Brown & Williamson Tobacco Corporation

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Brown & Williamson Tobacco Corporation

200 Brown & Williamson Tower
401 South Fourth Street
Louisville, Kentucky 40202
U.S.A.
Telephone: (502) 568-7000
Toll Free: (800) 341-5211
Fax: (502) 568-7107
Web site: http://www.bw.com

Wholly Owned Subsidiary of British American Tobacco plc Incorporated: 1906 as Brown & Williamson Tobacco Company
Employees: 6,600 Sales: $4.54 billion (1998)
NAIC: 312221 Cigarette Manufacturing; 312229 Other Tobacco Product Manufacturing; 31221 Tobacco Stemming and Redrying

Brown & Williamson Tobacco Corporation, a subsidiary of British American Tobacco plc, is the third largest manufacturer of cigarettes in the United States. The company possesses about 16 percent of the U.S. cigarette market and sells an assortment of cigarette brands, including Kool, GPC, Carlton, Lucky Strike, and Viceroy, as well as loose and specialty tobacco products, such as Kite and Sir Walter Raleigh Bloodhound. Brown & Williamson has overseas operations in Japan and South Korea. The company battled smoking-related lawsuits and negative publicity in the late 1990s.

Popularizing Tobacco in the Late 1800s and Early 1900s

Brown & Williamson (B&W) was founded in 1894 in the tobacco heartland of Winston-Salem, North Carolina. The business was started by George Brown and Robert Williamson, who formed a partnership before incorporating the company as Brown & Williamson Tobacco Company in 1906. In the beginning, B&W concentrated on specialty products including Bloodhound, Brown & Williamson’s Sun Cured, and Red Juice chewing tobaccos. After establishing those successful brands during the early 1900s, B&W assumed a leadership position in the pipe tobacco segment when it purchased the Sir Walter Raleigh brand. That brand had been marketed on a regional basis by the J.G. Flynt Tobacco Company since 1884. B&W purchased it in 1925 and began distributing it nationally. Sir Walter Raleigh eventually became one of B&W’s hallmark brands.

About the same time that it began marketing Sir Walter Raleigh pipe tobacco, B&W moved into the burgeoning cigarette market. Cigarettes had been a relatively small segment of the tobacco market prior to the turn of the century. They had first become popular with women during the 1800s as an alternative to cigars and plug, twist, and pipe tobacco. After cigarettes were issued to U.S. soldiers during World War I, though, demand began to escalate. B&W launched an aggressive drive into the cigarette industry following the war. Strong sales of cigarettes and other tobacco products created healthy profit growth at B&W, which caught the eye of outside investors. In 1927, London-based B.A.T. Industries PLC purchased B&W to operate as one of its subsidiaries. B.A.T. expanded B&W’s name to Brown and Williamson Tobacco Corporation in 1927, and in 1928 and 1929 added extensive manufacturing facilities in Louisville, Kentucky. At that time, B&W moved its headquarters from Winston-Salem to Louisville.

B&W made its mark on the cigarette industry during the 1930s with a number of brands and products. Importantly, B&W introduced Kool brand cigarettes, which were the first menthol cigarettes marketed nationally in the United States. B&W also began selling Viceroy cigarettes, which were eventually credited with popularizing the filter-tip. Both Viceroy and Kool became mainstay brands for B&W and helped to make it a growing force in U.S. tobacco. Besides those brands, B&W brought out Bugler and Kite cigarette tobacco in the mid-1930s. B&W’s Bugler Thrift Kit was the first roll-your-own kit sold in the country. B&W achieved another first with the introduction of the economy-priced pack of cigarettes. Dubbed Wings, the brand sold for just ten cents per pack (compared to 15 cents for most other brands at the time), making it a big hit during the Great Depression. Wings was also the first cigarette package to utilize an outer wrap of moisture-proof cellophane.

Cigarette Dominance in the Mid-1900s

Innovation and market growth buoyed B&W throughout the 1930s and 1940s. In fact, the legion of smokers in the United States spiraled upward after World War II and during the 1950s. At the same time, new influences began to shape the tobacco industry. Reports citing potential health risks associated with smoking cast a shadow on the industry. The results of the reported health risks were that tobacco taxes were increased, advertising channels for cigarette marketers were reduced, and smokers’preferences began to change. Among the most notable changes in preferences during the 1950s and 1960s was the switch to filtertipped cigarettes. B&W, a pioneer in the filter-tip segment, responded with filter-tip versions of most of its cigarettes. Furthermore, B&W introduced the first filter made of cellulose acetate, which became a feature of its Viceroy Kings brand.

Despite negative health reports, smoking increased throughout the 1950s and most of the 1960s. By the mid-1960s more than 40 percent of the entire U.S. population was smoking cigarettes regularly. B&W benefited not only from increased smoking, but also from market share gains. Its most successful brand was Kool, which had struck gold in certain market niches, becoming the “king” of the menthol market. Studies also indicated that Kool dominated the African American market, about 70 percent of which smoked menthol cigarettes. By the early 1970s, Kool was controlling a whopping ten percent of the entire U.S. cigarette market. Augmenting the highly successful Kool brand during the early 1970s was a lineup of new low-tar brands, including Kool Milds, Viceroy Extra Milds, and Raleigh Extra Milds. Those brand introductions helped B&W grab a 17 percent share of the entire U.S. cigarette market by the mid-1970s.

Although B&W enjoyed some significant successes during the late 1960s and early 1970s, it also began to face some serious internal and external challenges. Importantly, in the late 1960s the percentage of Americans who smoked began to decline. The descent was largely a corollary of a 1964 federal government mandate that required manufacturers to post health warnings on cigarette packages and advertisements. Subsequent government controls, most notably the 1971 ban on television advertising, exacerbated the dilemma and the share of smokers began to decline gradually; by the early 1990s, the percentage would fall to about 25 percent. Another blow came in 1983, when cigarette taxes vaulted 100 percent. That increase, moreover, was followed by a string of tax increases that devastated the domestic cigarette industry.

Although the share of the U.S. smoking population declined during the late 1960s and early 1970s, the actual number of cigarettes sold continued to grow at a heady clip. Total U.S. cigarette consumption grew from about 500 billion in 1965 to nearly 650 billion by 1980. Unfortunately, according to some critics, B&W failed to take full advantage of the increased industry volume. The problem was largely attributable to stalled growth of its core Kool brand. In 1975 B&W’s Kool began to lose market share to such rivals as Salem. Importantly, B&W had failed to translate its successful “Come to Kool” advertising campaign from television to print following the federal ban on cigarette television advertising. B&W tried during the early 1970s to attract younger smokers to Kool by associating the brand with jazz music, but kids were favoring rock ’n roll. Meanwhile, competing brands such as Newport employed more successful marketing tactics and managed to steal Kool market share.

Declining Domestic Demand and International Expansion in the Late 20th Century

Between 1975 and 1985, Kool’s share of the total cigarette market plunged from 10.3 percent to less than 7 percent. B&W tried to supplant lost sales with other products, but it achieved only moderate success. In 1981, for example, B&W introduced a new low-tar cigarette called Barclay, investing $100 million in the product launch to get Barclay off to a good start. Unfortunately, B&W had understated Barclay’s tar content, and the Federal Trade Commission forced the company to revise the ads. Barclay’s growth stagnated following the ad change. B&W’s successes during the early and mid-1980s included product introductions geared for the value segment of the cigarette market, which began surging following big tax increases in the early 1980s. But gains in that niche failed to generate growth. In fact, B&W’s total share of the U.S. cigarette market toppled from 17 percent in 1976 to about 12 percent ten years later.

For the first time since the turn of the century, cigarette purchases began declining in the early 1980s. Indeed, sales volume in the United States slipped steadily during the 1980s from nearly 650 billion cigarettes in 1980 to about 500 billion in 1990. That trend, combined with lagging market share gains at B&W, mandated a new strategic direction for the company. To that end, B&W promoted Thomas E. Sandefur, Jr., to president of the company in 1984. The 45-year-old Sandefur was a tobacco industry veteran, having worked for RJ. Reynolds Tobacco Co. from 1963 to 1982. Rejoined B&W with the understanding that he would eventually become head of the company. From 1982 to 1984 Sandefur worked to grow B&W’s international operations as senior vice-president of international marketing. Sandefur worked under CEO Raymond J. Pritchard (a native of Wales and a former B.A.T. Industries executive) but was a major influence on the company’s strategic direction.

Company Perspectives:

To be the world’s number one tobacco group and to perform within the top tier of global companies in terms of sustainable, profitable growth over the long term.

Sandefur was known as capable, demanding, and shrewd. He grew up in Perry, Georgia, and earned a business degree at Georgia Southern College. Recruited by RJ. Reynolds as a salesman, he moved quickly up the corporate ladder on the marketing side of the business. Among his successes at RJ. Reynolds was a line of hugely successful low-tar brands including NOW and Camel Lights. Impressed by his success at Reynolds, B&W lured Sandefur away in 1982 and began grooming him for the top spot. Sandefur was also known as a tobacco hard-liner who vehemently opposed government regulation of his trade. Yet he tried to keep a very low public profile, despite occasional appearances (in caricature) in the Doonesbury comic strip. Even in his work for civic organizations—he was active in a number of civic organizations, particularly the Boy Scouts—Sandefur tried to minimize his public exposure.

When Sandefur took the helm in 1984 he initiated his drive to turn the company around. Specifically, he launched an aggressive bid to increase B&W’s shipments overseas, where cigarette sales were growing, and to boost B&W’s efforts in the surging U.S. low-priced cigarette segment. Toward the latter goal, B&W began marketing as value-oriented brands Viceroy, GPC Approved (a plain label brand), Raleigh Extra, and Rich-land, among others. On the international front, B&W moved aggressively into cigarette markets in Asia, Africa, South America, the Middle East, Europe, Japan, and Puerto Rico. Meanwhile, Sandefur and other B&W executives continued to battle the army of federal bureaucrats assaulting the tobacco industry. In April 1994, Sandefur and other tobacco industry executives were brought in front of a Senate subcommittee, interrogated, and lambasted for their role in promoting smoking. Sandefur and other executives reportedly denied that cigarettes were addictive at the hearing.

Despite government entanglement, Sandefur managed to boost B&W’s performance during the late 1980s and early 1990s. International sales, for example, bolted 150 percent between 1986 and 1991 and B&W’s control of the U.S. cigarette export business surged to 20 percent. By 1991, in fact, B&W’s international business represented a full 45 percent of the company’s total sales volume. B&W also assumed a leading role in the value-priced cigarette segment, with 21.2 percent of the total market in 1991. Meanwhile, B&W continued to innovate by introducing the first super-slim cigarette—Capri—in 1988. Throughout the late 1980s and early 1990s, moreover, B&W restructured its operations and management as part of an overall effort to cut costs and streamline operations. The net result was that B&W managed to hoist revenues to about $3.5 billion by the early 1990s and to increase profit margins.

When CEO Pritchard retired in 1993, Sandefur assumed full leadership of the company. He continued to restructure, expand internationally, and chase the value market. In 1994, in a major industry merger, B.A.T. (B&W’s parent company) acquired The American Tobacco Company and integrated its operations into those of B&W. American Tobacco, which was once the unmitigated behemoth of the U.S. tobacco industry, controlled about seven percent of the U.S. cigarette market. Thus, the acquisition gave B&W a total of more than 18 percent of the U.S. market in 1995, making it the third largest cigarette manufacturer and marketer in the United States. American Tobacco owned well-known brands including Lucky Strike, Pall Mall, Misty, Montclair, Tareyton, and Private Stock. Those bolstered B&W’s successful brands, which in 1995 included Kool, GPC, Capri, and Viceroy. In addition to cigarettes, B&W marketed loose cigarette tobacco, pipe tobacco, plug chewing tobacco, and snuff.

Challenges Amid Increasing Litigation in the Late 1990s

The increasing anti-smoking climate of the 1990s affected B&W in a number of ways. Lawsuits grew in number in the late 1990s, and in 1996 a Florida jury awarded $750,000 to a former smoker who had filed a suit against B&W. B&W appealed the case, but it was one of many the company faced. Other cases included lawsuits filed by state governments to recover the costs of treating poor people with smoking-related health problems. In 1997 B&W joined with three other major tobacco companies to try and reach a national tobacco agreement. Negotiating with a group of state attorneys general and lawyers of plaintiffs, the purpose was to settle legal claims. After several failed attempts, the group finally reached an agreement, called the Master Settlement Agreement, with 46 states, the District of Columbia, and five U.S. territories and commonwealths in November 1998. Under terms of the settlement, the major tobacco companies agreed to pay more than $200 billion over a 25-year period to finance healthcare costs. The tobacco companies also became limited in the scope of advertising—billboard advertising of tobacco products was prohibited, the use of cartoon characters in marketing was not allowed, restrictions were placed on the distribution of free tobacco samples, and more. Also as part of the settlement, the involved states agreed to dismiss existing claims against the tobacco companies and not to refile the lawsuits.

Though B&W dedicated many resources to handling legal claims and negative publicity, the company continued to strengthen tobacco operations to secure its market leadership position. In 1997 the company reported revenues of $4.38 billion. U.S. sales accounted for the largest segment, reaching $3.11 billion. B&W’s share of the U.S. market was a solid 16.1 percent, and international operations grew, particularly in Japan, where Kent cigarettes became the leading import brand in 1997. The following year, B&W faced a price increase of ¥20 per pack in the Japanese market. Still, market share for brands marketed in Japan—Kent, Lucky Strike, Kool—all increased in 1998. The brands were available in 84 percent of onsite vending machines in Japan, which numbered more than 420,000. About 67 percent of B&W’s sales in Japan were attributed to vending sales.

Key Dates:

1894:: Brown & Williamson is founded in Winston-Salem, North Carolina.
1906:: Company incorporates as Brown & Williamson Tobacco Company.
1927:: B.A.T. Industries PLC purchases Brown & Williamson.
1929:: Brown & Williamson moves its headquarters to Louisville, Kentucky.
1933:: Company introduces Kool brand of cigarettes.
1984:: Thomas E. Sandefur, Jr., joins Brown & Williamson as president.
1994:: Brown & Williamson’s parent company merges with The American Tobacco Company.
1999:: British American Tobacco, Brown & Williamson’s parent company, merges with Rothmans International BV.

In 1997 and 1998, B&W faced increasing competition and heavy discounting, which cut into the company’s market share. To combat the stiff competition, B&W implemented repositioning and modernization strategies for the Kool and GPC brands, which were suffering from tired brand images. The efforts included new packaging, marketing campaigns, and brand extensions. B&W introduced Kool Natural, an all-natural menthol product, and three additional Kool products in order to attract Kool’s target audience of adult smokers under the age of 30. In addition to new packaging and the “B Kool” advertising campaign, B&W sponsored a Kool Champ Car in the FedEx Championship Series, a race car series. According to B&W, Kool’s market share in the U.S. increased from 3.39 percent to 3.43 percent in 1998.

B&W hoped to enhance the image of traditionally low-priced GPC. The company felt the mainstreaming of GPC would help boost sales, which were suffering as a result of heavy discounting by other tobacco companies. Lowering the price of GPC, B&W believed, would prove unprofitable, and thus the company resisted lowering the price, but the brand’s market share began to decline as consumers opted for discounted brands perceived to be higher quality. B&W fought back by initiating a marketing campaign designed to position GPC as a high-quality brand that also happened to be a good value. GPC also became the sponsor of the George Strait Country Music Festival in 1998.

Another brand B&W sought to reposition in the late 1990s was Carlton, a brand B&W gained from the 1994 merger with The American Tobacco Company. Carlton was an ultra low-tar brand, and among brands with up to one milligram of tar, Carlton commanded a 78 percent market share. B&W created new packaging and advertising for Carlton, boldly pushing its ultra low-tar feature to attract the target age group of smokers between the ages of 35 and 50. Other brands promoted by B&W included Lucky Strike, which was promoted in metropolitan markets, the value-priced Misty, and Capri. Despite such efforts, B&W’s share of the overall U.S. market dropped to 15 percent in 1998 from 16.1 percent in 1997.

At the beginning of 1999 British American Tobacco, B&W’s parent and the second largest cigarette manufacturer in the world, and Rothmans International BV, the fourth-largest cigarette maker in the world, merged. Rothmans, based in the Netherlands, was a unit of the Swiss Compagnie Financiere Richemont AG. Among Rothmans’cigarette brands were such premium labels as Dunhill, Cartier, and Rothmans. The deal was valued at $8.67 billion and created a global cigarette giant second only to Philip Morris. In October B&W consolidated its specialty tobacco units with those of Rothmans, which were located in Georgia. The combined division would supply 42 percent of the U.S. pipe tobacco market and about 62 percent of the roll-your-own cigarette segment. B&W planned to close its specialty tobacco plant in Winston-Salem, North Carolina, in 2000 or 2001 as a result of the consolidation.

In November 1999 B&W faced some excitement when The Insider, a major motion picture, was released nationwide. The film, though fiction, was based upon the true story of a former B&W executive, Jeffrey Wigand, one of the most well-known whistle-blowers of the tobacco industry. Wigand claimed that B&W withheld information from the public about the hazards of smoking. B&W sued Wigand in 1995 for violating confidentiality agreements but agreed to dismiss the lawsuit in 1997. The film chronicled the life of a tobacco industry whistle-blower, who was threatened by his former employer after publicizing his experiences.

The 1990s was a challenging era for B&W, one that forced the century-old company to reevaluate its traditional practices and adjust to new beliefs. The company withstood countless lawsuits and suffered through extremely negative publicity. For 1999, earnings in the United States were predicted to be six percent lower than 1998 revenues, and it was estimated that B&W’s U.S. market share dropped another 1.5 percentage points during 1999. As B&W looked toward the next century, however, the company hoped to build its market share, both in the United States and abroad. To accomplish this, B&W planned to move away from value-priced cigarette brands and promote premium-priced brands more heavily.