Tobacco Strateffy Review Team
A meeting of the Tobacco Strategy Review Team was hold on 18th Kay 1990.
Present: Mr. P. Sheehy, Mr. M.P. Broughton. Mr. B.D. Bramley.
Mr. R.J. Pritchard, Mr. U. Herter, Mr. L.J. Sabot& a Silva, Mr.
J-L- Mercier, Dr. R. Salter (Secretary)
Mr. I.J. Itambaut and Xr. T. Wylie also attended the meeting
Mr. A.L. Heard attended for items 47-50.
1.
The minutes of the meeting held on 9th February were agreed.
2.
Intax-company, transfers - Mr. Bromley reported that I transfers
had been Implemented since the last meeting and that the respective
Personnel managers were due to meet In June to discuss further
additions to the list of transfers to be arranged. The Chairman
stressed the need for continuing involvement by the Chief Executives,
who should give clear instructions to their Personnel managers an
specific transfers to be arranged.
3.
Central Additives Register : Mr. Bramley reported that the
preparation of the register was scheduled for completion In August.
It was noted that because of the possible need for disclosure of both
the chemical and usual names of additives to cigarettes (as was
already the case in Canada), further consideration would need to be
given to the Identification of substitutes for those additives which,
although they were net harmful, had usual names which eight give rise
to adverse reactions when disclosed in this way.
4.
Regulatory lose" : Mr. Pritchard repocted that although $**star
Kennedy's Smokers Education Bill was still In committee, there was a
strong posslblllcy that it would reach the floor of the House In
September. toy provisions In the Sill vote stricter soforcament of
penalties for sales to undor-sSe makers and the setting up of a
Tobacco Contra with funding of $185 all1lov and a radt to oppose
smoking. A now regulation requiring additives to be listed on the
carton would also be introduced. However, It me# not thought that the
latch Bill. on further advertising restrictions. would be introduced
during the next session. It was noted that in Canada the Introduction
of a mazimus $25,000 fine for sales to under-ago makers could bave an
adverse affect on distribution as same retailers sigh; be unwilling to
cock a product whose "Is could expose them to the risk of Incurring
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It was noted that the European Council of Ministers had agreed to a
car limit of 13 ag for 1993, reducing to 12 mg In I"S. Nowevar, the
directive as advertising bad not yet been agreed.
G.
Smoking %some : The Chairman draw attention to the recent article
Is the UK $uaday Tines critieloinS the apparent strength of SAT
cigarettes sold In certain countries In Africa. No stressed the
importance of being able to defend the sale of cigarettes with bigber
tar levels than were usual in Europe and North America, putting these
Into context wltb the requirements and prattle& In the relevant
markets. In addition, the continuing long tam at& would be to work
towards progressively lower deliveries In all markets.
7. It me noted that the article bad not Sivan visa to any correspondence
from sbarsholdars. However, BAT had taken tba Initiative In providing
major shareholders with a statement of the Group's position on this
Isson and there were also plans to Inform Interested MP*, Including NJ
the Minister for Overseas Development. Putting the company's cast an C)
this Issue would remain a high priority.
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S. 7-1 Tobacco : Mr. Pritchard reported that grown 6 Williamson had
2 million pounds of 7-1 tobacco and would be consumer tasting
cigarettes with a low tar:nicotine ratio during the Autumn.
Mr. Rartar reported that SATCT had samples of 7-1 which were being
used In product development. Souza Cruz were testing ventilated and
non-wentLlat*4 products including Y-1 and would repeat these tests
after ageing 1-1 for twelve sonths.
9. It was noted that there had been limited progress in 3ATCo. an product
developments based on Y-1 and the Chairman asked that this should be
given a higher priority, concentrating on the potential for developing
low-tar cigarettes rather than the difficulties of Incorporating Y-L
In wdstivS blends.
10. Mr. Mercier believed that it was important to develop cigarettes with
a lower tar:nicotine ratio but Imperial were pursuing other lines of
development and were not using T-1 tobacco.
11. It was noted that brown 6 Williamson had Y-1 "le-storile send
available and, since this did not regenerate. its disseaLuatIon would
not represent a security risk. It was therefore available for test in
growing areas worldwide.
12. It was also noted that the use of T-1 would be an additional subject
to be covered at the blenders' seminar. arSaolood by Mr. Pritchard, in
Jana, the prima object of which would be to provide information on
techniques for the Introduction of ammonia.
13. Ammonia Treatment : Mr. Mercier reported that ammonia treatment
had been tried on Imperial's ozistisS blends but had not been found to
give a noticeable Improvement. Nowevar, Mr. Sorter reported that
RATCY believed that their somonin-trested Lucky Strike was superior to
Marlboro and following success with 0 Lights, modification of 35
Itself was now being tried.
14. Siusa Cruz were using somoule treatment on Lucky Strike and export
versions of 15ollywood but were worried about cost on a-ther brands.
It was suggested that smoking quaUty relative to competitive products
allbt need to ovar-rLds cost considerations. at least In the initial
stages of development.
15. It was noted that 3ATCo. bad Initiated a program= to &seems the
effect of ammonia treatment on Virginia brands. This assessment
would continue to be given a high priority. starting with the
evaluation of the effect of ammonia treatment on exIstiva blends.
16. Reconstituted Tobacco i Reviewing progress on DECK and the *beat
process, it was noted that the sheet protons for reconstituting
tobacco appeared to provide a more certain route to producing an
ammosia treated cigarette of acceptable quality even at relatively
high levels of Inclusion. It was also noted that Brown 4 Williamson
were in the process of acquiring Lancaster Plant which would give
access to the relevant production technologies, allowing further
development of the process.
17. The Ckairsaa asked that ZATCo. and Souza Cruz should give further
consideration to the possible advantages of adopting the sheet
Process.
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18. lArr-Sidestramm : It was noted that recent reports had shown that
the reduction of visible and non-visibla sidestream was still a key
factor In making smoking more socially acceptable and product
developments with this six would continue to be given a high
priority.
19. Brown 6 Williamson, SATCY, NATCo. and Souza Cruz each had development
work In hand but so entirely satisfactory solution bad yet been found.
The subject would be kept on the agenda and progress would be reviewed
at the next meeting.
20. An an extension to the current work, the Chairman suggested that Sousa
Cruz abouLd consider whether PLraby should be Involved in developing
lowsLdestream papers, possibly starting by producing an existing
paper of this type under licence.
21. Acetate Taw : It was noted that currant developments in the Par
East and in Eastern Europa (where filter length could increase) are
likely to lead to a further tightening of the supply position for
acetate tow, where the currant capacity of 460 tons is only slightly
above the annual demand of 430 tons. including 65 tons for ZAT.
Although analysis by %town & Williamson suggest$ that capacity will
expand to smat the expected Increase In demand, it was agreed that it
would be prudent to ensure that all necessary steps have been taken to
avoid the possibility of a future supply problem. -
22. It was agreed that Mr. Bromley, Mr. Pritchard, Mr. Rombaut and
Mr. sorter would organist a meeting to discuss what action should be
taken to ensure continuity of supply, considering possibilities for
Increased stock levels, tighter contractual arrangements with
suppliers, atc.
23. leaf Duration P*UcL*s i Mr. Irmaley Introduced a note formalLsLaS
the policies for deciding an optimum leaf durations In each a - y.
it was agreed that this would be a useful Iran* of reference to
deciding specific objectives for the levels of leaf stocks In
Individual compaoLos.
24. Leaf Grade RatlowaLientims : Mr. Pritchard introduced a paper
-suggesting a classification of the leaf State used In the Group into
8 Brad* types for nue Cored, 7 for Burley and 4 for oriental grades.
This would be used as the basis for a programme In R&TC*. to monitor
stock levels In all countries. The object of this programme would be
to ease the movements of stocks free two company to another In cases
of under or ovor-supply.
25. It we agreed that the programme should be reviewed after its first
year of operation. It ms also suggested that In Implementing the
programme, It should be stressed that the prime object of Its
introduction we to Improve Interchangtobilfty. This would tborefore
be the main criterion In deciding whether or not It had been useful.
26. Frogess In Eastern Rux"a : Mr. Barter reported progress in
developing sales to Eastern Europe. Those had doubled In the first
four months of 1990, totalling 1,171 sUllos compared with 574 million
In the equivalent period 1* 1989.
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27.
Zast Germany was the priority market for development and although
this was currently being treated so an export market, it would
effectively become part of the domestic market for DATCY after 2od
July - As a result, the German market would expand from 118 billion to
around 150 billion.
28.
it was noted that the existing manufacturing facilities in East
Germany ware very inefficient and the quality of their products (which
bad tar levels of about 22mg), was poor. Since NATCY had capacity to
service the expanded market. it had been decided not to bid against
Philip Morris, &eatsms and Reynolds for the three existing cigarette
factories in Tact Germany.
29.
Although there was still some doubt about a possible tax robot& for
locally produced cigarettes. RATCY were confident of their ability to
compete In the market. It was also hoped that there would be a
continuing benefit to profits from the Berlin preference, which is
expected to be retained for the next throe years.
30.
The Group was well placed in Bulgaria which was a major exporter
and where BATCF had liceagod production. The licence business In
N-S-ry was also growing and a joint venture was a possibility.
The Chairman would be visiting both those countries during the
cancer.
31.
Although there was 11cenced production in Yugoslavia, there bad
boon quality problem and withdrawal of the licence is under
consideration.
32.
In the ran* of RommulA and Poland, the mala emphasis bad been
on exports, smd In the latter coca these would Include lower priced
experts from Braxil.
33.
There bad been limited progress In Caw3hoolovskia but It was bop*4
to ship wanst clgar*ttoo to the VXXR In Joss. It we noted chat
the Chairman we making a separate approsel to the USSR and this
should be borne In mind by Mr. 11arter In his own programme.
34.
Txaz : It we noted that RATCr bad agreed to sell 4 billion
cigarettes to Iran over 2 years. They were arranging for theme to be
transported throutb the UIXR In order to provide the Russians with
additional hard currency. It we suggested that it might be helpful
to have similar arrangements for transporting exports to Afghanistan.
35. Souss Crux Zaperts i It was also suggested that Iran could be an
export opportunity for Son" Crum colas BATCY contacts and possibly
arranglaS a tounter-trado deal gar all. 'The Chairman stressed the
Importance of having a high class. experienced manager heading up the
overall awrt effort from Brazil.
36. Turkey : Mr. Bramley reported that the recently announced Philip
Morris agreement to invest I* Turkey appeared to refer to a relatively
omit scale investment of $100 million. It did not appear to be
attractive financially and Mr. Pritchard suggested that the win
objective might be to obtain a parallel agreement for increasing
exports. BATCo. still believed that until the tax aLtattLon bad been
resolved. joist "stores. whether by Philip Norris or any other
overseas investor, pould remain unattractive. r*j
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37, While the accuracy of this assessment was accepted, It was suggested
that RATC*- should consider again whether to avoid allowing Philip
4orris a competitive advantage on imports, the Group should announce
its continuing Intention to invest, subject to the resolution of the
outstanding tax problem. Also, whether this should be backed by an
appropriate lattat of Intent. Mr. Bramiley was asked to study this and
to make recommendations to the CPC.
38. Thailand : Mr. Pritchard reported that GATT was likely to rule
agalusc the current That regulations which effectively denied access
co the market. Brown & Williamson were assuming that they would be
able to enter the market by the end of the year and negotiations were
proceeding on this basis. It was noted that despite a ban on
advertising. the Thais, were still heavy smokers. Bowever. tar levels
were relatively low and it would be important fat Group products to be
at of-41-r or lower levels.
39. Us International Iran" -. Mr. Pritchard presented a review of the
current situation on US International brands and stressed the progress
and plans for Test, Lucky Strike avA Barclay in Zurope. Re believed
that tent Lights should be a lead brand and IATCF were looking to
launch this In 1991. Lucky Strike we a particularly good bland and
was considered to be comparable to Marlboro. Lucky Strike Lights was
even better and was considered to be superior to all competitive
brands. The Barclay controversy was now resolved and this broad was
also progressive.
40. It was noted that there appeared to be a good opportunity for Lucky
Strike to gain share " sookars switched from Marlboro into a Lights
cigarette which no" not necessarily be KarLboro Lights. To moist in
this, SAICT required a Lights version of Lucky Strike with tar levels
below 10 as.
41. The Chairman stressed the Ispartance of planning for continuing volume
gains of at least 152 p-a- in all brands and bad been particularly
disappointed by the budgetted gains shown for licences In 1990. Re
also asked for a specific programose to be prepared for the relaunch of
Kent In lurops showing 3 years from L"l and amlysiag the costs and
benefits of the programme proposed. 7bersafter. there should be a
three year tolling programme obaidug the level of canaLtsent. and
expected ben*fito free the continuing expansion of both VAnt &ad Lucky
Strike.
42. UK zatermtIonal Brands g Mr. Stanley presented a review of the
cuc.en situation and plane for Samoa A ladles and State Isprese 555.
The Chairman stressed the Importance of capitalLelva on the mutating
goodwill of Renson & ladles and of giving this a higher priority than
the promotion of peripheral brands such an Pierre Salsain. Se also
suggested that greater pressure should be applied to expanding "Los
of Scats Zxprom 353.
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43. Competitor AnalysisfUl : Mr. Pritchard presented a verbal report
00 the current situation of I.J. Reynolds In which it vas noted
.h.t".-
(a) The asset "Its announced at the tint of the buy-out appeared to
be an track.
(b) Their current operating results are sufficient to met all
Immediate liabilities. following cuts which have Increased
income by around $550 million per year.
(c) They are believed to have assumed sales of 646 billion
cigarettes in the period L990-1994 but Brown & Willimson
estimate that this forecast could be missed by 150 - 200 billion
giving a shortfall of around $4.5 - $6 billion in contribution
(at $30/mille).
(d) If this shortfall occurred, LM will be faced with a mounting
cash crisis as their refinancing commitments became
progressively more onerous. They way then used to consider
further aseet sales.
(a) The only obvious major soo-tobacco &moot which eight be
available for sale would be PlanteralLifesavers and the maximum
this might be axp*ited to raise is $1.5 to $2 billion.
(f) Although some further cuts night be made within the tobacco
business, theme were not szpoctod to be sufficient to close the
Sap and as a result same tobacco assets could become available
for purchase.
44. It was noted that although 131 bad wltbdrawn from Brazil and war*
closing their factory in Brussels, they are still competing vigorously
in &U markets, at least an a abort care beels.
45. It me confirmed that the min potential Interest for UT was still in
the luropmes and Upert businesses sad wbil* it use not considered
worthwhila to carry out further detailed work at present, the
situation would continue to be closely monitored pending a further
review in October/Movember.
46. it was noted that Kr. Pritchard was Intending to write up his review
of the current situation and this would be circulated to the members
of the tomm.
47. Imses"A and Technology t Mr. Board presented a paper outlining
the current priorities within the Croup UD prograssoo Be thought
that the mount of effort an BAD was adequate and that the output free
the function me comparable or bettor then that of the major
competItors. CousiderImS possible future developments to R&D be
suggested that there. could be a case for Iscra"Ing the effort applied
to$-
(a) Leaf genetic development
(b) Snake tosto &sd flavour NJ
(c) Process development C)
(d) P&AASIUS (@or* there to virtually so work at present). cc
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48. While not disagreeing with the Importance of theme topics, It was
suggested that careful consideration should be &Ivan to whether they
night be covered more effectively In other ways, either through
contract research (e.g. an Sanatic developments) or In co-operation
with machinery manufacturers (packaging).
49. Talloving further discussion, It was agreed that it would be helpful
for the Strategy &*view Team to provide sore Sutdanc* to Mr. Reacd and
to the Research Conference on the topics which the Chief Executives
considered to writ the highest priority in R&D. It we noted that
this would be discussed again at the next seating.
SO. As a preliminary to this, it was agreed that Mr. Mercier would
organise a meeting of the Group's marketing directors to obtain their
view on the priorities for product development. The results of this
seating would then be presented an one of the Inputs to the
discussion.
51. Vanagamaut Training s Following a discussion on management
training, it was *Stood that Mr. Broughton would prepare a paper for
the next meting, suggesting bow the current arrangements might be
modified and Improved.
52. During the discussion It was noted that--
(a) The requirement woo for training In techniques specifically
applicable to the tobacco industry.
(b) There should therefore be more an key industry topics such as
excise. In addition, ==gets should also be helped to
withstand attacks an the industry and should receive general
orientation as well as technical training.
Cc) Thar* should be a clearer distinction between MTC and HOP.
(4) beyond VDP, there Is a need for sore functional courses (e.g. In
purchasing. marketing, etc.).
(a) The and result should be a training programme made up of
building blacks throughout a manager's career. The first
element of tbLs ought to be a recoguisod induction proS
offering graduates and other management level entrants a good
practical SroundIuS in basic commercial knowledge so that
everyone we able to understand fundamastial business procedures.
such as the construction of a profit a" lose account. Apart
from the value In Increasing management competence. this was
also necessary to compete with other cos"n1ee, whose tr&Wug
program=* were one of the factors attracting the better
recruiu.
53. gumerly Progress 1"orte : the reports for the quarter to 31st
March were reviewed and Mr. Broughton summarised the overall
contribution to the Group from the tobacco businesses.
34. Date for San NwitIng i The next meting of the came will be ba"
in Windsor Boos* at 10.00 a.m. on Monday, l?tb September. Following
this a further meting has bees arranged for TcHay. 30th November.
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Ist June 1990 OD
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