NO COPIES NI.A)'13E MADE SECRET
A meL,:n_z ofthe Tobacco Straie-gy Group as heid
in Rio de Janeiro on Thursday 9th February
1995
Present: Mr U G V Herter. Nfr R D Bro~vn, Mr A 14
de Castro, Mr B D Bramley, Mr T E
Sande-----,. Dr B S&,xe!,zc:-. Miss H C Barton
Mr K D---nt ,,as present *or itc-ns 36 to 46. Mr M
Waterfie;d &as present for items 41
to 46
Apoic::~-zs , -.7e rece:% ed "roin Mr D P Allvey.
-\I,- N G Brookes and Mr E E Ettedgui,
Minutes of the previous meeting
\ I -
fint.lte ',:~ "M7 and Mr Surdeau will discuss a
capital expenditure process with
N
,he Fir.~7-zc Di%z,.orz ~-id make a proposal to Mr
He-ter". Mr Hener %vishes to receive the
propos.-.: --efore -,he 7 SO meeting on 5th April
Nlinwe Nlr P Vm_-~ has been a,-pointed General
Manager of BATMark. with effect
,rom Azz-.~ or May Ic,2-z
3 Minute -*, Mr Sanden_,r reported that expor-,ing
from the US to Mexico 'is expected to be
a slow r-,2-,hod Of 270,ving market share,
therefore B&W is conside,-ing other ways of
increasinc marke, Sha7e more quickly. One
possibility is to make a licence agreement with
La NlocLma, possibiy leading to a joint venture.
In view of BAT's history with La
Modema. and La Moderna's activity (at leas-, in
the recent past) in supplying counterfeit
goods. ~70POSRIS will'be reviewed .-cry carefully.
4. La Mo-;trna may a~~3 be interested in a brand
exchange with BAT, for example,
exchanzmz Beim= .,-, Mexico for Montana in the US.
Mr Whitenair is meeting, managers
from La Moderna laze.- in Februar~l to find out
what they are prepared to offer. Mr
Hende.-.:)t and Mr C lo 'per should prepare a list
of the ownership of-major La Moderna
brands 'I--. -narket. M. Szndeflur will lialse
with Nir Dunt and make a proposai to Mr Herter
on the pcsition -,he G~cup should take.
5. Nfinute -- "Mr Pilbeam ill discuss flie Format
of competitor reports to agencies with Mr
Rembisz-!,ski" Mr Bamley will follow up this point
wid-. iMr Pilbeam and Mr
Rembisze,,ski
Mitters arising
6. Key Issues Council Position papers are being
developed and will be presented to the
next TSI-; riiee:inu. I., was agreed that a
Group-wide code of conduct on advertising
shOL11d'-2 tstibiished
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I Project ',Inple i Two options werz proposed: to
enter inz) an agreement to process for
Universal. and to shut down TPZ 3nd enter Into a
JV with Tabex. It was agreed that both
options would be progressed. Volume from Universal
would "buy time" but would not
soive the longer term problem tha: it will be
difficult to Justify capital expenditure in TPZ
,he:i it is needed.
9 Additives . It was avreed that a zentral
register would ensure that the Group compiies
with rezulations around the -ind 'hat inure~:ienis
would be tested oxicoioaically by
an external expert
9. End mnrket responsibili ties An update,_~ list
of end market responSi I Dilities,
incorporating the changes agreed "-,. -,he TSG to
the original list ?Ubhshed In Nlay 1994,
,,,,as agreed. As a result of me riL, import
regime in Russia frcm 1/1/95. BATCO and
BATCF should acree a proposal ic replace footnoce
(3), reterrina. -,o Russia.
10. Third p:irty contrict manufacture For Chinese
manufacturers The procedure
proposed though PP&,D was agree-'
11. Sourcing . The Souza Cruz boa-4 nas dec Ided
to switch the produc:ion of Hollywood
(for export to eastern EI.Irope) to 3-%TCF. as
additional box c-,i-)acit%- Is needed for the
Br:izliiar, dorntstic market.
12 B & ~( 'CO u I,dd nuihc:-,~re JPS :-I %!..zon
for expor- :o Japan. i%-Ir Sandefur proposed that
for Le~-z.-on could be swltche~ ftom C,,prus to
Hungary
t~e p~z_~~ or Vicero,,
3. A decision an sourcina wll~ De by Nlr "'e-ier
-,vnen the %vhoie picture has been
considered.
14 Herter re:terated zhat the end --arket.
manaQ~rs cannot decide on sourcing. The% may
rrake recommendations, but the TSG will make the
final dec'sion, taking account of
marketing and cost implications
Coresta
15. Tne TSG noted that BAT has Z.-od
representation on the Board oF Coresta. It was
decided hat %ir Herter. Mr Brim,:e,_.,. Nir Davis
and %Ir Baker should have a meetinv to
discuss the role of Corcsta. and Mr Read should be
asked to make a presentation to
the TSG
1994 trnding results and 1995 Budget
16. ',1,- Herter reported zhat IQQ4 %,as a good
year for Tobacco. The main problem was in
Brazil. but there the profits and ma-ke: share
improved strongly in the second hal,"year.
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I %1r Sandefur reoorted :hai the of American
Tobacco was well ahead of
SChCdL11C %Vilh the exception of -he R&D unit
which had been found to be used for
blending and quality control. In connection with
the discussion of progress againSE budge-,
he will discuss with Mr Herter in mid-NIarc1h the
possible price increase in the US in April.
Lucky Strike and Pall 'Aall will te made avaiiable
in the main US entry points and tourist
destinations, for the bene~-u ofGrou-,) ccrisumers
visiting the US, and a test market will be
made for these brands 'In California.
18. Some devaiuation was assumed ir. the Souz2
Cruz bud-get, but the currency appears likek
to devaiue more quickly. The assu.-nDt;ons on
prices, volumes and market share appear to
have been too pessimistic.
19 There is a risk- of other deval-a::ons in La:in
Ainerica. particularly Argentina after the
eiections in Ma%
Competitor Reports
20. Philip Morris overiook BAT in vo:ume term;
outside the US in 1994. Mr Bramley will ask
Nfr Bing-harn to provide an anaksis oFP\11's
olurne. turnover and profit for the next TSG
meeting.
21 Bollorti has taken a L share ~-.' St:m No
c,,her tobac,-z) company has any shareholding.
RJR have z.osed mnn~ plants. cit-101.15i'.. -,he
ones still operating are mainly in high
labour --osi countries It may be -=i the
-j.-I:-,7s remaining
I I _, are the larger ones, and although
labour zos-,s are hjifl-, thev are a rroncn:on
ofthe *otai costs.
2-, RJR, Philip Morris and JTI kn,e all filed
patents for smokeless cigarettes. Mr Herter
reqUeSted that Dr Kausch and N: Read review the
published information since Premier,
and advise the TSG on where recen: de,elo:rnents
miah, lead and whether there miaht be
an opportunity to market smoke:ess Produc .5
24 Mr Sandefur will produce a pi-07.'Sal which can
be pu, to Rothmans regarding Carlton in
Japan
New ninrkets
Z< Mr Branfle-.1 wfl! investip-ate the ezal query
about the acquisition ofjava.
26. BAT is close to signing a memorandum
ofunderstanding in China.
The Group Boa,-d his approved a Droposa! :o
acquire a 5 1 % share in Tanzania. The price
is quite high, but it is a profilabie company
which generates cash, and the acquisition w1il
protec, BAT's brand ownership :~3sltlon in kfrica.
2 S. The major N--BD initiatives for !995 are
Viernam. Turkey, Poland and Romania. Beiarus
and Bulp-arla are not priorities.
29 Nfr He:-,er and Mr Bramiev will isit Egypt
~1-here Eastern Tobac~:o may be privatised.
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30 The Cubar. iobacco rnonopoi-,, Is ica~;-_.- -.o
a 3M.111 Join[ ~entLFI! to Sell in the hard
currency market. Mr Bramiey ii: eassure Tabacalera
who are concerned as they buy
black tobacco from Cuba.
Eastern Europe
3 1. Mir Sandei'Ur will triveszigate a o.-.e
j~stribuor "dumping" non-banderoied
ciunrettes in Russia
International Brands
32 .1,1r Herier reported that be,.,,tr p-zg7css
hale been made in 1994 par,.iculariy in B&H,
IPGL and SE555. The SE55~ branz group v-ii: rnake
a presentation to Mr Herter and he
will share with them his feedback frorn his
vis-l-, :o Greater China.
33. Mir He-ter asked BATCo to .-epoi-. .-a:
lessons cculd be ie-irned froin :he recent success
ofJPS in France.
34. Mr Sandefur showed the first "Ge- Luckv" fi"m
for Luckv Strike. It was agreed that the
print versions do not capture the of tne Eirn. The
TSG also thought that the new
campaign ,as not be,,,e7 than "Sons- nichis" -or
Germany or "Biker" for Japan. Mr Herter
will review the tesz results wIh M, 'Xinebrenrier
and Mr Rembiszewski. before deciding
how to proceed
Future Business Environment
35 The follo,ing commen:s were mace on t"e
ouiiirle of the Tobacco key issues for the
Future Business Envircriment paper
anti-sinoking campaigns shc,-,;4- be added as an
issue.
the environmen- and packaging shouid be added as
an issue,
plain packagin.- is a separate issue from, larger
health warnings:
price sensitivit, is not just -- 'fee; good"
factor. Prices are vuinerable where they
are zi~readv high. such as in :',.e Far East and
in Dutv Free.
ISSLI-,S ri;sed b, the Tr,-t--'-, Marke,.:.-.L- &
Dlsirl~_-uiion con,,-Irence should be
include d For exarripie. as a resul', o" :.-ade
concentrafion in Germany, it is
expensive to ge- ne,.\ produc,_~ Fisted.
the :r;c~derice s--.-,Istics differ -Ieween
rria-ke-s, for example. the US and Canada-.
fl,.e profile of smokers n tile 'CS has shifted
from older fem-lie smokers to
yourlLe. Inale S;-inokers.
it Is not just tha: excess capaz;:y is driving
down prices. bul the market everywhere
is very niuch mnore price c,,-..petiti,,e today
than it was in the last decade. for Lr_I
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'!Xampie. with the ex7ansicn ofnauonai companies,
such, as Seitz anz :r.-.o the
internationa: arena.
Project Batinlion
36 Mr Dunt presented the approach and progress in
Project Battalion.
~:xtemal consultants will be used to challenue our
ideas, to b.-Iriz i.-, ne\, ideas~ to
benc'.mark against leading F\1CG companies. and to
facilitate the proc2ss
39. It was thought that some impetus had been lost
in R&D co-ordination The Worid-Wide
Best excrcises had worked well. but most
programmes now are marke, locused. It was
agreed that the TSG Should receive a presentation
on and product deveiopment
In crcer to discuss and auree Improved processes.
39 Common terminology and an information structure
will be agreed In tl--~ zo develop 0it
1996---Coo Plan. Consultants will also be used to
develop the longer term 1T solution.
It is aareed hat a new s-,ructure should produce
better results an' s2\-'nvs compared
\,.Zl!l ,he current position. R~sponsiblllty
should be as close to tile marke,. as possible.
and
-he added value ofeach lave, would have to be
proved.
L.-itin America
41. N', de Castro. Nir Dun[ and NIr Waterfield
made a presenEatl~,n ab-cia: the economic
SMI2110r, and outlook, and BAT's businesses. in
Latin Acnerici. GDP pe.- ::ipita increased
at about 29.~o p.a. over the past five years, but
is expec:ed to increase by about 4.5% p.a.
over the next five years However. the economic
prospects are f~agiie, as capital inflows
are suppor-ting tile government delicits.
41
International Brands have increased from 15% ofthe
Argentinean mark-.- n 1990 to 43%
in 1.994. mainly as a result of lo\v inflation and
no price increases. There is a major hsk
that this pattern could be repeated in other Latin
American markets.
43 Ove- t:ie past decade. BAT's market share in
Latin America has remained stabie at about
531,, Over the same decade, Philip Morris' share
has increased from 15-~ -o 23% as they
have taken share from tile national companies. It
is expected that the market in which
they will increase their competition is Chile.
44. A Booz Allen study of production sourcing
showed conversion costs o-.' '-'SS*-0/m1IIe in
Brazil. USS..4 in ArQentini and USS3.5 in the
Caribbean.
45 Printing departments in Latin America are being
rationallsed frorr. three ic two. but longer
J e pa r:-, t n : s
,erm it is questionable whether BAT should have
its own printing .
46. Mr Herter t1I0LIQJIt tfint tile presentation
firid been very valuable and ,"at it sihoui~i bt:
repeated at future TSG meetings for the other
regions
An%, other business
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Mlr Brown brlz,-,; the TSG about the deveiopment
offfie Inte.-ne:
48. The end market has the responsibility for
testing product quality. and must reed back- the
results to the manufacturer Samples should also be
sent back to the factory on a regrular
basis.
49. The Tobacco levei III programme has been
post-poned from Aprii to the autumn. and
therefore the nCNt TSG meeting will be on
Wednesday 5th April. and tht TSG rnembers
will not need to szav for the following dav as
originally planned.
H C Barton
'81h Februirv t99'z
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