Harrisons & Crosfield plc

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Harrisons & Crosfield plc

20 St. Dunstan’s Hill
London EC3R 8LQ
United Kingdom
(071) 626-4333
Fax: (071)782-0112

Public Company
Incorporated: 1908 as Harrisons & Crosfield Ltd.
Employees: 29,000
Sales: £1.86 billion (US$3.00 billion)
Stock Exchange: London

Since its beginnings in 1844, Harrisons & Crosfield (H&C) has grown from a small partnership based in Liverpool to a public limited company that derives its income from diverse operations in Europe, Asia, Australia, and North America. Its fortunes have been closely linked to Britain’s position in the international marketplace, and its history has been molded by a succession of strong personalities.

The partnership between Daniel Harrison, Smith Harrison, and Joseph Crosfield was formed on January 1, 1844. The Harrison brothers, the eldest and youngest sons in a family of 17 children, already were working as tea merchants in Liverpool. Joseph Crosfield was too young to have established himself in business, but at only 23 he was already recognized as an ambitious man and was reluctant to lose his independence by committing himself to a formal partnership.

Nevertheless, Joseph Crosfield’s parents persuaded their son to accept the favorable agreement offered by the Harrison brothers. In return for contributing one-quarter of the initial capital of £8,000, Joseph Crosfield was to receive three-tenths of the partnership’s profits. With Daniel Harrison as chairman, Smith Harrison as the firm’s representative at tea sales, and Joseph Crosfield in charge of the office, the partnership began its long history of trading.

For over 200 years the trade in tea had been controlled by the East India Company, which had obtained a monopoly when granted a royal charter in 1600. The Charter Act of 1813 canceled the East India Company’s monopoly and opened both India and China to wider enterprise. The removal of tariffs and shipping restrictions, increasing demand for tea in Britain, and the building of canals and roads in India further encouraged new trading ventures but, because of the prohibitive expense of setting up plantations, the new firms that entered the market had to begin as agency houses rather than as primary producers.

In its first year of trading H&C made a modest profit of £3,000 on a turnover mostly derived from tea but with a small element of coffee trading. It expanded rapidly and in 1854 moved from Liverpool to Great Tower Street in London, where it was based until 1989. The partners’ benevolent attitude toward their staff was shown in their provision of free accommodation for unmarried employees and of free lunches for all workers. The firm now concentrated solely on the tea trade and benefited from its proximity to the tea markets of Mincing Lane. In just ten years the small provincial firm had become an established national organization with international aspirations.

During the middle of the 19th century, Britain’s trade with its colonies exceeded that of France, Germany, Italy, and America put together. The year 1869 marked a crucial point in the history of the tea trade. The opening of the Suez Canal made transportation quicker and cheaper while the building of all-steel ships made wooden-composite ships such as the Cutty Sark —launched in 1869—something of an anachronism. Furthermore, a plague of coffee leaf disease devastated the 1869 coffee crop, forcing planters to focus their attention on producing tea, an obvious substitute that could be grown successfully on the old coffee plantations. H&C benefited from all of these changes and in 1882 its annual sales of tea exceeded 100,000 chests for the first time.

Daniel Harrison’s son Joseph was admitted to the partnership in 1855, where he was to remain until his death in 1915. His father retired in 1863 to be replaced by Smith Harrison, who remained chairman of the firm for the next 20 years. By 1883, however, all of the original partners were dead, and despite the continued involvement of members from both families, the future of the firm was beginning to look less secure than during the first decades of rapid growth. Change came in 1894 when two salaried partners joined, representing the new management that was to initiate another period of expansion.

Charles Heath Clark was an expert tea-blender who quickly grasped the commercial possibilities of expanding the range of products offered by the main office in London. H&C began to package tea for provincial merchants and it was a short step for the firm to produce its own brand for retail sale. The demand and supply of tea were both good and H&C benefited from a high margin on sales of Nectar, its proprietary brand. Heath Clark initially launched the brand in South Africa as he was unwilling to antagonize H&C’s customers in Britain by appearing to establish a competing brand. Indeed, when Nectar was launched in the United Kingdom in 1904, the cost of advertising the product was greater than any increase in income, and the loss of customer goodwill led H&C to sell the brand to Twinings.

The dynamic Arthur Lampard, a risk-taking entrepreneur, was to lead H&C into the 20th century. His strategy was to turn H&C into a firm with truly international interests, not only as tea agents but also as plantation owners. Lampard visited Russia in 1895 to set up a trade route from Ceylon to Moscow via Odessa in order to cut handling costs for H&C’s increasing number of Russian customers. In the same year Lampard visited Colombo, Ceylon, and set up Crosfield, Lampard & Co. to buy tea directly from plantation owners in Ceylon. Despite an unexpected fall in the market price of tea in 1904, Lampard continued his policy of overseas expansion, and by 1907 branch offices had been opened in New York, Montreal, and Kuala Lumpur.

H&C’s reliance on the tea market was soon to be reduced by its entry into the rubber market. In 1900 over two-thirds of the world’s annual supply of 40,000 tons of rubber was produced in Brazil, with the remainder coming from equatorial Africa. In 1903 Herbert Brett and W. S. Bennett, two names synonymous with the British rubber trade, enlisted Lampard’s help to issue a prospectus for the Pataling Rubber Estates Syndicate, a venture based on an old coffee plantation in Malaysia which had been converted to rubber growing.

H&C was appointed as agent and secretary to the company and Lampard persuaded his more cautious board members to make an investment of £1,000. Lampard was prepared to go without profit for the plantation’s first years, for he had forecast that a recent invention, the motor car, was likely to survive as rather more than a fashionable plaything for the rich. In 1905 Lampard and Brett, the latter by now an employee of H&C, purchased several small estates in Malaysia for £50,000 and amalgamated them into the Golden Hope Rubber Estate. Whereas the Pataling Syndicate had been under-subscribed, shares in Golden Hope were sold at a substantial premium. The following year Lampard visited the east coast of Sumatra and set up a plantation with a Swiss planter, Victor Ris, who shared Lampard’s vision of large plantations organized in the same efficient manner as Sumatra’s huge tobacco plantations.

These ventures in Malaysia and Sumatra carried more risk than those in Ceylon, which was perceived as a maturing economy run by professional and experienced planters. By supporting Malaysian and Sumatran plantation owners—for example, by underwriting new crops, providing fertilizers and harvesting equipment, and acting as sales agents—H&C ensured the success of the plantation and, as an obvious consequence, its investment. The company took responsibility for bookkeeping and the raising of finance and sent powerful visiting agents to inspect the plantations. In this way the fledgling plantations benefitted from high-quality advice on both the financial and agricultural aspects of the business.

Lampard had forecast astutely that his plantation rubber would be of a superior quality to that harvested in wild conditions in Brazil and Africa and his move into rubber growing was followed swiftly by Michelin, Dunlop, and Firestone. Britain’s previously unenthusiastic financial sector, which had curtailed investment overseas because of the Boer War of 1899 to 1902, was now impressed by the prominent Lampard who worked ceaselessly to establish the industry worldwide. When the price of rubber rose from around 4 shillings per pound in 1902 to 12 shillings in 1905, Lampard’s willingness to take risks was justified totally.

The next important step taken by the partners of H&C was to turn the firm into a limited-liability company. For several years it had been felt that a partnership, with its reliance on capital that could be withdrawn on the death or retirement of a partner, was too restrictive for an organization with ambitious expansion plans. Obtaining limited liability would make extensive capital expenditure possible—and most importantly for a business that was still run largely by the scions of two families—the share-holders of the company could vote against nepotistic elections to positions of responsibility.

A prospectus was issued by the brokers Foster and Braith-waite in May 1908 and the issue was fully subscribed. Existing partners exchanged their partnership capital for £150,000 of ordinary share capital and the first new directors took up 150,000 management shares of one shilling each. Friends, employees, and customers took up large blocks of shares and only £50,000 out of a total issued share capital of £307,500 was bought by private and institutional investors who had no direct link with the company. Years of steady profits and a stated aim of building up reserves rather than recklessly distributing profits ensured the success of the issue.

The worldwide increase in rubber planting was bound to lead to oversupply when crops were harvested four or five years after the first seeds were sown. The price dropped to between three or four shillings per pound in 1906, and reached a low of less than three shillings following the U.S. bank crisis of 1907. H&C weathered several difficult years until 1910, when the internal combustion engine became available, making the mass-production of cars economically viable. The demand for tires led to an annual demand for rubber of 100,000 tons in 1911, and H&C made excellent profits as rubber soared to 12 shillings per pound. The rubber boom forced H&C into building new accommodation to deal with increased paperwork flowing through the London office.

Charles Heath Clark became chairman of H&C in 1911, replacing James Crosfield, who had served the company for 46 years. He took over during a period of rapidly falling rubber prices and slow growth in tea sales. The seaman’s strike of 1911 led to riots at Liverpool Docks and a one-month embargo on unloading ships. The London Dock Dispute of the following year further damaged H&C when 100,000 men were called out over a very minor dispute. Nevertheless, an issue in 1912 of £150,000 worth of £1 ordinary shares at a premium of 10 shillings was oversubscribed.

The outbreak of World War I hit H&C badly. Britain diverted its resources to the manufacture of heavy engineering goods to support the war effort and communication with the plantations became increasingly difficult. Shipping restrictions and a low level of demand for tea caused a decline in international trade and many of the staff were called up to serve in the army. To compound the company’s misfortune Arthur Lampard died in 1916, and no adequate successor could be found to take over the leadership of the plantation companies until the war was over.

Henry Welch was an important addition to the board in 1917. A solicitor who had built up an extensive practice in the City of London, Welch had experience as a director of several public companies and was responsible for the founding of the National Institute of Industrial Psychology in 1921. His main task was the reorganization of the company’s balance sheet as soon as the war was over, when he restructured the share capital of the company to reflect the massive changes that H&C had experienced in the ten years since its incorporation.

Despite the war the directors of H&C did not ignore the possibility of new ventures abroad. Chinese green-leaf tea remained popular in Russia, America, and North Africa and H&C set up a joint venture with an established Chinese company to form Harrisons, King and Irwin in 1917. Based in Shanghai, with branch offices in Hankow and Foochow, the office was to be one of the casualties of the Japanese invasion during World War II.

Heath Clark, exhausted by his efforts in leading H&C through the war years, resigned from his position as chairman at the end of 1918. George Croll, who had worked for H&C in the Far East, was elected as his successor, but the young man whose energy had made a great impact on the company’s plantations was to be dogged continually by ill-health. Two successful issues of £150,000 in ordinary shares at a premium of 7 shillings 65 pence were made in January and July 1919, and the board was strengthened to include a complement of nine full-time members.

However, an issue of £400,000 ordinary shares made in December of the same year was undersubscribed, and for the first time in the company’s history a substantial portion of the issue had to be taken up by the underwriters. It was a time of national and international economic gloom and prices for tea and—in particular—rubber plummeted. Plantations were operating at a loss; and Heath Clark became a prime mover in the Rubber Growers’ Association, which voluntarily agreed to cut production in India, Ceylon, and the Dutch East Indies. Immediate profits were sacrificed, but future production in a more stable market was guaranteed by withdrawing 25% of possible output in 1921. Heath Clark formally reassumed his old position of chairman on the death of George Croll in 1922.

A significant new venture was begun in 1920 when H&C and the Chartered Company of British New Guinea acquired the assets and goodwill of the China Borneo Company. H&C was given exclusive rights to cut and develop timber and received Borneo government backing to develop the timber industry in Borneo. Production rose from 1.1 million cubic feet in 1919 to 6 million cubic feet in 1940. The timber-supplies division of H&C grew to include ventures in Australia and the United States and now has a particularly strong brand image in its Harcros chain of builders’ merchants which was started in 1935.

In 1921 H&C’s relatively minor interests in tobacco plantations were sold to Dutch companies. H&C felt that it lacked the experience necessary to turn the growing of tobacco, always a delicate crop to harvest, into a regular source of profits. Profits from tea enjoyed a renaissance in the late 1920s but the boom contained the seeds of its own destruction as increased plantings were to lead to an excess of supply in the early 1930s. However, expenditure on research and development gave a boost to the company when Linatex was invented by Bernard Wilkinson, an assistant on a Malaysian rubber plantation. The Linatex process, which treats rubber to allow its use as an abrasion-resistant lining, gives the twin advantages over mild steel of increased strength and lower cost and continues to be a valuable source of income for the firm.

H&C also diversified into growing coconut palms in the Philippines, Ceylon, and on the Malabar Coast. Once the kernel of the coconut is dried it turns into copra, which is then crushed to produce coconut oil. H&C initially sold this as a raw material for the production of soap and candles but the postwar shortage of butter led to demand for substitute products. Margarine, which is composed largely of coconut oil, became increasingly popular, and production of coprareached one million tons per annum during the 1930s. The depression suffered by the company’s rubber interests was partially offset by this boom, and to this day palm oil and copra are important commodities to H&C.

Eric Miller, a director of H&C since 1911, had been largely responsible for the Stevenson Report, which attempted to control the build-up of rubber stocks after the end of World War I. Miller had many close links with the heads of banks and rubber-growing companies and was a born diplomat. He convinced Winston Churchill that sales of British rubber at a good price to the United States would do much to pay off Britain’s war debt to that country. As with previous similar agreements, the plan was to restrict production in India, Ceylon, and the Dutch East Indies as a method of stabilizing world prices.

The Wall Street crash of 1929 precipitated the Depression. This was to be a severe test for Eric Miller, who was now chairman of H&C. The company’s profits for 1932 fell to £183,000, less than half the amount recorded in 1929. The world withdrew from international trade, putting up tariffs and imposing quotas on imports. Exchange rates fluctuated wildly and companies were reluctant to grant any form of credit as insolvencies became commonplace. H&C was forced again into a voluntary reduction of one of its commodities as the Tea Regulation Scheme limited exports from India, Ceylon, and the Dutch East Indies. Despite these measures, the company was forced to close several of its plantations.

The situation for rubber was even worse. The International Rubber Regulation Committee, to which Eric Miller was appointed by the government of British Malaya, signed an agreement in May 1934 which allocated each rubber trading company a strict production quota. With only a very few exceptions, new plantings of rubber were prohibited.

The outbreak of World War II was a further immense blow to the company as shipping lines closed and trade slumped. The entry of the Japanese into the war in October 1941 led to the invasion and subsequent loss of many of the Far Eastern plantations.

The end of the war saw more years of difficult trading for H&C. Demand for commodities was dampened by economic recession in the United Kingdom and transportation was difficult because of disruption to shipping lines. As in World War I, H&C lost many employees to the armed forces, and the Nazi bombardment of the City and the docks of east London further hampered international traders. Many plantations in the East had been destroyed by the invading Japanese, and when H&C attempted to reestablish operations abroad it was dismayed to see the effects of years of neglect.

The early 1950s saw a deterioration in the relationship between countries in the Far East and those countries which had controlled the majority of their trade. It was a time when war-damaged Britain was losing its old empire and the former colonies were no longer content to accept their traditional role of primary producer to foreign profit-takers. Governments imposed stringent restrictions on the transference of profits from their country to foreign agents and began to seek control over commodity prices. When H&C sought to renew its plantation leases in Indonesia it was forced to surrender one-third of its land to the Indonesian government. The outbreak of civil war in 1958 and increasing unrest in Malaysia and Sumatra left H&C unable to meet the commodity requirements of many of its customers.

H&C reacted to these problems by becoming increasingly involved in new technologies. A process to manufacture cyclized rubber was developed at the Rubber Research Institute of Malaysia and in the mid-1950s H&C began large-scale production. This rubber, which is used in printing inks and paints, was distributed by Durham Raw Materials Ltd., a joint-venture company half owned by H&C. The development of crumb rubber, and the introduction of standard grades for Malaysian rubber from 1965 onwards, did much to stabilize the rubber industry and, as a consequence, to make H&C’s profits from this sector more consistent.

H&C also decided to take over the full ownership of the British Borneo Timber Company as part of a strategy to increase the importance of this sector. Throughout the 1970s the company, through its Harcros subsidiary, began to buy up small timber yards throughout the United Kingdom. The acquisition of larger timber merchants, such as the Sabah Timber Company, gave H&C a powerful distribution network from which to pursue further expansion. It was a logical step to use these existing sites to establish a chain of builders’ merchants, still under the Harcros name, that supplied a full range of materials to the construction industry.

Eric Miller was knighted in 1958 after being replaced as chairman by Sir Leonard Paton in 1957. Although Paton only served as chairman for five years, he can be considered responsible for beginning the transformation of H&C, arguing long and hard to guarantee an adequate supply of timber from the Borneo plantations. Paton was replaced in 1962 by Finlay Gilchrist, who devised a complex system of defensive crossholdings between the H&C holding company, its subsidiaries, and its associates. By deliberately forging an intricate structure, Gilchrist was able to protect all of the group’s interests from predators looking to take over a small, but nonetheless valuable, subsidiary.

Tom Prentice became chairman in 1973 during a turbulent time for the company and needed to rely on all of the skills he had learned in the timber industry in the East. The nationalization of plantations in Sri Lanka—formerly Ceylon—was soon followed by changes in Malaysia which required foreign companies to relinquish 70% of their interests by 1990. The group, supported by Baring Brothers merchant bank, undertook a further complicated restructuring designed to unite the group’s interests in order to protect the value of share-holders’ investments. Throughout the 1970s this complicated structure withstood the efforts of corporate raiders—most noticeably the Rothschild Investment Trust—and Prentice was able to lead H&C away from its dependence on plantations to encompass fully the opportunities offered by chemicals, building supplies, and agriculture.

Recent years have shown the effects of this diversification away from a reliance on commodities that have proved too cyclical to guarantee consistent profits. In 1982 three large plantation groups—Golden Hope, Pataling, and London Asiatic—were sold to Malaysian concerns for £146 million. In 1984 H&C sold a large portion of its Malaysian investments to Permodalan, the state-controlled investment company. The remaining 30% was sold in 1989 for £145 million, but the plantations in Sumatra still remain in H&C’s ownership. H&C was floated on the London Stock Exchange in 1982 and since then has been active in reshaping its activities with a series of purchases and disposals.

In 1985 H&C made a significant acquisition with the purchase of Pauls Plc, a manufacturer of malt and animal feeds. Profits from this company form the backbone of H&C’s food and agriculture division, which was strengthened by the acquisition of Edward Baker, a specialist pet-food company, in 1989. George Paul, the chief executive officer of Pauls, was elected to the board of H&C and, along with Thomas Prentice, became joint chief executive officer of the company.

By 1986 H&C intensified its aim of moving away from tropical soft commodities. Palm oil prices had dropped by nearly 50% during the year, and profits from the rubber market were depressed by expenditure on research into disease control. George Paul identified the company’s problems as over-diversification, a reliance on primary agricultural products, and weak management in certain sectors. Paul instigated a rationalization plan and hinted that non-core companies would be sold off even if they were of historical importance to the company. As an example, Durham Chemicals Distributors Ltd. was sold in 1987, leaving H&C to concentrate on chemical manufacture rather than distribution.

Paul also took steps to improve H&C’s image in the City. Perceived as a steady but rather dull holding company, the board took on the former head of M and G Fund Management, David Hopkinson, to convince the City of the group’s intrinsic worth. After frequent allegations of insider dealing, fund managers began to see well-established conglomerates such as H&C as perfect vehicles for regular, long-term growth. Dependence on the plantations was reduced rapidly and by 1986 they accounted for less than one-quarter of the group’s profits. The City, which had always preferred to deal directly with the commodity market rather than through holding companies with interests in commodities, was becoming increasingly enamoured with H&C.

In November 1988 H&C announced the reorganization of its chemical interests under the new name of the Harcros Chemical Group. Its component parts include British Chrome and American Chrome, world leaders in manufacturing chromium chemicals, and Troyfel Ltd. and Hardman Inc. which specialize in iron oxide technology and adhesives. At the time of the reorganization George Paul stated that the company’s intention was to double the size of this group, through organic growth and selective acquisitions, within the next five years.

The Crossley chain of builders’ merchants was bought for £113 million in May 1990 and then amalgamated into Harcros, the flagship of the group’s timber and building supplies division. Under George Paul’s leadership the company is looking stronger than it has for many years. His success at reorganization has led to the company’s being regarded as an innovative major player in its main areas of interest. With a balanced and complementary set of core activities, strong leadership, and a prudently geared balance sheet, the future of Harrisons & Crosfield appears to be secure.