Tobacco : Strategy Review Team
The fourth meeting of the team set up to review
the Group's strategy for its
Tobacco activities was held on 27th September
1985.
Present: Mr. P. Sheehy, Mr. G.L. Dennis, Mr. B.P.
Garraway,
Mr. E.A.A. Bruell, Mr. P.J. Ricketts, Dr. R.
Salter (Secretary).
1. The minutes of the meeting held on 17th July
were agreed.
Prince Denmark
2. It was noted that Prince Denmark had a 5%
market share in the Hamburg region
and that in other areas of Germany where it had
been launched the sales
results were also promising.
Prince Denmark already had a share of the total
German market of around 1%
and BATCF were projecting an increase to 200
million/month which would
represent a 1.75% share. This was believed to be a
conservative estimate of
the market potential. for the brand.
3. Skandinavisk own the Prince Denmark brand and
BATCF could be vulnerable to
losing it. It was therefore agreed that it was
necessary co take action to
secure the brand for use in Germany on a long cerm
basis. In addition,
BATCo. also wished to secure the brand for use
elsewhere in Europe.
4. The current distribution agreement between
BATCE and Skandinavisk runs until
31 st December 1987. BATCF wish to negotiate a
longer term agreement prior to
their planned national launch on 3rd February
1986. Discussions are due to
be held on 30th September 1985 to investigate the
possibilities of:-
(a) Renewing the contract for a further 10 years,
with provision for
further discussions in 5 years to negotiate an
extension for a further
5 years after the scheduled end of the agreement.
(b) An agreement that BATCF should be allowed to
manufacture Prince Denmark
under licence when volumes exceeded a specified
level.
(c) An agreement for BATCF to retain the
discribution rights even if the
trademark rights change hands.
As part of che agreement, BATCF would contribute
agreed amounts to the
marketing expenses for the brand in Germany.
5. It was agreed that the BATCF negotiations with
Skandinavisk. should proceed.
However, ocher more permanent methods for securing
the brand should be
considered. It was agreed that BATCF should be
asked to estimate the value
to BATCF and to Skandinavisk of the brand in order
chat an offer to purchase
the brand might be considered. Another,
alter-native approach to be
considered would be an offer to purchase the whole
of the Skandinavisk
tobacco business. In this latter context, it was
noted that Prince Denmark
exports were thought to be the most profitable
element of the business but it
was also noted that because of their dominant
share of their domescic market,
any relaxation of the tax regime could transform
the profitability of the
home market.
6. In their current negotiations with
Skandinavisk, it was important chat BATCF
should keep their options open and that B.A.T
Industries should be kept
informed of progress. It was also agreed that
particular emphasis should be
placed on securing the rights to manufacture in
Germany. BATCF should check
back with B.A.T Industries before agreeing a
specific volume threshold above _n
which German manufacture would be allowed. While
appreciating Skandinavisk's t
desire to fix chis threshold as high as possible,
BATCF should endeavour to
agree a volume threshold below 200 million/month
and should aim to have this J-1
set ac 100 millionimonth, only slightly above
current volume levels.
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7. It was noted that Prince Denmark used an
expensive tobacco blend and that its
potential in markets other than Denmark and
Germany was thought to be -
limited. It was agreed that, while the potential
for exploiting the brand
elsewhere in Europe should be kept in mind, the
first priority must be to
secure the long term position in Germany.
Generic Imports into the UK
8. The market for generic cigarettes in the UK is
largely being satisfied by
imports. It has been suggested that, because of a
technicality in the
regulations, imports might have an advantage
through extended excise credits.
However, Mr. Bruell had established that, although
there was a difference in
the respective dates for starting excise credits
(i.e. the beginning of the
month or the 15th), both imports and domestic
production obtained the same
day credit period. Any decision to enter the
generic sector would therefor.
depend on cost and price factors only.
9. It was agreed that at current prices the
generic sector was not attractive
BAT UK & E or BATCF. The low cost Brussels factory
might be in a more
favourable position but BATCo. did not wish to
transfer more volume into this
factory until other rationalisation issues had
been settled.
10. It was agreed that the decisions not to enter
the generic sector appeared to
be justified. The Chairman also emphasised again
that any discussion to
extend or upgrade capacity must be justified by
mainline rather than marginal
business. In addition, the pursuit of marginal
business must not be used as
a means for delaying manufacturing
rationalisation.
US Brand Manufacture in Eurooe (excluding Barclav)
11. It was agreed that in order to service export
markets effective!~, it was
necessary for manufacturing to be based in one of
the stronger Group
companies in Europe. BATCF had been suggested as
the preferred manufacturi
source and it was agreed that ways for
consolidating manufacture in Germany
should be considered.
12. If it were decided to transfer manufacture to
Germany, it would be necessar-
for a new blend to be developed since current
German products were designed -
for the domestic market rather than exports. The
future of the HVL licenced
production of Kent would need to be taken into
account and also the impact on
the Brussels factory.
13. It was noted that the Brussels factory had an
annual output of US brands of
around 1 billion and the transfer of the licence
to Germany could lead to
industrial relations problems. However, BATCo.
would have a complete plan
for the rationalisacion of the Belgian facilities
by the end of 1985 and the
transfer of US brand manufacture to Germany could
be another factor to be
included in the total plan. It was noted that the
problem was complex and a
first stage might need to be for BATCo. to
purchase the Belgian company from
the Dutch company.
14. The Chairman emphasised the urgency of
implementing the planned
rationalisation. This would be kept on the agenda
for the strategy team and
progress would be reviewed at each meeting.
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Horale/4-otivation in the Tobacco Businesses
15. Mr. Dennis presented a paper summarising the
responses to the request to all
CAC companies to review and recommend action that
might be taken to improve
the motivation and morale of managers within the
Group's Tobacco businesses.
The paper also included information on action
which companies had taken in
other industries which were either in decline or
under attack.
16. It was agreed that the summary tended to
over-emphasise the negative aspects
of the letters received from the CAC companies,
perhaps because too much
weight had been given to the letter from Imasco.
To this extent, the summary
was not a fair reflection of the overall view
within the Group. However, it
did identify a number of issues which needed to be
addressed, including the
special problems of personnel operating in
headquarters units. It was also
noted that there was some worry that there had
been an erosion in salary
levels relative to other industries and this would
also need to be addressed.
However, it would need to be made clear that
maintaining salary differentials
depended on maintaining profitability.
17. It was agreed that the review had been
worthwhile. Mr. Dennis was asked to
have the summary revised to make it more
representative of the individual
responses and to emphasise the specific positive
response to the issues
raised. The Chairman will then send the summary to
the CAC companies who had
participated in the review.
Items Arising from the 17th July Meeting
18. There was a brief review of items arising from
the 17th July meeting on hich
full reports were not due until the mext meeting,
due to be arranged for
early December.
(a) Barclay - progress is in line with the plans
reported in July.
(b) Smoking Issues - there has been an active
interest by Imperial Group
in participating in an Epidemiological conference.
Dr. Thornton is
following this up.
(c) The worldwide R & D conference will be held in
November and results
will be reported in December.
(d) 3ATUS have carried out a preliminary review of
the competitive
position of R.J. Reynolds and the Camel brand.
Further work is in
hand to increase the depth of the review.
(e) Leaf Duration policies will be reviewed at the
December meeting.
(f) The position paper on China and the reviews of
the position in
relation to Turkey and to Sofical's African
interests will be
presented in December.
19. An additional item which was suggested for
review in December was the
position in Japan. Mr. Dennis was asked to provide
a report from Brown &
Williamson on the performance in L985 and the
plans for 1986.
RS/DJA
7 th October 1985
CD
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