8. Hungary : Mr. Bramley reported that following a
visit by the Chairman,
he had visited the cigarette factory at Pecs in
August accompanied by Mr.
Watterton and Herr Tomat. The management at Pecs
were looking for joint
venture partners who would participate in the
planned privatisation of the
factory. BATCo. had prepared a proposal reflecting
the management
requirements to develop exports, increase
capacity, improve quality and
develop local leaf supplies. Other companies who
are making proposals are
JTI, Reemstma and Rothmans but the local
management are thought to favour
BATCo. However, the final decision will be made by
the State Property
Agency (SPA) ho could take a different view.
9. If successful, the BATCo. proposal would
involve taking a 50%+ equity
stake in a business thought to be worth around ElD
million. A further
Z10 million would then need to be invested
subsequent to the takeover.
10. It was noted that Philip Morris had made a
similar proposal for an
investment in a factory at Eger but the SPA had
preferred the Austrian
Tobacco Monopoly. It would be desirable to
maintain contacts at each
level of decision making and a direct approach
would be made to the SPA.
L1. Bulgaria : An approach had also been made to
the Bulgarian Tobacco
monopoly but negotiations on this were likely to
be more protracted.
12. Leaf Advisory Team : It was noted that a key
Group strength was the
ability to provide advice on upgrading the quality
of local leaf and it
was considered that tf used effectively, this
could provide a competitive
advantage over Philip Morris.
13. It was agreed chat 'Mr. Bramley would set up a
team to investigate -hat
might be done to improve the quality of local leaf
in Poland, Hungary and
3 ulgaria, concencrating on the measures required
to produce good quality
Burley and Virginia tobacco in these countries.
Brown & Williamson,
BATCo., BATCF and Souza Cruz would each be asked
to provide an experienced
Leaf man on secondment and the team would be led
by Mr. Phil Fisher of
Brown & Williamson, who had extensive knowledge
and experience both in
agronomy and processing.
14. USSR : Mr. Pritchard summarised the background
to the shortages in the
USSR which had led to their asking for tenders to
supply large quantities
of cigarettes from Western sources. It was noced
that despite the highly
publicised contracts for Philip Morris to supply
20 billion and RJR
14 billion, there will still be a requirement for
further supplies which
the Russians will attempt to satisfy at low prices
from sources around the
world.
15. It was agreed that to place the Group in the
best position to cake
advantage of future opportunities in the USSR:-
(a) Mr. Herter w-Lll set up an office in Moscow
which will have
responsibility for maintaining contact with the
Russian authorities
and for channelling orders and enquiries to Group
companies.
(b) The Group -ill concentrate on establishing
three (low priced) brands
in the USSR. Blends will be standardised so that
each brand will be
recognisably the same irrespective of the source
of manufacture. Un
There will also be clear guidelines on pricing
levels. CD
r1 j
co
c3
CD
BATCO doCUrnent for Province of British ColUrnbia
25 October 1999


(c) Two of the brands will be Hollywood, at a
minimum landed price of
$7/mille, and Pall Mall, at a minimum price of
$11/mille. Mr. Herter
will circulate details of the blends to be used in
these brands.
(d) Mr. Bramley will select a Virginia brand and
will circulate the
details of this.
(e) International Brands will continue to be made
available to the market
under normal commercial arrangements. To avoid a
possible danger of
leakage to other markets, they will not be offered
at reduced
prices.
Growth Strategies : US International Brands
16. Reviewing the paper summarising the current
plans and forecasts for US
International Brands, Mr. Pritchard noted that
although these did not meet
the agreed objectives for 15% p.a. growth, it was
still hoped to achieve
this through new projects which were being
developed.
17. For Kent, it was noted that:-
(a) There vere favourable trends in Japan where
box styles were
successful and in China where problems of parallel
supply through
Uruguay and the Middle East were being overcome.
(b) Opportunities for expansion into Thailand,
Norway and Sweden were
being pursued. In Brazil, a test market was
scheduled for 1992 and
it ~as suggested that this should be brought
forward.
(r) The Team supported the programme for
relaunching Kent in Europe but
suggested that Spain should be added to the
countries to be
targetted, subject to further discussion of the
relative priority to
be accorded to Barclay and Kent respectively
within this market.
(d) The Kent Grand Slam travel packages to major
sporting events had been
found to be a very effective way of achieving
sponsorship association
.ithout incurring full sponsorship costs. Mr.
Pritchard said he
would circulate details of this scheme.
13. For Lucky Strike, it as noted that:-
(a) The brand Is progressive orldwide and the
blend including ammonia
technology, has performed better than Marlboro in
blind tests in
Germany. It was agreed that further priority
should be given to
achieving a consistent blend in all markets,
especially in Spain,
Hong Kong and Panama which do not yet use ammonia
technology and in
Argentina here the US blend is not used.
(b) Price levels should never be lower than one
point below Marlboro and
.here possible (e.g. Japan) the aim should be to
sell at a premium.
(c) For Australia, it was suggested that since
Marlboro are imported from
the USA, a similar strategy might be tried for
Lucky Strike (and also
for Kent and Barclay).
(d) It was agreed that further consideration
should be given to buying
the rights to use the Lucky Strike trademark in
France, where the
brand appears to be progressive. CD
NJ
(e) It was agreed that further impetus should be
given to Launching Lucky U-1
Strike Lights to compete with Marlboro Lighrs in
key markets. __4
Details of these plans should be communicated at
the next meeting. CO
... Co
BATCo document for Province of BritiSh Columbia 25
October 1999


- 4 -
19. For Barclay, it was noted that the main thrust
was in Europe and the
Middle East, with priority being given to line
extensions (e.g. the 9mg
Lights version in Norway).
20. Viceroy, Capri, Pall Mall and Kool are also
progressive and will
continue to be developed in selected markets.
21. The Chairman noted that the figures presented
for US International Brands
overall for 1990 did not appear to reflect the
expansion for the year to
date. The figures for licenced sales in 1991 were
also particularly
disappointing. It was asked that for the next
meeting:-
(a) The figures should be updated to include all
the expansion plans both
for exports/contract sales and for sales within
the licencees.
(b) Further consideration should be given to the
reasons for any failures
to achieve 15% p.a. growth and to possible
strategies for
accelerating the rate of expansion.
Growth Strategies : UK International Brands
22. Mr. Bramley noted that the review of progress
for UK International Brands
showed that 10% gro.Eh had been achieved in the
year to date.
23. Benson & Hedges had made good progress in
exports but was under
pressure in its domestic markets. It was noted
that research was in hand
on the potential for the brand in China and the
Chairman suggested that an
early decision should be taken on a launch in this
market.
24. It was noted that a Benson and Hedges variant
based on a light US
blend was being developed and would be reviewed in
November.
25. State Express was showing strong overall
growth. JPS was
progressive in South Africa but exports -ere
static and the brand was
declining in the domestic markets in Australia and
Brazil. Players Gold
Leaf was a key brand for Africa and BATCo. were
exercising tighter
control on blends and promotion. Embassy was also
thought to have a
good potential in Africa but Capstan and Wills
Gold Flake -ere
thought to have limited potential for growth
worldwide.
26. Summarising, the Chairman said that the review
was disappointingly
negative. In addition, there -as insufficient
emphasis on quality which
.as a continuing problem, especially in Malaysia
(555s) and in African
markets for Players Gold Leaf. BATCo. were asked
to report at the next
meeting, outlining action in hand and progress to
date on improving the
quality of Virginia cigarettes in the Group's key
markets.
Growth Strategies : New Markets
27. Mexico : It -as noted that the current
strategy as to import
cigarettes from the USA in order to
establish/re-establish brand goodwill.
This avoids the need for a substantial investment
and although the
contribution from the market will be minimal in
the short term, should
establish a base for future profits. A key brand
will be Lucky Strike,
sold at 10% above Marlboro.
28. A project manager will be appointed in October
with responsibility for
implementing the second stage of the strategy,
hich may include setting C:)
up a secondary manufacturing facility for cheaper
brands.
C()
Cl)
CD
(XI
BATCo document for Province of BritiSh Columbia 25
October 1999


29. Turkey : It was intended in August to sign a
letter of intent to
invest but this has been delayed following changes
in personnel at the
relevant Government ministries. It was noted that
a number of issues
would need to be resolved before an investment
proposal could be
justified. However, signature of the letter of
intent should help in
maintaining the ability to import into Turkey.
30. Negotiations for possible investments in
Thailand and Korea are
being progressed from Louisville and contacts are
being maintained from
BATCo. regarding the potential for investing in
Burma and Vietnam.
The Philippines was also suggested as a potential
market for
investment but it was agreed that business
conditions there were not such
as to justify considering an equity investment at
present.
Growth Strategies : Brazilian Exports
31. It was noted that Angus Leslie has been
appointed to provide a stronger
thrust in expanding cigarette exports from Brazil.
Growth Strategies : Capacity Implications
32. It was agreed that to be able to react
positively to opportunities for
growth, there should be an objective to have a
production capability
Group-wide sufficient to absorb orders 20Z ahead
of budget.
33. It was noted that there could also be a
requirement to have machinery
available to re-equip joint ventures and to
upgrade the machinery in Group
factories in developing countries. This could be
an outlet for less
sophisticated designs of machinery currently in
use in the major Group
companies. This might then be replaced by the
higher speed machinery,
which was now beginning to become available,
capable of outputs of
10,000-L2,000 cigarettes per minute.
34. In order to take full advantage of these
trends and to have a cushion of
available capacity, companies should consider
whether further orders
should be placed on machinery manufacturers,
taking into account that it
now appeared possible to reserve future capacity
on a provisional basis
without incurring a significant financial risk.
35. It was noted that Dr. Haslam at BATCo.
co-ordinated the Group's orders for
manufacturing machinery and Mr. Bramley agreed to
report back to the next
meeting on the current position on machinery
orders throughout the Group.
Priorities for R&D
36. Mr. Mercier reported the results of the
meeting which he had chaired, the
object of which was to obtain the views of the
Group's marketing directors
on specific product developments which they
believed should be given a
high priority within R&D.
37. It was noted that:-
(a) The marketing directors believed that the
highest priority should be
projects aimed at understanding the chemo-sensory
basis for matching
taste and for developing products which consumers
considered to be U-1
superior to 'farlboro. Associated work to
understand smokers' CD
behaviour and to develop improved methods/
techniques for blind tests IN.)
was also r-oristdered to be valuable as was work
to reduce bitterness
and irritation.
co
c0
(--D
all
BATCo document for Province of BritiSh Columbia 25
October 1999


- 6 -
(b) It was also agreed that it was important to
develop cigarettes with
reduced tar:nicotine ratios to prepare for
expected trends in
regulatory regimes and in consumer tastes.
(c) There was less market interest in developments
leading to cigarettes
with a reduced ignition potential, reduced
sidestream smoke and
'environmental friendly' characteristics. However,
there was general
agreement that biodegradable filters would be a
worthwhile
development.
(d) There was virtually no marketing interest in
'novel' cigarettes
or in alternative materials and structures.
38. It was agreed that the marketing directors had
provided a useful input to
the discussion of the research programme but the
Chairman stressed that
the Team also needed to take a broader and longer
term view of research
priorities.
39. In particular, he believed that although low
ignition cigarettes were
recognised as being important in only two
countries at present,
recognition of this requirement could spread to
other countries in the
future and it was important to be prepared to
react to this.
40. Similarly, although low levels of sidestream
smoke are not seen as a
positive marketing feature, it was necessary to
keep up with developments
by other manufacturers and to keep ahead of public
opinion. He suggested
that there should be an objective to reduce
sidestream smoke by quantified
amounts over time. It was asked that there should
be a progress report on
this topic early in 1991.
41. It was noted that following the R&D
conference, Mr. Heard would present
his proposals for the Research Programme at the
next meeting of the Team,
due to be held in November.
42. The Chairman asked Team members to consider
before the next meeting:-
(a) The value of the marketing conference in
providing an input to the
R&D programme.
(b) The effectiveness of the current arrangements
for technical liaison
within the Group and possible ways in which these
might be modified
to improve the interchange of information and to
reduce wasteful
duplication of work.
43. It -as noted that the marketing directors had
suggesced that they should
have further meetings to discuss marketing
strategy. but it was felt that
strategy -as the responsibility of the Team Itself
rather than the
marketing directors. However, it was agreed that
there could be a case
for organLsing meetings to discuss marketing
techniques and to share
experience on sponsorship, etc.
N)
U-1
__J
co
C~C)
CD
BATCo document for Province of British Columbia 25
October 1999


7 -
Reviev of Current Trading
44. It was noted that volumes were significantly
ahead of 1989 with gains in
market share in Brazil and Canada and improved
exports to China, Japan,
Eastern Europe and Iran. The Chairman stressed the
need to maintain the
pressure to achieve steady increases in volume.
Hanager Development
45. ',It. Broughton reported that, following a CPC
review of a paper from
Chel.ood, it had been agreed that a project would
be set up to consider
all aspects of manager development, including
recruitment policies,
induction and the optimum inter-relation of
training and development
throughout a manager's career.
46. The work was expected to last for 9-12 months
and would be led by a
selected 30-40 year old 'high flyer' who would be
seconded to the
project full time. Consultants would be used to
look at all aspects of
current practice, in relation both to the
objectives and to best
practice in other companies.
47. It was noted that the project would
distinguish the different needs in
the Tobacco and Financial Services businesses and
that the end object
would be to devise programmes of manager
development tailored
specifically to the needs of the businesses.
48. During the course of the project, the existing
Chelwood courses would
continue to operate and the Chairman asked that
these should continue to
have the full support of management both as
contributors and in sending
delegates to the programmes.
49. Inter-Company Transfers : Mr. Bramley reported
that a meeting held
in September to review progress in stimulating
inter-company transfers
had concluded that the initiative had been
worthwhile in increasing both
the number and quality of the candidates for
transfer. Another
conclusion was that there could be value in
considering more short term
(6-12 months) secondments as well as the 2-3 year
postings. Further
study -as required on the issue of remuneration
but this was not seen as
a fundamental problem.
50. It was agreed that pressure to identify
candidates for transfer should
be maintained on a continuing basis throughout the
year. It was also
agreed that it would be valuable to have a
stocktaking on an annual
basis and that the personnel managers should
arrange a further meeting
for mid-L991, to review progress during the year.
51. It was noted that the secondment to the
manager development project and
the plans to build up a team round Mr. Watterton
to investigate
investment opportunities in Eastern Europe should
help in opening new
opportunities for development. The Chairman also
stressed the need to
identify candidates for teams to man any new joint
ventures which were (-n
set up as a result of Mr. Watterton's work. It
-was intended that these CD
teams should be multinational and this would
create opportunities r1i
throughout the Group. (-n
CO
CO
CD
00
BATCo document for Province of BritiSh Columbia 25
October 1999


8 -
Other Issues
52. Additives Register : Mr. gramley reported that
the additives register
was virtually complete and it was agreed to review
this topic again early
in 1991.
53. Smoking/Regulatory Issues : It was noted that
WHO were continuing to
pressurise airlines to ban smoking worldwide and
Mr. Herter reported that
partly for logistic reasons following the
introduction of 3 class travel,
Lufthansa were due to impose a ban on smoking on
domestic flights from
end-October. Mr. Bramley suggested that the Group
needed to mount a more
concerted effort to counter these pressures and
agreed to produce a
strategy paper on this for the next meeting.
54. Mr. Bramley reported that France will ban
advertising from 1st January
1991. Other EEC countries could follow by Ist
January 1993 but this trend
is being resisted in Germany on constitutional
grounds and also in the UK
and Holland.
55. Hr. Mercier reported that in Canada the legal
representations to limit the
impact of C51 should be completed by end-October
and the industry was
hoping for a favourable judgement on the issue.
56. It was noted that in Brazil the new Minister
of Health had introduced
further legislation to limit tobacco advertising.
However, following
representations by Souza Cruz, the level of
restriction was likely to
remain largely as before.
57. ~Ir. Pritchard reported that despite
continuing Congressional activity in
the USA, no new restrictive legislation -as
expected to be enacted in the
1990 session.
58. The Chairman noted that the regulatory trends
on advertising had again
confirmed the need to understand the inherent
value of Trade Marks and to
devise methods for maintaining or increasing brand
goodwill in an
environment where advertising was banned. He
suggested that this should
be considered as a topic for a future marketing
directors' seminar.
59. It was noted that a substantive new regulatory
development in the USA was
the introduction of a bill formally recognising a
method for testing the
ignition propensity of cigarettes.
60. Mr. Herter reported that the VGA in Germany
had introduced a DIN test for
measuring tar levels in RYO tobacco. Details of
this test would be
circulated to the other companies.
61. It was agreed that Smoking/Regulatory issues
would be kept on the agenda
as a permanent review item and the Chairman asked
that, for the next
meeting, Team members should consider whether
there should be specific
research on the likely impact on the industry of
'Green' pressures.
62. Y-1 Tobacco : It -as noted that Mr. Pritchard
would report back to the
next meeting on the assessment of a new blend
including Y-1 tobacco where
the objective had been to produce a lo.-tar
cigarette with flavour
comparable to that of Winston.
C)
CD
CD
BATCo document for Province of British Columbia 25
October 1999


63. Ammonia Treatment : Mr. Pritchard reported
that the blenders
conference held in June had been useful as a means
for exchanging
information and experience.
64. As a follow-up to this, it was intended to
produce a blenders handbook
which would be distributed throughout the Group.
65. t4hile welcoming this development, the
Chairman emphasised that the loss or
copying of this would represent a leakage of very
valuable trade secrets.
The handbooks would therefore need to be kept
totally secure.
66. It was noted that Ammonia treatment was now
being used increasingly
widely. For security reasons, it was suggested
that, in future, the
treatment should be referred to by a code name.
67. The Chairman also suggested that further
research should be carried out in
the Fundamental Research Centre to characterise
the decomposition products
of cigarettes containing components hich had been
treated in this way.
68. Reconstituted Tobacco : It was agreed that in
deciding which process
should be used to produce reconstituted materials
for incorporation in
cigarettes, the prime consideration should be
product enhancement rather
than cost. It was also suggested that further
consideration should be
given to possible benefits to reconstituting stem
in sheet form.
69. Acetate Tow : It was noted that the supply of
acetate tow did not
present a problem in those countries which had
established domestic
supply. However, there could be a problem in those
BATCo- companies which
depended on imports and in Brazil, which would
need to be dealt with on an
individual basis.
70. It was agreed that Mr. Bramiley would give
further consideration to ways in
which this problen might be resolved through
negotiation with suppliers on
a worldwide Group basis.
71. Future Meetings : The next meeting of the tea.
has been arranged for
Friday, 30th November. Dates for meetings in L991
are still to be
arranged.
RS/DJA
20 th September L990
U-1
CD
r1 j
Ull
---j
CC)
BATCo document for Province of British Columbia 25
October 1999