NO COPIES KAY BE MADE
TOBACCO STRATEGY REVIEW TEAM
A meetiig of the Tobacco Strategy Review Team was
held on
6 ch September , 1991 .
Present: Siz Patrick Sheehy, 4r. X. F. Broughton,
I
.It B. D. Bramley, Mr. R. J. Pritchard,
1
.4 t U. G. V. Rerr~r, Mr. A Monteiro de Castro,
Dr. R. Salter (Secrecary)
'1 r -j.-:,. Mercier was -able to attend
:n At:endance: Mr. T. ;. ',;ylie, Mr. E. Kohnhorst
Minutes of the FTevious Meeting/Matters Arising
'_ .The minutes of the meeting held on 30th Kay
were agreed.
2. BAD Funding Arrangements. Mr. Broughton
reported that the
allocation oE the costs of the fundamental
research programme
had now beer agreed.
it was noted :hat Mr. Castro will draw up with BAT
Industries
legal department, an agreement through which Souza
Cruz will
pay for research results and technology passed to
them. Souza
Cruz will then need to obtain approval from the
INPI in Brazil
in order to be able to make payments under the
agreement.
Although, initially, these payments may be
relatively modest,
it is felt to be important to establish the
principle that
Souza Cruz should make a financial contribution to
the research
programme.
Marketing Issues
3. No~e2ber Marketing Seminar: 1: -as noted that
invitations
had been sent to everyone who had been nominated
to attend the
conference. Ro.ever, following the resignation of
Mi. Hazel,
his place will now be taken by Mi - Norman Davis.
Mi. Pritchard will agree with the Chairman a final
programme
for trke zonference and this ill then be sent out
to delegates.
1 ~, was noted tnat the speakers will also act as
chairmen for
their sessions except where there are several
speakers, in
which case a separate chair-an will be nominated.
The Chairman
emphasised the tmpartance of ericouraging
discussion and
suggested that this should be tmpressed on
Professor Quelch,
whose f,:s: session snould set the pattern for the
whole
seminar. ~;e also suggested that the timing of the
afternoon
sessions snould be flexible, with provision for
these to C-)
over-run the sr_rteduled time, if requiced.
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5. Marketing Information Systens: Hr Bramley's
proposals for
setting up a modified Group data-base, showing
cigarette sales
worldwide was accepted but it was suggested that
its
implementation should be accelerated, aiming to
complete this
during 1992.
It -as noted that the person responsible for
setting-up and
managing the system would be Ian Ross. It was
suggested that
Souza Cruz should contact him to ensure that they
have full
access to the system.
6. it was noted that the system would he based on
sales to final
consumers rather than shipments. 'While it was
agreed that this
was the most useful measure, it was asked that
there should
also be a reconciliation elating these figures to
shipments,
which are the basis of the financial reporting
system.
7. TV Screening of Motor Sports: Mr. Herter
presented a paper
summaxising the position on possible restrictions
on the
screening on TV of Rotor Sports sponsored by
cigarette
manufacturers. 7he current view Is chat this
should continue
to be allowed. However, it was noted chat the
European
Commission take a different view. In view of this
uncertainty,
it w,ould be important to have escape clauses in
any contracts,
allowing cancellation if a ban is imposed.
8. Co=petitor Activity: It was noted that Brown
and
Williamson had recently completed their periodic
review of
competitor activity and copies of this would be
distributed to
all members of the team.
9. Hr. P-itchard reported chat Philip Harris had
completed
their management re-orga.isation and -ere
continuing to act
aggressively, especially in trying to replace R.
J. Reynolds
in-store in retail our-lets. Karlboro--medium had
been launched,
apparently aiming for the segment of the market
which wants a
lighter cigarette but which is un%rilling to
convert to Marlboro
Lights. It is too early to judge the success of
this
initiative.
10. In the US domestic market, Philip Morris
increased prices in
Aarch and June and are rumoured to be seeking a
further
in September. Prices are being increased more
rapidly
on the r-heaper brands, narrowing the gap to the
full-price
segment. At the lower end of the market, Bristol
and Bucks are
being pushed harder than Cambridge.
1'.. Overseas, Philip Morris are managing food and
tobacco together
in Bra--il and the rest of Lacin America but
elsewhere the two
activities appear to be managed separately. Other
developments
have been attempts to influence excise in
Argentina and
S~ngapore (asKing for an increase ti the
proportion of specific
c.ix) and a strong promotion of BeLmonr-,Jltya in
an atc~pt to
p-e-empr t he expan sion of Barclay.
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12. R. J. Reynolds' strategies continue to be
heavily
influenced by their financial structure with an
apparent
emphasis on quality, efficiency and profit margins
ahead of
market share. However, there is some evidence that
the loss of
market share in Canada may be damaging profits and
market share
may again receive more emphasis in the longer
term.
13 .Rotboans appear to have st.-engthened control
from the
centre. Innovative products (sticks) have been
introduced in
Canada as a means of overcoming the problems of
high excise,
while in Germany there is evidence of a push for
share at the
expense of profits, which could lead to the
introduction of a
lower price category.
14 ~. ReeAstma, which is a family business and
more able,
:-ierefore, to accomoodace short-term reductions
in profits may
also be tempted to introduce low-price brands in
Germany in an
attempt to recover share.
'5. American Brands, Lorillard and Ligetts, all
continue to
earn good profits. American Brands has been
successful in the
USA ith the low priced Montclair and Misty Slims,
which could
be a threat to Capri. For Lorillard, Newport is no
longer
gaining market share and although Keat has beea
relaunched it
has made little impact. Ligetts has a range of
private label
business bur is losing market share. However, they
appear to
be invoived in a project to rebuild a cigarette
factory in
Russia.
16. it -~as agreed that a review of competitor
activity should be a
feature of Tobacco Strategy Review Team meetings
and
the Chairman asked that greater priority should be
given to
this item. It was also asked that members should
provide
information and views for. the next meeting on how
the new
?hilip Morris otgamisation is working in their
territory and
how they are financing promotion, especially in
Latin America.
Key Markets
17. Eastern Europe: Mi. Herter reported continuing
good
progress with exports to F-astern Europe. Although
the
political situation could effect sales to
Yugoslavia, there
tnere were good prospects elsewhere for a further
increase in
exports in the second half of trie year.
18. Representatives have been appointed for
Poland, Balgarta
and Czechoslovakia. An off-ce has also been set up
in
Russia and candidates for nie job of running this
are being
interviewed.
'9. The Chailzman believed that there was a need
to accelerate the
development of contacts in Russia and the other
former Soviet
.epublics, possibly in conjunction with another
company. He is
4- to visit Russia during September and will
arrange a meeting CD
:o progress rhis. N)
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20. Hungary- It was noted chat BATCo were still
negotiating
with the SPA for the purchase of a shareholding in
the Pecsi
Tobacco company.
Rmamia: Mi. Pritchard's review of the Romanian
market was
noced and it was agreed that although there were
limited
opportunities for development at present, contacts
should be
maintained.
France: It was noced that the study of the
pocencial. for
acquiring the rights to Lucky Strike in France had
now been
t!xtended and the possibility of acquiring che
rights to the
brand worldwide in exchange for the rights to
Bensoa and Hedges
(excluding Duty free) was now being considered.
The
.n Europe
Chairman intends to discuss chis possibility with
the Chairman
of American Brands during his forrhcoming visit to
che USA.
:3. The possibility of licencing SEITA to
manufacture and sell all
SA- brands in France will also be considered.
24. UX: It was agreed that no further action would
be taken at
?resent to investigate the pocential for BAT in
the UK markec,
apart from ensuring the continuing zvailability in
the London
area of Lucky Strike imported from Germany.
25. Chi=: It was noted that following further
investigation
of the implications of the proposed
re-organisation of the
companies serving the China market, Mr. Bramley
was preparing a
26. m--ico: It was noced that although contacts
would be
mainta-Ined, it was not expected that significant
progress could
be made is becoming re-established in Mexico until
it became
par.: of the North American Free Trade Area. In
the meantime,
I : was noted that the licence for Kent would not
be renewed
beyond its current term, which expires in
November.
27. TuxiLey: It was noted that Philip Morris had
announced a
S48Dm investment in a 30bu capacity manufacturing
plant.
Bramley reported that a
Mr .
-1- -1 ..... 1A - . . 1-1 1 .,~
~ir .Watterron would be resporisible for the
furcher development
of this project.
29. Th&J-Iand: Mr. Pritchard reported that
although locally
produced cigarettes still had a substancial price
advantage
3,ve: imports, it was still hoped to sell 1.
billion into the
,~iai atket '.n 1992. Shipments il- start in the
Autumn of
..991 and, including ?ipelining, should total 0.3
billion during
..ie res, of the year.
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29. Contacts are being maintained in Burma and a
strategy paper
was beinZ prepared covering Vietnam.
30. Colombia: It was noted that the development of
Group
sales in -.he Colombian market were being
co-ordinaced by Brown
and Willianson. 7he next meeting to progress this
was
schedule'- for November.
2 1. South Cone: Mr. Broughton reported that a
meeting would be
held in Brazil in September to set up a project to
study
possible implications for the Group of the
proposed free trade
agreement between Brazil, Argentina, Paraguay and
Uruguay
,,4ercosul) .
US International Brands
32. Dverall Performance: Xr. Pritchard reported
that although
total volumes to end-June were ZZ ahead of 1990
they were 10Z
below budget. However, this shortfall was expected
to be
*argely eliminated during the second half, leaving
full year
sales over 9Z up on 1990 and only 0.4Z below
budget.
33. Kent., Shipments have been affected by i-
I ' ' X.- However in-market data suggest that
sales
1 ~ final r-onsume;s are sciii increasing and a
team is
invest
.igacing ways to overcome the problems with
shipments.
34. it was noted that Kent sponsorship in the Far
East is to be
rationalised, focussing on a S2.7m Golf promotion.
Experience
-ined
ta the Far East may then be applied more widely.
35. it was noted that Kent is being launched in
Munich and a launch
in Benelux is also being considered. The Chairman
suggested
that Brown and Williamson should consider putting
more impetus
behind the development of Kent in Europe.
36. Lucky Strike was continuing to make good
progress in
Germany and had been introduced successfully into
Brazil.
However, progress had been disappointing in Italy
and
Switzerland. The Chairman emphasised the need to
achieve
comparable or better quality (e.g. by using more
imported leaf)
and to reduce the price differential to Marlboro,
aiming to
achieve the target of not being more than one
price point below
Marlboro in all markets by end - 1992.
37. It was noted that the other US brands were
continuing to make
sacisfaC:3ry progress with significant increases
for
Hilton, ?all Hall, Viceroy and Barclay.
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UK International Brands
38. overall Performance: Mr. Bramley reported that
sales of UK
international Brands to end June were 8.5. ahead
of 1.990 but
0.7.', belo. budget. For the full year, sales are
expecced to be
11.7Z greater than in 1990 and 0.8% ahead of
budget.
39. State Express 555 -as progressing well.
BATCo's new
markecing director had been revieving the
promotion and
sponsorship for this brand and would be presenting
his
proposals an this in October. The Chairman
suggested that in
developing the plans for the brand, consideration
should be
given to the potential for a Lights version.
.0. Benson and Hedges had been disappointing but
market shares
were being ~intained and some improvement is
expec:eii in the
second half of the year. It was noted that B&H
Special Mild
had shown a significant increase in volume in
1991. However,
doubts were expressed about the attractiveness of
Benson and
Hedges Golden M-i-ld with its mixed US and
Virginia taste.
-1. Players Gold Leaf continues t3 be progressive
but aA'-Co are
reviewing the positioning of JPS as an
internationa.:
brand.
-4. The Chairman emphasised the importance of
qualitv and asked for
a formal review of this to be tncluded in the next
progress
report on UK International Brands.
Manufacturing Issues
43. Production, Capac-ity: Mi. Kohnhorst reported
that Ummim6dog
4,4. Conversion Costs: Mr. Kohnhorst presented an
analysis and
comparison of production costs in the UK, USA,
Germany and
1 ~r azil. This sho.ed
5. -as noted that there had been an increase in
the cost of
equipment relative to labour. As a result, - 1 .11
..-
-1 --Pr
s and a L50 billion capacity plant might be very
atc,active from this point: of view.
~6. '.it. Kohnhurst will send copies of the slides
used during his
presentations on aznufaccuring capacity and
conversion costs to
a!'. members of the team. N)
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7. Upgrading Manufacturing in Brazil: Mr. Castro
-as asked to
arrange for Mr. Saboia to investigate further
whether there
could be an advantage to Souza Cruz in importing
secoad-hand
equipment from :he USA. Although old, this could
still
represent a significant advance on some of the
equipment
currently installed in Brazil.
Leaf
48. LejLf Processing Meeeting: Mr. P-ritchard
reported that a
seminar to discuss and exchange information on
leaf processing
had been arranged for November. Messrs. Bramley,
Herter,
C~-scro and Mercier were being asked to nominate
attendees.
-9. Lef Rationalisatiou Scheme: Mr. Pritchard
reported that
following the introduction of the leaf
rationalisation scheme,
there had been a significant increase in the
movement of stocks
from one company to another. Visits to the USA by
GrouD Leaf
buyers had also decreased fro. 35 in 1989 to 11 in
1990,
representing a substantial saving in costs.
50. Lead Supply Position: hr. Bramley presented a
paper
revieving the leaf supply position in the BATCo
operati3g
companies. It was noted that this still showed a
number of
companies which were either below or above the
agreed sc:)ck
duration targets and the ~'hairman asked for
further pr~sure to
be applied to improve this situation. Further
consideration
should also be given to the opportunities for
expanding leaf
exports (e.g. from Central Ame:ica).
Smoking Quality
reported that a s:,~dy
Report by Study Group: Mr. Kohnhorst
group of himself, Xr. Ross (BATCo) Dr. Kausch
(BATCF) and
.ft. Andrade (Souza Cruz) had been set up:-
(a) To establish a better interchange of
experience on smoking
quality testing within the Group;
(b) To recommend action to improve the
effectiveness with
which quality is measured and monitored.
52. -he proposals to collect examples of best
practice wre
accepted and it was suggested that Bigatt in
Venezuela snould
be one of the companies to be visited.
,he study group was asked to report back with its
r ecom.endat ions at the meeting of the team
arranged for
9
-5 ch February 1 92
Management Development
53. Review Kepart: Mr. Broughton reviewed --he
results of the
study cc management training and development in
the robacco
,us-,ness which had been presented to the CPC.
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54. Following further discussion, it was agreed
that it was helpful
4
ng. It was also agreed that
the (-- X~ - . - _-1
sommWnfin" with particular empoasis on developing
expertise
relevant to the tobacco busiaess. However, the
functional
courses should also have an element which dealt
with the
contribution which the function makes to the
success of the
company so that the manager can understand his
function in the
wider context of the business as a whole.
55. It was suggested that, ideal-7, the functional
courses should
be *wwommeafieWl bringing together expertise from
different
companies. In addition they should also take place
along side
a practical activity rather ---an in an academic
envirortment.
56. It was agreed that each Operating Group might
specialise in one
functional area with f, r
I and E
Members were asked to provide It. Broughton with
outlines of
the arrangements they would make to set up
Induction,
Mid-career and Refresher cou7ses for the
respective functions.
57. Firther discussion would be zeiauired of the
way in which these
functional courses would be `7-:egrated with
training for
general management and of the arrangements for the
general
marLagement courses themselves. For the time
being, members
should assume that the existi:L& Chelwood courses
will continue
and nominations for these co=ses should be made as
before.
58. Inter-Ompany Transfers: Mr. 3ramlev presented
the results
of the annual review of prog:e-ss in arranging
inter-company
transfers and in identifying andidates for future
transfers.
1 : -as agreed that this syste2 as operating
effectively both
as a means for developing inz~_fviduals and for
rrarLsferring
expertise througii the Group.
Research and De~velopvent
59. Drganisation: It was agreed --zat ~ft.
Braimley,
Mr. Pritchard, Xr. Herter and 4r. Castro would
meet to consider
'how Research and Development snould be organised
in the tobacco
businesses in order to achieve the most effective
develop"at
Df products and processes suDerior to those of the
Group's
co=oecltors-
60. it was suggested that the research programme
should be derived
di-ectly from the requirement -o develop better
products and
processes, with a closer liak :)ecween research
and
development.
5 A consequence of this could be zhac tndividual
R&D depay--menEs
woul~~ develop particular spec~alisar_'ons and
this would CD
--c-ease the need for effectve communication
between N)
-esearchers in diffEerent parts ~f the worLd,
perhaps through an __j
2 nia[ged -nual Research Conte:enct- C)
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62. It was suggested that there could still be a
need for
centralised research on regulatory and health
issues but the
Chairman questioned how much value past research
in this field
-iad been in enabling the company to win arguments
with its
Critics.
63. it was noced that one of the subjects for
discussion would be
whether or not there was a need to appoint a new
Research
-o-ordinacor to replace Kr. Heard, who is leaving
the company.
64. it was also noted that in view of the current
uncertainties
about the future organisation and programme for
R&D Mx. Bramley
will inform Mr. Heard chat the Research Conference
arranged for
Novetpber should be cancelled.
TechnoloRy Reviews
65. Team members presented summaries of the
reviews of technology
which had been prepared for the BAT Industries
Board meeting in
Dcrobe:, when each of the Group's businesses is
asked to assess
where it stands relative cc competition in the
application of
66. :t was noted that the assessments showed an
improvement in
product quality relative to competition but
primary marnifacture
and leaf processing were seen as continuing areas
of weakness.
67. The Chairman emphasised the importance of
using I.T. to improve
- effectiveness of the field sales-force and Mr.
Pritchard
.he -
agreed to organise a meeting to exchange
experience in the
applicacion of I.T. to selling.
Technical Issues
68. Reduced Sideatzeas: It was agreed that
although low
sidestream might be part of the specification for
a new
product, attempts to reduce sidestream in existing
products did
not appear to be worthwhile since the methods for
achieving
this appeared cc result in no net gain in the
overall
attractiveness of the product.
69. T-1 Tobacco: It was noted that tests of
cigarettes
I
.ncorporating Y-1 tobacco were continuing in the
US, Germany
and Brazil.
70. Decomposition Products of Ammoniated Tobacco:
Mr Bramley
reported that analysis of the decomposition
products of
cigarettes made from ammoniated tobacco had
suggested that use
~f the ammonia process in manufacturing has little
effect on
the comDosition of the smoke from the cigarettes
produced.
-~rther ork is in hand to try to discover the
reason for the
ibserved improvement: in smoking quality.
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Use of Reconstituted Stem: It was noted that using
the!
Band Cast system, Brown and Williamson were able
to incorporate
stem in blended products. T'hey also used Paper
Recons--icuted
Tobacco (FRT) made for them under contract.
72. influenced by the lower capical cost, Souza
Cruz were
evaluating the DEER process. However, although
this might be
accepcable as a short term solution it was
suggesced that the
Band Cast process should also be evaluated. In
addition
they might also consider taking a licence for the
PRT process
with a view to exporting the product from Pirahy.
it was noted chat Imperial and BATCF were also
evaluating
processes for incorporating increased amounts of
stem and while
BATCo had found this to cause irritation in
Virginia brands,
further evaluations would be made on blended
products.
Regulatory Issues
1- ETS: Ma - Pr i tchard repor ted that the draft
repor ts by the
US Envi~:onaental Protection Agency (EPA) on
Health Effects of
Passive Smoking and Environmental Tobacco Smoking
in Workplaces
would not be published or given official
endorsement. While
tndividual researchers could still publish their
work this
would reduce any impact which it might have.
73. Fire-safe Products: The Congressional task
force set up to
develop a standard for fire-safe cigarettes has
met and will
continue with its work. However, they have not yet
established
an acceptable test method and progress has been
slow. The
situation on this will continue to be monitored.
76. Additives Register: hr. Bramley reported that
the
additives register is now complete and is
operating
sat'-sfactorily.
77. SwokLing Compeudiuss: Hr. Bramley reported
that updated
versions of the smoking compendi=s have been
distributed.
78. Envirotmental Charter: Kr. Broughton reported
that the
Group's environmental policy was due to be
reviewed at the
October meeting of the BAT Industries Board. Since
it was
clear. chat tobacco companies could not subscribe
to either the
1 CC Environmental Charter or to the Valdez
Principles, it -as
'ikely that BAT Industries ould continue to have
its own
Environmental Policy, worded in a way which was
approprl-ate to
the specific circumstances of the Croup's
businesses.
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Operating Results
79. FinanciAl Results: Mr. Broughton reviewed the
results for
half year. The importance of achieving the full y
ar
forecasts was stressed and It was noted that there
had been a
good increase in sales volumes in Jully.
Future Meetings
80. The next meeting will )e on Monday, 2nd
December and meetings
in '99-1 have been arranged for Wednesday, 26th
February,
Friday, 29ch May and Wednesday, 2nd December. A
further
meeting will be held at the beginning of September
but the date
for this has still to be arranged.
RS,cp
13 t~i Sept:ember 1991
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