Tobacco Strategy Re~iew Team
A meeting of the Tobacco Strategy Review Team was
held on 9th February 1990.
Present: Mr. P. Sheehy, Mr. 8.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. Rombauc and Mr. T. Wylie also attended
the
meeting.
Mr. B.P. Garraway was unable to attend.
I. The minutes of the meeting held on 10th
November 1989 were agreed.
2. Mr. Bramley reported progress on Inter-Company
Transfers and it was
noted that two transfers had been implemented
since the last meeting.
A meeting, including a representative from Imasco,
would be held in
mid-1990; to progress the transfers planned for
1990-1991 and to
consider candidates for 1992-1993. Further
progress would be reported
to the team in lace 1990.
3. It was noted that the commercialisation of new
products based on
Y-1 tobacco and De Mauduit 'lo. sidestream' paper
-as being progressed
in Brown & Williamson. Development -as also
planned in BATCo., BATCF,
Imasco and Souza Cruz.
4. It was agreed that all companies would review
their requirements for
Y-1 tobacco and would place orders during the next
30 days for
delivery in 1991 either from Brazil or through
arranging, as has
already been done in Canada, to have Y-1 grown in
ocher countries where
the Group could exercise sufficient control to
ensure exclusivity. It
was noted that although Y-1 yielded approximacely
10% less than
conventional tobacco, this was compensaced for in
the price to the
farmers. It was also noted that disease resistant
strains were under
development.
5. Regarding low sidestream products, It was noted
that there was a
potential problem in chat some products with a
reduced visible
sidestream actually have an increased invisible
sidestream (e.g.
Virginia Super-slims are said to have high CO
numbers - which would be
a problem in Canada -here CO numbers are shown on
the packs). It -as
agreed that Mr. Pritchard would present a paper at
the next meeting
reviewing possible ways for achieving lo-
sidestream and the
implications of the alternative methods available,
including double
wrapping. It was noted that Brown & Williamson
could not use De
Mauduit paper because of the additives involved.
However, they might
be able to use an alternative paper which is under
test by BATCF and
which is said to reduce both visible and invisible
sidestream.
6. The importance of introducing ammonia treatment
as the means for
producing an authentic US taste -as again
stressed. It was noted that
Brown & Williamson considered that the optimum
effect: is obcained
through the introduction of diammonium, phosphate
and ammonia during the
cooking process In the production of band cast
reconstituted tobacco.
BATCF are not permitted to use diamanium phosphate
in cigarettes sold
in Germany and have developed an alternative
process incorporating a
mixture of pectin, ammonium hydroxide and sugars
into paper
reconstituted tobacco. As an alternative to these
processes, ammonia CD
can also be introduced via casing compounds.
However, the current view r1j
is that this is Less effective than the other
processes in producing
the desired smoking quality.
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7. It -as agreed that Mr. Pritchard would organise
a technical seminar to
ensure that blenders throughout the Group were
fully conversant with
the techniques for ammonia treatment and could
introduce appropriate
modifications to all processes for producing
US-type cigarettes.
8. It was also noted that Mr. Bramley would
initiate an R&D programme to
investigate possible benefits of introducing
ammonia treatment for
Virginia cigarettes.
9. Reviewing methods for producing reconstituted
tobacco, it was noted
that the paper process gave the lowest cost
product but required high
volumes to be economically viable. The extrusion
(DEER) process
was more economical at low volumes but tests by
Brown & Williamson had
suggested that the binders used in the process
could introduce an
off-taste in the product. In addition, it had not
yet been possible to
introduce ammonia treatment into the process. They
therefore preferred
the band cast process which although slightly more
expensive did have
the potential for introducing superior smoking
quality to the product.
10. Mr. Mercier reported that Imasco had
experienced some effluent problems
with the band cast process which had not yet been
overcome. He also
reported better experience with their pilot plant
for DEER with the
expert panel failing to detect any off-taste from
the product.
However, this still needed to be confirmed in
consumer testing.
11. It was agreed that a first requirement for any
reconstituted tobacco
process -as that its use should result in
sustained or improved quality
in the final product. No further DEER plants
should be ordered until
it was certain that this condition would be met,
with solutions being
found to any problems relating to off-taste and
ammonia treatment and
approval obtained for any additives used. In the
meantime, companies
should also evaluate the band cast process as an
alternative.
12. It was agreed that the research programme to
develop an extrusion
process for cigarette manufacture (EPCOT) should
continue but it
should be made clear that, at this stage, the main
interest in the
process was within R&D, who should be challenged
to provide evidence of
their ability to develop a product either with a
significant cost
advantage but no diminution in smoking quality or
with a new quality
which is sufficiently marketable to justify a
commercial interest in
the development. It -as also noted that the
process should not involve
the use of new additives which might lead to
regulatory problems.
13. It was noted that a first edition of a Central
Additives Register
for the Group would be completed by August.
14. Reviewing the Group's arrangements for dealing
with regulatory
issues, it -as noted that the representation on
CORESTA had been
strengthened and that the Group was also active in
influencing ISO. It
was agreed that Mr. Bramley, 11r. Herter and Mr.
Pritchard would be
jointly responsible for (!nsuring that the Group
was adequately covered
in relation to US and European regulatory bodies,
with appropriate
arrangements set up; to monitor any proposed or
actual new legislation
and to ensure that the Group's views are taken
into account as early as
possible during the framing of new regulations,
including those
governing advertising and promotion. They would
also ensure that
Imasco and Souza Cruz were kept informed of
developments so that they
could prepare for the possibility that similar
requirements would be
introduced in Canada and Brazil. ~_n
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15. It as noted that two new Smoking Issues
Documents would be
available for distribution at the end of February.
These will be
Habit or Addiction?" and "Smoking: The Scientific
Controversy", which is a shortened version of
"Smoking and Health, the
Unresolved Debate". It was also noted that it was
intended to review
and update these and all previously issued
documents on an annual
basis, starting in January 1991.
16. It was noted that Mr. Bramley would present a
paper at the next
meeting, proposing a Group policy on Leaf
durations.
L7. It was also noted that Mr. Pritchard would
present a paper proposing a
co-ordinated Group list of Leaf grades,
rationalistng similar grades
under a common nomenclature as a first stage
towards easing transfers to
rectify under and over-supply of stocks in
individual companies.
18. It was noted that further study had shown that
off-balance sheet
financing of leaf stocks would involve a
significant charge and/or a
reduction in the security of supply. As a result,
it had not been
possible to devise a scheme here the benefits
outweighed the costs.
19. Reviewing potential new markets, it was noted
that although still
small in terms of market share, BATUKE volumes in
Thailand had
increased by 50% in 1989 and ere no. 250 million.
The total market
was 35 billion and following strong pressure from
the US Trade
Representative, invoking Super 301, it was hoped
that the market would
open up further towards the end of the year. In
preparation for this,
BATUKE had identified agents and had increased
market expenditure.
Brown & Williamson had taken preliminary action on
promotion and were
also marketing US brands through SUTL.
20. Mr. Herter presented a paper on Eastern Europe
reviewing the
current situation and providing data on the
economic background and
market characteristics for each country, including
the USSR.
21. It was agreed that it -as necessary to
consider each country separately.
Although they were all moving in the same
direction towards becoming
market economies, they were at different stages of
development and the
nature of the opportunictes varied from country to
country. The one
common factor was the need to keep open as many
options as possible,
concentrating on establishing contacts rather than
becoming involved in
long term contractual obligations such as Joint
Ventures or long term
licencing agreements similar to that which had
been so disadvantageous
to Philip Morris in Japan.
22. It was agreed that the main responsibility for
developing the markets
in Eastern Europe should be shared between Brown &
Williamson and BATCF
.ith BATUKE working through BATCF.
23. East Germany was expected to become part of a
unified German market
and BATCF would aim to achieve a 207 share of the
27 billion cigarettes
sold in the currenc East German market, using
existing capacity as the
source of supply and treating both parts of
Germany as a single domestic
market to be served by the existing salesforce.
The current
manufacturers in East Germany had three
inefficient factories and were
not seen as strong competitors. However, Philip
Morris -ere operating
at full capacity in their current manufacturing
plants and might use the
opportunity to escablish a new factory in the
East. Further
consideration would be given to ways in which this
competitive threat
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24. Elswhere in Eastern Europe, the firsc priority
would be to expand
direct exports to hard currency shops. AC the same
time, opportunities
would also be sought to licence tactical brands,
in order to keep a
contact in the market, ahead of the time when it
becomes completely
open. It was noted that BATCF already had an agent
in Poland and
were seeking representation in other countries.
25. It was suggested that the priority markets for
further consideration
should be Czechoslovakia and Hungary and that the
first stage
in becoming established in these markets should be
to identify embryo
private organisations run by people of substance,
who were likely to be
in the forefront of the market's development.
Representation in the
markets should be negotiated at the highest level
and the CPC consulted
before appointments are made.
26. Introducing the review report for the major US
brands,
Mr. Pritchard said that the figures quoted would
be revised in the
light of the most recent information available and
a modified report
would be circulated to team members before the
next meeting. It was
noted that the growth in licensee sales may have
been underestimated.
As an example of this, Hilton sales into China
were already exceeding
the rather conservative budget.
27. The Kent blend was said to be as good as it
has ever been and this,
combined with sharply focussed promotion, had
enabled the brand co
compete strongly, outselling Marlboro in some
major markets. The
Chairman noted that there was a good awareness of
the brand in Europe
and suggested that a task force should be set up
to relaunch Kent in
selected European markets. Mr. Pritchard will
report back on this at
the next meeting.
28. Mr. Mercier suggested chat che expected
relaunch of Kent in the VFM
segment of the US market might affect the image of
the brand in other
markets. It was agreed that this ould need to be
monitored carefully
but the view at present was that a move downmarket
in the USA would not
necessarily degrade the image of the international
brand.
29. Lucky Strike appealed to younger smokers and
was making encouraging
progress in most markets. It was noted that there
had been some
problems in adapting the brand image to all
markets. However, while
minor modifications could be permitted to meet
local requirements,
these variations should not be such as to confuse
or dilute the basic
formula.
30. It was agreed that promotional efforts should
be tightly focussed (e.g.
by concentrating on Lucky Strike Lights in
priority markets such as
Brazil, Italy, Argentina and Spain, where there
should be a specific
objective to reverse the adverse share trend which
has been
experienced).
31. Mr. Pritchard was asked to report progress on
Lucky Strike ac the next
meeting. In addition, he -as also asked to study
and report on the
relationship between price and quality and the
extent to which improved
quality might enable Lucky Strike to compete with
Marlboro at smaller
price differentials than had been found necessary
up to now.
32. Mr. Pritchard reported that the problems
regarding the classification
of Barclay had been largely overcome and that a
major promotion of Ln
the brand was planned for 1990. This would include
Barclay Lights (3-9 (D
mg tar) and Ultra Lights, using a conventional
acetate filter and Y-L r\J
tobacco. The Middle East market was picking up and
there were also Ln
plans for a launch in Japan using a charcoal
Actron filter.
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33. It was noted that market shares were not
progressive in some key
councries in Europe. However, Mr. Pritchard said
that a new thrust
was planned in Norway, Mr. Herter said that a
launch of the Lights
product was being considered in France and Italy
once the ISO
classification had been finalised and Mr. Bramley
said that a new push
was planned in Switzerland as soon as agreement
was reached with the
canconal chemists on the classification for the
product. Planned
growth in BATCo. was 6% overall.
34. The Chairman asked to see the plan for growth
in Switzerland and asked
that a full 1991 marketing plan for Barclay should
be prepared in the
autumn with particular emphasis on Europe.
35. It was noted that although there had been some
disappointment in the
overall share achieved by Capri, the brand had
done well in those
countries where there was an established female
segment. The 120 mm
version was now out in the market and was being
progressed. It was
also believed that further progress could be made
wich a Lights version
of Capri, especially in the USA and Italy.
36. It was noted that Vogue had been more
successful than Capri in France
and the Netherlands. This was ascribed to an
earlier launch by Vogue
which also had the advantage of a name which -as
particularly evocative
of female style in France. Mr. Mercier suggested
that in francophone
countries the alternative brand name of Finesse
might be more
successful than Capri.
37. it was noted that the main market for Viceroy
was out of Cyprus
into the Levant. However, the brand was also being
launched in Israel
and was doing -ell in Chile. It was hoped to
recover share in Hong
Kong through reverting to a product which would be
manufactured in the
USA and sold under a traditional label.
38. Mr. Pritchard reported that although the
quality of Kool had been
improved, smokers had failed to appreciate this.
Experiments were
under way with a new pack design co try to break
the apparent
association between the old pack design and the
harshness of flavour
which was the previous cause of complaint.
39. Mr. Bramley reported chat Benson & Hedges was
still generally
progressive and was a major contributor to
profits. It was noted that
the problems experienced in Malaysia and with the
advercising campaign
in Nigeria had shown the importance of maintaining
quality and of
persevering wich the traditional image for the
brand.
40. Mr. Mercier also noted that Benson & Hedges
was declining in Canada
where Philip Morris had allowed the Image to be
downgraded. Mr. Herter
reporced that there were problems in Germany where
strong competition
from Davidoff and FM Gold had underlined the
movement in taste towards
a lighter smoke and away from brands such as
Prince and Benson &
Hedges.
41. It -as noted that an American blend version of
Benson & Hedges -as
being considered and would be the subject of a
presencation to
Mr. Bramley in March.
42. Reporting on State Express. Mr. Bramley said
that this brand also
made a major contribution to profits and was very
successful in the Far ~_n
East, including Malaysia were It was growing in
importance. The need
co maintain quality and to monitor this through
research was again
emphasised in relation to the Malaysian markec.
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43. It was noted that JPS and Players Gold Leaf
were of relatively
minor importance as international brands and
although progress should
be made where possible, the main emphasis in
markecing should be
focussed on the major brands.
44. Summarising the discussion on brand
management, the Chairman
stressed the importance of concentrating the
Group's resources on
promoting a limited number of major brands within
selected growth
market segments. There should be particular
emphasis on:-
(a) Penetrating the low-tar segment.
(b) Relaunching Kent in Europe.
(c) Reviving Lucky Strike in Spain which was a key
market both
domestically and because of the tourist trade.
(d) Careful step-by-step market expansion by Lucky
Strike Lights
ensuring that it is properly positioned in each
market.
(e) Rigorous justification of the requirement for
an extension to a
Lucky Strike Ultra Lights product, market by
market.
(f) Continued promotion of Barclay, especially in
Switzerland.
(g) Tighter control of Benson & Hedges and the
launch of a US-type
product.
45. Capri, State Express and the other
international brands should continue
to be progressed but with less priority than for
the major brands.
46. The paramount importance of quality was again
emphasised and it was
agreed that the achievement of improved smoking
quality should take
priority over cost saving.
47. it was agreed that there should be a further
review of international
brands at the next meeting of the team and that
figures for US domestic
brands should also be included in this review.
48. Reviewing the budgets for 1990, the Chairman
stressed the need to
achieve a good result in 1990, which could be of
critical importance if
the Hoylake bid was revived. The increase In
volume achieved in 1989
was encouraging and a similar increase was planned
for 1990. However,
there were still elements of this forecast which
were unsatisfactory
and there was a need to improve on the figures for
US international
brands, especially in respect of franchised sales.
49. The total tobacco profits for the Group showed
a satisfactory
increase in 1990. However, it was important that
all companies should
contribute fully to this and some further
improvement was being looked
for in BATCF. Tt was noted that profits could be
adversely affected by
a possible reduction in the loading in the USA.
This and any
shortfalls from the current budgets would need to
be compensated for
else-here and it -as possible, therefore, that
companies might be asked
to implement contingency plans later in the year.
50. The next meeting has been arranged for Friday,
18th May.
,:D
RS/DJA
21 st February 1990
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