&r, BAT ~BEHGE (Olseusslon Piper) 1 The French market hackPrPund 1 Trench cigarette arlret, after rising by ol9Z In 1990, Is expected to decline for the next two yen, possibly stabillslnq by 1994 Is price increases oodentc, I ban on all forms of casla~unlatlan has been legislated and will be effective within two yelrr~ laportsrr dominate the premium end of the olrM, while SEITA controls the lower priced categories. There II a danger of down trading to SEIA bonds as the retail selling price Is rzt~ed in anticipation of approximation, SffTA distribution Is maintaining Its de facto monopoly of distribution by means of 5 year contracts (1990·95) with 111 main suppliers, Sales of the Mjar players in the French rmrbt are pmjeeted II follows: (bns) le1P 1PPL 19111 1PPI Philip Morris 21,6 23,2 24,8 24,4 27,5 RJR 7,( 8,0 8,2 7,9 8.9 Rothmans 13,1 13,1 11.0 11.2 SEITA 49.9 43,8 46.5 38.1 36.1 Total narket assumption 94,9 95.8 95,0 83,6 85.8 2, BATls oosltton in the French.Kark_et The BAT Group had a 1,59X share of a total market of 95,8 bn In 1990, B a H alone, cut of nine BAf brand families On the market, Is progressive, Oetlfl~d volume forecasts for each of the cigarette brand families from 1989/95 Is shown in Appendix A and slllllllrlsed below: (mns) 1PBP 1P~S 1291 lPP1 Bah 835 887 887 836 910 Kool 301 278 258 206 189 Kent 65 60 56 46 IZ Eaprl 13 12 10 Boule O'Or 120 112 103 77 63 HE 107 107 loo 74 68 Kin ,22 65 _59 40 Total 1513 1521 1473 1279 1305 The USIB segmt represents (OX of total aar~et, 47.g of the blended market, and 81.1X of the imported market, BA'T't only products In this segment Ire Kent (0,0fX tar); Kool (0,3rX ms) and eaprl (0,01X ms), eaprl is to be withdrawn In 19911 Lucky Strike Is not available to BAT. Barclay is not t~unehed~ Kent Is declining, The UKrB segnent In France Is declining, BenJan I Hedges has 1 total market share of 0,88X, a UK segment share of 13X and represents 57X of BAf's total s~les~ Its recent growth has slowed down, ·1· Clit; PDF -!::!!::!!::!.f3 StlC.i: 0111 The Berman and Belgian brands i ive largely off the border trade which will diminish as Et price differentials are eroded. HE II anyway declining. UJA is the lading tlported shag, and the second highest volw product sold by BAT In France, 450 tons was sold In 1990. Share and vol~aa are rising, 3, BAtl~~Strueture In the French market 881 france acts solely as a sales farce, and represents the BAT Group coepanies with SEITA and the unuhctuten' association BAT Group products are sold directly to SEITA, and BAT France's costs are recovered from the brand owners pro rata to turnover, plus a & margin, BAT France RE 25 salesnen whose roll bacoa~l rrs critical Is the advertising ban approaches, This compares with 1 Salts force of 150 in Philip Iknlr ad 100 in R]R, The marketing of 8 I H Is handled by BA'TUKf, on licence from BATeo. The arbtfnp of Kent, Kool and kprf is undert~hn by B I i, the Parltetlng of Boule D'or by BAT Benelux, and the marketing of Kin, ha, and Kurnut by· BAICF, Ylth the exception of BATCF, the.p~orlty of brands, Incl, B I H, se e~nhetured In the Brussels factory on contract, although aanuhetun of 8 I H could revert to South1mpton, invoicing of PF'IA Is handled directly by BAT Benelux, and BATUKE, not by the brand owners except BAT[~. the brand owners rely on BAT ~nna to undertlle thelprDwtlon of their brands through its sales farce. Henrl Ylntermans have 1 1ZT a~ri~et share of the cigar Iarr:et, They enjoy BAT Group contnctual terms for distribution by SEI'III, with whom they have a direct rel~tfonshlp. Henrl Ylntennans have an Independent field force of three area managers and Is salesmen through a long te~m contract with grguette of narreille. This sales force is dedicated rollly to the Ylnternar range of products, Hen·rl Ylotera~a also spend relatively heavily on establishing relations with the tobacco retailers' union, I, ShortcorainPs andmoteotfal IraProvc~9nfs BA'I france suffers fron 1 structure which Iaclrs focus, thus Ilnitfng its fnpact In the la~rlut, and which Is not necessarily cost efficient, The structure of M france was devised In particular to be tax efficient, enabling group products to be Im~orted fra within EC, and avoiding french corporation tax on the profits, However, the structure has had the effect of failing to make my serious impression In teres of oarlcet shire, This is due to fragmented accountability for volume sales and ERIF~t share between BAT Prance, BATUKI and the bond owners, a Iael: of genuine profit nottve by BAT Fnnce, a well as an inability to control support levels and resources, and 1 lack of my BAT Group focus, on the European drive bonds, except 8 1 H, The pr~ot~on of BAT group products in Prance with the exception of B a H, 1#t r· ~~::~··! ·I~ eny serious eonmlrmenr tram me arand owners, The level of communications support which Is shown In Appendix 8, is below even the low level allowed by law, An important improvement would be the renewed support of aljor BndJ which bye been abandoned, Far exan~te, with consistent support, Koo1 could be expected to recover volume and earket share. The denotkatlan of the nles staff in the face of falling sales, the Impendlng colmrmnications ban, and lack of a genuine profit motive, is evidenced by high turnover rates, ReloHntlon and relnforcenent of the existing team would be essential to frpprovln9 BAT's impact In the market, ·2· U: Clit; PDF -!::!!::!!::!.f3 StlC.i: 0111 The Tacit of long ten gvnt~tnt behind hey brands, and the absence of any profit lotlvdton within gAT prance, thus appear to be the principal causes of the Group's tell; position In fnce, BAT has Been successful In Europe where the local operating company Las been able to build up Rht rha ed proftlbllltr a a result of I licence to exploit BU1 brands, Thotl ccapenles have demonstrated their ability to afford the nacess~ry levels of epaaualedlon upendfture from salf·gunented Income by focusslml resources behind 1 vary narrow range of froup bonds. There II close colaPunleltlon with the brand owners, and adherence to ~u~lty, and other crtteF11~ The closure of be Aasterdam f~etory will r~ BAT lederlind the only fletPr~·lers BATeo ~ricetlng subsidiary In Eurape with licensed Group brands using its own resources to achieve earl:et shire and profit goals, BAT We~etlmd wttl continue to licence brlnds fror B A Y Ind BPJeo, sourcing the from BrulJJ, and vlll continue to be ptlvlted by responrtbfllty from neter share and profit generation. It is proposed that respPnslblllty for the french rmrhet should be redefined In I sldllrl more conventlonl1 wanner, i.e,aslngle nanagewent orouo with financial ed aarkettng responsibility for the French arrht, 6ut itructured to continue to allow the profits from the French aa~et to fall within the UK, the prlnrfpls of L norgmtntlon would be a follour: i. BAl IrMre will ~emaC pri~lrlly 1 cut contn for the pu~oa of employing the marketing tease In france, 2. A direct uh subsidiary of BATCD, Bn Trading, will be forwd to hold licences from BI and BATeo foF the French lalrket, to piece orders on BAT Benelux, BATUKE ed BAftT to mmuhcture product for, and to dispatch It to, SE1TA. BAT Tndlng will invoice SllTA dfroet, 3. BAT proooo will he MnogeriollY nponllbla for BliT Tndlng's profitability, I, Fundino of advertising and pranctton In the French arlrat, ad of BAT france's costs, will be bome by BAT Trading, 51 BAT ~ndlngwlll be responsible for the negotiation and plyment of any royalties to B~YI 6. The Bald of BAT Tndlng would comprise BATCo UK based executives, but would Include the Chief executive of BAT FF~nee, An tnl~np~nm of the proposed ~rnngenent tr Ittched a Ipp~ndlx C to this paper, for ~urh a 1~7mgant to he efftctlve BAT Trading would require initial funding by the brand owner It 1 level adequate to cover the costs of BPT France, Including reinforce~wntl to the maletlng team, as well a the cost of 111 caapllniatlonr in the French maket, The financial Inplle~tlon of this proposal Ir considered In section I below, ·3· Clit; PDF -!::!!::!!::!.f3 StlC.i: 0111 I, Estimated Imalet onsseratrons IhEnna Given 1 refocussing of support and resources, BAT France would be able to stop the decline of Kool, to tl~ qulcl(er decisions on deployment of its resources In promoting B I H and the 'border" brands and, given resources sufficient to launch the US brands, would increase Prbt share, The volume sales achievable by I more independent 8A~ France, with 1 faster, more effective, decision making process It the tactical level, are estimated below; and Ire compared with the current projections shown In bracl(ets, ~se~ lent mea 1991 lent Kool 258 240 225 227 230 Kent (Inc, Lights) 56 58 60 62 65 BIH 887 890 850 890 925 'BAT ~hnce could show an Initial 80 w increase before 1995, Kool (includlng 100 me In a box) would be skbllfsed close to the 1991 level, growth of 8 I H would be accelerated, and Kent, including Lights, would tes~me growth, In order to launch Barclily, Kent Lights, or a further 8 I H or AJJC1 product, BAT Trading would need to provide significant support over a three year pried at least, To launch Fortuna, philip Morris Invested f5,0 n, and to lunch Battlstonl In 1990 approx f3,0 mn, Current investment In media for Yinston Is f4,0 mn p,a, compared with 21,5 n for 8 I H; yet In terms of overall spend, more Is Invested behind 8 I H than can be justified by its marlret share (I~DX of oatet : 3,5X SOV), 5, Financial eerfonnuan The value to the BAT Group of Its current tobacco operations in France, In terms of profit performance In 1990 is shown In the table below, 8~ BBY Be~I~I B~EEI U~dl Volume (mns equlv) Cigarette 880 338 161 108 1(88 Shag ~8P 880 JJ8 161 589 1968 (French fr 1000s) Net Turnover 93(39 35329 16156 37221 182148 variable Costs 33917 20175 6154 15165 75441 Freight 2121 98 188 171 2578 Specific Prod, Overheads 3562 ~h~t2 ~e3 ,glh9. ~Ph~ contribution 51809 9414 8121 13719 83063 Dlstrlbutlon he 9202 4226 2PPU Harglnal Contribution (2507 5841 6425 7493 62266 Adnrtlslng~ProMtfon 21000 1200 600 1300 24100 BAT France Op, ~penses ~eZ~i ~3858 4066 Iqaef Harginal Trading Profit 11302 783 1060 2127 18272 Financing Costs ~481 ~UI ~5Pl Narginal Proff t 5621 ·188 3542 .536 9211 The above figures, as supplied by the brand owners, suggest that: ·I· Q Clit; PDF -!::!!::!!::!.f3 StlC.i: 0111 tl &P'IUK~ Llrl lot tncllded pn rite bCt~ oYorhoIdl whioh I11 ooroollr he Ilr~lr to thole of ~a It lboot f],Io nor I111II 11 t~~ ~ in, PE 1~(1 tn rrnnoe ire pnly mn~nl I Is~~ b~~l~l ii. I I 1 LB( uventlted thnir r~~~ll pltl It I C~~nC CP1~I n~~flO 1 IIfO or npl IoIoot cost for IoIf, At tit rr ~lrllll~ colt Is 04TCF or MTUKE (P~~), I I I rodl P r~~ I orofit of fr,fr,n7,t r, (t6.b) Ils~ on tho Ill~tl(D1 of 1 ofodoot Porohele Jtlel to IT flodio9 11 L60 pet dntl olur 1 ~~ froo P T~1S to the Cnl rn of I trldlll pnnt, on II h~nlt 1Ivll If ~llas end rlth the eriltioo p~l 6t1uotoro, rrta be: (n·FR, 9,66) .· 51116 901991 (II): Hp~tll sheg (ns rqulv) 616 1,953 (pl) dot furnwlr 19,052 eost al I~uct 6,166 Ir~qht 229 lo108 tl btld·nlr~ II Olltrlbutlon 2,117 6,123 Iranotlo~l $endltun 2,610 Fnlp OPrltllP ~IPICJ t,l(( ~rldlng Iroflt r~ass Tho InftlIl clpftlllrltlon of 9Af Tr~l~, which oould be funded hy the brrd·nrr, would need to elnr PI folllrll9 inverlrntc (d00) 3 mnths lurehlle of Iroduct Inel, ~IJ~HII 1,II 6 nth C~lol allldltn 1,266 I ontht Ithtr cxpcndftun ~512 f5,100 T~ tot~ Clabst tf f5 (II wnd I,11 tn hi I~ClltJ bl Ih '· · ~· 1 I----'·- -' 91rtliy, lont Llphts M,O to fS,0 ons to Eovar thl pot~ntl~l Iluncner ul end oDlrible 6 I H Golden n~d. ~bb Ist ~ly 1991 ·5· O ClibPDF - v~~fastio.soni CpMdix A I)IMD votVlp K~e~~T_ ~ ~eB~ ~ffl mar ~er ) C H IBf tit 190 136 175 910 113~ 0,93 0,95 1,0 1.0 1,01 1,06 ~tOO~ 211 258 220 206 191 169 IS S 0,29 0125 0,13 0,I 16111 60 46 IO IC 11 II IIS I 0,06 0,06 0,06 0,06 0,01 0,05 IOVI~ 0'011 111 103 11 11 69 63 IIS t 0,12 0,11 01l0 0,09 O,QI 0,01 H11 ~01~ ~NI~X 101 100 117 11 11 68 nsI 0,11 0,10 0,II a,al o,oll 6'5 IO Id 40 36 31 IS 8 0,06 0,06 0,05 0,01 0,04 0,01 WfAI 1, I109( 1,163t 1,40'1 11279 1,192 1,305 115 I 1,58 1,5'1 1.53 1154 1,52 e Clgti not included TOBL lUIltIT (5ai) 95,1 95.0 19,0 13,6 11,1 Clit; PDF -!::!!::!!::!.f3 StlC.i: 0111 I oPSle P Id O I r Ic P 1 L ~w I 1 i lI 1 I I E o Irp I ~d o I o II a ~ Td O d r d a o ~y a O1oEeid o 10 L n ~O U .LI; bibL 4 4 b~ P ~I ' o) o a n u r IO o L~~~~O I I ~O a a P 4 III I 1 I II CY r 1 O I 1 A II P a b a II CY~~ ~I 1 I ~P 1 4 A I o I u I O YO O O 1. 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