Tobacco StrateRy Reviev Team
A meeting of the Tobacco Strategy Review Team was
held on 18th May 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 47-50.
I. The minutes of the meeting held on 9th February
were agreed.
2. Inter-company transfers : Mr. Bramley reported
that 2 transfers
had been implemented since the last meeting and
that the respective
Personnel managers were due to meet in June to
discuss further
additions to the list of transfers to be arranged.
The Chairman
stressed the need for continuing involvement by
the Chief Executives,
who should give clear instructions to their
Personnel managers on
specific transfers to be arranged.
3. Central Additives Register : Mr. Bramley
reported that the
preparation of the register was scheduled for
completion in August.
It was noted that because of the possible need for
disclosure of both
the chemical and usual names of additives to
cigarettes (as was
already the case in Canada), further consideration
would need to be
given to the identification of substitutes for
those additives which,
although they were not harmful, had usual names
which might give rise
to adverse reactions when disclosed in this way.
4. Regulatory Issues : Mr. Pritchard reported that
although Senator
Kennedy's Smokers Education Bill was still in
committee, there was a
strong possibility that it would reach the floor
of the House in
September. Key provisions in the Bill were
stricter enforcement of
penalties for sales to under-age smokers and the
setting up of a
Tobacco Centre with funding of $185 million and a
remit to oppose
smoking. A n~- regulation requiring additives to
be listed on the
carton would also be introduced. However, it was
not thought that the
Hatch Bill, on further advertising restrictions,
would be introduced
during the next session. It was noted that in
Canada the introduction
of a maximum $25,000 fine for sales to under-age
smokers could have an
adverse effect on distri6ution as some retailers
might be unwilling to
stock a product -hose sale could expose them to
the risk of incurring
a fine on this scale.
5. It as noted that the European Council of
Ministers had agreed to a
tar limit of 15 mg for 1993, reducing to 12 mg in
1998. However, the
directive on advertising had not yet been agreed.
6. Smoking Issues : The Chairman dre. attention to
the recent article
in the UK Sunday Times critLcising the apparent
strength of BAT
cigarettes sold in certain countries in Africa. He
stressed the
importance of being able to defend the sale of
cigarettes with higher
tar levels than were usual in Europe and North
America, putting these
into context with the requirements and practice in
the relevant
markets. In addition, the continuing long term aim
would be to work
towards progressively lower deliveries in all
markets.
7. It was noted that the article had not given
rise to any correspondence
from shareholders. However, BAT had taken the
initiative in providing
major shareholders with a statement of the Group's
position on this U-1
issue and there -,.Tere also plans to inform
interested MPs, including CD
the Minister for Overseas Development. Putting the
company's case on r1i
this issue would remain a high priority.
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8. T-1 Tobacco : Mr. Pritchard reported that Brown
& Williamson had
2 million pounds of Y-1 tobacco and would be
consumer testing
cigarettes with a low tar:nicotine ratio during
the Autumn.
Mr. Herter reported that BATCF had samples of Y-1
which were being
used in product development. Souza Cruz were
testing ventilated and
non-ventilated products including Y-1 and would
repeat these tests
after ageing Y-1 for twelve months.
9. It was noted that there had been limited
progress in BATCo. on product
developments based on Y-1 and the Chairman asked
that this should be
given a higher priority, concentrating on the
potential for developing
low-tar cigarettes rather than the difficulties of
incorporating Y-1
in existing blends.
10. Mr. Mercier believed that it was important to
develop cigarettes with
a lower tar:nicotine ratio but Imperial were
pursuing other lines of
development and were not using Y-1 tobacco.
11. It was noted chat Brown & Williamson had Y-1
male-sterile seed
available and, since this did not regenerate, its
dissemination would
not represent a security risk. It was therefore
available for test in
&roving areas worldwide.
12. It was also noted that the use of Y-1 would be
an additional subject
to be covered at the blenders' seminar, organised
by Mr. Pritchard, in
June, the prime object of which would be to
provide information on
techniques for the introduction of ammonia.
13. Ammonia Treatment : Mr. Mercier reported that
ammonia treatment
had been tried on Imperial's existing blends but
had not been found to
give a noticeable improvement. However, Mr. Herter
reported that
BATCF believed that their accoonia-treated Lucky
Strike was superior to
Marlboro and following success with HB Lights,
modification of HB
itself was now being tried.
14. Souza Cruz were using ammonia treatment on
Lucky Strike and export
versions of Hollywood but were worried about cost
on other brands.
It was suggested that smoking quality relative to
competitive products
might need to over-ride cosr considerations, at
least In the initial
stages of development.
15. It was noted thac BATCo. had initiated a
programme to assess the
effect of ammonia treatment on Virginia brands.
This assessment
would continue to be given a high priority,
starting with the
evaluation of the effect of ammonia treatment on
existing blends.
16. Reconstituted Tobacco : Reviewing progress on
DEER and the sheet
process, it ,as noted that the sheet process for
reconscituting
tobacco appeared to provide a more certain route
to producing an
ammonia treated cigarette of acceptable quality
even at relatively
high levels of inclusion. It as also noted that
Brown & Williamson
were In the process of acquiring Lancaster Plant
which would give
access to the relevant production technologies,
allowing further
development of the process.
17. The Chairman asked that BATCo. and Souza Cruz
should give further
consideration to the possible advantages of
adopting the sheet
process.
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18. Low-Sidestream : It was noted that recent
reports had shown that
the reduction of visible and non-visibl-
sidestream was still a key
factor in making smoking more socially acceptable
and product
developments with this aim would continue to be
given a high
priority.
19. Brown & Williamson, BATCF, BATCo. and Souza
Cruz each had development
work In hand but no entirely satisfactory solution
had yet been found.
The subject would be kept on the agenda and
progress would be reviewed
at the next meeting.
20. As an extension to the current work, the
Chairman suggested that Souza
Cruz should consider whether Pirahy should be
Involved in developing
low-sidestream papers, possibly starting by
producing an existing
paper of this type under licence.
21. Acetate Tow : It was noted that current
developments in the Far
East and in Eastern Europe (where filter lengths
could increase) are
likely to lead to a further tightening of the
supply position for
acetate to., where the currenc capacity of 460
tons is only slightly
above the annual demand of 430 cons, including 65
tons for BAT.
Although analysis by Brown & Williamson suggests
that capacity will
expand to meet the expected increase in demand, it
was agreed that it
would be prudent to ensure that all necessary
steps have been taken to
avoid the possibility of a future supply problem.
22. It was agreed that Mr. Bramley, Mr. Pritchard,
Mr. Rombaut and
Mr. Herter would organise a meeting to discuss
what action should be
taken to ensure continuity of supply, considering
possibilities for
Increased stock levels, tighter contractual
arrangements with
suppliers, etc.
23. Leaf Duration Policies : Mr. Bramley
introduced a note formalising
the policies for deciding on optimum leaf
durations in each company.
It was agreed that this would be a useful frame of
reference in
deciding specific objectives for the levels of
leaf stocks in
individual companies.
24. Leaf Grade Rationalisation : Mr. Pritchard
introduced a paper
suggesting a classification of the leaf grades
used in the Group into
8 grade types for Flue Cured, 7 for Burley and 4
for Oriental grades.
This would be used as the basis for a programme in
BATCo. to monitor
stock levels In all countries. The object of this
programme would be
to ease the movements of stocks from one company
to another in cases
of under or over-supply.
25. It was agreed that the programme should be
reviewed after its first
year of operation. It was also sTiggested that in
implementing the
programme, It should be scressed that the prime
object of its
Introduction was to improve interchangeability.
This would therefore
be the main criterion in deciding whether or not
it had been useful.
26. Progess in Eastern Europe : Mr. Herter
reported progress in
developing sales to Eastern Europe. These had
doubled in the first
four months of 1990, totalling 1,171 million
compared with 574 million
In the equivalent period in 1989. LF"
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27. East Germany was the priority market for
development and although
this was currently being treated as an export
market, it would
effectively become part of the domestic market for
BATCF after 2nd
July. As a result, the German market would expand
from 118 billion to
around 150 billion.
28. It was noted that the existing manufacturing
facilities in Fast
Germany were very inefficient and the quality of
their products (which
had tar levels of about 22mg) , was poor. Since
BATCF had capacity to
service the expanded market, it had been decided
not to bid against
Philip Morris, Reetsma and Reynolds for the three
existing cigarette
factories in East Germany.
29. Although there as still some doubt about a
possible tax rebate for
locally produced cigarettes, BATCF ere confident
of their ability to
compete in the market. It was also hoped that
there would be a
continuing benefit to profits from the Berlin
preference, which is
expected to be retained for the next three years.
30. The Group was well placed in Bulgaria which
was a major exporter
and where BATCF had licenced production. The
licence business in
Hungary was also growing and a joint venture was a
possibility.
The Chairman would be visiting both these
countries during the
summer.
31. Although there was licenced producrion in
Yugoslavia, there had
been quality problems and withdrawal of the
licence is under
consideration.
32. In the case of Romania and Poland, the main
emphasis had been
an exports, and in the latter case these would
include lower priced
exports from Brazil.
33. There had been limited progress in
Czechoslovakia but it was hoped
to ship some cigarettes to the USSR in June. It
was noted that
the Chairman was making a separate approach to the
USSR and this
should be borne in mind by Mr. Herter in his own
programme.
34. Iran : It was noted that BATCF had agreed to
sell 4 billion
cigarettes to Iran over 2 years. They were
arranging for these to be
transported through the USSR in order to provide
the Russians with
additional hard currency. It as suggested that it
might be helpful
to have similar arrangements for transporting
exports to Afghanistan.
35. Souza Cruz Exports : It was also suggested
that Iran could be an
export opportunity for Souza Cruz using BATCF
contacts and possibly
arranging a counter-trade deal for oil. The
Chairman stressed the
importance of having a high class, experienced
manager heading up the
overall export effort from Brazil.
36. Turkey : Mr. Bramley reported that the
recently announced Philip
eforris agreement to invest in Turkey appeared to
refer to a relatively
small scale investment of $100 million. It did not
appear to be
attractive financially and Mr. Pritchard suggested
that the main
objective might be to obtain a parallel agreement
for increasing Ln
exports. BATCo. still believed that until the tax
situation had been CD
resolved, joint ventures, whether by Philip Morris
or any other r1J
overseas investor, would remain unattractive. U-1
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37. While the accuracy of this assessment was
accepted, it was suggested
that BATCo. should consider again whether to avoid
allowing Philip
Morris a competitive advantage on imports, the
Group should announce
Its continuing Intention to invest, subject to the
resolution of the
outstanding tax problems. Also, whether this
should be backed by an
appropriate letter of Intent. Mr. Bramley was
asked to study this and
to make recommendations to the CPC.
38. Thailand : Mr. Pricchard reported that GALTT
was likely to rule
against the current Thai regulations which
effectively denied access
to the market. Brown & Williamson were assuming
that they would be
able to enter the market by the end of the year
and negotiations were
proceeding on this basis. It was noted that
despite a ban on
advertising, the Thais were still heavy smokers.
However, tar levels
were relatively low and it would be important for
Group products to be
at similar or lower levels.
39. US International Brands : Mr. Pritchard
presented a review of the
current situation on US International brands and
stressed the progress
and plans for Kent, Lucky Strike and Barclay in
Europe. He believed
that Kent Lights should be a lead brand and BATCF
ere looking to
launch thXs in 1991. Lucky Strike was a
particularly good blend and
was considered to be comparable to Marlboro. Lucky
Strike Lights was
even better and was considered to be superior to
all competitive
brands. The Barclay controversy was now resolved
and this brand was
also progressive.
40. It was noted that there appeared to be a good
opportunity for Lucky
Strike to gain share as smokers s.itched from
Marlboro into a Lights
cigarette which need not necessarily be 11arlboro
Lights. To assist in
this, BATCF required a Lights version of Lucky
Strike with tar levels
below 10 mg.
41. The Chairman stressed the importance of
planning for continuing volume
gains of at least 15Z p.a. in all brands and had
been particularly
disappointed by the budgetted gains shown for
licences in 1990. He
also asked for a specific programme to be prepared
for the relaunch of
Kent in Europe showing 3 years from 1991 and
analysing the costs and
benefits of the programme proposed. Thereafter,
there should be a
three year rolling programme showing the level of
commitment and
expected benefits from the continuing expansion of
both Kent and Lucky
Strike.
42. UK International Brands : Mr. Bramley
presented a review of the
current situation and plans for Benson & Hedges
and State Express 555.
The Chairman stressed the Importance of
capitalising on the existing
goodwill of Benson & Hedges and of giving this a
higher priority than
the promotion of peripheral brands such as Pierre
Balmain. He also
suggested that greater pressure should be applied
to expanding sales
of State Express 555.
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43. Competitor Analysis/RJR : Mr. Pritchard
presented a verbal report
on the current situation of R.J. Reynolds in which
it was noted
that
a) The asset sales announced at the time of the
buy-out appeared to
be on track.
(b) Their current operating results are sufficient
to meet all
immediate liabilities, following cuts which have
increased
income by around $550 million per year.
(c) They are believed to have assumed sales of 848
billion
cigarettes in the period 1990-1994 but Brown &
Williamson
estimate that this forecast could be missed by 150
- 200 billion
giving a shortfall of around $4.5 - $6 billion in
contribution
(at $30/mille).
(d) If this shortfall occurred, RJR will be faced
with a mounting
cash crisis as their refinancing commitments
become
progressively more onerous. They may then need to
consider
further asset sales.
(e) The only obvious major non-tobacco asset which
might be
available for sale would be Planters/ Lifesave rs
and the maximum
this might be expected to raise is $1.5 to $2
billion.
(f) Although some further cuts might be made
within the tobacco
business, these were not expected to be sufficient
to close the
gap and as a result some tobacco assets could
become available
for purchase.
44. It was noted that although RJR had -ithdran
from Brazil and ere
closing their factory in Brussels, they are still
competing vigorously
in all markets, at least on a short term basis.
45. It was confirmed that the main potential
interest for BAT 7as still in
the European and Export businesses and while it
was not considered
worthwhile to carry out further detailed work at
present, the
situation would continue to be closely monitored
pending a further
review in October/November.
46. It was noted that Mr. Pritchard was intending
to write up his review
of the current situation and this would be
circulated to the members
of the team.
47. Research and Technology : Mr. Heard presented
a paper outlining
the current priorities within the Group R&D
programme. He thought
that the amount of effort on R&D was adequate and
that the output from
the function was comparable or better than that of
the major
competitors. Considering possible future
developments in R&D he
suggested that there could be a case for
increasing the effort applied
to:-
(a) Leaf genetic development
(b) Smoke taste and flavour
U-1
(c) Process development (Z)
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(d) Packaging (where there is virtually no work at
present). U-1
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48. While not disagreeing with the importance of
these topics, it was
suggested that careful consideration should be
given to whether they
might be covered more effectively in other ways,
either through
contract research (e.g. on genetic developments)
or in co-operation
.ith machinery manufacturers (packaging).
49. Following further discussion, it was agreed
that it would be helpful
for the Strategy Review Team to provide more
guidance to Mr. Heard and
to the Research Conference on the topics which the
Chief Executives
considered to merit the highest priority in R&D.
It was noted that
this would be discussed again at the next meeting.
50. As a preliminary to this, it was agreed that
Mr. Mercier would
organise a meeting of the Group's marketing
directors to obtain their
views on the priorities for product development.
The results of this
meeting would then be presented as one of the
inputs to the
discussion.
51. Management Training : Following a discussion
on management
training, it was agreed that Mr. Broughton ould
prepare a paper for
the next meeting, suggesting how the current
arrangements might be
modified and improved.
52. During the discussion it was noted that:-
(a) The requirement was for training in techniques
specifically
applicable to the tobacco industry.
(b) There should therefore be more on key industry
topics such as
excise. In addition, managers should also be
helped to
withstand attacks on the industry and should
receive general
orientation as well as technical training.
(c) There should be a clearer distinction between
MTC and MDP.
(d) Beyond MDP, there is a need for more
functional courses (e.g. in
purchasing, marketing, etc.).
(e) The end result should be a training programme
made up of
building blocks throughout a manager's career. The
first
element of this ought to be a recognised induction
programme
offering graduates and other management level
entrants a good
practical grounding in basic commercial knowledge
so that
everyone -as able to understand fundamental
business procedures,
such as the construction of a profit and loss
account. Apart
from the value in increasing management
competence, this was
also necessary to compete with other companies,
whose training
programmes -ere one of the factors attracting the
better
recruits.
53. Quarterly Progress Reports : The reports for
the quarter to 31st
March were reviewed and Mr. Broughton summarised
the overall
contribution to the Group from the tobacco
businesses.
54. Date for Next Meeting : The next meeting of
the team will be held
in Windsor House at 10-00 a.m. on Monday, 17th
September. Following
this a further meeting has been arranged for
Friday, 30th November.
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