W COP=S MAT ZZ "Luz St C I Z T
Tobacco Strata" Review Tom
A meeting of the Tobacco Strategy Review Toss was hold an 2nd December -991.
Present : Sir Patrick Sheehy, Mr. X.F. 3roughton. Mr. B.D. Brmley,
@Lr. X.J. Pritchard, v1w. D. G.,. aerter , Mr. A. Monteiro de Caszro,
mr. J-L. Mercier. Dr. R. Sal-.sr (Secretary).
Minutes of rho Previous Neetiuc/matters Arisin
1. The minutes of the mating held on 6th September were agreed.
2. I.T. in Selling Seminar : Mr. Prit:hard reported that a seminar or. the
application of I.T. in selling had been arranged for 13th-14ch Febr-2ary in
Louisville.
marketing Issues
3. November Narketing Seminar : Reviewing the results of the mar"
seminar hold in Orlando, Lzmediats reactions were that:-
(a) The formula proposed by Mr. Dunt should be applied to calcul&:a
values for key brands across the Group. The implications of :he
values obtained should then be considered in rho reviews of p'-=s for
1993-1997.
(b) The strategic analysis of competitors should be improved, will
particular emphasis an the collection and use of information = cost
struct%zrss and other factors which ware likely to be significant in
determining the ability and mocivation of competitors either to react
to scr-acegias proposed by BAT companies or to initiate strategies of
their own.
(c) Achieving and maintaining superior product quality was a vica:
pre-condition for building a successful marketing strategy. :his
should continue to be Siven the highest priority.
4. The Chairsan asked for the results of the seminar to be reviewed again at
the next meeting, to provide a wre measured view both of the was:
significant issues to have merged and of other action which might
usefully be taken to pursue those.
5. Marketing Information System : Mr. Bromley presented a paper outlizing
the proposals for implementing the improvements to the -mrkatizg
information system which had been agreed. It was noted that every effort
mould be made to accelerate the implementation of the now system, aiming
to have this complete by 4md-1992.
6. It was suggested that it might be helpful to use consultants to assist in
the choice and implementation of appropriate oaf tmore and system. 1-ft.
3roolay will consult with other ambers and will than select an outside
firm with relevant expertise to provide assistance an this projecc.
7. Com"titor Analysis - Philip XMis : It was noted that Philip Marts
were still in the process of re-organization following the appointment of
at. Miles 4s Chairman. There appeared to be a continuing trend towards
simplification and a* at-. 04=t ion but no disinuation in the pressure to
expand volumes and shares of the Marlboro brand worldwide. A ka? strategy rNIJ
appeared to be to plan an a regional basis and to concentrate manufacture 4=
in plancs with a sinimn capacity of 5 billion cigarettes p.a. -
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S. It was noted that Philip Morris was now profitable in Brazil and had
increased their equity share of their Argentinian company. However, their
ability to exploit the potential of the Indoctosian market was constrained
by not owning Cho Marlboro crademark in this market.
9. Market share and profits were still progressive in G4ruany but there had
boon chang*s in the top management which appeared to have weakened the
company. It was noted that there bad been some reduction in the proportion
of the total promotional spend allocated to Europe with more emphasis now
being given to the For Ease.
10. It was agreed chat it would be worthwhile to carry out in-depth consumer
analysis, co assess the strengths and weaknesses of Marlboro in Europe and
to decormine whether the Marlboro cowboy was beginning co lose his appeal.
Mr. tartar will design an appropriate questionnaire and will recommend to
the Chairman how this enquiry might be progressed.
11. &.J. Reynolds : It was suggested that althoulh the recent financial
restructuring moves by R.J. Reynolds had been well received by the market,
the business itself was still under considerable pressure with declining
market shares in the US, Canada and a number of other key markets. Despite
further cost-cutting. profitability was thought to be declining, especially
within the international business.
12. It appeared the: a resi,Donso to the market share problem had been to
increase loading. it was suggested that Mr. Brought= should consider
bringing this to the attention of the appropriate market analysts.
13. There was also an indication that &JR night be prepared to sell the rights
to market their brands in certain overseas markets. Mr. Pritchmd was
asked to prepare an update for the next meeting of his previous report,
assessing the price at which the purchase of defined elements of In's
overseas business might be worthwhile.
14. lotbams : It was noted that in Germany, Brinkmauns was losing share,
with Golden American failing to sustain its early propose in the Nov
Lands. Rothmans vat also losing share in Canada where the response bad
been to move to unusual products such as 'sticks'.
15. It was noted that the recent improvements in Profitability shown in
J Rothmans' accounts had been favourably received by the market. However. it
was believed that this was largely due to plant rationalisatian in Europe
and that the =denying trends were less favourablo. The Chairman asked
the Secretary to prepare an Malys is of Rothmans' profits and to assess
whether the analysts' favourable view of Rothmans' results is justified.
16. American Brands : It was noted that American Brands continued to show
good results based on the success achieved with Montclair and Misty Slims
in the USA and with Gallshers in the UX. However, Silk Cut had failed to
make an impact an an incernational brand and Gallaher International new
reports in to the UK.
L7. Larillard/Ligg*tts : There was mm evidence that Lo ril lard night be
contemplating a re--entry to the international Uarkat. possibly with
Heritage. Liggett have said that they will re-Launch Ive. Chosterfiold and
UX as fuLl-Tevenus brands but both this and early negotiations an a joint
venture in the USSI are thought to be largely aimed at boosting the value
of the tobacco business ahead of a possible sale.
C)
la. M - it was noted that volumes of JTI exports appear to be increasing,
especUlly at the low-price and of the market. The Secretary was asked to co
check wich 4r. ChaLfen whether there are pounds for initiating
anti-dimaing ac:ian in respect of this trade.
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3
Uy Markets
19. Zastern Europe : *r. Herter reported that sales to the region remained
progressive despite the war situation in Tagoslavis and the econ '
problems im Bulgaria which had restricted *&I** to these countries.
20. It was noted that sales to Russia were continuing but only where
payment was assured. This contrasted with some competitors who had
supplied on extended credic and were now said to be worried by their
exposure. 'Ias C-hair-san suggested that it might be worthwhile to reassure
bankers that SAT was not "posed in this way.
21. Conditions in Romania wart chaotic. I Kent was still
progressive and progress was also being mad* with Kim and Kim Menthol.
Sales co Czechoslovakia wave increasing slowly and the contacts
established in the country should lead to an acceleration in this trend.
22. Land showed an encouraging increase including sales by Sonza CrUZ
and exports from Cyprus offsetting a reduction in direct sales from Brown
Williansan. S&TCT sales were largely 13, of which some were being
re-exported to Pa
G rmany.
23. Imagery was noted that the investment in Pecs was in that f iiI,
stages of =agod-ativas with the SPA. It was hoped to compLeta the
purchase iz, tobviary at which time BkTC*. would take over the
responsibility for managing the investment.
24. & review meeting has been arranged for 10th-11th December at which the
objectives and strategies far further expanding the Group's interests in
Us tar-a Europe and the former USSR will be agreed country by country. It
was noted .!Let it is intended chat the evaluation of Lovescment
opportuni:-.es, the reparation of proposals and the subsequent
negotiations will be brought under direct B.A.T Industries' control.
25. China : It yam noted chat the now Organisation for supplying the China
market would boczm operative from the Ist January.
26. South Coa* : It was noted that the current view is that the Mercosul
will be established during the 1990s, although not necessarily by the 1995
target date. It was agreed that Mr. Castro would take over the
responsibility fzr the study group set up to consider the implications for
B.A.T Industries and to recommend appropriate action. Be was asked to
report propose to the Team on a regular basis.
27. CeImbia : Mz. Pritchard reported that sales to Colombia were
progressive. The next meeting of the group set up to co-ordinate SAT
Salts co the Meet is due to be bald early in December. The results of
this meeti-mg will. be reported at the next meeting.
28. Thailand : ?L-. ftit:hard reported that raquiremuts for retailers to
obtain new '.icaucas in order to sell imported brands had restricted sales,
which were below plan. However, peessave would be maintained and progress
was already being =&de wir-IL SZ355, Lucky Strike and Want.
29. A visit to Torkew by the Ch&L--tan and Hr. Pritchard had established
that market domizacian by Takal and Philip Morris, combined with laws
which rendered izves=enc -inactractive, severely restricted the
opportunities for przfitabLe participation in the market. The Turitish
Governmenc -jould be .*Id that, under those circumstances, UT would not
wish to pursue i:s interest in the market.
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30. It was noted that srudies wart still underway in Burms. and a paper was
being prepared. racmumdLal tha strategy for Vistaiss. BATCo. and
Brown & W were continuing to wminr the situation in Mexico.
US International Brands
31. Overall Performance : Mr. Pritchard reported that although sales to
date of US International Brands were still 4.5Z below budget. this was
largely accounted for by a shortfall in Duty Tres exparts from 11ong Kong
and by the temporar- closure of sow Middle East markets. The forecast
for the full year was that sales would be only 0.5% below budget.
32. Zent volumes were improving aftar a poor fizst half which was largely
attributable to the duty increase in Rang Kong, interruptions in
re-exports from Kong Kong and Singapore, and the effects of the Gulf War.
Initial results from the test aark4t in Gormany had been disappointing but
a full evaluation of the test was not due until the second quarter of
1992. The Ch&i--- "hasimed the need to review Kant spoasorship an a
worldwide basis and c* ensure that this had the necessary high profile.
33. Lucky Strike continued to make good progress but although volume was
11'. higher that 1990 this was still nearly 10% below budget. It was noted
that Lucky Strike was thought to be emparablo to Marlboro in making
quality while the Lights version was believed to be superior to the
corresponding Marlboro product. Nowevar, it was also noted that Marlboro
Meiiium continued to build share in the USA and might be introduced
internationally. providing a new element of competition.
34. It was agreed that expanding sales of Luckv Strike should continua to be a
priority objective, especially in Brazil and Europe where there should be
continuing mphasLs an positioning the brand at the higher and of the
market through quality, pricing and strong advertising. The launch of
Lights versions should also be pursued, aiming to keep ahead of Marlboro.
33. Taliman . Mr. Broughton reported that a meting had been arranged for
15th January to discuss further the possibilities for obtaining the rights
to the Luckv Strike trademark in markets where those wore still owned by
American Brands.
36. lawcLay : Mr. Pritchard reported that Barclay was Progressive most
markets and relatively stable in Norway and the Saudi Group but had
declined in Turkey due to changes in the pricing scracturs. in the market.
37. It was noted that the new delivery Classifications would be introduced in
Belgium. The Ultra version will be introduced first an agreed but the
subsequent launch will follow shortly afterwards rather than after the 3
months' interval which had been planned initially.
38. Mm Chairman accepted the need to push ahead with the launch progravown in
Belgian but mphasLsad the need to monitor the results vary closely. It
was also important that in ocher markets, the agreed strategy should be
adhered to, regarding the interval between the launch of the Ultra version
and the completion of the r"asitioning.
39. Other International Brands : ft. Pritchard reported continuing good
progress with Riltan, Capri./Finesse and Viceroy, which was
useful as a lower price international brand. There was also evidence of a
growth in demand for %nthol bran", especially in the far East and Middle
East, which could support the further expansion of Zeal. Mr. Pritchard
will report vore fully on these brands at the next mating. co
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UK International Brands
40. Overall Performance : Mr. Broalty reported that sales of UK
International Brands to the end of September were 7.4% ahead of che
corresponding period in 1990 but were scill 2. LZ below budget. Sales of
SES55 had been particularly good, offsetting a reduction in Benson &
ledges. Players Cold Leaf and M. were bach about 8% ahead of last year
buc J?S salts were nearly 12'. below budget.
41. Season & ledges : It was noted that although there were continuing
problems vich Benson & ledges in Australia and Xalaysia, domestic ssLes
in $ouch Africa were progressive with the mild variants doing
parc.cularly wall. Export sales were nearly LOX below budget with sales
to French West Africa being adversely affac:od by political disturbances
and T. 1. t. licenced manufacture while European Duty Free sales were
a!!ac-.ed by the reduction in tourism.
42. The Chairman stressed the need for tighter management of the brand,
overcoming the long-standing quality problems (e.g. spatting in the
Middle East) and ensuring that the bland was right before the Golden
I
.4ild/Lights launch scheduled for 1sc Quar-.ar 1992 in Greece and Trance
was activated.
43. it was also important that SAM. should be clear what they wished Benson
& ledges to stand for in the miedium co long term and should ensure that
the blond, pack design, advartisims and sponsorship was consistent with
the image which they wished to project, worldwide.
44. SZ555 : It was noted that S1555 'mad very strong latent goodwill in a
number of markets. This should be nurtured, building out from positions
of strength and pricing the band correctly in each market. The Chair:saa
also suggested that the brand concept might usefully be redefined,
especially in respect of the characteristics of the bland.
45. Players Cold Leaf : The Chairman suggested that in defining the
scrately for POL, more emphasis should be given to product qualL:7 as a
key factor to be controlled from the contra. Re was also disappointed
with the relatively low rate of growth projected for the five years to
1994 and asked that this should be reviewed.
46. 'Jobs Player Special : It was agreed that the perennial of JPS should
be reviewed, with a view to deciding by the end of 1992, whether it
should continue to be promoted as an international brand.
47. Qmality : Mr. Broulay presented a paper outlining specific targets
and proposed programmes of action to affect an overall improvement in the
quality of UK International brands. It was agreed that he would report
back in December 1992, on the pr:grtss achieved in meting the targets
which had been sec.
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Research and Develoveent,
48. PolLcy/orgasisation : Mr. Bromley :aported. an discussions hold with the
other members of the toast, the object of which was co consider whether
there should be a change of emphasis in the Group's Research and
Development with a greater proportion of the e!!ort being applied to
consumer-led research aimed at dev loping b*c:ar cigsrectes.
49. In the discussions, it had been agreed that although ambers believed that
it was advantageous to continue to centralism some work on ragulacary
issues within the Fundamental Research Centre MC), chis work should be
sustancially reduced from 37 man years in 1991 :o 10 mm years in 1992.
covering work an Biossmays. Additives/Materials, Inter a at ion& I Standards
and Sucking Issues only.
50. At the sea* time, the range of work in the resoactive development
laboratories should be increased; by 37 man years in UlCo. (RTC). by L4
man years in Brown Williamson; and by 7 am wears in U=F.
51. Mr. Mercier noted that Inasca supported the Strengthening of product
development but also amphasised the importance of continuing fundamental
research an a Gcoup basis.
52. It was agreed that the change in emphasis which had been proposed should be
implemented. Mr. Braulay was asked to prepare detailed plans and proposals
'for the scaling-down of F&C and for the transfers or reductions in staff
which would be involved. Be was also asked to consider further, whether
the post of Research Co-ordinacar should be retained. Mr. BraaL*y will
report progress to the next meeting.
53. T-1 Tobacco : It was noted that there had been encouraging progress in
the USA., Vr and Germany where cigarettes incorporating 1-1 tobacco had
performed wall in tests. Imover. Souza Crux had not found any advantage
from incorporating T-1 while Imasco found that T-1 incorporation appeared
to increase the harshness of Virginia-type cigarettes. Further progress
will be reported ac the next meeting.
54. Reconstituted Stan : The Chairman stressed that in considering the
incorporation of reconstituted stem a" in deciding how this component
should be produced, the overriding consideration should be to enhance the
quality of the final product, sot to cut costs. It was also suggested that
La addition co testing the potential for incorporation in Benson & Redges,
BATCO. should also consider the potential for incorporation in SZ555. It
was noted that RATCT and Souza Crux will prepare papers for the next
meeting. assessing the potential for producing and using reconstituted stem
and considering the capical expenditure replications.
Leaf
55. L"f Procassiag Seminar : Mr. Pritchard reported that a Leaf processing
eminar had been arranged for 9th-12th December. Twenty-six delegates from
:round the Group were expected to attend. The seminar had a full programme
which included a visit to Wilson.
36. Leaf Purchasing : It was noted Chat there had been a number of cases
where the prices agreed with farmers for the purchase of Leaf had beem too
high. with consequent adverse effects an the Group's profits. asp*cLally
where the L4&f was subsequently sold to distributors. Mr. Broughton was
asked to formulate with Mr. Pilbom, guidelines an crop costing which could co
be applied round the Group to overcma Chi$ Pr2blem. It was also noted
that B.A.T Industries' LogaL De tmr =en was reviewing the contracts for
Leaf supply to distributors with a view -.* rec*mmnding whether or not
these should be changed (e.g. to elizinact exclusivity clauses).
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57. Leaf Zzpacts : It was noced chat although there had boon some
improvement in the supply of Burley. the current crop in the USA was not
expected to be sufficient to restore durations. The siruat.-ou for
flue-cured cobacco was easier and fire-cured was a weak market with a high
degree of Volacility.
58. Although there had been some easing of the leaf supply situation, it was
believed that there were scill good opportunities to increase Leaf exports
from Croup companies, provided that costs war@ contained.
59. It was noted that BATCo. were planning to incresso Leaf exports from
",000 tons to 91,000 tons over a five--*ear period, representing an
increase in sales from $128 million to 5400 zillion. On current
estimates. this could represent an increase in profits from $40 million in
L991 to around $120 million in 1995. Thu fixed asset invesment required
to achieve this would be of the order of $90 million and additional
working capital of $60-$75 million would also be required. A paper
outlining the overall plan, which included a proposal to upgrade the
central managamont of Loaf was due to be presented to the CPC in the near
110@ future.
50. Sousa Crux also planned co increase Leaf exports, following the
acquisition of Dobra, which allow" a more integrated approach to Leaf
smagment.
lamlatm,y Issues
61. 11avirsaimental Policy : Mr. Broughton reported that following the B.A.T
Industries Board review of the Group's environmental policy statement,
this had beta uo4ified. A copy of the modified statement had beta
circulated with the papers for the meati2s. It was noted that the person
at B.A.T Induscries responsible for the co-ordination of environmental
policy within the Group was now Mr. D.D. Read.
62. InvircommataL Tobacco Smoke : Racent developments in the USA. Can"&
and the Ut had strengthened Cha view that XTS was currently a political
rather than a scientific issue. This led to the conclusion that although
data should continue to be collected, it was unlikely at present that
scientific arguments would be effective in altering the trend towards
increasing restrictions au the right to smoke inside public buildings.
63. Advertising Restrictions : It was noted that there was also strong
pressure for increased restrictions on advertising. although here there
were some signs in Canada and Furope of zero resistance from bodies
concerned with personal liberty, allied to media whom* commercial
intervats are threatened by reductions in the total volume of advertising.
It was noted that the Social Affairs Unit. a right-wing research and
educational trust in the UK, had recently produced two pamphlets on the
adverset affect of advertising bans. The Secretary was asked to circulace
copies of these to Team members.
64. lire-We Cigarettes : Mr. Pritchard reported that although tho US
Ufa Cigarette Act of L990 calls for a final report from the Technical
Advisory group by August L993. recommending a suitable form of
fire-Waponsity testing, the evidance to data was that this was unlikely
to be achievable. Brown 4 Williamson will continue to =mitor
developments and to report an any that are significant.
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Management Devel t
65. Review Report : ft. Broughton presented a report outlining proposals
far a complete overhaul of the Group's management training and development
processes. This separated management training into 4 Levels with the CPC
responsible for t*p management training. the TSIT responsible for the
training and development of senior management; Operating Group companies
responsible for business training and development; and Functions
responsible for functional training and development. 'Et was noted that
Mr. David Stevens would take over the responsibility for the further
development of theme proposals, replacing Mr. McBeath.
66. Discussion centred an the proposals for functional training and it was
agreed that:-
(a) Functional courses should be aimed at everyone who joins a function
ac a managerial level.
(b) In the first instance, courses should be designed for Marketing,
Production, Finance and Leaf only.
(a) As previously agreed, VZC? should be responsible for the courses in
Marketing. vich Brown & Williamson responsible for Production, BATCo.
for Finance, and Souza Crux for Leaf.
(d) The respective mesib*rs of the TSIM would be responsible for
drawing-up proposals for appropriate courses, having agreed the form
of these with the other Operating Companies.
67. It was agreed that management training should be reviewed again, at the
next mating when Mr. Broughton would report progress on the development
of the new arrangements.
68. Tater-Compamy Transfers : Mr. Brumley reported that 24 transfers had
been arranged and that there were a further 39 vacancies under
consideration. It was suggested that it might now be possible t* extend
Cho system to cover more junior posts end further consideration would be
Siven to this. There would also be a review of the terms and conditions
offered to people who were transferred to ensure that theta were
appropriate.
Future Nestinn
69. Dates arranged for the mastings in 1992 are Wednesday, 26th February;
Friday. 29tb May; Thursday, 3rd September and Wednesday. 2nd December.
its/DJS
20th December 1991
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