NO COPIES MAY BE MADE
Tobacco Stratexy Review Team
A meeting of the Tobacco Strategy Review Team was
held on 30th November
1990.
Present: Hr. P. Sheehy, Mr. M.F. Broughton, Mr.
B.D. Bramley,
Mr. R.J. Pritchard, Mr. U. Herter, Mr. P.J.
Rombaut,
Hr. J-L. Mercier, Dr. R. Salter (Secretary)
Mr. A.L. Heard attended for items 35-51.
1. The minutes of the meeting held on 17th
September were agreed.
2. Inter-Company Transfera It was noted that
opportunities to
broaden managers' experience and to transfer
expertise through
movements of staff between Group companies were
being pursued
actively. A meeting to review existing secoadments
and to review
progress on the identification of new
opportunities and new candidates
will be arranged by Mr. Bramley in mid-1991. The
results of these
reviews will be reported to the team in September
1991.
3. Representation In Overseas Plarkets : It was
noted that in some
markets where more than one Group company was
represented,
insufficient advantage was being taken of
opportunities to reduce
costs and improve efficiency by sharing office
facilities, market
information, market research, etc. It was agreed
that Mr. Bramley,
Mr. Pritchard and Mr. Herter would review the
arrangements for their
overseas representation and would report back to
the next meeting on
specific action being taken to improve
co-ordiaation.
4. US International Brands : Mr. Pritchard
reported that sales of
USIB for the year would show a significant (13%)
increase on 1989.
The rate of increase in the second half of 1990
would be less than in
the early part of the year but there were specific
factors explaining
this (e.g. the timing of the Chinese New Year; of
launches in Japan;
and of the opening of East European markets).
Thus, it did not
represent a slackening in the underlying momentum
of growth in US
International Brands. Brown & Williamson were
committed to the
objective of achieving 15% p.a. volume growth
through identifying and
fully exploiting market opportunities as these
arose, worldwide.
5. For Xent, it was noted that a first evaluation
of the Total Offer
Tests in Europe would be made in mid-December.
Assuming that this
evaluation shows encouraging results, test markets
are planned for
1991 with a pan-European launch in 1992. It was
also noted that the
launch in Brazil had been brought forward from
1992 to 1991.
6. Lucky Strike Lights was considered to have a
good growth potential
and would be available in 15 countries in 1991. A
possible launch in
Venezuela was being considered and Lucky Strike
was making good
progress in Brazil. Prospects in Europe were
considered to be
particularly good with significant progress in
Germany and further
launches planned for 1991. The Chairman underlined
the importance of
mounting a really effective sales drive for this
brand, commensurate
with its exciting prospects in the market. It was
also important that
the guidance on pricing and on blends was followed
in each market to
ensure the right positioning relative to Marlboro.
7. Mr. Bramley was asked to review the blends,
pricing and distribution
in Spain and to report back to the next meeting on
action taken to
improve quality, raise prices and strengthen
distribution in this
market. C"
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8. The Chairman stressed the importance of
conforming to the approved
blends for Kent and Lucky Strike worldwide and
asked for reports for
those markets where other blends were being used,
outlining action in
hand to change to the approved recipes.
9. For Barclay, it was agreed that it would be
critical to avoid
damaging the image of Barclay as combining full
flavour with low
deliveries. It was important, therefore, to be in
a position to
launch Barclay Ultra Lights (2mg) ahead of any
change in the tar
rating of the existing product. Revised strategies
should be
considered for those markets where it had been
intended to launch a
5 mg rated product ahead of the 2mg version. The
revised strategies
for Barclay will be reviewed at the next meeting.
10. It was agreed that Capri and other superalim
products would
continue to be significant as niche products but,
in future, progress
should be reviewed at 6 monthly intervals rather
than quarterly.
11. It was noted that Viceroy and Kool continued
to be progressive
in selected markets and it was suggested that
further consideration
should be given to the potential for expanding
sales of Menthol
cigarettes in the kfrica/Middle East region.
12. It was noted that Pa.11 Hall was important as
a leading low-priced
brand for Eastern Europe and for Germany. The
Chairman stressed that
it was important for the brand owner to control
the blends. However,
provided this was done, the markets should be
supplied from the lowest
cost source, subject to the further condition that
the business must
be profitable on a full cost rather than a
marginal basis. Specific
consideration should be given to supplying Fall
Mall from Brazil.
Details of the blend to be used will be supplied
by Mr. Pritchard.
13. The 1991 Plans for the major US International
Brands will be
reviewed at the next meeting. In addition, Mr.
Pritchard will also
provide a note explaining the differences between
the methods used to
calculate the figures for US International Brands
as presented by
Brown & Williamson and BATCo. respectively.
14. UK International Brands : Mr. Bramley reported
that although
domestic sales of UK International Brands, apart
from Players Gold
Leaf (PGL), were static or declining, export sales
of SE 555 and PGL
were progressive and the declines in Benson &
Hedges and JPS appeared
to have been halted. Overall, sales of UK
International Brands were
continuing to expand.
15. For Benson & Hedges, it was noted that there
had been good
progress in France (0.9% market share) and the
position in West Africa
appeared to have stabilised. The evaluation of the
potential for
launching a Benson & Hedges American Lights had
not been encouraging
but as being looked at again in the context of the
Malaysian market.
16. State Express continued to do well in the Par
East. There was a
need to redesign the pack for the Low Tar variants
but it was agreed
that the brand image was sufficiently strong to
allow considerable
latitude in design.
17. Smoking Quality was a continuing concern and
it was agreed that in
order to maintain the image of the International
Brands, it was
important that these were based on international
blends. Every effort N-)
should be made to negotiate an end to any
restrictions (e.g. in Spain C:)
and Malaysia) requiring the use of local leaf. r")
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18. Eastern Europe : Mr. Herter reported that even
excluding East
Germany, which is now part of the German domestic
market, 1990 sales
to Eastern Europe up to the end of October were
2.5 billion, which was
over 50% ahead of the corresponding period in
1989. However, market
conditions were becoming more difficult due to
political uncertainties
and a worsening economic situation. It was also
noted that Philip
Morris was still more successful in penetrating
the markets and in
expanding sales to duty free and hard currency
outlets.
19. The USSR was being visited during the week and
one purpose of the
visit will be to set up the Moscow office. The
Group had already
established a range of contacts in the USSR and in
addition to offers
to the Central Import Agency, enquiries were also
being received from
traders who were believed to be supplying the
market through
counter-trade arrangements.
20. In Poland, increased taxes and punitive duties
on imports were
severely restricting business, especially in the
hard currency
outlets. Although there were some opportunities
for imports from
Brazil (which attacted lower rates of import
duty), longer term
expansion was likely to depend on manufacturing in
Poland.
21. Mr. Herter had had talks with the works
council of a factory in Poland
which could be privatised and the next stage would
be to send a formal
proposal for a joint venture. Although the factory
was smaller than
the two leading manufacturing plants (which are in
negotiation with
Philip Morris and RJR), it appears to be
reasonably efficient and has
room for expansion. If the Group proposal were to
be accepted, the
likely level of investment would be around E4.5
million, which might
be in the form of machinery.
22. The Chairman suggested that it would be
helpful for Mr. Herter to seek
assistance from a company in London which was
known to the Group and
which had experience of negotiating joint venture
arrangements in
Poland. Mr. Herter said he would do this ahead of
sending the
proposed letter of intent to the Polish Minister
for Foreign
Investment. In addition, it was noted that the
Group should also be
prepared to advise the Polish Government on excise
structures, which
appeared to be rudimentary at present.
23. Hungary : Mr. Bramley reported that a proposal
for an investment
in a factory at Pecs in Hungary was currently
being considered by the
State Property Agency. Although their response on
this had been
delayed, it was expected within the next few days.
However, the
change of Finance Minister in Hungary might cause
a further delay.
24. Bulgaria : Following a visit to evaluate 3
factories in Bulgaria
as potential investments, it was intended to send
a letter of intent
which Mr. Watterton hoped to discuss with the
Bulgarian authorities in
January. Mr. Watterton would also seek to identify
export
opportunities during his visit.
25. Leaf Advisory Team : Mr Bramley reported that
the Leaf Advisory
Team had been set up along the lines previously
agreed and the team
planned to visit Hungary, Poland and Bulgaria
during January. It was
hoped that by April next year, the team would be
in a position to
provide useful advice on Leaf growing in each of
these countries.
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26. Vietnam -. Mr. Bramley reported that Mr.
Watterton bad visited
Vietnam and would return in January for further
discussions on the
potential for investment there. In the meantime,
it was thought that
there could be opportunities to promote exports of
SE 555.
27. Bar=& : BATCo. had sent in an adviser to help
the Burmese
Government set up an excise structure. Although
immediate
opportunitites for increased trade or investment
appeared to be
limited, contacts with this market would be
maintained.
28. SUTL : It was noted that BAT had been well
known in Vietnam and
Burma through SUTL and the Chairman suggested that
a formal agreement
with SUTL might be consfdered as a way to build on
these contacts.
29. Mexico : Mr. Bramley reported that the Group's
brands had been
registered in Mexico and an import licence had
been applied for. The
potential for setting up a secondary manufacturing
plant was also
being investigated. Attempts were being made to
buy back the rights
to the Viceroy trademark but the current owners
were resistant to this.
30. Turkey : Mr. Bramley reported that a meeting
would be held early
in December to progress the negotiations on a
potential investment in
Turkey. This project had now been handed over to
Mr. Watterton and
his team.
31. Brazilian Exports : It was noted that
following a significant
increase in 1990, the target for exports from
Brazil in 1991 would be
3 billion, which was over double the volume
achieved in 1989. The
Chairman stressed the need to upgrade the staffing
and expertise in
this activity and it was noted that Souza Cruz are
obtaining help from
Brown & Williamson in this respect. It was asked
that Souza Cruz
should report progress at the next meeting,
considering the price and
profitability of exports as well as the volume.
32. Manufacturing Capacity : Following discussion
of an initial survey
of the present and potential capacity of the
Group's main
manufacturing facilities, it was suggested that
further work was
required both to establish where shortfalls might
occur and also to
establish where there was a potential for
expansion to improve the
overall productivity, cost-effectiveness and
tax-efficiency in
sourcing the Group's markets.
33. It was agreed that Mr. Kohnhorst should be
asked to arrange a meeting
of the Group's production directors and that he
should produce a
review for the May meeting of the team; showing
the currently planned
capacity and output of the Group's manufacturing
facilities;
identifying potential problems; and considering
options for specific
expansions to provide extra capacity and
opportunities for more
cost-effective and tax-efficient ways to meet
overall Group demand.
34. The Chairman noted that Mr. Bannister at
BATUKE had produced a good
appraisal of the potential for expanding
Southampton and suggested
that a similar appraisal should be carried out for
Bayreuth. He a.1 a o
stressed the need for each company to ensure that
machinery would be
available to meet planned expansion and
refurbishment up to 1995. It
was also suggested that Souza Cruz should contact
machinery
manufacturers to try to encourage improved
availability in Brazil of
the equipment needed to update their manufacturing
facilities.'
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35. F=damental Research Programme : Introducing
the proposed programme
for Fundamental Research, Kr. Heard said that
there had been a change of
emphasis with greater priority now being given to
providing the
scientific basis for improved product design. As a
result, less priority
was being given to regulatory issues and to
speculative work on
innovative products. The proposed allocation of
effort was:-
(a) Smoke Quality Improvement 35%
(b) Innovative Products 20%
(c) Regulatory Issues 28%
(d) Environmental Issues 17%
36. After discussion, it was agreed that the
proposed allocation of effort
and the total budget of E3.885 million plus LO.296
million for the
Scientific Research Group projects were
acceptable. The proposals for
the contributions from each company to funding the
programmes was noted
but before agreeing these it was asked that there
should be a furthe r
check by Mr. Broughton to ensure that the
allocations are made in the
most tax-efficient way.
37. Biological Activity : A specific issue
discussed in the review of the
research programme was the Group's position on
testing for 'biological
activity' by the Ames test and by other methods.
It was noted that there
is a continuing programme to monitor trends in the
emergence of new
bioassays and to develop expertise in those which
may have relevance to
tobacco products. It was also noted that despite
the uncertainty
associated with current in vitro tests and their
applicability to complex
systems, they could provide information both as to
how people who use
these tests may characterise Group products and as
to whether further
research is required. However, this does not imply
acceptance of the
validity of these tests.
38. Technical Liaison : Reviewing the current
arrangements for technical
liaison, it mas noted that the interchange of
information on R&D and
product development appeared to be working well
but there was less
confidence in the effectiveness in sharing
information and expertise on
manufacturing processes.
39. It was agreed that, wherever possible,
technical liaison should be on an
ad hoc basis and regular liaison meetings should
be avoided. It was also
suggested that it was better for the person
responsible for an activity
to be involved directly rather than having one
person responsible for
liaison over a range of subjects. While it was
accepted that secondments
were a very effective means for sharing experience
in depth, these should
be restricted to cases where there was a specific
purpose related either
to the transfer of specific expertise or to
manager development.
40. The Chairman asked Mr. Bramley to arrange for
a paper to be presented to
the next meeting, detailing the technical liaison
meetings which had
occurred in 1989 and 1990, showing the location of
each and the names of
the people who had attended. Based on this, the
team would then be asked
to decide whether there was a case for reducing
the number of meetings
and whether the attendance at future meetings
ought to involve a wider
spectrum of people.
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41. Regulatory Issues - Smoking on Aircraft : Mr.
Bramley introduced a
paper suggesting approaches which Group companies
might take when faced
with the possibility of airlines introducing bans
on smoking. It was
agreed that the paper would be useful as general
guidance for use by
individual companies and should be made available
to them for use in this
way. It was also suggested that an additional
point to be made was that
the airlines gained from smoking bans through
reduced administrative and
cleaning costs. Hence they would not be judging
the issue entirely from
their customers' point of view.
42. US Environmental Protection Agency : It was
noted that the US
Environmental Protection Agency had produced two
draft reports on Health
Effects of Passive Smoking and Environmental
Tobacco Smoke in Workplaces.
Mr. Pritchard reported that these were now being
considered by the
Government's Scientific Advisory Board (SAB). He
will report the
reactions of the SAB at the next meeting.
43. Sidestream Smoke : Objectives for reducing
sidestream smoke will be
reviewed in February 1991.
44. Smoking Compendiums : It was noted that the
Smoking and Health
Compendiums will be reviewed and updated in
January 1991.
45. The Additives Register will be completed in
the first quarter of
1991.
46. Green Issues : It was noted that the main
issue likely to be of
significance to the Group was the attitude to
packaging and the related
work in the European Commission which could lead
to a Directive, based on
proposed German legislation, to make retailers
responsible for the
collection of packaging used on products which
they sell. It was agreed
that developments in attitudes to packaging would
be a key issue to be
monitored by the Croup.
47. Valdez Charter : It was noted that there was
increasing pressure in
the USA for major companies to sign an
environmental charter based on the
'Valdez Principles'. The Secretary was asked to
report back on the
possible significance of this to B.A.T Industries.
48. Products Incorporating Y-1 Tobacco : Mr.
Pritchard reported that
products incorporating Y-1 Tobacco were undergoing
tests, the results of
which would be reported at the next meeting. Mr.
Herter reported that
tests of BATCF products were due in 1991 and
BATCo. also reported that
Y-1 was being evaluated.
49. The Blenders Handbook had been completed and
Mr. Pritchard would
arrange for this to be circulated throughout the
Group. The handbook
would be treated as a high security document and
this would be reflected
in the way in which it was distributed and
subsequently held.
50. Ammonia Technology - Decomposition Products :
It was reported that
the project to characterise the decomposition
products of cigarettes
containing materials subjected to ammonia
treatment is due for completion
by mid-1991. Results of tests to date have not
given cause for concern.
51. Use of Reconstituted Stem : It as agreed that
the project to
evaluate the benefits of incorporating stem in the
form of reconstituted
sheet should be completed as soon as possible.
Assuming that this shows
that the use of sheet is beneficial, plans should
be prepared for meeting
the requirement for sheet in Europe, drawing on
the experience of Brown & r1l)
Williamson who have sheet made for them by
Kimberly Clark. CD
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52. Leaf Supplies : It was noted that reviews of
the likely
availability of tobacco in 1991-1992 had suggested
that shortages
could develop, especially in Burley. It was agreed
that all companies
should ensure that orders were placed as early as
possible in 1991,
sufficient to cover the total requirement for
1992. If there are any
shortfalls, action should be put in hand
immediately to expand
supplies within the Group (e.g. in Brazil and
Nicaragua).
53. Grade Rationalisation : It was noted that the
working of the Leaf
Grade rationalisation scheme was due for review in
May 1991.
54. Current Trading : Reviewing the results for
the Group's tobacco
businesses up to the end of the third quarter,.Mr.
Broughton drew
attention to the increase in volume which, for the
full year, was
expected to be 14 billion higher than in 1989,
despite an assumed 3
billion reduction in trade loading in the USA.
Trading profits were
also expected to show an increase compared with
1989 despite an
adverse movement in exchange rates.
55. It was noted that R&TCo. were hoping for a
significant increase on
1989 despite adverse effects due to exchange rate
movements and an
economic downturn in Africa. Spain had performed
better than
expected. Market share and profits had increased
in India in local
currency but this had been offset by the
devaluation of the Rupee.
56. Brown & Willi,sinson were also hoping to meet
their profits budget
but volume could be slightly below budget. The
results were adversely
affected by the expected intention of Philip
Morris to increase trade
loading as the pressure grows for their tobacco
brusinesses to
compensate for reduced growth in their food
businesses.
57. BATCF profits before tax were DM5 million
below budget at the end
of the 3rd Quarter but were expected to meet the
budget for the full
year.
58. So=& Cruz me expecting to achieve a market
share of 81% for the
full year but there would be a negative variance
on profits due to
price controls on cigarettes and the adverse
effect of an overvalued
Cruzeiro on Leaf exports. The current trend was
for the Cruzeiro to
devalue which would be good for exports but would
have an adverse
effect on the translation of profits.
59. Imperial's market share had increased to 60%
and Operating Profits
were expected to be Can$11 million better than
budget. However,
industry volumes were down 4.5% on the year and
this trend was
expected to continue.
60. Management Development : Mr. Broughton
reported that the project
to review the arrangements for management training
and development had
been set-up and would be co-ordi:nated by Mr.
McBeath. The main part
of the work would be carried out by two secondees,
one from Tobacco
and one from Financial Services but it was also
intended to use
consultants to collect data on current practices
both within BAT and
in other companies.
61. it was noted that it was likely that the
consultant to be used would
be Bill Laidlaw, who had worked for Rothmans and
was now a partner in
Mosaic, a small independent consulting firm
specialising in this
field.
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62. It. was agreed that the person seconded to the
project should be a high
potential manager in 30-40 age group and should
preferably not be a
personnel specialist. A specific nomination was
made which will be
followed-up by Mr. Broughton.
63. The Chairman asked that the team should be
provided with progress
reports as the project developed.
64. Marketing Directors Sexinar : The Chairman
thanked the members of
the team for their suggestions for issues which
might be considered by
a future marketing directors' seminar. The
arrangements for this
seminar will now be progressed from the Centre.
65. Dates of Future Meetings Meetings in 1991 will
take place on
'Wednesday, 27th February; Thursday, 30th May;
Friday, 6th September;
and Monday, 2nd December.
F,S/DJA
12 th December 1990
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