Tobacco Strategy Review Team
Lhe cench meeting of the Tobacco Strategy Review
Team was held on 31st
October 1988.
Present: Mr. P. Sheehy, Mr. E.A.A. Bruell, Mr.
B.D. Bramley,
Mr. R.J. Pritchard, Mr. U. Herter, Mr. L.J. Sabota
e Silva,
Dr. R. Salter (Secretary)
'I r.
3.P. Garraway, Mr. H.F. Frigon, Dr. H. Erichsen
and
Mr . P.J. Rombaut also actended the meeting.
Mr. A.L. Heard as presenc for items 11 to 25
inclusive.
L the meeting, the Chairman said that the
membership of the team
had been extended to include the Chief Executives
of the Tobacco
businesse!s in BATCo., BATUS, BATIG and Souza Cruz
with 14r. 8rdell
representing the Associated Companies, Imasco and
Amatil.
2. Revie.ing the terms of reference, it was noted
that the principal aims
of the team would be to ensure that the Group
mounts a coherent strategic
tnr-isc in Tobacco, that there is effective
technical and mar1cecing
ct-ceration between the Group's Tobacco businesses
and that chere is a
uniffed acoroach on Smoking Issues.
7*-e -eam -would be concerned with major new
initiatives and with re=oving
5 r_,_::ura'- and other obscacleg co effective
marketing or technica-7
c-)-oceracion- It was not incended that it should
be concerned i:~, '
inz
in_g progress in areas ;nere CO-ODeracion is alre
o r ady proceed
s~:IsZac:crily or wi--h issues which are specific
to only one Opers:".Ig
01,; However, it may be
used as a means for sharing information in
:-as-as where chis ap-r-s to be appropriate (e.g.
where a develop=en: in
'ne be _' , cares:)-
mpan-, could o wader Ln
3. 7-e Minutes Of the ore,7ious meeting, held on
5th November L987, were
azreec.
_n S=okinz Issues. 'Ir. 3ramia, reDorze,_~ thac,
the summar, com=end_:_=
be compleced in November and it Its hoped to be co
L: oy
:-.e end ~f che year.
5. )n from ch.'s, it is hoped to be able to
complete and a
=ore data-'led comDendijm, which will be directed
at the scientific
ct=unJ'c-:-, in March 1999.
6. -was aocac; rhac the =a :or public con--erence
on lo--risK epidemi~;iogy,
co,ering a range of ocne:, subjeccs as ;ell as
Tobacco, was still scheduled
to held in Germanv in March 1989. Philip Morris
were organising their
own c-_nference in Februar-.- but this would be
limited to Tobacco. 1: -as
u-.f:r:-una:e chat the r--.;o conferences -ere
being held so close together and
I!r. 3ramley was monitoring the situation to
ensure that any possible
adverse effects were ainimised.
7. The Chairman emphastsed the importance of
maintaining pressure an S=oking
lss~es. Ile believed that the t.o compendiums
would be useful in this
res-.ec: and scressed :he need to have them
translated into German, Spanish
and Portugese.
1 : was suggested that while maintaining pressure
at the national level,
partf-c-ular emphasis should be given to
organising representations at
municipal level, using local people as much as
possible,
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8. It as noted that work sponsored by the Tobacco
industry in the USA on
Environmental Tobacco Smoke (ETS) was being funded
jointly by Philip
Morris and ?.J. Reynolds rather than by the
Tobacco Lnstitut;. Brown
Williamson had puc money into privately funded
projects at the University
of Kentucky and was accive in promoting work on
'sick-buildings' to
research the degree to which radon and air
conditioning systems were
important contributors to environmental health
hazards.
9. mr. Herter reported that BATCF had organised a
conference on ETS jointly
with the Auscrian Tobacco monopoly. They were also
co-operating with
wholesalers in ensuring that the industry position
was represented
effectively to gover-,:=ent both at local and
national level.
10. Mr. Saboia reported chat Souza Cruz were also
active in this respect in
Brazil where there was a trend towards more
restrictive legislation (e.g.
ree-arding ETS in non-entilated enclosed spaces).
11. Mr. Heard reviewed Research and Develooment.
Total Group expenditure
on -3bacco-re.Lated R&D was E30 million. The
major'-:-! of this was managed
and funded locally but there was a co-ordinated
programme of Group
Sc:azegic R&D accounting for around 10Z of total
ex;*nditure. Total
ex--endicure ia 1988 had been budgetted at Z3.3
million solic as foLlo-.;s:-
(a'. Smoking issues Research (External) ZC-3
million
01 7unda=en:a-' Res-2arch (mainly BATLrK&r-_) E2 -
0 =41.1ion
( r- '. ?rojec: Gceendo: (BATUK&E) i 0 mill-on
(d, ?rDiez: A_`r~bus .'.3rown & ',;Llliamson, I 11
i o n
S:ZC1::1g 7SS-5 Researzn comprises a group of
projec:s by medizal ard ocher
scientific depar:menza of universities, by
hospitals and by ocher
r-2;,:a1ble insc'-:,itions identified and agreed
with CA,_- companies. The cost
OZ ::~eSe pr:IeCt.3 IS -:lit equaily between the
CAC z"-oanies, exclud`ng
3,-:4-1. It -.;as noce-4- :hat the same sysce-,i
of fund--*.-g would be retained in
L9 E: :)ur t~ia: the overall level of expenditure
would be Increased by 10%.
T- z was a 1e,-21 than the original proposal, "nad
been for an
increase o~
13. it -.;as nocec~ :na: the Fundamental Researc-i
program=e di-.,ides into projects
res:onding :o regulat,-r7 issues (such as
Environmental Tobacco Smoke) and
~ncse -mect---i: fm-pCo,,!=Lrnt of product 'a
'uality. Imior-canc elements of this
vo:,K 3ra pr~:ec:s to reduce specific products
from s=oking to defined
levels, projects to measure the degree to which
cerzain chemicals persist
in enclosed environments and the development of
in-itro tests applicable
to -:)bacco products. Consideration is given to
publishing work wherever
this is judged to have scientific merit. Product
de,eiopmerics include a
fire-safe cigarette and flavour developments in
Souza Cruz. It was noted
chat a 15% increase in expenditure on fundamental
research to E2.3 million
was proposed for 1989.
14. Pro'ect Gr-eendot has the specific aim of
developing a cigarette with ver-f
low zar concent but normal nicotine delivery. The
aim is to move from a
current 10:L to a 2:1 Tar/Nicocine ratio over a
five vear programme of
development which will include modifications both
co ~he Tobacco and to
the design of the cigarette itself. It was agreed
that in view of the
importance of this project, efforts should be made
to accelerate the
development programme. The proposed level of
expenditure in 1989 is Z0.75 CD
mill-lon, which is a 50Z Increase on 1988.
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IS. Project Airbus is a more radical approach to
develop a product which has
some similarities to the recently launched RJR
Premier, but which relies
on an alternative system based on developments by
Ellis and Hughes,
patented by BAT.
16. It was noted thac RJR had now launched Premier
in two States in the USA.
While it was too early to be able to gauge the
response of the market, the
initially unattractive taste and aroma and the
technical problems
associated -ith the difficulties in lighting the
product, the variations
in length and a shelf life limited to five monchs
were all identified as
significanc problems chat would need to be
overcome. It was also noted
that even the status of Premier as a fire-safe
product depended on a
narrow technical definition of the test applied
and was critically
dependent on the orientation of the product when
tested.
17. In addition, there is the more fundamental and
scill unresolved question
as to whether the product ill'be classified as a
drug delivery system
rather than a cigaretze and thereby fall under the
jurisdiction of che
FDA.
18. Despite the uncertainties about Premier, it
was 'agreed chat this was a
significant devei-opment in which there was a high
level of public iacerest
and which could nor be ignored. It was also noted
that although Philip.
Morris had noc =ade any public statements on the
RJR development, they
were chougn: to have develovec_' a similar product
which they were '~-.oldLlg
in reserve _--jr a oossible launch as a comnecitor
to Pra=ier.
19. With the except-':)n of Switzer'-and, where
new regulations would e_f_-ec:tvely
preclude the launch of this type of product, most
counzr~es were adoptIng
a similar to that in the US in caking ac least a
neutral stance.
No restric:ions *.;e:-e expected on sales of the
product '-:I 3razil a.-_~
Germany, the au:' '-'orit'_es were generally
supporz:Lve of a development -.nlch
was seen as ~ei-g positive on public health
grounds. iowever, it was
still thouz~: t,a-- if there was a decision in the
US :-at the produz:
should be zlassi~_`ed as a dr-az delivery syste=,
atzitudes would be
reversed crId-,"~-2 and RJR tnemselves have said
t*-ac i~ the prod~c: were
to be placec' under the jurfsdict_'on of the FDA,
iz ~;ouic .be withdra-n.
20. It was agreed t~a: pending clarification of
the regulatory situac-jon and
further evaluaclon of the impac:: in the market of
the :U1 product, --he
developmen: of A-'--':)us should continue.
21. It -as motee - '.a: jince Che--de5i;n of the
product involves some combusi 6-rT_
of the Tobacso, -'-- has a greater claim than
Premier to be classified as a
genuine cigaret--a. However, ic mighc still
encounter the same
difficulties as Premier if this was classified as
a drug delivery system.
22 . It was also noced' that there were still
technical difficulties to be
overcome and it had not yet been possible to
develop a prototype of a
satisfactor7 Airbus product. The current aim was
to complete this phase
of the project by 4arzh 1989. -
23. It was noted that -it was proposed to increase
the expenditure on the
project from E0.5 million in 1988 to Z3.88 million
in 1989. However, in
view of the uncer:ainries both about Airbus and
about, Premier, it was
agreed that before going beyond the prototype
stage, the project should be
reviewed again in the light of the progress
achieved in the project itself
and in relation to the situation with regard to
che RJR product. It was
agreed that this review should be held in March
1989. NJ
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24. It was suggested that the expenditure on the
Fundamental Research, on
Greendoc and on Airbus should be funded on a
similar formula to that
applied in 1988 giving allocations as follows:-
IM 1988 1989
BATCo. 0.75 1.73
Brown & Williamson 0.90 2.08
BATCF 0.57 1.32
ITL 0.57 1.32
Amacil 0.21 0.48
TOTAL 3.00 6.93(a)
Note (a) E3.38 million of the additional
expenditure is accounted for by
Airbus and is subject to a favourable review of
thar-projecc in
March 1989.
25. On Tobacco ExDansion:-
(a) Mr. Bramley :eporzed that the APEX development
is held up pending
the completicn of toxicity tests where there have
been problems in
finding sui:able laibora:ories who have the
capacity available to
undertake th-'s wor-.,. The costs of installing
the plant are also
being q.erie-_:. Howe,.,e:, this is still
considered to be an excellent
product.
(b) It is to ciose the DIET plant in Berlin and to
sall this to
Aus t r a_14 a -
(c) It was aocec' :hac '513 is still in use in
Singapore and the Chairman
under.Uzed t-a need to -Implement the policy to
eliminate -,rocesses
using ':-_-_-o:-;za_-bc-.s t=.-ughotic the Group.
26. On Leaf Buvinz, Mr. Bramley rejorzed chat the
co-ordination between
BATC- and BA--C:c. -.;as progressing and would be
fully operative end-9^E9.
More general-'-.-, _': was rcred ::hat greater
co-ordination,of lea- buying
would enable s:zc'k_= to ~e reduced throughout the
Group and it .;as asked
that Mr. Bra-_Ia-~ -z.-.ould a--a:-.;e for Mr.
Davis to produce a revia-,.? repor:
for the nex: =ee:ini, showing the impac: of
co-ordinated leaf `_u7ing in
reducing dura---'ons.
27. Reviewing the prcgress with Barclav and CaDri,
it was noted
that:-
(a) Capri was -to-.; national in the USA where it
had an 0.45Z =arket
share. 'Zhe 120mm product- had been launched and
the Chair=an
sugges red tha: this version was a particularly
clear statement of
what the prc6ucr- stood Eor.
pri had been launched in 68 markets and while the
(b) Elsewhere,_Ca
'
progress or t-is produ.c-- and of the competitive
product Vogue had
been li=ited in Europe it had made more progress
in the Middle
East.
(c) Mr. Herter reported that there was no real
interest in Ulzra-chin,
products in Germany and Barclay was still having
liaited
success. However, the brand was being maintaiaed
and furzher
attempts would be made to develop it in 1989.
(d) Mr. Bramley reported that Barclay was still
progressive in
Holland, Belgium and Finland and was holding share
in
S . i t z e r la nd. However, there was no
interest in Denmark.
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(a) Mr. Pritchard reported that despite the
attacks by Philip Morris,
Barclay was still doing well in che Middle East
and was progressive
in other export markets.
(f) Although Gallahers had shown no interest in
licencing Barclay or
Capri, Tabacalera had shown a more positive
intaresc and further
talks on this were scheduled for November. It was
also intended to
negotiate with the Swedish monopoly in 1989.
The Chairman reiterated the importance of keeping
up the pressure in
developing the markets for Barclay and Capri and
asked for a further
review of progress to be prepared for the next
meeting of the team.
28. Regarding the work to prepare for the Single
EuroDean Market scheduled
for completion by 1992, the paper summarising the
current position on the
projec: to push ahead with Kanufactur~ag
Rationalisation was noted.
29. Mr. Bramley reported that Mr. Heywood -as
chairing a team, including
representatives from BATCF, which had set up study
groups to prepare
proposals on each of the key aspects of the
Group's activities which were
likely to be affected by the developmeat of the
single market.
30. On Tax Harmonisacion, BAT were trying :o
persuade the Commission to move
from their current proposal of a specific tax of
19.5 ecu and an ad
valorem tax of 52% to 31.7 ecu plus 40Z ad
valorem. This was felt to be
more realistic than the posi--Ion adopted by the
ocher Free Enterprise
Tobacco companies which were still pursuing a
policy of pressing for a
100% specific tax, in direct opposition to the
Monopolies who were
pressing for 100% ad ,alorem.
31. The stud-,, group were also considering :"e
proble= of Roll Your Own (RYO)
and were lformulaz:inz ap-)roTrfa:e propcsals.
32. The Chair--an emphasised che i=porzance of
comin; to a fir= decision on the
optimum 3AT position on the :-=x issues _'ncludinz
RYO, as a preli_-inar:7 to
pursing as effeczively as possible on a political
rather than merely
a technical plane. He also suggested :hat fur:'-er
emphasis should be
given to s:zengthening the poli:ical
a=~roac~es-being made both to the
Commission and to ind_vidual Moacoolies and
Comsanies in an attemDc co
influence :hem towar~_s our polac oz view.
33. Mr. Bramiey reported that a position paper was
being prepared on marketing
issues arising from the single -rkp~ and.
thi-s-wou1d be completed by the
end of the year. T'his, and the other asoects of
the European Single
Market, including the effect on the Du:7 Free
crade, were continuing to be
given a high priority within BAT.Co-
34. Following a discussion of Cigarette ExDorts,
it was agreed that a
separate study should be set up to review the
criteria applied by each
of the Tobacco companies in deciding both the
extent to which exports
should be pursued and the way in which each market
should be sourced.
In the lat:er case, one of the factors :o be
considered would be the
need to ensure that the activity provided an
acceptable return on the
funds employed in che business, taking both fixed
assets and working
capital into account.
Subsequenc to the meeting, it was agreed that Mr.
Pritchard would be
responsible for co-ordinating this study.
U-)
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35. It was noted that in certain markets,
competitors were offering cigarettes
at very low prices, thought to be sourced from
Brazil. The Chairman
thought that this might be classified as dumping.
He asked the Secretary
to investigate further whether this is so and, if
it is, wh.at action might
be taken against the companies concerned.
36. On the develoDment of new markets and the
co-ordination of major
initiatives to improve market share (e.g. in
Japan, China, Thailand,
Turkey, etc.), it was agreed to defer discussion
until the next meeting.
37. Regarding Skandinavisk, it was noted that no
further action was
possible at present to increase the Group's
shareholding in the company.
38. Regarding representation in Italy, Mr. Bruell
and Mr. Pritchard
reported that after reviewing the position they
had decided that there was
no real alternative to continuing with the current
agent. However, there
would be continuing efforts to find ways to
improve the effectiveness of
this representation.
39. On Management Develooment, the Chairman
emphasised the need for the
managers in the Tobacco business both to take an
active interest in the
Tobacco courses at Chelwood and to suggest
improvements where these were
felt to be appropriate. One of the advantages of
having induscr-
y specific
courses -as that they provided an opportunity to
cover subjects which were
imoortant to the induscr-7 and which managers
ought to know about as par-
of the general background to their jobs. As an
example of this, everyone
should be informed about excise systems and their
importance to Tooacco
companies. If Chel*aood did not include this as a
subjec: on :-Ieir Tobacco
courses, it should be suggested to them that: :hey
should.
40. Incer-comvan~ transfers of managers were an
i=portant aspect o--
management develop=enz and L: was suggested :
.::a: progress or :-is s~Lauid
be actively =onicored by the team. Subsequenz to
the meeting, .11r. 3ramley
was asked to co-ordinate this and to report back
on the arra,-ge=en:s which
had been set u~;-
1 - The current developments at RJR/Nabisco were
aoced and I: was agreec;
that c.-.e infor--a-zicn on the current status of
their overseas 7o'oaczo
opera:-'or.s sa3uLd be updated so that BAT could
=ove quickly I-'
opportunities or threats emerged as a result o.-
changes in dizect-'cn by
RJR. Xr. Bruell agreed to co-ordinate the
collection of this in~or=ation
on the current market position, the physical
facilities and the ;sci=ated
values of RJR's overseas operatiogs. Tt 1~
',=ended--thac -rhis review will
be comzleted r~,e e~d of November when it will be
discussed t-.e CFC.
42. It -as noted chat the next meeting of the team
Is likely to be hel_~ in
6 months' ti=e in March/April 1989.
RS/DJA
23 rd November 1988
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