RJR Nabisco Holdings Corp.

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RJR Nabisco Holdings Corp.

1301 Avenue of the Americas
New York, New York 10019
U.S.A.
(212) 258–5600
Fax: (212) 969-9004

Public Company
Incorporated: 1879 as R.J. Reynolds Tobacco Company
Employees: 55,000
Sales: $13.88 billion
Stock Exchange: New York

RJR Nabisco Holdings Corp., despite a major diversification into food and other consumer products, still derives the majority of its sales and profits from its original business, tobacco. The company, one of the largest tobacco manufacturers in the United States, paid $4.9 billion for Nabisco Brands in 1985. It went private in 1988 in the heretofore largest leveraged buyout in the United States, by Kohlberg Kravis Roberts & Co. at a price of $24.88 billion. With a 1991 stock offering, the company became public once again.

The company’s founder, Richard Joshua Reynolds, son of prosperous tobacco manufacturer Hardin W. Reynolds of Patrick County, Virginia, sold his part interest in a tobacco business he had with his father and in 1874 moved 60 miles south to Winston, North Carolina, in the heart of the bright leaf, or flue-cured, tobacco area. Reynolds invested $7,500 in land and built and equipped a small factory there to manufacture flat plug chewing tobacco. During the first year of operation Reynolds produced 150,000 pounds of tobacco that sold primarily in the Carolinas and Virginia. In 1879 the R.J. Reynolds Tobacco Company was incorporated in North Carolina. Reynolds faced stiff competition from manufacturers in Winston and its neighboring city of Salem. Reynolds, along with his brother William Neal Reynolds, who joined the firm in 1884, controlled the company. Initially Reynolds sold his products to jobbers who distributed chewing tobacco for him under their own brand names. In 1885 he introduced his own brand, Schnapps, which became popular.

In the 1890s there were several significant changes in the Reynolds Tobacco Company. In 1890 the company issued its first stock, with R.J. Reynolds owning nearly 90% of the company. He was elected president, with his brother serving as vice president. In 1892 a sales department was created along with a systematic national advertising program.

Reynolds was one of the first companies to introduce saccharin as a sweetening agent in chewing tobacco. The company also adopted many labor-saving devices and had a 400% production increase between 1892 and 1898. In 1894 Reynolds began to experiment with smoking tobacco to compete with James Buchanan Duke’s profitable brands and also because of his desire to turn scrap tobacco into a paying product. In 1895 the company introduced its first smoking tobacco brand, Naturally Sweet Cut Plug. In 1898 the company’s assets were valued at more than $1 million.

Due to considerable expansion in the late 1890s, Reynolds was in need of large amounts of capital. Reluctantly, he turned to his rival Duke for help. In 1898 Duke’s American Tobacco Company established a subsidiary, Continental Tobacco Company, in an effort to monopolize the nation’s chewing tobacco business. In April 1899 Reynolds sold two-thirds of his stock to Continental, but retained his position as president of the R.J. Reynolds Tobacco Company. Reynolds tried to maintain his independence in Duke’s tobacco trust and reportedly told friends that “if Buck Duke tries to swallow me, he will get the bellyache of his life.” Duke let Reynolds have his independence as long as he acquired chewing tobacco companies in the Virginia and Carolina area for the trust. Reynolds gobbled up ten companies, but by 1905 he demonstrated his independence from the trust by producing five brands of smoking tobacco. In late 1907 he introduced Prince Albert smoking tobacco, a unique mixture of burley and flue-cured tobacco. Prince Albert achieved instant success with the slogan “it can’t bite your tongue.”

The tobacco trust, like most trusts during the first decade of the 20th century, proved to be unpopular. In 1911 a U.S. Circuit Court ordered the dissolution of the American Tobacco Company. American was forced to divest itself of all Reynolds stock. R.J. Reynolds and members of his family reacquired some of the company’s stock. In actuality the trust years were good to Reynolds. He expanded facilities, hired aggressive new managers, and increased production and sales almost five-fold during the trust period. By the time he reacquired control of the company in 1912, the R.J. Reynolds Tobacco Company was the smallest of the big four tobacco manufactures, but it was quick to expand.

Soon after achieving independence from the trust, Reynolds instituted a plan to get the company’s stock into the hands of friendly investors. A company bylaw encouraged Reynolds’s employees to buy company stock, and the board of directors approved lending of surplus funds and profits to employees for the purchase of “A,” or voting, stock. By 1924 the majority of the company’s voting stock was in the hands of people who worked for the company. Soon all tobacco businesses began to emulate the Reynolds stock purchase plan.

As early as 1912 R.J. Reynolds considered the production of cigarettes because of the great success that the Prince Albert brand had experienced. By July 1913 Reynolds had manufactured the company’s first cigarette. Reynolds decided to produce three different cigarette brands simultaneously to see which one had the greatest public demand. He personally selected the blend—Turkish tobacco, burley, flue-cured—and the name of the brand that proved most popular, Camel. The Camel brand became an instant success because of its blend, pricing, and advertising. Camels sold for 10C a pack, which undersold Liggett & Myers’s popular Fatima. Reynolds spent more than $2 million in 1915 in an aggressive national advertising campaign. In 1919 the famous slogan “I’d walk a mile for a Camel” appeared. Reynolds also instituted the idea of selling cigarettes by the carton. Profits soared from $2.75 million in 1912 to nearly $24 million in 1924, largely because of the phenomenal sale of Camels. By 1924 the R.J. Reynolds Tobacco Company’s net profits surpassed the nation’s largest manufacturer, the American Tobacco Company.

The company prospered under R.J. Reynolds’s paternalistic leadership and continued to do so for decades after his death in 1918. William Neal Reynolds assumed the presidency after his brother’s death and remained in that position until 1924 when he was elected chairman of the board of directors, with Bowman Gray Sr. appointed president. This ensured the perpetuation of R.J. Reynolds’s management philosophy and provided a continuity of leadership from people inside the company. Before R.J. Reynolds’s death he had begun the process that led to the company’s listing on the New York Stock Exchange—preferred stock in 1922 and common in 1927.

William Neal Reynolds retired as chairman in 1931 to be replaced by Bowman Gray, Sr. Under Gray’s direction the company in 1931 introduced moisture-proof cellophane as a wrapper to preserve freshness in cigarettes—an innovation that other companies soon adopted; began to manufacture its own tinfoil and paper from factories in North Carolina to reduce dependence on foreign supplies; and developed a new sales policy that concentrated on mass sales based on brand name recognition and customer loyalty. Reynolds during the 1930s invested heavily in a series of advertising campaigns that emphasized the pleasure derived from smoking. By 1938 the company produced 84 brands of chewing tobacco, 12 brands of smoking tobacco, and 1 primary brand of cigarette, Camel.

After Gray’s accidental death in 1935, S. Clay Williams directed the company until 1949. During the 1940s R.J. Reynolds faced shortages of materials and personnel because of World War II, and immediately after the war there were labor problems that included accusations of communist sympathies against certain union leaders. Labor relations improved by the early 1950s, however, as the company became agreeable to many union-advocated reforms, including the desegregation of its work force.

In 1948 a major antitrust suit against the tobacco industry went to trial. Several R.J. Reynolds officers were convicted and fined on charges of monopolistic practices, although they strongly asserted their innocence. The company itself also was convicted. The company’s misfortunes continued. In 1949 Reynolds introduced of a major new cigarette brand, Cavalier. The public did not accept the brand, which lost $30 million in five years.

The innovative John C. Whitaker assumed the presidency in 1949. During his tenure Reynolds rebounded and prospered. Technical advances increased the amount of tobacco suitable for cigarette manufacturing, which helped the company’s output double from 1944 to 1958. Reynolds instituted an active merchandising campaign by using display racks of cigarettes in supermarkets. In addition, company bylaws that had resulted in concentration of stock in the hands of employees were gradually eliminated, making the shares available more widely.

A major factor in Reynolds’s growth during the 1950s was the introduction of Winston and Salem cigarettes, from which the company received huge profits. Winston, the company’s first filter-tipped cigarette, appeared in March 1954 to compete directly with Brown & Williamson’s Viceroy. With catchy advertising phrases such as “Winston tastes good like a cigarette should” and “It’s what’s up front that counts,” the cigarette was quickly accepted, with 40 billion sold in 1954. By 1956 Reynolds began marketing Salem, the industry’s first king-size filter-tipped menthol cigarette. It too made tremendous profits. Nevertheless, Camel retained its leadership as the industry’s best-selling cigarette until the early 1960s. All cigarette manufacturing was centralized in 1961, when a massive modern factory opened in Winston-Salem.

During the 1950s the tobacco industry experienced for the first time critical attacks centering on the issue of smoking and health. In 1952 an article entitled “Cancer by the Carton” appeared in Reader’s Digest, and the next year the Sloan-Kettering Cancer Institute announced that its research showed a relationship between cancer and tobacco. The development of filter-tipped cigarettes was in part a response to health concerns. The board of directors also responded by appointing a diversification committee in 1957 to study possible investment in nontobacco areas and to consider expansion of tobacco operations overseas.

Alexander H. Galloway became president in 1960 and, along with Chairman Bowman Gray Jr., led the company into a period of unparalleled growth and diversification. The corporate diversification strategy initially focused on acquisitions in food-related industries. Reynolds bought Pacific Hawaiian Products in 1963 and spent $63 million for Chun King in 1966. All nontobacco companies were placed under the direction of a subsidiary—R.J. Reynolds Foods—that was created in 1966. By the late 1960s, diversification had expanded into nonfood areas. In 1969 the company bought Sea-Land Industries, a containerized shipping business, and adopted a new corporate name—R.J. Reynolds Industries. Aminoil, a domestic crude oil and natural gas exploration firm was purchased for $600 million in 1970. Businesses later added to the R.J. Reynolds Industries portfolio were Del Monte in 1979 and Heublein in 1983.

Tobacco, however, continued to be the mainstay of Reynolds. In 1968 R.J. Reynolds International was established to develop foreign tobacco markets. Two years later all tobacco operations became a subsidiary of R.J. Reynolds Industries. In the 1960s the smoking and health controversy had intensified. In 1964 the U.S. surgeon general issued a report linking smoking with lung cancer and heart disease. The U.S. Congress in 1965 passed the Cigarette Advertising and Labeling Act, which required tobacco companies to place health warnings on cigarette packs. Cigarette advertising was banned from radio and television after 1971. The federal cigarette tax was doubled in 1983.

In addition to governmental pressure, Reynolds faced intense competition, primarily from Philip Morris, as marketing strategy focused on luring customers away from competitors instead of attracting new smokers. By 1976 Philip Morris’s Marlboro surpassed Winston in domestic sales. In 1977 Reynolds introduced the Real brand cigarette to appeal to the back-to-nature movement, but its sales were disastrous, and by 1980 the so-called “Edsel of cigarettes” was discontinued. Reynolds actively engaged in the domestic tar wars of the late 1970s. Several promising new low-tar brands, such as Doral and Vantage, were marketed in an effort to improve tobacco’s health image. In 1983 Reynolds began manufacturing the novel 25-cigarette-per-pack Century. Most consumers, however, preferred the traditional 20-per-pack cigarettes. By 1983 Philip Morris had replaced Reynolds as the leader in domestic sales.

Reynolds’s strategy in the 1980s centered on developing new foreign markets for tobacco products to offset lower domestic demand and sales. In 1980 Reynolds was the first U.S. company to reach an agreement with the People’s Republic of China to manufacture and sell cigarettes there. In September 1980 the company announced an ambitious $2 billion, ten-year construction and plant modernization plan. By 1986 the ultramodern Tobaccoville factory just north of Winston-Salem began production.

Leadership at Reynolds underwent significant changes during the diversification period. For the first time in the company’s history several persons from outside the corporation were brought into major management positions. J. Paul Sticht, originally an executive from Federated Department Stores, who joined Reynolds in 1972 and his protege J. Tylee Wilson led Reynolds into a period of extensive growth. By 1980 Sticht and Wilson had developed a new direction for the company. Reynolds began to divest itself of noncomplementary companies and concentrate efforts on strengthening existing subsidiaries through acquisition of tobacco and food-related businesses. In 1984 Reynolds sold Aminoil to Phillips Petroleum for $1.7 billion. In one of the largest acquisitions ever, Reynolds purchased Nabisco Brands, Inc. in 1985 for $4.9 billion, which raised the corporation’s nontobacco earnings to 40% of its total. The next year the conglomerate officially changed its name to RJR Nabisco, Inc.

Tumultuous changes followed. F. Ross Johnson, who came over from Nabisco in 1985, was appointed president and chief operations officer. By 1986 he had forced Wilson out and assumed the position of chief executive officer. He continued Wilson’s policy of returning the company to its core business by selling off more than half the corporation’s subsidiaries. Johnson also moved corporate headquarters from Winston-Salem to Atlanta. In 1987 Reynolds began to test-market a smokeless cigarette, Premier, in response to mounting pressure to make smoking more acceptable. Premier was a colossal failure.

At a meeting of the board of directors on October 19, 1988, Johnson proposed a massive leveraged buyout. Johnson headed a group of company executives who wanted to buy Reynolds stock for $17 billion by borrowing against the corporation’s assets through bank loans and the issuance of high-yield junk bonds. Once the new company became private, unprofitable parts would be sold. Ultimately, the new and leaner company would issue stock and became public, with the Johnson group to realize huge profits. The directors, alienated by Johnson’s proposal, opened the door to other bidders. In November 1988 they accepted the $24.88 billion offered by Kohlberg Kravis Roberts & Co. (KKR), an investment firm specializing in leveraged buyouts, instead of a higher bid from the Johnson group. This was the biggest leveraged buyout in U.S. history. RJR Nabisco Holdings Corp. was set up at this time as the parent company of RJR Nabisco, Inc.

Johnson resigned in February 1989. A month later KKR selected Louis Gerstner Jr., former president of American Express, as chief executive of RJR Nabisco Holdings. He immediately began cutting costs to reduce the massive buyout debt. There was an 11.5% personnel cutback in tobacco operations; the practice of overstocking retailers with cigarettes was eliminated; corporate headquarters were moved to New York; and Del Monte and parts of Nabisco were divested in 1990. Attempts to target selected groups with new cigarette brands, such as Uptown for blacks and Dakota for blue-collar urban women, failed in 1990. RJR, however, did penetrate the Soviet market that year.

Under Gerstner, in the early 1990s, RJR Nabisco had focused on increasing the efficiency of its existing operations, rather than on making acquisitions. By 1991 it had reduced its debt to about $17 billion from $25 billion at the time of the buyout. Early in 1991 the company went public once again with a new issue of stock, although KKR continued to own a majority of shares.