PRESENTATIO.N BY ULRICH HERTER
AT 1995 BATCO GMs CONFERENCE
Good momincr everyone and thank you, Barry, for
asking me to
talk about B.A.T Industries' strategy for tobacco.
The findings
from the first round of management interviews
conducted in the
g
course of Project Battalion revealed a
considerable de-cTee of
concern about the Group's apparent lack of
strategy.
Let me say, right away, that I do not accept this
criticism about
our lack of strategy. What I do accept is that we
have not
communicated our strategy clearly enough in the
past. This is
therefore a good opportunity for me to explain
what we are
trying to do and why.
I am going to concentrate almost entirely on our
tobacco
strategy, since Martin Brougghton will be covering
the role that
tobacco is expected to play in the future
development of B.A.T
Industries, and the strategy for the Group as a
whole, on the
final day of this conference.
As Keith Dunt will be giving you an update on
Project
Battalion after this, I don't want to say much
more than that
both Martin and I are totally committed to the
radical change
that Battalion will involve. Battalion fol.lows on
logically from
the move to end market control and it is about
nothing less than
the requirement to change the structure of our
orgarusation so
that tobacco can be manaaed as one worldwide
business.
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This does not, however, mean that we intend to
become a
company with nigaid central control. Our aim is to
preserve our
decentralised culture because it provides us with
an impor=1
competitive edge. Our ambition is to achieve the
--reatest
possible degree of delegation, with absolutely
clear
accountability.
The new structure will, at the same time, provide
for clear
strategic direction and wW also incorporate very
clear decision
Processes for those issues which cannot, or should
not, be left
to end markets. Two good examples are
international brands
and product sourcing, within which I also include
manufa turing strategy. That's all on Battalion
for now.
Our objectives for both B.A.T Industries and
tobacco are ver.V
focused. The primary objective for B.A.T
Industries is to
provide our shareholders, over the long term, with
a total return
above the average of the companies making up the
FTAII-
Share Index. Total return measures capital growth
and
di,,idend income and is therefore appropriate for
a group. like
BAT, that is committed to dividend increases
significant-IV in
excess of the rate of inflation.
BAT"s objective for tobacco is to regain our
position as the
world's number one tobacco business within 10
years and
thereby deliver strong profit growth. I believe
that this
objective is stretching but achievable in volume
terms but I do
accept that it is unrealistic in profit terms.
It ~xqll, however, maximise the profit and cash
flow to the
Group from the tobacco business over the Iona
term, without
Jeopardising our short term profit targets. In the
long term.
triere will be a virtuous circle of risincr value
share, as well as
0
risine volume share and the objective of being,
number one in
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profit terms will be met. 11.14
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'VVe wili irow our value share in those markets
where we
already have a large volume share, and we will
grow our
volume in other markets. We will also invest in
new markets
and expand through acquisitions, if they make
financial and
strategic sense. Last year's acquisition of
American Tobacco
sets a ve-.,- hi-h standard for a developed world
deal.
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In our assessment, there are a number of things
that we must
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achieve if we are to regain the number one
position in volume
terms in 10 years:
- maintain volume in the shrinldng US market,
building on
0
the American Tobacco acquisition and the success
of
Kool. GPC, Nfisty and Carlton;
- maintain share in the growing Brazilian and
Indian
markets;
- continue to grow share in Japan;
- achieve a significant position in China;
- establish the joint venture in Turkey;
- build on the investments in Russia and Eastern
Europe.
.A.s well as these specific targets, there are
also six strategic
imperatives.
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Develop a focused, segmented and differentiated
brand
portfolio
First, we have to develop our international brands
to generate
future profit and cash flow. I know that, in the
past, there has
seemed to be an endless debate about which of our
brands
actually qualified as international. Our criteria
for the selection
of international brands are that they should be
seen by the
consumer as international and that they should
have critical
mass. On this basis, our international brands are:
Lucky
Strike, Kent, Pall Mall, Viceroy, State Express
555, Benson &
Hedges, John Player Gold Leaf, Barclay and
Hollywood.
Carlton and Silk Cut are two new possibilities
available to us
since we made the deal with American Brands. End
of debate!
Each of these intemational brands must be
consistent on a
worldwide basis, something I accept that we have
been weak at
in the past. If we are not to confuse our
consumers, we must
have consistency in the product itself, in its
communications, its
pricing and its packaging. However, consistency
does not
mean that everything, has to be the same in every
place.
Lookina at the international brands segment in
more detail,
both the value-for-money and premium segments are
growing,
although value-for-money is growing more quickly.
BAT has a
much hiaher volume share in the value-for-money
segment
than in the premium segment, which is why our
international
brand profitability is so much lower than Philip
Morris'.
To2ether with their dominance of the US market,
this is the
main reason why it is unrealistic for us to expect
to match
Philip Morris in profit terms in 10 years.
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Our premium international brands are Benson &
Hedges, State
Express 555, Carlton and Barclay. In the mid to
high price
segment we have Kent and Lucky Strike, with
Viceroy, Pall
Mall, John Player Gold Leaf and Hollywood at the
value-for-
money level.
Our strategy is to build on the strength of our
high share in the
fast growing value segment, as well as ensuring
that we are
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better placed to cater for the consumer who wishes
to trade up.
We expect the switch from local brands to
international brands
to be a ceneral trend, although it is one which
will happen more
quickly in some markets than in others. The speed
of switch
can sometimes be slowed by strong support for
local brands
where we are strong but we must accept that
international
brands will dominate in the end, even though it
may take some
time. Of course, local brands may still hold
significant market
positions if they have been managed well and have
at least
developed into regional brands.
And talking of regional brands, we must obviously
maintain
our strong position by supporting selected brands.
There's not
quite such an intense discussion here but our most
important
brands are: Kool and GPC in the US; HB, Prince and
kim in
Europe; Hilton in Asia Pacific; Belmont, Derby and
Free in
Latin America; Embassy and Sportsman in Africa;
and Wills
Gold Flake, Scissors, Bristol and Wills Navy Cut
in the Indian
Sub-Continent.
The priority for regional and local brands is to
generate current N3
profits and cash flow, while maintaining brand
loyalty and our C:~
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corporate market share. Success with regional
brands is what Ln
will enable us to invest ftirther in our
international brands. L11
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Some of our regional and local brands are in
vulnerable
positions with old or weak campaigns, so we are
revitalisinz the
communications for brands like Kool and BB, and
must
continue to do so, to maintain our market share.
BAT also needs to take advantage of the
opportunity to develop
a free standing Lights brand, so that we can take
a strong
position in the growing Lights segment, where our
two main
candidates are Kent and Barclay. We also have
opportunities
with Carlton and Silk Cut, so we are well placed
to capitalise
on the world market's gradual shift to lower tar
and nicotine
levels.
In our assessments there is a limit to how far a
full flavour
brand can be stretched. Philip Morris, for
example, have not
yet succeeded with Marlboro Ultra Lights in the
US, despite
many years of testing. This really should give BAT
the
opportunity to develop a brand against which
Marlboro can't
currently compete very well.
We need to focus our research and development on
improving
=duct and smoking quality, as well as generating
genuine
i
novations w
a hich can be used to oain a competitive
advanta-ae.
!a- the Lights and Ultra Lights segment, for
example, it must be
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our aim to achieve greater consumer satisfaction
than can be
offered by our competitors' brands.
In order to drive our brand portfolio, we
obviously have to
. M-Prove the effectiveness of our marketing
spend. As an
example of what not to do, I need do no more than
mention the
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inconsistent level of support for Lucky Strike
over time, alone Ul
--ith its various campaigns. Ln
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,.aother instance of our willingness to embrace
what rruight
=pear to be a cultural change, in BAT's terms, can
be seen in
te fact that we are now prepared to enter contract
=ufacturing agreements and even to license our
trademarks,
Toint ventures or other entry routes to new
markets are not
-'-!asible, for the time being. The examples here
are Poland,
I -arkey and China. I accept that these
arrangements will
s~merate lower absolute levels of profit than RW
scale
c,2erations, but they should still produce very
attractive returns
cl our investment and provide the base for us to
reach our
u~~ mate objective of establishing fully fledged
joint ventures.
Have an exceUent trade marketing and distribution
capability in the end markets
M-ovina beyond the brand portfolio, we must focus
on
a:vantage from trade marketing and distribution.
All of you
w~o have heard Hans Niedermann on the subject
should not
z.!%--d me to persuade you that this is an easier
area than some
-where gaining a competitive advantage is
concerned.
Fzthermore, where media is not available, trade
marketing is
te only tool that can be used to build our brands.
Nflnimi e supply chain costs within the
constraints of the
marketing objectives
Tae efficiencies we can achieve throucyh trade
marketinc, must
b-- reinforced by a continuous reduction in our
unit costs. I
2 z--.-pt that, with our wide range of brands and
larger number of
factories, we do not have the economies of scale
to be the Un
lcwest cost provider, worldwide, in the short to
medium term. (-n
Eat think of the opportunity!
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That is why sourcing decisions cannot be left
simply to the
discretion of end-market managers. They have to be
decided
centrally so that our sourcing, and following on
from those,
capacity and expenditure decisions, can be
optirnised.,
worldwide, in terms of cost, quality and the
marketing aspects
of "Made in Enaland" or "Made in the USA".
Our marketing strategy will mean supporting fewer
brands and
styles in future, although a brand or style will
only be dropped
completely if it is not profitable. The
development of free trade
will increasinggly allow us to supply one market
from a factory
in another market, even though there will still be
some regions
where the best low cost option will still be to
have local
factories, so that we can avoid high import
tariffs.
We also need to ensure that we achieve a
competitive
advantage from our position in Leaf. There is some
evidence
that the edge provided by Leaf is less than it
used to be, so we
need to decide whether the business should be
continued on the
basis of minimum time and maximum profit, or even
whether it
should still be part of the Group's core business.
Establish leading positions in priority markets
where we
are not already strong
Leaf has certainly given us an advantage in some
of the new
business development markets, where tobacco is an
important
crop, and we have already achieved investments in
many of our
priority markets, particularly in Eastern Europe
and the former
Soviet Union. The remaining top priority markets
are China,
Turkey, Poland and Vietnam. CZ)
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NN't are also under represented in many of the
world's largest
ar- 0 most profitable markets, such as Italy,
France, Spain and
th~~ T--K. In all of these, the only realistic way
to achieve a
m-:-or position in a relatively short time scale
would be to make
ar acoulsition but any acquisition has to make
strategic and
fiz=cial sense.
Las: year's American Tobacco transaction is a good
example of
how expansion in developed markets can balance the
risk of
invtsting in developing markets, particularly
where payback
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pe-.-:-ods and remittable earninas are concerned.
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Support consumers' freedom of choice to smoke
Ore of the strategic imperatives that inevitably
involves a
lonpr payback period is our commitment to support
co- F-,, rners' freedom of choice to smoke. We do
intend to take
a hi zher profile position internationally and
attempt to "get
scitzoe back into the debate".
The World Health Organisation's Beijing conference
in 1997
wil: probably target the activities of tobacco
multinationals in
developing markets. We clearly need to do whatever
we can to
minimise any risk that the conference might damage
our
bus'---.ss, particularly in China.
We -;6-M also continue to lobby ag
gainst excise tax increases
whe-:ever possible, so as to support our consumers
and,
par "--ularly in the European Union, work for a
tax structure
whic,~ would diminish the price difference between
local and rQ
inte=ational brands. CD
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Ensure manal-ers in kev functions are first class
Just as important as supporting our consumers is
ensuring that
we, ourselves. have first class people in our key
functions. In
particular, we must continue to strengthen our
marketing skills
so that a state-of-the-art brand management
capability can be
developed.
We do need, however, to recognise that some of our
operations
will be orientated towards low growth and cost
reduction and
Q that the skills needed for them will be
different, although no
less important.
Conclusion
I believe that these eight strategic imperatives
simply must be
met, if we are to achieve our objective of
becoming the world's
number one tobacco company within 10 years. I do
not expect
everyone to a!zr."e with every detail but I very
much hope that
the broad dirust is not only clear but acceptable.
Before I hand
over to Keith, I just want to make one last remark
to make it
absolutely clear that we have a strategy and
explain how you
11 co me in" and can contribute to our vision of
regaining the
number one position worldwide.
Last year, the centre provided four acquisitions
which will
contribute some 50 billion sticks to our total
Group volume this
year. We are looking for your contribution and
help in
increasin!z market share and volume in our
existing markets, as
well as, Of course, in exports. Without your
contribution we
will not achieve our overall objective. Let's be
absolutely clear
about that.
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Now over to Keith, who is going to give you an
update on the
progress of Project Battalion, after which he and
I will both be
happy to answer your questions, whether they're on
the tobacco
strategy or on Project Battalion. They are both
equally
important, because Battalion is very much the key
to the
successful execution of what I believe is a
coherent and
ambitious strategy, reflecting the vital
importance that B.A.T
Industries attaches to the tobacco business.
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BAT Industries document for Province of British
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