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BAT Industries document for WHO 5 March 1999
NOTE YOL TOBACCO STRATEGT REVT~ TEAM ~EETINC - 26TH FZBXUAET 1992
|
Budapest Conference : 20th-22nd MaT I992
A conference will be held in the Rilton Rotel, Budapest, from 20th to 22nd Fay.
The purpose of this conference will be to provide informat£on to B.A.T
Industrles' main contacts in Eastern Europe, including the CIS, on:-
(a) Key characteristics of the tobacco industry worldwide.
(b) BAT's position within the industry.
(c) The Group's strengths.
(d) BAT's intentions for developing within the region.
The conference will also be attended by the top management of the Group's tobacco
businesses and by the team charged w~th developing the Group's interests in the
region.
Attached to this note are:-
1. A draft progr-mme.
2. A list of people nominated to attend.
Dr. Salter will be responsible for co-ordinating the programme for the conference
itself and M~ss Black will be responsible for the administrative arrangements and
for the social programme.
It is proposed that the people nominating the delegates should be responslble for
invltlng them to the conference, enclosing a formal invitation from the Chairman
and a questionnaire regarding the administrative arrangements.
B.A.T Industries will be respousible for all arrangements from the start to the
end of the conference but it will be the responsibility of the sponsoring company
to resolve any problems regarding travel to Budapest, expenses, etc.
Speakers for the first morning of the conference will be briefed by Dr. Salter
who will also discuss with Mr. Bramley, Mr. Herter and Mr. Prltchard the form and
content of the other presentations.
Issues to be discussed at the Tobacco Strategy Review Te-~ ~eeting on 26th
February will be:-
(a) The programme and llst of attendees.
(b) The arrangements for inviting delegates.
(c) " Any other issues arising from the conference.
~ote
: It is also intended to hold a meeting befoze the conference, starting
at 9.00 a.m. on Wednesday, 20th May for the people who attended the
meeting at Sandwich on 10th-llth December, when the action programme
for developing new markets was discussed. This meeting viii be the
subject of a separate note.
RS/DJS
"'/
19th February 1992
BAT INDUSTRIES CONFIDENTIAL- CATEGORY !" MINNESOTA TOBACCO LITIGATION
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BAT Industries document for WHO 5 March 1999
Budapest Conference : 2Och-22nd Ha7 1992
. 7='' , ! •
Draft Programme
WednesdaT~ 20th MF.a~,
6.00 p.m. : Reception & Dinner: Welcome by the Chairman
ThursdaT~ 2IsC w-7
9.00 - 9.30 a.m. : The Chairman
9.30- 10.30 a.m. : ~£r. B.D. Brr, ley
10.30 - 11.00 a.m. : Coffee
11.00 - 11.45 a.m. :
11.45 - 12.30 p.m. :
12.30 - 2.30 p.m. : Lunch
2.30 - 2.A5 p.m. : The Chairman
2.45 - 3.30 p.m. : See Note
3.30 - 4.00 p.m. : Tea
&.O0 - ~.20 p.m. :
4.20 - 4.40 p.m. :
4.40 - 5.00 p.m. :
Eveulng
Friday, 22nd Hay
: Introduction co the Conference
: The Tobacco Industry and BAT's
posiClon ~rithlu iC
P~. H. Taylor : Lea£
~c. G. Oltermann : Production
: ~ntzoducclon to Pecs
: Peca/Hungarian Tobacco KarkeC
l'~. U.G.V. Hercer : KepreaenCatlon elsewhere iu
Eastern Europe
See Note : Poland
See NoCe : Czechoslovakia
Boat Tr~p and Dinner
9.00 - 9.20 a.m. : See Hoce
9.20 - 9.40 a.m. : See HoCe
9.~0 - 10.00 a.m. : See Note
10.00 - 10.30 a.m. : Coffee
10.30 - 11.00 a.m.
11.00 - 11.20 a.m.
11.20 - 11.40 a.m.
11.40 - 12.00 p.m.
: Yugoslavia
: Romauia
: Bulgaria
: Hr. U.C.V. Hercer : RepreseuCeClon in CIS
: See Note : Russia
: See Note : Ukraine
: Chef,manta Sumlnary
12.00 : Lunch and disperse
" Not___~e : IC is expected thaC the presentations from the individual
countries will cover the else of the market, the structure of the
industry, BAT's current pos~t~ou relatlve to competitors and an
assessment o£ the =aln opportunlC~es £or expansion, tsk~n~ into
account the poliCical/economlc slCuaClon and the prospects for
prlvaclsaCion. Hr. HerCer will arrange and brief the speakers
except Chose for ~omania (Mr. PrlCchard) and Hungary (Kr. Bramley).
RSIDJS
19th February 1992
BAT INDUSTRIES CONFIDENTIAL- CATEGORY ]" MINNESOTA TOBACCO
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BAT Industries document for WHO 5 March 1999
BUDAFKST }gCET~lqG : 20TB-221~ HAT 1992
Delegate List
B.A.T Yndustr~es
Sir Patrick Sheehy
Kr. D.S. Watterton
Mr. A. van Waay
Hr. D.J. Pearce
Miss A. Johnson
Hr. H. Taylor
Hr. M. Booker
Dipl. Ing. Viktor Hatovcik (Acting Director, CSTP, Bratlslavla)
~van Dichev (President, Bulgartabac, Sofia, BulEarla)
~ATCo.
TOTAL
Mr. B.D. Bramley
Mr. J. Rembiszewski
Mr. N.G. Brookes
Pets
Mr. M. Jennings (General Manager)
Mr. A. Page (Leaf Director)
Mr. S. Jurgens (Marketing Director)
Mr. S. Irim~ (Director)
MS. E. Simon (Financial Planning)
Mr. A. Molnar (Production Director)
Hr. J. Cabot (Logistics)
Hr. L. Komalski (Public A/falrs)
Brmm & Williamson
TOTAL
TOTAL
Hr. R.J. Prltchard
Hr. T.E. Whitehair
Mr. I.D. Macdonald
Mr. C. DeWolf
Mr. E. LybaerC
Ms. B. Moore
Mr. Nichlta (General Manager, Romanian Tobacco Monopoly)
Hr. NeaEomiranu (Rowauian Tobacco Monopoly)
Hr. Kostic (General Manaser,~DDTN Tobacco Company, ~i|. Yugoslavia)
Hr. Taslc (Import/Export Manager, DXN Tobacco Company, His, Yugoslavia)
Mr. Nordhammer (Scanex) ~ --
Mr. S. Hashnlkov (Rnula)
General Brakov (General Manager, Zil ~ndustrial Complex~ Moscow, Russia)
TOTAL 13
SUB-TOTAL 33
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BAT Industries document for WHO 5 March 1999
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NUM3EE CARRIED FOERAED
33
BATCF"
Mr. U.G.V. Herter
Mr. H-A° TomaC (Board member, YoreiEn Business)
Mr. D. Schnadter (Regional Director, Eastern Europe)
Hr. C. BehninE (Area Manaser Poland, CSFR, Romania)
Mr. R. Duda (Leader of the Polish Team)
Mr. F. Rulle (Area Manager, BuIEaria)
Mr. W. Kruse (Adviser, YuEoslavla)
Dr. G. Oltermaun (Read of Technical Team, Eastern Europe)
Hr. J. Siwek (Head of BATCF office in Warsaw, Poland)
Mr. M. M/chnfewlcz (Director~ MT Augustow)
Mr. M° Pokorny (Prasue)
Hr. A. Aleksov (Sofia)
Mr. J. Sh~nhuber (Head of Hoscow Office)
Mrs. H. Dreskovlc (BATCF ageuC/HagiscraC, Ljubljana, Tusoslavla)
Hr. S. Nelkovskl (Director Make~d_Qnla Tabak, Skopje, Yugoslavia)
Mr. S.Y. Palitjtschuk--(Read of Ukrtabakp~om, Ukraine)
Mr. V. Rodichev (Adviser, Moscow)
Hr. O.L. Yason (Director of Pryluki Tobacco Factory, Ukraine)
Mr. Y.A. Hikolenko (Head of Cherkassy Tobacco Factory, Ukraine)
Mr. R. CouCscharenko (Director HonasCirrieka Factory, Ukraine)
TOTAL 20
Sonza Cruz
Mr. A. Monceiro de Castro
Mr. F. de Andrade
Mr. K. ~arrloc
TOTAL 3
Adminiscraclon/Incerpreters
Dr. R. Salter
Hies W. Black
Mr. E. Javor (Pets, Sales P.anager)
Joseph (Pecs, Public Affairs)
TOTAL 4
CXAND TOTAL 60
RSIDJS
19Oh February 1992
BAT INDUSTRIES CONFIDENTIAL- CATEGORY !: MINNESOTA TOBACCO LITIGATION
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BAT Industries document for WHO 5 March 1999
SOUZA CRUZ GROUP
EASTERN EUROPE
FEBRUARY 26~h, 1992
RESTRICTED
3°a
ZHTRODUCTIOH
During the second half 1991 Souza Cruz carried out an evaluation
of the key Eastern European markets and, at the same time,
continued to seek alternatives to consolidate . its brands in
Poland.
This evaluation has shown that Hollywood has considerable
potential in the growing value for money segment of these markets.
In order to meet the challen~e of marketing its key brands in this
area, Souza Cruz has dec~ded to revise its Export Department's,,
structure by forming an Eastern European Group,based in Hamburg,
U
consisting of an Area Manager and two Terrltory Managers.
Tn addition, another Group, based in Cyprus, will be responsible
for the operations in Rumania and Bulgaria, consisting of an Area [(
'Manager and a Territory Manager.
Through the overseas structure, Souza.Cruz will improve it's end
market information and data base, and, also ClOSely mon.lnor all
relevant changes in the area which could affect its buslness.
Souza Cruz will continue to maintain close cooperation with BAT CF.
POLAND
D~WDmm
IHTRODUCTZOH
nmmm
With a total market of approximately, 95 billion cigarettes,Poland
remains a key market in Souza Cruz's Eastern European plans.
It is estimated that the imported brand segment of this market
reached volumes in excess o~ 10 billion pleces" in 1991, which
includes re-exports to neighbouring countries, mainly Russia, and
was largely dond~ated by NDP channels.
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BAT INDUSTRIES CONFIDENTIAL- CATEGORY I: MINNESOTA TOBACCO LITIGATION
BAT Industries document for WHO 5 March 1999
2
Pre~..um brands, such as Marlboro and Camel, represented a
conslo.erable par~ of the total. How. ever,, the medium and low price
segments are ee:~ma:ea =9 nave naa a n%gner growth rate through
brands such as Golden American (Rothmans}, LM (PM) and Montecarlo
(~Tal.
The constant political and economic changes observed in Poland
have greatly affected the cigarette market. Due to this country's
need to improve tax revenue, the Government has taken a series of
actions to control NDP imports which have, since January, greatly
reduced volumes imported through this channel. However, due to
consld?ra~le stocks, ttill avail~ple in the market at NDP prices
ano une ~acK oz aezln~tion concerning long term eficiency of this
control, it Is still not possible.to establish DP operations.
Recently, the Government has also co,sldered re-establishing state
controlled monopoly for cigarette imports.
he tendency observed during 1991 of joint venture/licensing
omesulc, pr?uu~.lon has also been affected by Government changes.
ne prlvatlza~lon of certain strategic industries, tobacco
included, is being reviewed and the return of a state monopoly for
this indusury is being considered.
Souza C~Iz volumes (millions} and share (%) in this market,to date,
are~
1990 1991
HOLLYWOOD vol 27 188
share 0,03 0,20
STRATEGY
a) Overall:
Closely monitor all changes and Government actions which could
affect the cigarette market. In order to be prepared for shifts in
tendencies, close contacts will be maintalned with potential DP
and NDP operators. Special attention will be given to the former
state monopoly of tobacco imports (Agros).
b) Portfolio:
Souza Cruz will continue to concentrate efforts in Hollywood. The
brand has shown good potential and will continue to be positioned
a~e the value for mgney segment where LM (PM) and Montecarlo (RJR)
the main competitors.
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BAT INDUSTRIES CONFIDENTIAL- CATEGORY I: MINNESOTA TOBACCO LITIGATION
BAT Industries document for WHO 5 March 1999
3
c} Distrlb.ti0n:
~w~m~m~mm~m
Even though there sre a lot of indefinltions in the market, Souza
Cruz will intensify contacts and negotiations with private NDP
traders.
Considering the difficult~ of establishin~ contact with this type
of trader, Souza Cruz wi11 participate in fairs and exhibitions
making itself available for contacts.
The main requirement for. this channel is prompt delivery of
merchandise. This problem wi11 be solved by April 1992 with stocks
of Hollywood being held in a European bonded wharehouse (Hamburg}.
P~o~zc'~v v~ (MZLLZOn) ~ SSA~S (t)
1992
HOLLYWOOD vol 300,0
share 0,32
RUMANZA
ZIP~RODUCTI~
This 30 billion cigarette market is showing considerable potential
for imported brands due to the bad c?nditions of the domestic
industry (shortfall and very low qual~ty brands). Bowever, ~ne
poor state of the economy andlow purchase ~ower indicate that the
demand will be concentrated in the low prlce segment. Presently,
the main competitors in thi8 segment are Montecarlo (R/R), LM (PM|
and Assos (Papastratos).
There is a very strong Middle East connection in Rumaniah
cigarette a~port8. The operation is DP with internal tax and
exchange rate loopholes aria is largely controlled by Lebanese and
Syrlantraders. This connection stimulated and developed ex-Cypru8
operations.
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BAT Industries document for WHO 5 March 1999
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8ouza Cruz has decided to enter Rumania through Kental's recent
expansion in this market. An initial shipment of 45 million
Bollywood has been made through Cyprus (December 91) and a second
delivery of 30 million should ~e made in February, also from
Cyprus.
STRATEGY
m~mmmm~
With the appointment of a Territory Manager in March 92, Souza
Cruz will ~rove its knowledge of this market, developing
specific Marketing and Distribution Plans, aiming to ¢onsolidate
this operation and concentrating efforts on Hollywood.
In addition to this, Souza Cruz will create 6pecific stocks
logistics in order to guarantee direct supply to this market,
separating it from other ex Cyprus operations.
BULGARIA
ZFJ~RODUCTZOli
With a total market of, approximately, 18 billion cigarettes,
Bulgaria has the most developed tobacco industry of Eastern
Europe. The state monopoly Bulgartabac is one of the most
important industries in the country, dominating the domestic
market. It is also one of the largest cigarette exporters in the
world.
In the r.ecent past the international brand segment was exploited
through llcense agreements and hard currency outlets. However,
private trade channels have been expanding, in similar conditions
to Rumania, i.e., Middle East connections exploring loopholes an
the tax systems. Even though ~his operation has a smaller scale
when compared to Rumania, ex Cyprus exports are already being
developed.
STRATEGY
Considering the difficulties in entering this market through
existing channels, Souza Cruz will stimulate and monitor Kental's
development in this market.
, CD
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BAT INDUSTRIES CONFIDENTIAL- CATEGORY l: MINNESOTA TOBACCO LITIGATION
BAT Industries document for WHO 5 March 1999
CZS ~ ILEPU~ZC8
m ~m ~
ZIN~RODUCTZON
The former USSR continues to present a shortfall in excess of i00
billion cigarettes for a total market of 435 billion pieces. This
gap and the strong demand for the l?w price segmen_t makes the CZS
and Republic Souza Cruz's main priority in ~as~ern zurope.
However, lack of hard currency and payment conditions still remain
a problem for trade in t~Lis market, which is asravated by the
desestabilization taking place in the country.
STRETEGT
Souza Cruz will continue to contact traders with conditions for
direct deals (barter). Indirect trade through Poland, Rumania and
Afghanistan will also be sought.
Special efforts and support will be given to the Group's
centralized negotiation with ROSVNESHTORG.
REMAINZHG OF EASTERN EUROPE
As a consequence of the trade experience acquired in the already
exploited markets of Eastern Europe, it is reasonable to project, a
considerable business potential in Hungary, Czechoslovakia,
Yugoslavia, Slovenia, Croatia and Albania.
More profound analysis will be carried out to i}egtify trade
opportunities and existing bilateral, aavan~a~es mecween ~n?s?
countries and Brazil are currently beuq stud~ed. Contacts w~th
traders and visits to these markets are 5eing held to monltor the
situation and, if possible, to ~nitiate sales-operations.
PROJECTED VOL~NE (NILLIOHS) EASTZRS EUROPZ (EICLUDING POL.Mi'D)
1992.
HOLLYWOOD 1.000,0
-- // --
MTEm~2
PE1064
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BAT Industries document for WHO 5 March 1999
®
SECRET
NEW BUSINESS DEVELOPMENT
TSRT PROGRESS REPORT
A Sale and Purchase agreement between BATCo and the SPA for the
acquisition of s majority sial= in the Pecs Tobacco Factory was signed on 13th
December 1991. The legal process of registration is cxpecmd to be complct~l
by the end of February 1992. In addition to the inltial acquisition cost of some
£18 mn, there will be a capital injection of some £8.7 mn in 1992, which will
contribute to the company's capital expenditure requirements over the n=xt 3
years in modcrnising and increasing production capacity. BATCo's final
shareholding will be around 90%.
The signing ceremony is being arranged for the 9th March but the earliest this
can be confirmed is the previous week when it is hoped that the Court of
P~gistration will approve the process.
Mr. Rembisz=wski has taken over Director r~sponsibility for BAT-Pccs and
the expatriam management team is now resident in Hungary. One of their fast
tasks is to prepare updated for~z~ for 1992 and 1993 for presentation to the
Group Chairman on the day of the signing ceremony.
BULGARIA
The recently formed government under President Zhelev is still formulating
proposals for new legislation regarding foreign investment and privatisatlon in
g~nentt and the tobacco industry specific~ly, and once these lmvc been
established a visit to Bulgartabac to discuss areas of mutual interest will be
arranged.
CZECHOSLOVAKIA
The total Czechoslovakian market is 28 billions split between the Czech
Republic (Tabak) 19 billions, and Slovakia (CSTP) 9 billions. The situation
regarding the priv~sation process in r~spect of both production monopolies
remains unclear, particularly as regards the timing, the mex.hanics and the
decision-making process.
Although BAT Industries' initial attention late: last year was focussed upon
Tabak, in view of their long-standing business relationship with PM and the
feeling that they will always be prepared to offer more than BAT, our
prcferenee has now switched to CSTP.
BAT Industries document for WHO 5 March 1999
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However, the timetable for CSTP's privatisation process has met with some
delay. The original timetable envisaged that an information memorandum and
questionnaire would be sent to prospective investors by the 7th February. This
document has not yet been received but it is now e~ to be available by
the 21st February. The impact this delay w~l have on the rest of the timetable
is, as yet, unclear although it is likely that an indicative offer will be requix~
by llth March with our formal tender (which we understand will be required
to constitute a binding contract upon acceptance) to be received by CSTP by
the 23rd March.
As regards Tabak in the Czech Republic, BAT is slill interested in psrticipeting
in the tender process although we are not prepared to submit any bid based on
the limited information currendy available to us. The prlvatisafion process and
timetable remains unclear and Schroders have been in regular contact with
Tabak's advisers, Nomura, to try to progress the situation and arrange the
timing for a BAT visit. However, as they have had little succ~ in this
respect, the Chairman sent a le~r to the Minister for Privatisation on 6th
February seeking formal clarification on the status of Tabak's privatisafion.
We await a response.
YUGOSLAVIA
The long term objective for Yugoslavia will be to acquire at least one, and
poss~ly both, companies With which the Group has trading relationships;
Makedonija Tabak in Macedonia and NIS in Serbia.
Mr. Watterton held introductory talks with the Makedonija Tabak management
on 9th January. The meeting was conducted in a friendly and positive
atmosphere; they expressed interest in a joint venture with BAT involving the
leaf and cigarette operations and with a BAT majority share.holding and
undertook to discuss this with the relevant authorities. They also offered to
prepar~ and send to us an "information pack" on the industry and they agreed
to receive a multi-functional BAT team to review their activities and discuss
possibilities for future collaboration.
Laza_nis and Coopers & Lybrand have been appointed as our advisc~ and a
multi-functional visit with advisers is being arranged for the first week of
March; Coopers & Lybrand will, however, be making an initial visit to Skopje
during the week commencing 17th February.
BAT INDUSTRIES CONFIDENTIAL. CATEGORY [: MINNESOTA TOBACCO
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BAT Industries document for WHO 5 March 1999
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POLAND
There has been little progress made in recent weeks regarding BATCF's
negotiations to establish a joint venture with the Augustow cigarette factory.
These am still "on hold" pending recommendations arising from Morgan
Grenfell's study on the proposed re-structuring of the industry. Morgan
Grenfi:ll have submitted their report to the Ministry of Pr/vatisation but is
unclear as to when any decisions may be expected.
MOLDOVA
Following the leaf visit in September 1991 a multi-functional BAT team visited
the Kishinev factory between 20th and 23rd January. The prime objectectives
were-
(i)
to assess the quality of tobacco for a possible barter
arrangement between the State Tobacco Monopoly (Tutun)
and BATCF, aimed at helping Tutun obtain acetate filters.
to progress the 1992 leaf development programme in
accordance with the outline plans agreed last September.
to gain more detailed information on their cigarette
manufacturing facilities.
seek their views on establishing a closer business
relationship that could lead to an eventual BAT investment
in the leaf and cigarette business.
Moldova is considered to be of strategic importance, within the CIS context,
both for the quality, and potential development of its leaf crop (currently the
major supplier to the Ukraine with some 18,000 tonnes in 1991 as well as
being the main tobacco producer in the former USSR) and also because the
clgaretm factory is considered to be one of the be.st in the CIS. Although the
domestic cigarette market is small (approx. 4 bns), significant growth
opportunities could arise if Moldova reunites with Romania, thus forming a
market of 30 million people.
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However, in view of the prevailing political and economic unc~rtalnties and the
lack of legislation on prlvatisafion and foreign investment (which is expected
during this year), BAT strategy at this time is essentially to strengthen links
with Tutun, through a letter of intent, granting BAT exclusivity, following
which leaf trials would be commenced, payment for which would be in the
form of leaf.
UKRAINE
BAT is very keen to participate fully in the future development of the Ukranian
tobacco industry. With flds aim, and following various discussions with the
13kranian authorities, a Letter of Intent is expected to be signed on 24th
February giving BAT exclusivity to prepare a Business Development Plan, to
be completed within 3 months, based on a joint enterprise which encompasses
cigarette production at two selected factories t'Priluck-7 and Cherkassy) and
tobacco processing at the Monastirriska plant.
RUSSIA
The outline proposal for developing a greenfield factory on the site of a former
military industrial complex, possibly involving oH-barter arrangements, is
being finalised, fonowing which a Russian partner win be sought.
Separately, the preparation of an outline proposal for establishing a joint
venture investment based on an existing cigarette factory in the Republic has
been delayed. The continued turmoil in Russia has made it difficult for
BATCF to make significant progress on this project.
ESTONIA AND LATVIA
At the Sandwich meeting it was agreed that Suomen Tupakka (STOY) would
investigate the situation in Estonia and Skandinavisk (STK) would be allowed
to proceed with their discussions in Latvia. Discussions are currently taking
place between BAT/STOY and STK to decide the most appropriate future
course of action.
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EASTERN EUROPEAN LEAF TEAM
As part of the leaf temn's recommendations following their visits to Poland and
Hungary earlier this year, two Souza Cruz technicians visited the leaf
processing plants in these two countries between the 9th and 27th November
1991 to review their operations.
A brief summary of their findings is as follows:
O)
The Nyirigyhaza GLT plant in Hungary was the best of the three
facilities seen in terms of equipment, product quality aM the
attitude of management, although the amount of stem in lamina
was high.
An estimated US$2 million would be required to improve
standards.
The Szolnok GLT in Hungary was deemed the sex.end best
facility, although standards of safety and hygiene and
management attitude are below those of Nyirigyhaza.
An estimated US$3.2 million would be required to improve
standards.
The Augustow combined C&C/Primary consists of mainly locally
manufactured components and improvment of standards would be
more complex than for the Hungarian GLT's. Cost estimates for
proposed upgrading would exceed US$3 million.
These reports have been sent to BAT Pecs and to BATCF (Augustow)
for progressing as considered appropriate.
VIETNAM
A future s~gy paper was discussed at the Sandwich Strategy meeting. This
proposes a four stage, phased investment approach, encompassing leaf
growing, marketing " and trading and cigarette manufacture and ultimately
envisages a BAT majority controlled joint venture producing by the year 2000
some 21.6 billion cigarettes per annum and 24,000 tonnes of leaf, both for the
' BAT INDUSTRIES CONFIDENTIAL- CATEGORY:].".MINNESOTA TOBACCO LITIGATION
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joint venture and for export. The total investment between 1992 and 2000 is
envisaged to be of the order of £45 - 60 million.
Due to the difficulty in obtaining from V'mamba the level of information
required to progress the completion of the business plan/investment proposal, it
is now u~ly that our target completion data for this of 30th March will be
achieved.
We have been informed that the government responsibRily for Vinataba has
switched from the Ministry of Food and Agriculture Industries to the .]~.finistry
of Light Indus~es. STC are trying to de~ne the implications, if any,
arising from this change and planned to discuss this with Mr. Thuy (President
of Vinataba) during his recent visit to STC.
An SIC delegation has been invited to visit Hanoi from the 25th February to
3rd March for introduction to the new Minister. In addition, a multi-functional
BAT team will be visiting Ho Chi Minh City to progress detailed joint ventm-e
discussions, particularly relating to a strategy for leaf and th¢ poss~I~
participation of Intabex.
A Souza Cruz finance manager is soon to be seconded to Singapore for a
period of between one and two years to assist the s'rc team in progressing the
Vietnam and other Indo-China projects to completion.
MYANMAR
A future strategy paper has been discussed with the TEC andnoted by the
CPC. BAT will investigate further, with the appropri..ate government ministry
and with SUTL, the possibilities for Group majority participation in a
combined joint venture involving the total cigarette manufacturing industry. In
parallel, BAT will also investigate the posdbility of estabfishlng s leaf
development joint venture with the government which may, or may not include
SUTL. It is anticipated that these studies and a proposal will be submitted to
the TEC within six months.
In this re.spect, a multi-functional BAT team will be visiting the Pakkoku
cigarette factory and leaf operations from 17th to 24th February to assess
current activities and discuss possibiliHes for furore co-owa'afion and
development.
BAT INDusTRIES CONFIDENTIAL- CATEGORY l: MINNESOTA TOBACCO LITIGATION
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CAMBODIA"
An Early Warning Note has been submitted to the TEC advising them of an
opportunity for a majority stake in a joint venture with Tay Choon Hy¢ and the
Cambodia Tobacco Company, the sole dgarcttc manufacturer in the country,
which is state owned and produces approximately 3 bn dgarettes per annum.
As with the Vietnam project, the timetable is behind schedule but a multi-
functional team will bc visiting from the 24th to 27th February to conduct a
preliminary assessment of production fadiifics and leaf growing potential.
MEXICO
At the Sandwich Strategy meeting it was agreed that, although BAT has a long-
t~rm objective to become fully re-established in the Mexican market, any
proposal should tak~ account of the development of the North American Free
Trade Agreement and, that appropriate arrangements can b¢ se.ctu~ to
ensuring an acceptable business operating environment.
B&.W are in the process of evaluating the possibility of re-introducing KENT
to the market, possibly by Ticensing La La'benad to manufacture product from
imported blend components ex Chile. However, it has been establhhed that
the importation of a cased blend ex Chile would not benefit from preferen~
tariffs and may require import and health pormits. In view of this B&W arc
looking at some other a]ternativ~ for a re-entry to the market.
D.S. WATTERTON
P_bJ='k im
Sir Patrick Sheehy
Mr. B.D. Brandey
Dr. R. Salter
Mr. G. Burgess - BATCo
DSW/DET
21st February 1992
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At the meeting of the Tobacco Strategy Review Team on 2nd December 1991,
members were asked to consider whether there might be grounds for
initiating an antl-dumping action against JTZ.
Back~ound
The criteria for initiating this type of action are that:-
(a) An imported product is being sold at a price that is less than
the 'normal price' at which it is sold in the expott~nE country
or country of oclgln and
(b) the imports cause or threaten to cause material injury to the
indigenous industry.
The process for establishing that dumping is o~currlng varies £=om one
country to another but is generally protracted.
The remedy if dumping is established is the ~,nposition of an anti-d~ping
duty to cotmteract the effect of the dumping.
Couclus ion
There vere no countries identifled where Croup companies felt that they
might have a case for initiating an anti-dmupinE action.
The posslble vulnerability to similar action in respect of exports groin the
USA miEht also need to be taken into account before starting this type of
action.
RS/DJS
20th Tebruary 1992
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We suggest handlin~ this subject with the help of focus
gTOUpS. Therefore we have developed the followlng
question guide. It can also be used for individual
in-depth-interviews.
The basic principle of the question guide is to start in
a general way - where the participants can react
spontaneously - and then it moves to a more focussed and
aided procedure. It is important to find out, in which
stage negative or positive opinions occur, especially
in reaction to the advertising. This helps us to
determine their perceptions, both on a conscious and on a
subconscious level.
We propose the following groups:
Inhabitants of larger cities of middle and highe~ social
class. One third of each group should be female.
Smokers of Marlboro KS:
Smokers of Full Flavour
Ciqarettes ex¢l. Marlboro:
18 - 24 years = 1
25 - 30 years - 1
18 - 24 years = 2
25 - 30 years = 2
Countries of interest are:
Switzerland, Spain, Italy, Hungary, Holland, Greece,
Germany.
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QUESTION GUIDE
I. Warm up
Smoking History
Start of smoking - age and circumstances
Current brand(s) - previous brand(s)
Reasons for change
Consumption per day
2. views on the important brands of the market
Which are the most smoked cigarette brands on this
market? What are the reasons for this?
Invite respondent to describe typical smoker{s) of
the brand(s) in terms of age, sex, class, life style,
what might their reasons be to smoke the brand?
Discuss ~he product, the pack, the advertising;
find out Likes and Dislikes and what attracts
the respondent personally.
IIf Marlboro was not mentioned I
What is thought about Marlboro?
Work out the strengths and weaknesses of Marlboro in
the above mentioned points in comparison to other
brands.
3. Awareness and attitudes to advertisinq
Which advertising campaigns were noticed in the recent
past? Why did they stand out - Likes and Dislikes?
,i
If Non-Cigarette-Campaigns are mentioned talk also
I shor~ly about these. But from now talk only about
Icigarette advertising.
Are there (other) cigarette advertising campaigns
which.stand out? What makes it ttnlque? -
Likes and Dislikes
IIf Marlboro was not mentioned
Talk about the advertising of Marlboro.
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4. The advertisin~ campaign of Marlboro, ~pecific tr@i~-
aent
IIf not dealt with before I
- awareness and description of details and attitudes
- the cowboy, his role, attitudes
- to whom should the campaign appeal
(extensive description - pro~ection)
- main message of the advertising
- projective procedures (the campaign as animal,
flower and main attributes for example)
- work out differences to other cigarette advertising
mentioned before
3
5. Presentation of Marlboro .advertisements and o~
advertisements of two or three other main brands of
the Full Flavour Market.
Germany: ~/~boro KS, Lucky Strike Filters, Camel
Filters,~threa subjects of each).
- differences Between the campaigns - Likes and Dis-
likes
If not spontaneously mentioned talk about:
- which campaign will win new smokers more easily -
why
- which campaign attracts the respondent most -
why
- which campaign is least interesting and should be
improved -
in what direction
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SOUZA CRUZ GROUP
COMPETITOR ANALYSIS
FEBRUJUtY 26th, 1992
SECRET
2.d
I • INTRODUCTION
mmmm~m~ m~m
TOTAL MARKET
Domestic market volume in 1991 reached 156.3 billion
sticks and was 4.7% below 1990. As 1991 has been a very
turbulent year, in order to explain this market
performance, it will be necessary to focus on independent
periods.
Brazilian economy in 1991 registered an insignificant 1%
GNP growth over 1990.
Ist. Quarter
In this quarter market sales were stable compared to the
same quarter in 1990. By the end of January the Government
authorized a 50.3% price increase for the product, 24.1%
in real terms{ freezing prices at this level. This new
price positionlng negatively affected February sales but,
by March, it was already absorbed by consumers and sales
regained growth momentum, being, In real terms, 6.3%
superlor to March 1990.
2ha. Quarter
During this quarter demand continued to grow
significantly, as a result of the price freeze. Besides
this, Souza Cruz detected that it would face tobacco
shortages. In order to guarantee a normal cigarette supply
in the key competitive markets, the Company ueciaed to
limit sales in low competition areas, more precisely in
the North, Northeast and parts of the Centre. Together
with this, to minimise the supply problem in these
re~ions, Souza Cruz decided to manage its sales mix,
reaucing dramatically the volume of the low price sector.
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With Souza Cruz sales limitation, total market grew by
only 1% compared to the same quarter in 1990, otherwise,
this growth would have been considerably greater.
3~. Qua~er
During the 3rd. Quarter the market supply was improved by
Souza Cruz, which developed three new blends with the
available tobacco, permitting increasing volume levels in
the areas affected by the cigarette shortfall. These
blends were destined to BELMONT SUAVE in a first stage and
later to LUIZ XV and CONTINENTAL.
Also in July, the Government agreed with the Industry a
strategy to increase real prices of cigarettes. This
strategy was succesfull and besides a 18% real price
increase, a reduction in the number of price categories
from 10 to 6 was authorized in August. With this, the gap
between the lower and the highest price categories
declined from 280% to 230%( increasing both the loyalty of
the consumers of high priced brands and the contribution
of the low sector of the market.
As a result of the above scenario, total market sales
volume in the 3rd. quarter was 2.3% lower than that
reached in the same quarter of 1990.
4th. gua~er
During the 4th ~uarter the Government continued to
authorize real .prace increases for cigarettes and the
average price in December was US$ 0.73 ~er 20, up 53%
compared to September levels (US$ 0.48). ThAs resulted in
a significant 14.1% retraction In market sales compared to
4th. quarter 1990.
In December Souza Cruz initiated a slow return to normal
sales in the areas affected by the cigarette shortfall,
and in January sales are being normalised in these areas.
With this, it is expected a share reduction for HOLLYWOOD
and CARLTON, brands which had benefitted from the mix
management.
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2. P~ S~:e~e,~ in 1991
In 1991 PMB strategy was very clear. The key points
identified werez
a) Development of Marlboro
During the year PMB dedicated the major part of its
investments to MARLBORO. Strong media support was given to
the brand, around US$ 13.0 million, concentrated in the
strategic markets of the Centre/South. Additional
visibility was achieved as a result of the International
medza, which in commercial terms represented US$ 26.0
million during the year.
In areas affected by Souza Cruz cigarette shortfall, PMB
increased MARLBORO's volume and distribution.
MARLBORO LIGHTS was extended on a national basis in
November. The version reached in the month 0.40% s.o.m.
contributing to a historic sales record for the brand
family in Brazil. In December PMB maintained strong sales
support for the Lights version, negatively affecting the
results of the Full Flavour-Box versaon, whlch lost 0.3 pp
som in the month. MARLBORO family share evolution was as
follows:
S.O.M. S.O.M.
1979 0.2
1980 0.2
1981 0.4
1982 0.5
1983 0.6
1984 O.7
1985 0.8
1986 1.1
1987 1.4
1988 1.3
1989 1.4
1990 1.6
1991 Jan/Jun 1.9
1991Jul/Sep 2.3
1991 October 2.3
1991 November 2.5
1991 December 2.1
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b) Selective com~unicat~on support to PALACE
PALACE, in the price category II, is PMB's key brand in
the low priced sector. The brand has been supported in the
key competitive areas of the Centre/South and was also
benefitted during Souza Cruz's cigarette shortfall period.
Communication investments dedicated to the brand of US$
1.0 million were 142% higher than 1990 level. Family share
evolution was as follows:
S .O.M.
Jun 89 1.3
Dec 89 1.5
Jun 90 1.6
Dec 90 1.9
Jun 91 2.4
Nov 91 2.8
Dec 91 2.7
c) Distribution Optimisation
Durin@ 1991 PMB implemented several changes in its
distrlbution profile. Direct distribution was eliminated
in the North, Northeast and In low competitive areas of
the Centre/South. In these areas PMB distribution is
currently held by authorized distributors. Some of them
were also operating with Sudan products.
PMB is concentrating its distribution resources in the key
competitive and strategic markets of the Centre/South,
giving priority to retailers which commercialize more than
3.0 thousand cigarettes per week. In the low volume
outlets PMB has been working with on the spot sales aiming
to take advantage of the retailer's cash availability.
d) Portfolio Rationalisation
During 1991 PMB continued to clean up its brand portfolio
aiming to maximise sales, dlstribution and industrial
operations.
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Since April 1990, when PMB took control of Reynolds
operations," 21 brands were withdrawn from the market.
These brands represented approximately 2.5% of the market.
In December 1991 PMB portfolio was composed of 24 brands
and versions.
Brands withdrawn from the market and respective market
share pre-merger were the following;
Category Brands Withdrawn
S.O.M. pre-merge
m~mmlm~ml
V
Shelton Lights slims 0.19%
Ella 0.10%
Camel Box 0.04%
Camel Sc 0.04%
Salem Box 0.03%
IV
Winston SC 0.33%
Winston HL 0.19%
Monterey Lights Slims 0.06%
Parliament SC 0.04%
Vantage Family 0.02%
Salem SC 0.01%
III
Tropical Box
Mistura Fina slims
Mustang Box
Monterey Lights SC
Luxor Box
0.13%
0.11%
0.08%
0.02%
0.01%
II
Vila Rica KS 0.52%
Tropical Sc 0.45%
Connm~nder 0.10%
Dallas 0.04%
Master 0.01%
Total Share
2.52%
e) Cigaz'et~e Expoz~ Expansion
In 1991 PMB expanded significantly its exports. The volume
evolution and the turnover generated by these operations
were the following:
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J
Volume Turnover
(Billions) (US$ Million)
~mm
1989 4.0
1990 6.5 43.8
1991 (Est) 16.0 107.2
The 146% volume growth registered in 1991 is basically due
to a co-packing system coordinated by PMI in order to
attend Eastern Europe markets.
Considering the current production capacity of PMB , in
three shifts, 1991 output could have been 11..5 billion
cigarettes higher.
Volume
Billions
Total Capacity 49.0
Domestic Sales 21.5
Export Sales 16.0
Spare Capacity 11.5
It has also been identified in 1991 that PMB imported US$
2.0 million of reconstituted tobacco from Belgium,
Switzerland and U.S.A.. As this type of product has not
been found in the domestic brands, it was possibly
utilized in PMB export brands through the year. Although
impossible to confirm, there is a chance that this
reconstituted tobacco originated from a draw-back
operation.
The following picture indicates P. Morris key export
brands and markets:
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Brand ~ Key Markets
Bond Street
K
S
Congress
LS
LM
Commander
Marlboro Menthol
Marlboro FF/Lights
West Africa / Middle East / Russia
West Africa / Middle East / Russia / E.
Middle East / Suriname
Middle East / Suriname / E. Europe
Chile / Aruba
Asia
E. Europe
S
K
S
Master
Flint Lights
LM
Majorca
Galaxy
Monte Blanco
Paraguay / Chile / Suriname / Bolivia
Chile
Aruba / West Africa
Paraguay / Peru
Paraguay
Paraguay / Bolivia / Chile
f) gewAdministrative Structure
As from August PMB administrative structure has been
modified with the merger of the cigarette and the ice
cream divisions, the latter represented by KIBON (General
Foods}. Since then, both businesses are reporting to the
C.E.O., Mr. Paulo Hennig and the structure is as follows:
CEO
I
I
Juan M. Forn Richard Sucre
Group Finance PM. Mkt. S/A
Vice President General Mng.
I
J J Cardoso Lucena
Kibon S/A
General Mng.
Clodoaldo Ce
Group Corp
Affairs Di
Following data summarizes some key information about the
two groups:
P. Morris Xibon
Gross Turnover (US$ Million) 485 150
Profit 1990 (US$ Million) 15
Staff 5,000 3,000
1991 S.O.M. (~) 13.7 60.0
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3. PMB Possible 8trateg~ 1992 and 5ouza Cruz Responses
a) High Priced Sector (Price Categories IV to Vl)
In this sector of the market PMB will ~robably continue to
focus MARLBORO development as its prlncipal objective is
to make MARLBORO the best selling brand in Brazil. It is
estimated that 90% of total communication investments of
PMBwill be dedicated to the brand.
Souza Cruz will maintain its multibrand attack strategy
against MARLBORO. BOLLYWOOD, CARLTON, FREE and LUCKY
STRIKE, each with its own role, will be the ANTI-MARLBORO
brands. Increasing and strategic-orientated communication
investments, coupled with h~gh product quality, will be
given to these brands during the year.
b) Low Priced Sector (Price categories I to III)
In this sector of the market PMBwill probably maintain
its direction of 1991, giving support to PALACE, which is
showing some ~otential. There is another possible
movement, which is the launch of a low tar or mild option
(local or international), in price category III. With this
new brand PMB would be able to attack PLAZA directly, and
HOLLYWOOD and FREE indirectly, as an undercut.
Souza Cruz strategy for this segment is clearly defined.
PLAZA is the key brand of the sector and must be protected
from category II mild offers. On the other hand, PLAZA
must also be attractive for category IV down-traders. With
this, the new PLAZA campaignC an evolution compared to the
previous one, will be run In the key competitive markets
of the country. A new pack design is being extended
nationally an February 1992.
RITZ .and BELMONT will be supported at the point of sale,
and wlll only receive TV media support in reactive terms.
All Souza Cruz brands in the
substantial product improvements,
quality.
segment will suffer
particularly smoking
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c) Advantages of the Hew Adminigtrative Structure
There is a big chance that PMB will try to take advantage
of the new structure after the merger of the cigarette and
ice cream areas.
The merchandising dominance of Kibon, mainly in the key
bakeries of the strategic markets, is a threat to Souza
Cruz. It is expected that PMB will pressure these key
retailers looking for merchandising exclusivity for the
cigarette business, aiming to increase MARLBORO
visibility.
At the moment Souza Cruz is evaluating possible directions
to counter- balance this competitive advantage.
d) Price Freedom Process / Excise
With the possibility of a new price scenario it is clear
that the objective of PMB is to obtain total pricing
freedom, if possible changlng the excise from "ad valorem"
to specific, with a single bracket. With this, PMB would
reach a more competiti¢e price positioning for its key
asset, MARLBORO.
Souza Cruz supports price freedom, however, the company
will not acce~t losing its current advantage, in terms of
price poeitionlng( which has been built over several ~ears
and is one of ate key strengths. To make this possible,
the way to implement prlce freedom should have certain
rules:
The maintenance of a structure of price categories
An excise structure that avoids MARLBORO price
competitiveness
The key price positioning that must be maintained involves
the following brands:
- CARLTON and LUCKY STRIKE --> same price as MARLBORO
HOLLYWOOD SC and FREE SC --> 20% cheaper than MARLBORO
RITZ SLIMS and KS/SC --> same price as PALACE SLIMS and SC
PLAZA SC --> 10% cheaper than HOLLYWOOD andFREE
- PLAZA SC --> 10% more expensive than PALACE
- BELMONT FF and Mild --> same price as MUSTANG FF and Mild
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3) PRODUCT VARIABLE COBT ANALYBZB
In order to better understand the variable cost structure
of PMB main products, based on analysis of these products
by the R&D dlvision, certain key conclusions were reached
by Souza Cruz:
- Philip Morris =oats are hi~her than Souza Cruz's and
this difference lays basically an the packaging material.
While Souza Cruz has its own Graphic Department, PMB
depends on third-parties.
- PALACE SLIMS is a very expensive brand. Its cost
analysis shows that its price positioning is not allowing
an adequate contribution. If one conszdered PMB marketing
investments to the brand, the situation worsens even more.
- Even with its current premium price positioning
(category V), MARLBORO contribution level is not
representing a competitive advantage to PMB, as Souza Cruz
brands of category IV generate similar results.
- MUSTANG and BELMONT contributions are almost the same.
Key Variable Cost Figures
- MARLBORO costs are 31.7% higher than FREE FAMILY
MARLBORO costs are 51.9% higher than HOLLYWOOD FAMILY
MARLBORO costs are 28.4% higher than CARLTON
MARLBORO costs are7. 0% higher than LUCKY STRIKE
- PALACE SLIMS costs are 19.2% higher than PLAZA FAMILY
PALACE SLIMS costs are 14.9% higher than RITZ FAMILY
PALACE SLIMS costs are 47.1% higher than BELMONT SUAVE
- MUSTANG KSF/FF costs are 4.52% higher than BELMONT KSF/FF
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FEBRUARY 1992
Tllr'Er~
Oporst INi I~van:
D~est tc Talcr~ 1t.S81) t0,370
.11.a
IntePmtf~l ~ ~
1slat labec~o D.IK,0 Z1,090
"15.0
TotsL Opmstt~j tm $6,&$8 SI,1~
-10.3
q:.rett~ r.~pmles lrm:
Ooeestl¢ T41mcco &,808 4,Z96 -14.3
1otli il~ 6,S20 S,600 -16.4
Total QperltlPi l~cl~ 10,0S1 8,?30 -15.1
Kit lncill frii Oporxtlms &,Z91 3,~0 *21.Z
llire iirnll fril Opiritllni 1.6~ 3.83 *ll.1
fl rigid irnll net intone fop 1991 fell IIInlflllily llill! II's
llilniltl
tllni In Ili#illnl Iril i i| i~lPlli
roistl~ to I~ ltcountinl c~lnl, for retiree bl~tflil (nit after tu chorll of $1 blllllll i~ ltt
ceeis of rlilri tel
mriitte food oporlila~ (i2~ million ~i slier I"). lr~fi G~erel lwis flre~ ~no paor~i of Its opereill
~or~enlee.
iarlll llilrlill viii Increeeed $.3X II leo bllllm Ills for the ylor. For Philip Irrll U.lol.,
lliirelll t~oli rlsl
sillily to ilO.7 bllllml units, uhic~ Ir~ it I~lre to 13.31, up 1.1 Share poll ovlr the lrtor yur.
norlbolt'l
Iveretl ire Is iS.SI for ~e yeer d~n fl it.el In 1990 ~I Ill no~lun lchlltll • lull llor shire #
1.1I. Its
fourth querier ira vii 1.1Z. ~ Icklewd I li.SZ sh~P* of tKI dll©li ee~ up iron 16.1l in 1990. Phllil
norris
llorniilmll'i tlll~ello unit viii, I~illdlri U.S. exports, I~riiild 13.iZ to &17.3 billion unlll In
1991, U ltilrlly to
ki~er ~11 in the lurI ~wmunliy. illiern fUrZe itl, ~ llc~lo lui, ilion, krlle~ln~ ~ lP, II. luporis
If,.,, i~e
Unttl~ llilu IrtPiued IO 107 blllli unlll, I 9.SI for the y~or.
I ltlr~, P~'l lxicllvi VP Ind llnlnclll Ill/it, rliporil~i to lilly•el lhil Istiilld llliI I~irt
ovlr lhl lg91-1t limll I
IrI ti 19 bllllm illh 31l for to/co, lr~ in Inilmlilanil ¢llirSitl lilt iIIl rilri Iddln8 icily In
l~l U.I. ind
I
lrtl~illl.
In motility, P~ ttll unvtll norit lilm nltlorllll, • fly loU-tlr, Icl nicotine cllIrelil. ~ Ippelrl
1o be Itlinl Merit
UIill it ~m. Ju~l~i frwl Ill i~vIPlllll lull in flivir ~ ull of i cork tlllrt, ll~lor V~-llrklttt.
Divid Oingoor.
Uld lht I~rlor lute oleos from o ~iv ~ckli cmtintrle flttlr" thii loducei in nsler ~rl~ thl
lll~ribil ctglriites, llrli
Villi I In rim-ethel only mrd viii bl ivllllbte in Pegullr end li Itin.
Totil OForitinl|m 1&,989 13,879 *8.0
Gltritl~l ¢calmmln Incom:"
iotii labKce 2,1'26" 2,729 -0.1
lolil Opereilnl In=m~ ' 3,.~.3 3,iib *3.&
iktt ll~nl (Loss) 368 (&29) o-
Shape [Imlr~ (Lois) 0.?.2 ¢1.11) --
..; ...'".
~orl lllriitiltll i# iPm~ r~ ltiilil...
lop 199%1J1'1 Inil~tlorll tdml~:o unit Irclee' 19I wld bullnils unit cltrlb~ll irireesed 21i.
prllilrtty is •
ree~lt of ¢llInuid viii lllnl in l~o~i, lhl liddLi lut Ind Alli.".lt" iahnltmi, ctlll ind ClO of IJI
lciili¢l. Itlll~
lr~h o~rllttts llre Ai.|i. lu~o~4, llllim [+ llolln~, g~rii~y In~ Czlchollovlkli), Ihl foil USSll
IorW~f, Ir~sil
and noxtco.
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BAT Industries document for WHO 5 March 1999
Met sales in the dcmesttc t~cco unit far the full year ~ro lZ h|gher than the year before, sh|te
txJSir~ss unit ¢on;.rlb~lon
declined &Z. bolestlc tobacco rooulta reflected fammrabte pricing sad tam+ a-aerial coots tho¢ ~lre
more thin offset by lover
re|iDa end Ihcroooed marketing oxpendltWts. For the foul~JI gkllrtor0 tolat Interest eZl~e fell to
1/,71 slLtlen fr~ f,~?6
allison and $2.1 billion for the year co, red to 13.0 billion In 1990. During the yur, lie paid off
or converted SA.3 billion
of debt, le~wtng s deb'r, of el&.& billion.
IlJIt fe PoL||nli out hstlonl|Ly a Iharttr, fetter Carol clgarlltte - C41~L Video - Illde allah a
bill.el laid to 9lYe • "leather
nooks." Carol VIdu vial be sold In box and be ir,,aIlld)ta is full flavor lad L|Ohtl. JLl~aL ~l Im|d
to be to nan over 30. Ads
rill fill• a pair of rill+ ,llsltar to "the Itues Brothers ore•aid ulth thick soaked movie
OldllltLterll," lu-ld ire Like those hou
for Carat (~uet I little fitter).
A]~[]~P,]C, IJ~ 1B]~,IJ~I)S - J~rteen lobocco reported achieving Its tirol tJ.$. dQmestlc unit ~t~
Incrom ih over • q~arter
el•tory, Its lZ IhcPesso ~esu|ted in i mrket shore |ncP1mse to over ?q4 for the year L~Bpered m|th
6.B:L |h 1990. U.S. td=acco
Im ~ operottn0 |Ira rose 8X lind 7X, reepectl~Ly, for the year,
I]~ATION)LT,
- i~ changed Marit'e edv~t(sln0 cl~t0n to Ilul41e-beesd "0tsoover Maria,x restoring
ictloh-or~ented soitln0 visuals erd
supported It heavily. PI! ~ I=ullt soq~roL Itev can=lair blmrds featuring a -cut out- IlartbePo
coubey roughly three stories
high. They are r~ to be |lq~chin0 Aiplhe (••thai) tn early 1~ vh|l~t Uo, lld further helght~ an
already very tenl~tltlve
lerlthOl eeg~. Ilotetcrthy le the Itllntll~e |MI of e&q=port for Llrk, ~Ollo soles Nero rlLitlt~ly
dull In 1991 dm to the
first quarter price lncroese.
I~ Is reportedly hey|he difficulty hiring sales reprosentatlves vlth total Psos|n|n9 at
approxilteLy 1,000. SCAT reports that
PIq has stopped eq~ing their calve• contract I)rogrla erd contracted coL~ applrentLy mill stmltlze
st over one laltLl~.
represent|hO roughly 130.00Q Item urv:Jer contract, tCAT aL,.s reports that PH's vend|no Ithlne
pragrm ~e buds•ted to 9rou by
3,000 oocKlhoo Ih 1992 Ira IO,000 in 1~1, tess then earl©Spited. If true, this mill slime I1+1 to
obtain eddltionat machines
col~ c~ntrlcts In qlalLtty L~etions, lqhlncth0 ovtrsLL vsl~lin9 dlstrtl:~l~lon.
Move~r year-to-<Let• Ira•eared lucia spendlhg euggests that Pll,e spend In ~aeured sadie decllhed
9"~ versus 1990 Levels,
pr|lr+Ly ~ to tttnlr rotluteted adv~rttslmqi (G~P) Limits. lear, ms•sutural a~dla fails to mssure
LocaL TV iKIvtrt|eLn0, i1~
red|o slat+arm sad es~ciaLty DOH, vhare PN appears to be Investing heavily, Considering Increased
cOq, promotion and
dLstr|but|on caste, total PN's spading Bray significantly in 1991.
- The Italian Klnlstry of Finery• berr~d c~tlc sales of PH's Marlboro,
Merit oral Itursttl A/~ssador from
illd-Dec~mber until illd-Jmry is • SlW~Ct|~ for excesIl~l controI3and satoo of time brlu~ds. ]111
is estimated to have Lost
Ipl=~4matsly ~ million Is yell el trede 944drill. The lh'Irlds vhI£11 hivll It341/~eflted most from
the lltultlm ore princlp41tty
Camel, NarLboro Lights end, to I Lesser degree, Chesterfield ~ Lucky Strike.
the launc~ of Narlboro N4dIum Is rumored In Holland for tl~ sKond half of 1992.
Pli closed i deal xlth Ioshv~stor8 In ~etaber 1991 for the •apply of 11 blttlm cigarettes to the
foP•or USSI. the dial
coral•as of I b|Ltlon Itsrtbores st an esttsoted price of 118 Far thousand tad 19 billion ApalLo/~
Ex-Maxlco. Average price
of t~e total dell Is I;9 W thO~lesnd sad 9-12 months credit tares. In eddlt~en. Plq has agreed to
Im~Ld l~t~on depertlmts tn
luse|~n cigarette feotorles for the manu~ectwln9 of various ¢iller~tte i~bell. PN off|l:|lll
Indic•ted at I May York anllysts
rating thlt they had shipped eLL 21 bltilm units for 1991 and hid been paid for hell, ,mr, the fern
of payment ms I~t
stated.
Colorllb~l - The offlrJ•l dlstril~utor for PM |s Atlas Cl~mmlll. the or+sinai prices roglstero<l by
I~ for imports ere S17~ for
Marlboro lax end 9151.40 for Portia•mr sad Nerlt. The final price to the car•mr usa. orliinetty,
600 pesos I peck uhlch ms
r~ed t~m months Liter to 620 pesos. Only Marlboro end Marlboro Lights are {squirted durlrqi the
quarter. I~ is ax~oecte<l to
open • fully'stuffed off|me In lOllOt+a +n early 1992.
]Puerlo ]P.Jco • ~ La~r~+~l<l the 1&s version Of Marlboro Lights end ProvIokld heavy lo~vertislng
el.l:~ort at 91.+0 per Pock.
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- A recen~ annau~ment by the Otalmsn of Eastern Tcd~cco rtferrsd to the fact that in
In attempt to fulfill
aq~pty of tl bL|i|tm at~ska-'ts the rotator USSIt, P~ ~s Lapp(n9 a|tsrrmtivo Sourcing. Eastern sit|
bonefft by Incrnsing
peod~tlon of PN bNmds fl~m the ma.reht 1.& b|tL|on pea ylslr to double or triple that quantity.
~aDL't - IMR ral~rtodty has ba~t Vantod profit roller In 19Y'Z to bo lore aggrasslw in omrkatlne 4n
Jspan. Ac¢ordin8 to
s~rces, ~ antl©lpets no profit for |~t in 1992 In JqNn.
~tn :intm to be Ia's kW brand ~ In ~r ~ : m|~ ~lsl~ ~1~ fasturi~ similar ~a~ts ~ mrs
PoLulq ul© ~ ~ nw ~l~ ~ . . ." ~ ~, hLcel ~ ~lLy thr~ s~mlp of ,btem S~
~m" ~MI, ~l~ ~elM utq W ~ usi~ of ¢{pmte ~Litien Limits, This iwmslw strst~ Is LikoLy
to cant|am In 1~. JJ| suRxx-tod Sale Trln Lights 100s md L~ Salem Ll~ts 100s lax In Lots 1991. ban
THe Llpts
lh ~ to b ~lcaiLy sH~lq Vl~nls SLim, ~r, ~le ~ ms rather tinlt~ ~ astos ~ ~ ok.
kLce Lg~ts I~ lax ~ to ~ been L~d Into Llmlt~ dlstrlUlen a~toLy to uintaLn ~ KIsLq. Ia m~rc~
plans to Launch Satan Psrwtt KS Ikm (13q) in February 1992.
f.~R| ~ ~ I m saq~|grt fNturlrql the "Joo Saooth" (also imaun N m01d Joe," '~;acky ao~') cd~r~ter in
s Leather Jacket
and hi,,, Jeans faa|t|ar |n the U.S. The ctq=y states ULet*s It Caml.m The ¢aq~|gn, supporting Case|
L|ghts |ca, h4s recently
bmm (d~lrVed |n impzlrtstl, PQS a~d ln~ as sell. Use of TV |h support of Carol Lights I~c |s vary
uni|koLy became Its three
mr toia~sion "v|ndo~ uplrsd this annth. Unless m nsv Carat at/to Is laundt,d, eapm:tat|ar~ ors for
rmL to m:hlev~ IV
nadla expmmro v|a sp~arshlp ~-t|vlty. Uith Carol, c~pet|t|on is anticipated to aianlf{c~ntLy |scram
for ~ ~Lt mLo
umkors.
on llovmber ymmr-to-data m~ur~l emd{s reports, IJIt's spmd|ng |ncrees4d 5X in 1991, excluding
~ and th* addlt|ormL
s|smLf|cant m~clls lu4x~rt for Sol',', slx:nsm'sh|p sct|vtty. 14easur~d ~|a suPi~rt (ms Pri-*rily
f~us~d ~n Salm and Vestige.
Nousver, vants0e spend (ms reduced significantly In the stctmd half of |~;91, d~ to poor NLas
perfommcs.
T~rooe =nd Middle ~_.tst - Taboos(era |s In discussions with ItJR ulth (ha reported intent to form
a joint venture.
ItJR reco4vm:l approval for a esrs;fKtur|r41 venture In Turkey (similar to the me rer~ntty
snnoun¢~l by PM). Cc~struct|on should
be c~apLet~cl |n 18 mnths. Itw~f~C~rlno of clgarettes v|LL l~Oin In tats I~, ~th pr~lucti~ ~,~LLy
reschln~ 10 b~LLlon
armua[ty. R JR |ndicstsd p[ims to invest ov~r S100 n| Lt|c~ in Turkey over the heXt 10 y~ars.
- Dur|h9 the Last c~arter of 1991 there have beam tam ImJor activittas in Puerto
IHcs: 1) The Lma'r.h of l&'s
v~rsions of V(hSten, W|nst~n L|ahts, Vinston ULtra LIah';s, Salem Lights, Coast and Cam( L|ghts,
and 2) heavy support for the
16's at Sl.2~ per I~ck.
.TAPkN TOBACCO l~C.
- JTI's nov product sctlyity Sto~J dolm in the fourth quarter of 1991. Ulth the addltSon of
Successful lax sad .t.ov Tar
styles, JT| usa able to ach|ov~ ln-mrkot v~t~ 8rmrth |n 1991 v~rsus 1990. This is nntevorthy in
Light of their ~ pricing°
uhlch is at a preslus (2~0 Yen) rsLstiw to the emlnstrsaa dams(is price asWIw~t (229 Yen). As JT|
attains lore In" capacity
they wtlt att~q~t to |N)ede the |routh of |Irmrta, especially If they introduce aor~ Box styles at
the amino(real price. JTL
cantinas to m4q:ort its kay brands st c:~petltlve Levels (Nitd Se~n, Sev~m Stars, Caster, Cabin,
S~metlae). llc~rmber 1991
mr-to-data msasursd ladle ~ m up 1~ Yarlus 1990. uith In=raasod use of radio, mlvspapers and
emgo&lrles offset(ins the
r~Latod decLine of teteYlatcrl lal4ge.
- Tha Introduction of Japan Tol~c=o |r-'.~s Cabin 85 mad HiLd Sawm Lights to{sad JTL'S
shar~ of laport~d brand sales
from 3.&Z tn lcnmd=er to 5.72 in De(ember |n Thaltsrd.
Iw/tsrt-92.~
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Imasco Observatlons on Orlando Conference
,, , .,
No question B.A.T companies would benefit from more frequent
senior level ~arketing conferences.
Because markets are quite diverse (consumer preferences,
cultural differeucei, political/economic conditions, historic
trademark prevalence), marketing conferences tend to focus on
actions (these are the conditions in our market, this is
what ~e did about it). While interesting, this provides little
to apply at home. Perhaps conferences should focus on the
process and structures of marketing: consumer focus,
market segmentation, market research technique, market analysis
technique, brand poe£tioniugD new brand development,
prioritizing resource allocation, forecastinE, realistic
objectives, communication with management. Those marketing
functions that are common.
One of B.A.T's major objectives is the establishment and growth
of international brands, a necesslty ~n today's global marke~.
However, many operatiuE companies still have real bus~neas
opportunities from local brands within their own borders. This
could (and does) cause Friority conflicts. Both goals must be
realized. A common understanding of planning, structure,
objectives and resource prioritization would be an ~nportant
conference subject.
Anti-rooking activities and growing government restrictions vary
by country, but it is generally accepted that sooner or later,
they ~rill increase in intensity and affect our c~n (and
opposltlou) operating abilities. Within the group, there is
enough experience to help all accept and prepare for enforced
restrictions -which can prove a competitive advantage.
T.S.R.T. has provided the groundwork for a comprehensive
marketlnE development program. We can only stress the
Lmportance of this and, again, recommend that this program be
~ocused on the baelc process of marketing (rather than
~ndividual market situations, which can be competently addressed
by B.A.T's center~operating company relationships) and that it
should be designed to develop all levels of marketing
consistently.
~B/do¢
lOth February 1992
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In~r oduetlon
Rotb~ms International
--.. .
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At the meeting of the Tobacco Strategy Reviev Team on 2ud December 1991, the
Chairman asked for an analysis to be made of aothumns' profits to assess
whether the analysts' favourable view of their increased profitability was
justlfled.
The latest results, for the six months to 30th September 1991, show some
improvement on the comparable period in 1990:
6 Mouths to 30th September
199__~0 199__1
Uet Turnover (£m) 1.022 1,085
Operating Profits (£m) 166.9 180.1
Harg~ (X) 16.3 16.6
The improvement in profits is said to be due to improved profits in Canada,
France, Germany, Malaysia, New Zealand and Poland, offsetting a decline in
Australia. Profits in Australia were also said to be af£ected by a change in
accountlnE treatment which reduced operatins profit by 10.1 million. Without
this adjus~nent, the margin would have improved to 17.5%.
Even at this level, the ~-rgine are still siEnlficantly below the 23.3Z and
23.8Z achieved by B.A.T Industries in 1990 and 1991 respectively.
There is no country by country analysis available for Rothmans' half year
results but an analysis of the full year results for the periods to 31st
March 1990 and 1991 is shown below:-
Whole
AnsCralla MalaTsia Canad_._.._~a UE(a___~) Others(b)
Turnover 1990 £1914m A$i337m MS 666m C$388m £400m £696m
1991 £2051m A$1624m M$1020m C$417m £~0m £862m
Op. Profits 1990 E 325m AS 130m MS 162m C$119m £ 49= £ 82m
1991 £ 352m AS 185m MS 269m C$111m £ 55m £I13m
M~-gins 1990 17,0% 9,7Z 24.2Z 30,6% 12.3Z ll,8Z
1991 17,1Z 11.4~ 26,4Z 26,5% 12,5Z 13,1Z
~TNn=g~.us 1990 23,3Z 6.2% 20,2% .36,8Z 27,4Z 15,2X
1991 23.8Z 2.9X 15.9X 35.7Z 30.3Z 16.3X
Notes (a) Rothnmns includes domestic and exports. BAT - BA2qT~.
(b) Rothmans tOthers' includes Germany, Singapore, Netherlands,
S~r~tzerland and Belgi,~. BAT = BATCF.
The 1991Rothmus' margin for Singapore vas 23.2Z compared with 17.8Z for BAT.
The BAT margin in Belgium was ll.4Z and in Sv~itzerland 15.9%.
Conclusion
While there has been some improvement in margins, especially in Australia,
M~laysia and Etwope, the level is still relatlvely low in Australia, the OK
(including exports) and the rest of Europe.
Progress by BAT in Australia, Malaysla and Singapore and continuing pressure
in Canada and Germany could make it difficult for Rothmans to sustain the
improvement whlch has been achieved over the past eighteen months.
~s/DJS
20th Fcbruacy 1992
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SOUZA CRUZ GROUP
NOVEMBER MARKETING SEMtNN:I
IrJmRUJUtT 26~h, 1992
~ING~C~
ORLANDO - N~ER 19 TO 23rdr 1991 - USA
RESTRICTED
2.a
AREAS - Cost effectiveness of promotion
--- Consumer marketing in the 1990's
- Developing, maintaining, enhancing and extending
brand images
- Importance of quality on brand goodwill
(Company experiences)
- Valuing brand goodwill and accounting considerations
- Distribution / Trade relationships
- Excise structure
- Competitor analysis
- Tobacco business cases Kool, Argentina & Australia
CONFERENCE STRUCTURE
External (Quelch) and internal speakers participated in the
Conference. This type of structure seemed to be adequate.
Besides sharing experience with people in the Group the
presence of external speakers introduces a new vision and
concepts, which is important to improve managerial quality.
SIGNIFICANCE OF THE CONFERENCE THEMES
All themes presented at the Conference are pertinent to the
process of understanding and improving market management.
Although the themes are familiar to participants in the event,
treating them in a professional and disciplined way results in
gaining know-how and experience.
Apart from all other themes, Valuing Brand Goodwill and Excise
Structure are of special relevance to Souza Cruz. The first one
because it shows to be an important tool for improving brand
management and as soon as the company is familiar with the
technic involved, it is our intention to implement it for Souza
Cruz main assets. The second because the discussions which have
been maintained by Souza Cruz with government authorities for
obtaining the end of price control involves a possible change in
the actual price structure and to have it right in the first time
is of vital importance for the future of the Company.
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2.
EXPOSITION OF CORFERERCETH~qES
In general we had good presentations. Some themes, being a
novelty, caused good impact {Valuing Brand Goodwill}. Others,
due to their relevance, afforded a good level for debate {Ex-
cise Structures]. Others, for lack of time for debate, were
rather theoretical (Consumer Marketing in the 1990's}.
All presentations with visual support and time to be debated,
were of great interest to the participants.
RESULT OF THE CORFERENCE
The most relevant point of the Conference, to Souza Cruz, was
the possibility it afforded to reveal the manner in which BAT
is conducting its business and to make it more efficient.
The presentation of "Cases and Experiences" of the Companies
in the Group caused great impact and should generate a review
in our management.
COORDINATION
Impecable in all aspects.
SUGGESTION
Continue to conduct similar events whenever relevant themes are
to be shared with executives in the Group. As a consequence,
no fixed time should be established for organizing next meetings.
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BAT Industries document for WHO 5 March 1999
To:
Sir Patrick Sheehy
Mr. M.F. Broughton--"
Mr. B.D. Bramley
Mr. £.J. Pr~tchard
Mr. U.C.Vo Hatter
Mr, A. Moutelro de Castro
Mr. J-L. Mercier
c.c. Mr. B.P. Garraway
Tobacco Strategy Rmviev Team
The minutes of the meeting of the Tobacco StrateEy Review Team held on
2nd December are attached.
AlthouEh there have been mlnor changes in paragraphs 38, &9, 50, 56,
59, 62 and 65, the sense of the minutes is unchanged from the draft vhlch
has already been sent to you and which should now be destroyed.
R. Salter
RSlD~S
20th December 1991 Enclosure
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BAT Industries document for WHO 5 March 1999
NO COPIES MAY BE MADE
Tobacco Stratea~/ Review Team
SECEET
A meeting of the Tobacco Strategy Review Team was held on 2nd December 1991.
Present : Sir Patrick Sheehy, Hr. M.F. Broughton, Hr. B.D. Bramley, Hr. R.J. Pritchard, Hr.
U.G.V. ~erter, Hr. A. Montelro de Castro,
Hr. J-L. Heftier, Dr. R. Salter (Secretary).
Minutes of the Previous Meeting/Matters Arisin~
1. The minutes of the meeting held on 6th September were agreed.
2.
I.T. in Selliug Seminar : Mr. Pc itchard reported that a seminar on the
application of I.T. in selling had been arranged for 13th-14th February in
Louisville.
MarketiuS Issues
3. November ~trketing Seminar : Reviewing the results of the marketing
seminar held in Orlando, imediace reactions were that:-
(a)
The formula proposed by Hr. Dunt should be applied to calculate
values for key brands across the Group. The implications of the
values obtained should then be considered in the reviews of plans for
1993-1997.
(b)
The strategic analysis of competitors should be improved, with
particular emphasis on the collection and use of information on cost
structures and other factors which were likely to be significant in
determining the ability and motivation of competitors either to react
to strategies proposed by BAT companies or to initiate strategies of
their own.
(c) Achieving and maintaining superior product quality was a vital
pre-condition for build£ng a successful marketing strategy. This
should continue to be given the highest priority.
The Chairman asked for the results of the seminar to be reviewed again at
the next meeting, to provide a more measured view both of the most
significant issues to have emerged and of other action which might
usefully be taken to pursue these.
5. MarketluE Infonsation System : Hr. Bramley presented a paper outlining
the proposals for implementing the improvements to the marketing
information system which had been agreed. It was noted that every effort
would be made to accelerate the implementation of the new system, aiming
to have this complete by end-1992.
6. It was suggested that it might be helpful co use consultants to assist in
the choice and implemeutatlou of appropriate software and systems. Hr.
Bramley will consult with other members and will then select an outside
firm with relevant expertise Co provide assistance on this project.
7. Competitor Analysis - Philip Morris : ~t was noted that Philip Morris
were still in the process of re-organisation following the appointment of
Mr. Miles as Chairman. There appeared Co be a continuing trend towards
simplification and cost-reduction but no dimlnuation in the pressure to
expand volumes and shares of the Marlboro brand worldwide. A ke~ strategy
appeared to be to plan on a regional basis and to concentrate manufacture
in plants vlth a minimum capacity of 5 billion cigarettes p.a.
/Boo
BAT INDUSTRIES CONFIDENTIAL- CATEGORY I" MINNESOTA TOBACCO LITIGATION
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8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
It was noted that Philip Morris was now profitable iu Brazil and had
increased their equity share of their Argentinian company. However, their
ability to exploit the potential of the Indoueslan :a=ket was consCca£ned
by not owning the Marlboro trademark in this market.
Market share and profits were still progressive in Germany but there had
been changes in the top management which appeared to have weakened the
company. It was noted that there had been some reduction in the proportion
of the total promotional spend allocated to Europe with more emphasis now
being given to the Far East.
It was agreed that it would be worthwhile to carry out in-depth consumer
analysis, to assess the strengths and weaknesses of Marlboro in Europe and
to determine whether the Marlboro cowboy was beginning to lose his appeal.
Mr. Herter will design an appropriate questionnaire and will recommend to
the Chairman how this enquiry Night be progressed.
R.3. Reynolds : It was suggested that although the recent financial
restructuring moves by R.J. Reyuolds 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.
It appeared that a response to the market share problem had been to
increase loading. It was suggested that Mr. Broughton should consider
bringing this to the attention of the appropriate market analysts.
There was also an indication that RJR might be prepared to sell the rights /
to market their brands in certain overseas markets. ~r. Pricchard was
/
asked to prepare an update for the next meetinE of his previous report,
assessing the price at which the purchase of defined elements of RJR's
overseas business might be worthwhile.
Rothsans : It was noted that in Germany, Brlnkmanns was losing share,
with Golden American failing to sustain its early progress in the New
Lands. Rot~nans was also losing share in Canada where the response had
been to move to unusual products such as 'sticks',
Tt was noted that the recent improvements in profitability shown in
Rothmans' accounts had been favourably received by the market. Rovever, it
was believed that this was largely due to plant rationalisation in Europe
and that the underlying trends were less favourable. The Chairman asked
the Secretary to prepare an analysis of Rothmans' profits and to assess
whether the analysts' favourable view of Rothmans' results is justified.
American Brands : It was noted that American Brands continued to show
good results based on the success achieved with Moutclair and Misty Slims
in the USA and with Gallahers in the UK. Bowered, Silk Cut had failed to
make an ~npact as an international brand and Callaher International nov
reports in to the UK.
Lorillard/LiEgetcs : There was some evidence that Lorillard might be
contemplating a re-entry co the international market, possibly with
Reritage. Liggett have said that they will re-launch Eve, Chesterfield and
L&M as full-revenue brands but both this and early negotiations on a joint
venture in the USSR are thought to he largely a~med at boosting the value
of the tobacco business ahead of a possible sale.
JTI : It was noted that volumes of JTI exports appear to be increasing,
especially at the low-price end of the market. The Secretary was asked t~
check wlth Mr. Chalfen whether there are grounds for inltiaclng
anti-dumping action in respect of this trade.
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20.
21.
22.
23.
24.
25.
26.
27.
28.
29.
Markets
Eastern Europe : Mr. Hercer reported thac sales to the region remained
progressive despite the war situation in Yugoslavia and the economic
pc.blares in Bulgaria whlch had restricCed saZes Co chess countries.
Zt was noted that sales to Russia were continuing but only where
payment was assured. This contrasted with some competitors who had
supplied on extended credit and ~ere now said Co be ~rried by their
exposure. The Chairman suggested thaC iC might be worthwhile to reassure
bankers thaC BAT was noC exposed in thls way.
Condlclous in Romania were chaotic. However; Kent was still
progressive and progress was also being made with Kim and KimMenthol.
Sales Co Czechoslovakia were increasing slowly and the contacts
established in the country should lead Co an acceleraclon in thls trend.
Poland showed an encouraging increase including sales by Sou~a Cruz
and exports from Cyprus offsetting a reduction in direct sales from Brown
& Willimneon. BATCF sales were largely I~, of ~nlch some were being
re-exported Co Germany.
Hnngary : Ic was noted Chat the investment in Pets was in the final
stages of negotiations wiCh the SPA. Zc was hoped Co complete the
purchase in February, at which time BATCo. would take over the
responsibility for mauaging the investment.
A review meeting has been arranged for 10th-llCh December at which the
objecclves and sCraCegles for further expanding the Group's interests in
Eastern Europe and the former USSR will be agreed country by ¢otmtry. Ic
was noted that it is intended chat the evaluation of investment
opporCunlClee, the preparation of proposals and the subsequent
neE, clarions will be brought under direct B.A.T XndusCries' control.
China : It was noted thac the new organisaciou for supplying the China
market would become operative from the let January.
South Cone : TC was noted that the current view is chat the ~ercoaul
v£11 be established during the 19908, although noC necessarily by the 1995
target dace. It was a~eed chat Mr. Castro would ~ake over the
respouslbiliCy for the study group set up Co consider the implications £or
B.A.T Industries and Co recommend appropriate action. He was asked to
report progress co the Team on a regular basis.
Colombia : Mr. Pricchard reported that sales to Colombia were
progressive. The next meeting of the group sac up to co-ordlnaCe BAT
sales Co the market is due co be held early in December. The results of
this meeting will be reported ac the next meeting.
Thailand : Mr. Pricchard reported thaC requirements for recailers to
obtain new licences £n order to sell imported brands had restricted sales,
whlch'were below plan. However, pressure would be maintained and progress
was already being made with SE555, Lucky Strike and Kent.
A visi~ co Turkey by the Chairman and Mr. Pricehard had escabllshed
ChaC market domination by Tekel and Philip Morris, comblned with laws
which rendered investment unattractive, severely restricted the
opportunities for profitable participation in ~he market. The T~rkish
Government would be co~d char, under Chess circumstances, BAT would noC
wish to pursue its interest in the market.
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30. It was noted that studies were still underway in Burma and a paper was
being prepared, recommending the strategy for Vietnam. BATCo. and
Brown & Willi~enson were continuing to monitor the situation in Mexico.
US International Brands
31.
Overall Performance : Hr. Pritchard reported that although sales to
date of US International Brands were still &.bZ below budget, this was
largely accounted for by a shortfall in Duty Free exports from HongKoug
and by the temporary closure of some Middle East markets. The forecast
for the gull year was that sales would be only 0.bZ below budget.
32.
Kent volumes were improving after a poor first half which was largely
attributable to the duty increase in HonE Kong, interruptions in
re-exports frc~ HonE Kong and Singapore, and the effects of the Gulf War.
Initial results from the test market in Germany had been disappointing but
a full evaluation of the test was not due until the second quarter of
1992. The Chairman emphasised the need to review Keuc sponsorship on a
worldwide basis and to ensure that this had the necessary high profile.
33.
34.
Lucky Strike continued to make good progress but although volume ires
llZ higher than 1990 this was still nearly 10% below budget. It was noted
that Lucky Strike was thought to be comparable to Marlboro in smoking
quality while the Lights version was believed to be superior to the
corresponding Marlboro product. However, it was also noted that Marlboro
Medium continued to build share in the USA and might be £nCroduced
internationally, providing a new element of competiclon.
Tt was agreed that expanding sales of Lucky Strike should continue to be a
priority objective, especially in Brazil and Europe where there should be
continuing emphasis on positioning the brand at the higher end of the
market through quality, pricing and strong advertising. The launch of
Lights versions should also be pursued, aiming to keep ahead of Marlboro.
35.
Talisman : Mr. Broughton reported that a meeting had been arranged for
15th January Co discuss further the possibilities for obtaining the rights
co the Lucky Strike trademark in markets where these were still maned by
American Brands.
36.
37.
38.
39.
Barclay : Mr. Pritchard reported that Barclay was progressive in most
markets and relatively stable in Norway and the Saudi Group but had
declined in Turkey due Co changes in the pricing structure in the market.
It was noted that the new delivery classifications would be introduced in
Belgium. The Ultra version vii1 be introduced first as agreed but the
subsequent launch will follow shortly afterwards rather than after the 3
monthsI interval which had been planned initially.
The Chairman accepted the need to push ahead with the launch progranne in
Belgium but emphaeised the need Co monitor the results very closely. Tt
was also important Chat in other markets, the agreed strategy should be
adhered to, regarding the interval between the launch of the Ultra version
and the completion o£ the re-positioning.
Other International Brands : Hr. Pritchard reported continuing good
progress with Hilton, Capri/Finesse and Viceroy, which gas
useful as a lower price international brand. There was also evidence of a
growth in demand for Menthol brandas especially in the Far East and Middle
East, which could support the further expansion of Tool. Hr. Pritchard
will report more fully on these brands at the next meeting.
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D~ Z~ce~ational Brands
40.
41.
/,2.
43.
45.
Ova=all Performance : Hr. Bramley reported chac sales of UX
InCeruaClonal Brands Co the end of September were 7.4Z ahead o£ the
corresponding period ~ 1990 but were still 2.1Z below budget. Sales of
Sg555 had been particularly good, offsetting a reduction in Bensen &
Hedges. Players Gold Leaf and JPS were both about 8Z ahead of last year
buc JPS sales were nearly 12Z below budget.
~6.
Benson & Hedges : XC was noted than alChough there ~re concinulng
problems with Benson & Hedges in Australia and Malaysia, domesClc sales
in South Africa were progressive ~riCh the mild variants doing
particularly well° Export sales were nearly I0Z below budget with sales
co French West Africa being adversely affected by political dlscurbances
and T.E.I. llcenced manufacture while European Duty Free sales were
affected by the reduction in tourism.
47.
The Chairman stressed the need for tighter management of the beand,
overcoming the Ions-standing quality problems (e.g. spotting in the
Middle East) and ensuring chat the blend was right before the Golden
Mild/Lights launch scheduled for lsc Quarter 1992 in Greece and France
was activated.
Xt was also important chat BATCo. should be clear ~hat they wished Benson
& Hedges to stand for in the medium to long term and should ensure that
the blend, pack design, advertising and sponsorship gas consistent wLth
the image which they wished to project, worldwide.
SE555 : It was noted thac SE555 had very strong latent goodwill in a
number of markets. This should be nurtured, building ouC from positions
of strength and pricing the band correctly in each market. The Chairman
also suggested that the brand concept might usefully be redefined,
especially in respect of the characteristics of the blend.
Players Gold Leaf : The Chalrmau suggested that in defining the
strategy for PGL, more emphasis should be given to product quality as a
key factor to be controlled from the centre. He was also disappointed
vlth the relatively low rate of growth projected for the five years to
1996 and asked Chat this should be reviewed.
John Player Special : Tt was agreed that the potential of JPS should
be reviewed, with a view co deciding by the end of 1992, whether it
should continue to be promoted as an international brand.
Quality : Mr. Brsmley presented a paper outlining specific targets
and proposed programmes of action Co effect an overall inprovement in the
quality of UK International Brands. XC was agreed that he would report
back in December 1992, on the progress achieved in meeting the targets
which had been set.
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• eselcch and Development
Pol~cy/Ocgan~saclon : Hr. Bramley reported on discussions held with the
ocher members of the ream, she object of which ~as Co consider whether
there should be a change of emphasis in the Group's Research and
Development with a greater proporC£on of the effort being applied to
consumer-led research aimed ac developing better c£sareCces.
49.
In the discussions, it had been agreed thaC although members believed that
it was advantageous to continue to cenCralise some work on regulatory
issues ~thin the Fundamental Research Centre (FKC), this work should be
susCantially reduced from 57 man years in 1991 co 10 man years in 1992,
covering work on Bioaasays, Additives/Hacerials, International Standards
and Smoking Tssues only.
50.
At the same tithe, the range of work in the respective development
laboratories should be increased; by 37 man years in BATCo. (BTC); by 14
man years in Brown & Willi~son; and by 7 man years in BATTY..
51.
Mr. Mercier noted thac Tmasco supported the strengthening of produce
development buc also emphasised the importance of continuing fundamental
research on a Croup basis.
52.
Tt was agreed thaC the change in e~phasis which had been proposed should be
implemented. Mr. Bramley was asked Co prepare detailed plans and proposals
for the scaling-down of FRC and for the transfers or reductions in staff
which would be involved. He yes also asked to consider further, whether
the post of Research Co-ordinator should be retained, Hr. Bramley will
report progress to the next meeting.
53.
t-1 Tobacco : Tt was noted thac there had been encouraging progress in
the USA, UK and Germany where cigarettes incorporating Y-1 tobacco had
performed well in tests. However, Sours Cruz had not found any advantage
from incorporating Y-1 while lmasco found that Y-1 incorporation appeared
to increase the harshness of Virginia-type cigarettes. Further progress
will be reported at the next meeting.
54.
Reconsclcuced Stem : The Chairman stressed thac in considering the
incorporation of reconstituted stem and in deciding hoe thls courponent
should be produced, the overriding consideration should be co enhance the
quality of the final product, not co cuC costs. TC ~as also suggested Chat
in addition to testing the potential for incorporation in Benson & Hedges,
BATCo. should also consider the potential for incorporation in SE555. It
was noted that BATCF and Souza Cruz will prepare papers for the next
meeting, assessing the potential for producing and using reconstituted stem
and considering the capital expenditure impllcacions.
Leaf
55.
Leaf Processing Se~az : Mr. Prltchard reported that a Leaf processing
seminar had been arranged for 9th-12th December. T~enty-six delegates from
around" the Croup were expected Co attend. The seminar had a full programme
which included a v~siC to W~lson.
56.
Leaf Purchasing : It was noted that there had beeua number o~ cases
where the prices agreed with farmers for the purchase of Leaf had been coo
high, w~th consequent adverse effects o~ the Group's profits, especially
where the Leaf was subsequently sold to distributors. Hr. BroughCon was
asked to formulate ~th Hr. Pilbem~, guidelines on crop costing ~hich could
be applied round the Croup co overcome this problem. Tt was also noted
that B.A.T Tudustries' Legal Department was reviewing ~he contracts for •
Leaf supply to distributors with a view ~o recommending whether or not
these should be changed (e.g. to el~ninate exclusivity clauses).
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57.
Leaf Exports : It was noted chat although there had been some
improvement in the supply of Burley, the current crop in the USA was no~
expected to be sufficient to restore durations. The slcuaclon for
flue-cured tobacco vat easier and fire-cured was a weak market with a high
degree of volatility.
58.
Although there had been some easlng of the leaf supply situation, it was
believed that there were still good opportunities to increase Leaf exports
from Group companies, provided chat costs were contained.
59.
Tt vas noted chat B&TCo. were planniug Co increase Leaf exports from
~A,000 tons co 91,000 tons over a five-year period, representing an
increase in sales from $128 million to $400 milIion. On current
estimates, this could represent an increase in profits from $A0 million in
1991 to around $120 million in 1995. The fixed asset investment required
to achieve this ~uld be of the order of $90 million and additional
working capital of $60-$72 m~I1£on vould also be required. A paper
outlining the overall plan, ~d~ich included a proposal to upgrade the
central management of Leaf was due Co be presented Co the CPC in the near
future.
60.
Souza Cruz also planned to increase Leaf exports, following the
acquisition of Dobra, which allowed a more incegTaced approach to Leaf
management.
Regulatory Issues
61.
Ymv~rowaental Policy : Mr. BroughCon reported that follo~ng the 3.A.T
ZudusCries Board review of the Group's enviroumental pol£cy statement,
this had been modified. A copy of the modified statement had been
circulated ~th the papers for the meeting. Tt was noted that the person
at B.A.T lndusCTies responsible for the co-ordinat~on of environmental
policy ~r£thln the Group was nov Hr. D.D. Read.
62.
Environmental Tobacco Smoke : Recent developments in the USA, Canada
and the UK had strengthened the view tha~ ETS was c~reucly a pol£tlcal
rather than a scientific issue. This led Co the conclusion that although
data should continue to be collected, it waa unlikely at present that
scientific arguments would be effective in altering the trend towards
increasing rescricClOUS on the right to smoke inside public bu£Idiugs.
63.
Advertlsing Restrictions : It was uoted that there was also strong
pressure for increased restrictions on advertising, although here there
were some elgne in Canada and Europe of more resistance from bodies
concerned with personal liberty, allied to media whose commercial
interests are threatened by reductions in the total volume of advertislns.
~t was noted that the Social A~falrs Uuit, a right-~ng research and
educational trust in the UK, had recently produced L~o pamphlets ou the
adverse effect of advertising bans. The Secretary was asked to circulate
copies of these to Team members.
64.
Fire-Safe Cigarettes : Mr. Pr£cchard reported that although the US
Safe C£garette Act of 1990 calls for a final report from the Technical
Advisory Croup by August 1993, recommending a suitable form of
f£re-propenslcytesting, the evidence Co dace was that this was unlikely
Co be achievable. Brown & Wi~li~son ~II continue co moulcor
developments and to report on any that are sisulf~cant.
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F, anasemeuc Develo~aeuc
63.
ReT£ev lel~orC : Mr. Broughcon presented a report outlining proposals
for a complete overhaul of the Group's management tra~n£ng and development
processes. This separated management cra£n/ng £nto 4 levels ~th the CPC
responsible for Cop management Crainlng, the TSRT responslble for the
training and development of senior mnagement; Operating Group companies
responsible for business Cralniug and development; and Functions
responsible for EuucClonal training and development. ZC was noted Chac
Hr. David Stevens would take over the reoponelbili~y got the further
development of these proposals, replacing Hr. McBeach.
66. Discussion ceuCred ou the proposals for funcC£onal training and it yea
agreed that:-
(a) Functional courses should be aimed at everyone who joins a functiou
at a ~nageriaI level.
(b) £u the first instance, courses should be desisned for Yaarketing,
ProducClou, Finance and Leaf only.
(c)
As previously agreed, 3ATCF should be responsible for the courses in
~arketing, with Bro~a & Williameoa responslble £or Production, BATCo.
for Finance, and Souza Cruz for Lea£.
(d)
The respective members of the TSI~ would be responsible for
drawlng-up proposals for appropriate courses, having agreed the form
o£ Chess ~Ch the other Operating Companies.
67.
It was agreed thac management training should be reviewed agaln at the
next meeting when l~c. Broushton would report progress on the development
of the new arrangements.
68.
Inter-Company Transfers : Hr. Bramley reported chat 24 transfers had
been arranged and that there were a further 39 vacancies under
consideration. It was suggested Chat it might uow be possible to extend
the system to cover more junior posts and further consideration would be
g~veu Co this. There wouId also be a review of the terms and conditions
offered Co people who were transferred to ensure chat these were
appropriate.
Future F, eetlnss
69. Dates arranged for the meetings in 1992 are Wednesday, 26th February;
Friday, 29th May; Thursday, ~rd September and Wednesday, 2nd Decomber.
RS/DJS
20th December 1991
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To:
CoCo
Sir PaCr£ck Sheehy
Mr. M.F. Brou2hCou
Kr. B.D. Brmley
Mr. R.J. PrlCchard
Hr. A. MouCelro de Castro
Dr. B. Schweitzer
Mr. E.~+. KohnhorsC
Hr. B.P. Carraway
Hr. J-L. Merc£er
I
°~ .............
Tobacco SCraCes7 Eevle, w,Tema
The agenda and papers for the Tobacco Strategy Review Team meeting,
due Co be held aC 10.00 a.m. on Wednesday, 26Ch February in the Boardroom
aC Windsor House, are attached.
R. Salter
xs/DJS
2IaC February1992
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lqev Tobacco 14arketa "'+ :
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A meeting yes held in Sandwich on 10th and 1lob December 1991 Co review the
action in hand for preparing proposals and progressing invese-enc projects
a~ned at expanding the Group's tobacco interests in Eastern Zorope, the former
USSR and other countries where the Group does noC currently have an active
subsidiary or associate company, but where there are good oppurtunities for
profitable Group investment or re-investment in the u~srke¢.
Present : $~r Patrick Sheeh7, Mr. B.D. Bramtey, Hr. R.J. Pr£cchard, Mr. U.G.V. Hatter, Hr. A.
Monceiro de Castro, Hr. H. Tomat,
Mr. D.S. WaCtertou, Dr. R. Salter (Secretary).
le
The Chairman said thac the purpose of the meeting gould be Co review the
countries in turn, co define the Group's objectives for each and Co agree
the responsibilities and priorities for action co pursue Chess
objectives.
2e
These objectives and the action agreed are s,mm--rised in the paragraphs
which follow, taking the countries in approximate order of priority°
Countries identified for priorlCy action are Russia, U~aine, Yugoslavia
(Macedonia) Czechoslovakia (Slovak£a) and V~ecnsm/Cambod~a/Burr~a. A lower
priority was assigned to action on Moldova, Poland, Estonia and LaL'vla.
The third SToup of countries where the prospects appeared more dlatant
were Lithuania, Belorussla, Bulgaria, Romania, Albania, Mexico and
Uruguay.
3.
Action in hand to monitor developments in the formation o£ Mercosul, to
assess the impllcaCious for BAT Zudustries and to recommend acciou was
also reviewed.
tt was agreed chaC it was noC worthwhile to pursue potential opporCunlcles
in Cuba where the quallCy of the leaf ia unsuitable for ~king good
clgareCtes. However, if the market opens, it could be of interest as an
export market for Brown and Will£muon.
The proposal fro= STK for a ratioualisaCion of the Scandinavian uutrkeC
was also noted. IC was agreed thac this appeared co be largely driven by
the financial strategies of the respective national ¢cqpanies and did not
have a strategic marketing rationale. IC was also likely Co lead Co a
reduction in the level of BAT's equity in STK and gould represent a
weakening of control in the marker. It was agreed Chat ]ft. Br~mley
gould inform STK chaC the proposals were not of interest Co BA~
Tnduscries. He will also review the existing STX agreements with
Mr. Chalfen and will consider whether these could allow stronger control
by BAT Industries on brands and brand strategies in Scandinavia. Also,
~neCher some renegociaCion of the agreement might be proposed.
General issues
1
Yurther Review : It was noted chat the priorities assigned to the
different countries reviewed could be reasseeaed if there were sil~o+iflclnt
developments in the cl~ate for foreign invesPment (eg in Poland or
Hexlco) or if new information emerged, suggesting thac the potential ~or
profitable invest~nenC was greater or less than originally thought. ~C was
intended, in any case, chat progress in all the countries covered would be
reviewed again inMay 1992.
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7.
Project Teams : The Chairman stressed the need to ensure that the teems"
evaluating investments had strong leadership and chaC they drew on both
internal and external expertise to ensure thac all aspects of the
investment were fully covered. Tt was likely chac there would be a
requirement to have a locally based law firm working on each project to
ensure thac all legal aspects were covered. There would also be a
requirement to identify consultants who had good connections wlCh the
leadin~ industry and potiCical figures in the co,cry and who could
provide insights inCo likely developments which could affect the cleats
for foreign investment.
8.
It was important to have advice on exclJe atructuTea ~ich might
usefully be proposed to governments. Y~. Binghem in BATCO would continue
Co be available to provide this.
9Q
Brand Strategies : It was confirmed that Brand Strategies should
continue Co be based on a top range including Kent, Lucky SCrSke, Barclay,
Capri, HB, Elm, $E555 and Benson and Hedges; a second range including
Viceroy, Pall Mall and Players Gold Leaf; and a third range including
Hollyvood, North SCare and Acdath. Tt was important the quality standards
should be maintained, especially in the cop rouse, either through imports
or by imposing stringent standards ou local production.
10.
Brand Ownership/Reglstraclon : It ~ras agreed chat all companies should
be more pro-active in reviewing the regisCraClon of brands especially in
the P~publics of the former Soviet Union. Mr. Castro should also
carry out a general review of the position for Souza Cruz brands
worldwide. He ~11 obtain advice from Mr. Bramley on Trade Mark Agents
used by BATCo.
11.
Filter Toy : It was noted that it may be difflculc to obtain adequate
supplies of Filter Tow. Mr, Pritehard will review the position on
this worldwide, discussing potentialproblems with the main suppliers;
Celanese, Eas~nan Kodak and P.hodiao
Prlorit7 Countries
12.
Russia v~Ch a population of around 147m and cigarette production
substantially lower than consumption is considered to be the prime target
for invesmnent.
13.
The objective for Russia will be Co establish the Group's brands in the
marker, to continue to expand imports and Co become established as a
manufacturer either through a sreenflelds pro~ect (probably on the slte of
a former zilitary industrial complex) or through a project similar to but
more comprehensive ~han the approach by Philip Morris, who ~re proposing
to Cake over and upgrade an existing c~garette factory.
14.
It was noted that it would be ~zportant to continue to strengthen contacts
with, and knowledge og the Russian market through the office in Moscow,
through existing consultants and through other well connected people
within Russia. This would be ~he responsibility of Mr. Hercez.
15.
It was agreed that although ex-Soviec orgauisaclons should be largely
ignored, contact should be maintained with key people. Specific
information to be checked should include
Ca)
Cb)
Whether the Moscow and St. Petersburg factories still have a
s~ecial status separate from the rest of the Russian industry.
The current situation regarding the tlCle Co assets in all ex
USSR republics.
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16.
17.
18.
19.
20.
21.
22.
23.
25.
26.
-3-
Mr, P~itchard was also asked Co check ou current eac~ates of the
excen~ to which there was a separate US dollar baaed economy within Russia
(eg How accurate is the estimate of 20bn dollars held by individual and
trading organiaations in Russia?).
It was agreed that the main thrust should be a dual stratesy to set up a
manufacturing plant:-
(a) Mr. Castro will be responsible for prepariug a proposal to set up
a green£~eld factory, following a meeting with the appropriate Russian
contacts which will be set up byMr. Better.
(b) Mr. Wattertou v£11 prepare a proposal for upgrading an existing
activity, aiming for this to be better and more compreheusive than the
~itlp Morris proposal, details of which will be provided by
Herter.
The first objective will be to have oucllne proposals availabl~ by end
January.
It was noted thac the greenfields proposal would need to involve equity
investment, arrangements for machinery supply, the provision of leaf
know-how and the possible involvement of Petrobras if an oil-barter
element was ~nvolved. There should also be provision for local equity
involvement.
The Chairman wili make contact with the EBRD, to establish whether the
Bank could provide assistance in financing.
Zn parallel ~Ch the investment thrusts exports will COu~iuue to be
promoted with offers co the state ocganisation being co-ordinated through
the Moscow office but with companies reaccinE to approaches from traders
on an individual basis within the guidelines previously aEreed for brands
and prices. The F~)scow office should be kept informed of developments in
this trade.
It was noted that Hollywood would be included in the offer for the EC
financed project but would need to be manufactured in Europe, using a
Souza Cruz blend of leaf imported from Brazil.
The Moscow office is unlikely to be useful in establishing contacts
outside Russia and Mr. Herter will consider whether additioual offices
need to be set up to service the other former Soviet Republics. Be will
also extend the investigation of potential opport~tles to Eastern Russia
and to Republics not already identified as having investment potential.
Ukraine : The objective for the Ukraine will be to find a way for
parcicipating in the coral tobacco industry for the republic, including
leaf. Cigarette consumption is estimated at 80bn and production 70bn from
II factories. These are not part of a monopoly but are an association of
relatively independent businesses.
The first objective will be for Nm. Berter to obtain assistance from
an approprlaCe Merchant Bank and Co prepare an outline by end December
for a total reorganisation of the Ukrainian Tobacco Industry, ready for
presentation to the head of the Industry in Kiev in early JanuarT.
The aim of this initial move will be to pre-empt the commissioning of a
sectoral study of the type which the Polish Industry obtained from Morgan
Grenfell.
.=.
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28.
29.
30.
31.
32.
33.
34.
35.
36.
37.
-4-
Yugoslavia : The Ions-term objecClve for Yugoslavia w~ll be to acquire
at least one and possibly both companies w£th which the Croup has trading
relationships; Macedon Tabak in Macedonia who supply oriental leaf to
BATCF and B&W and Nis in Serbia who are the licencees for Kent.
It is understood that Macedon Tabak is Co be privatised early in 1992 and
that the workers council, who effectively control the company, have
obtained permission to attract foreign investment. Although they are
Brinks, ann llcencees, relations are bad and they are thought to be looking
for alternative partners. They have co~nlssioned Ernst and Young to value
~he company.
Hr. Watterton will attend a meeting wi~h the Macedon Tabak management
which has been arranged by BATCF for January. He will then develop a
proposal using the BATCF consultant, Mr. Kruse, to provide background and
assistance.
Hr. Pritchard will maintain contact with Nis and will carry out a full
evaluation of the potential for investing in this company.
Czechoslovakia : It was noted that the total market for Czechoslovakia
~s 38bn, split between Czech Tabac (19bn) and CSTP (gbn) who cover
Slovakla. Because of the central geographical position participation iu
the Czech and Slovak industries is an agreed long-term objective for the
Group.
The first objective will be to try to formulate a joint proposal vlth
Austria Tabak for the acquisition of CSTP. Hr. Wattecton will attend
a meeting in January which BATCF have arranged with Austria Tabak. Re
will then follow'up Co try to develop a joint proposal, being prepared to
allow Austria Tabak to have a majority share in distribution, printing and
cigars on condition that BAT will have the majority share in cigarette
making.
If it is not possible to come to an agreement with Austria Tabak, the
alternative of making independent bids for the Czech and Slovak companies
should be considered.
A third possibility would be Co set up a greenfield plant just across the
border from Bayreuth. This plant would then be used to produce 2 or 3 key
brands for sale in the Czech market.
It was noted that Hr. Watterton was also intending to v~sit Bratislava
to obtain more information about the market.
Far East : Hr. Watterton will strengthen the team operating out of
Singapore in order to progress the investment proposals for Vietnam, Burma
and Cambodia. It was agreed that Mr Yap Boon Ann m~ght be made available
~o lead the team but that it would be necessary uo provide a good finance
man, possibly from Souza Cruz. Mr. Castro will consider who might be
made available for this post.
Vietnam : It was noted that although Vietnam was still relatlvely
undeveloped it was believed to have the potential to become ~he next
Thailand, towards the end of the decade. The current cigarette market is
about 35bn with Rothmans Craven 'A' as the leading locally-produced
lnternational Brand. There are also substantial imports of SE555 through
the transi~ trade.
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38. The loug-term objectives should be to become established with a cigarette
manufacturing business and Leaf exports.
39.
40.
41.
42.
43.
44.
45.
46.
47.
B
The first aim will be co extend the discussions with the leading
Vietnamese tobacco company, aiming to set up joint ventures for a new
factory and a leaf company, in which the dealers Inter Bex ~ght also need
to be involved.
TC vas noted thac the first stage of a joint venture could be to set up a
secondary llne on a greenfields site, importing cut rag from Singapore and
aiming to re-establish Capstan in the market along with 2 or 3 brands
ceded from the Vietmanese.
A second stage vould be to build a complete factory capable of 2bn per
month, including blended cigarettes.
A third stage could be involvement in £mproving distribution in the
market.
Cambodia : IX was noted chat Cambodia has a market of 3bn, run by the
monopoly. Tay Choon Hye, BAT's distribuCors in Singapore, have suggested
that it could be available for privatlsatlon.
The objective will be to cake over the monopoly, retaining the Cambodian
Government as a minority partner.
A tea= ~ill be sent from Singapore in January, to evaluate Cambodia as
an investment opportunity. Based on the results of this visit,
Hr. Vatterton will prepare a proposal.
Burma : Tay Choon Hye are already involved in a joint venture with the
local monopoly in Burma which might be exteuded to include BAT.
Hr. ~actertou is arranging for an evaluation of the opportunities
available and rill produce a proposal by end-March.
The Chairman stressed the need for any arrangement to be transparently
fair to both sides so that it has a chance of surviving the expected
change in regime.
2nd
48.
49.
50.
51.
PrloritT Countries
Holdova produces 70,000 tons of (mainly oriental) tobacco and also has
a reasonably good cigarette factory capable of producing 9bn.
The long-term objective will be to be involved iu leaf processing and
exporting and also in cigarette manufacturing.
As a firs= a~, Hr. Watterton irfll arrange £or a full evaluation of
the opportunities for invesement in the Leaf sector and Hr. Prltchard
will make a Leaf expert available to assist with this work. The supply of
seed from Brazil should also be considered.
As s follow-up, Hr. Watterton ~11 evaluate the cigarette industry,
possibly drawing on BATCF to provide the resource to carry out their
evaluation.
/9OO
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52.
53.
54.
55.
56.
57.
59.
60.
61.
Poland : ~e lous-r.erm objective for the 88bn Pol£sh market is to own
a factory and to supply the market through BAT's own sales organisatlon.
Rowever it will not be clear what opportunities are available to the Croup
until the author~tles have reacted to the sector study subm£tted recently
by Morgan Creufell.
In view of this, it will be necessary to prepare alternative strategies in
order to be able to move quickly once a decision is made, whether or not
to privatlse the industry. It is also accepted that further lengthy
delays could be involved while the form which any privatisatlon should
take is determined.
Although the acquisition of Augustow remains the preferred option
Mr. Herter, with advice from a Merchant Bank, will also develop
alternative proposals assuming that Augustow is either not available or
not available by itself.
In the meantime, he will discuss with the Augustow management the
possibility of contract manufacture of 2 or 3 brands based on imported cut
rag and machinery leased by BAT, possibly at a peppercorn rent.
He will also go ahead with the registration of the trading company set up
to distribute BAT products and will renegotlace the terms of she agreement
with the current distributors, cutting out the exclusivity clause.
The potentlal for leaf imports fr~n Brazil and BATCo companies should also
be assessed.
The Chairman will be prepared to approach the Polish Ambassador ~f
required, to enlist his help in trying to bring to his Government's
attention the damage caused by delays in the privatisatlon programme.
In Estouia/Latwia/Lithuanla the objective will be to participate in
the respective nwnopolies. The i~ediate aim will be to have
opportunities in these countries evaluated by end March 1992.
Estonia : Mr. Brmaley will arrange wlth the Finnish company to
have the Estonian market evaluated.
Latvia : Hr. Brmaley trill also arrange with the Danish company for
an evaluation of the Latvian market.
3rd Prlorit7 Countries
52. Lithuania : Mr. Hotter will arrange to have the Lithuanian market
evaluated.
63.
64.
Belorussla : Hr. Hotter will also arrange for the team involved
with AugusCow to visit Belorussia.
Tadzhlkistan/Kirghlzla : Hr. WatCerton reported approaches from
these Cwo Republics, who wished to build up their exports of Leaf and
cigarettes. However it was agreed that BAT would not ~sh to develop in
these Republlcs at present. Mr Watterton will respond accordingly.
.B!
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65. Bulgaria : It was noted Chac the previous Socialist government in
Bulgaria had been de£eated in the 0ccober elections. The current
pollcicat situation yes unstable with the largest (Democratic) parry
not having a majority and needing to put together a coalition
including the Turkish party in order to survive. One consequence og
the political situation fs that the privatisatiou and £oreigu
investment laws are likely to be revritten. The Government ~r~ll also
wish to have a greah review of the £uture og the tobacco industry and
a new head of the industry has been installed.
66. The industry produces 80bn cigarettes a year, based on local, largely
oriental tobacco. Domestic consumption is only 15bn and the majority
of production is exported. The lea£ crop is around I10,000 tons o£
which 30,000 Cons of good quality oriental leaf is exported. Burley
and Plue-c~ed is also grown but in the wrong areas aud quality is
poor. The main export markets for cigarettes were Russia,
A~ghanlstan and Tran but there are problems with all of these. In
addition, the cigarettes are not of a type ~ich can be sold in other
marks ts.
67.
68.
69.
s
70.
71.
72.
73.
The long-term objective for Bulgaria is to become involved in their
Leaf sector. However, there is a need Co upgrade the quality o£ the
non-oriental Leag before thls can become an attractive proposition.
This may also not be feasible before there is laud refo~,
The ~nmediate a~n ~ll be for Mr. Wacterton to establish contact
w~ch the hey iuduscry leader, who is already known to the Croup, and
who yes involved in previous negotiations betveeu BAT and
Bulgar tabak.
The short-term objective should be Co assist Bulgartabak in raising
the quality of their lea£ operation. BAT's ability to do this should
be demonstrated by arranging v~sits to Souza Cruz, Brown and
Williamsou and the University of North Carolina.
In parallel with these contacts there should be continuing efforts to
sell lea~ from Brazil and to consider the potential for expanding
llcenced production (eg introducing V~ceroy).
Romania : Mr. Pritchard will set up a re-evaluation of the
potential for investment in Romania, which should be completed by
end-February, probably using Hr. Libert out of Brussels to carry
out the evaluatiou. He will also review the quality of advice he is
currently obtaining on developments in Romania and wilI consider the
appointment of a new adviser. (Mr. Herter may know of a candidate
for this.)
More immedlately~ BATCF will respond to an invitation from the
Romanlan mouopoly by saying that a visit will be arrauged in
January.
Albania : ~C was agreed that Albania ~ll only be o£ interest i£
BAT can enter the market by taking over the monopoly. Mr. Fcltehard
will arrange an evaluation visit by Mr. E. Aquiler, who is an Italian
speaker.
mo°
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75.
76.
77.
78.
79.
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1~Jclco (market 55bn) : It was agreed that although BAT Industr£ee
has a long-term objecclve co become fully re-esCabl£shed in che
Mexican ~rkeC ~r~ch a major £acC0¢7 and dlsCributlon in the main
ciCles, this v£11 only be feasible if the relevant agreements can be
made under US rather than Mexican law.
The key development which could open the market to BAT would be the
extension Co Mexico of the US/Canad£an Yree Trade Agreement. Hovever,
£C wiT1 also be important Chat the FTA extension should include
cigarettes as a sector Co be covered. Mr. Pritchard will cunc£nue
co lobby for this wlChln the USA.
Mr. WatCerCon and 1~. Pritchard b-ill continue Co couslder
posslbilicles for re-inCroduclng Kent Co the marker (eg by the.
acqulslClon of La L£berCad and by ~nporCing cased scrips from Chile.)
However, £ir~ proposals should uoC be prepared unless the quallCy of
the produce can be guaranteed, and unless there is no danger ChaC BAT
wouid again be forced to wlchdraw from the market.
Uruguay : Ic was uoCed chat BATCo have had an approach from
Hr. ~ailhos, the head of the largest business iu UruEuay. It was
agreed ChaC Mr. Castro would follow up on this and would arrange a
visit in January.
Mercoaul : IC was noted Chac Mr. Castro had Oaken~ over
responsibility for the sCudies co deCermlne the ~plicacions for BAT
Industries of the formaclou of Hercosul.
A meeting Co revi~a progress involving Mr. Grant from the Argenc~e
will be held in February, during the Chairman's v~slC Co Brazil.
BAT INDUSTRIES CONFIDENTIAL- CATEGORY l" MINNESOTA TOBACCO LmGATION
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t
To:
Sir
Patrick
Sheeh7
tf ~ i
,
~. ~-~ .~.~-. _ ~ ..
.~.
Tobacco SCrate~v levfe~ ~Februar~ 1992
Briefin~ Notes
The notes have been numbered to correspond wlth the items on the agenda.
The references in parenthesis relate to the minutes from the previoum
meeting (copy attached). The minutes of the meeting beld on 10ch/llth
December to progress action ou new markets are also attached.
~.C.w.. •
lm
Minutes of 2nd December Meeting : All matters arising from the
December meeting are dealt with by other agenda ite~, except:-
- The inplementation of the @ins re-c~ganisatlou (m~ute 25).
- Environ=ntal Policy (minute 61).
Another issue which is not dealt with either in the minutes or on the
agenda is the impllcaClous for B.A.T Industries o£ the increase in
excise evasion and transh trade.
Z(a)
Nevembar Wm~keC4~g Seminar : There are papers from Souza Cruz and
Imasco. Members were asked to take a measured v~ew of the ~ssues to
have emerged from the seminar and to suggest possible follov-up action
(minute 4). Tc has already been agreed that Operating Groups should
apply the 'Dust formula' Co evaluate brands ahead of the 1993-1996
planniuE exercise.
(b) LT. in SellhS $ea~a~ : Mr. I~itchard is due to report ou the
sem/uar held on 13th/14th February (minute 2).
Cc)
Market4-$ Information Syates~ : Mr. Bremley is due to report which
consultants have been selected to provide assistance in setting up the
improved marketing information system (minutes 5-6).
Cd) Competitor J=alTsia : There are papers from Brown & Willismsen and
Souza Cruz. Imasco have reported on Canada (not circulated) and there
is also a note responding to your query about the quality o£ the
~proved margins in Rothmans (minute 15). The update of the valuation
~of E/E'a international business has not yet been started (m/sure I3).
- ~,,,.~ ,to_ =..~..,,~ ~ ;~. ~ ~,,,,.',~ ~ ~ ~ ~...'.,,.~.
(e) Consumer Analya~s/Na~ibo:o in Emeope : There £s a paper from BATCY
responding to your request for them to recommend a study of 14arlburo's
appeal in Europe (minute I0).
(f)
~TI - AnC~-dumping : There is a paper responding Co your request
to consider the possibility of initiating anti-dumping actions asainst
JT~ (minute 18).
Hr. ~atterton will be available to be called down for item 3.
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3(a)
Cb)
Co)
Cd)
Ce)
~Ca)
Cb)
5Ca)
7Ca)
Cb)
Co)
Cd)
Easee~u Europe : In addition co the regular statistical report
from BATCF, there is also a paper from Souza Cruz and a paper from
Mr. ~attertou coveriuz the follow-up on new markets since the December
10th/llth meeting (minutes 19-24). The developments in new markets
are due to be discussed in detail at a meeting arranged for 20eh ~ay,
the day before the Budapest conference.
Budapest Conference : There is a paper on this.
MTanmarb Cambodia and Vietnam are covered in Mr. Wattertou's paper
(minute 30). Mr. Bramley is also due to report on developments in
Scand£nav£a.
Thailand, Colombla, Mexico and Cuba are due to be reported on by
Mr. Pritchard (minutes 27-28). There is also a paper by Souza Cruz on
Colombia.
Mercoeul : There is a paper from Souza Cruz Cmiuute 26).
US International Brands : There is a paper ~:omMr, Prltchard
(minutes 31-39). There is also a paper on Lucky Strike in Brazil
(minute 34).
Talisman : Mr. Broughton is due to report on his discussions vith
American Brands on the possible purchase of Lucky Strike rights for
additional markets (minute 35).
UK InCeruatloual Brands : There is a paper from Mr. Bramley
(minutes 40-47).
Smoking Quality Study : Report by Mr. F~hnhorst on the study set
up last May to consider what should be done:-
(a) To establish a better interchange of experience on quality
testing withim the Group.
(b)
To improve the effectiveness ~vith which Smoking Quality is
measured and monitored.
Mr. Kohnhorst ~r~shes to show overheads to support his presentation
(which should not exceed 20 minutes).
ReallocaC£ou FRC : Mr. Bramley is due to report on the scaling
down of the Fundamental Research Centre and on uhether the post of
Research Co-ordinator should be retained (mluute 52).
Up~caded Product Development : Mr. Pritchard and Dr. Schweltzer
are due Co report on the upgrading of product development Co include
work previously covered by FRC (minute 50). There is also a paper
from'Souza Cruz.
Y-I Tobacco : Progress reports are due from Hr. Pritchard,
Hr. Br~ley and Dr. Schweiczer Cminute 53).
ReconstltuCed Stem : Mr. Bramley is due to report on the potential
for introducing reconstituted stem into SE555. BATCF and Souza Cruz
are also due to report on the potential for producing and
incorporating reconstituted stem - and the capital expenditure
implications Cminute 54).
see
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8Ca)
Cb)
Leaf Proceaalng Smainar : Mr. Pritchard is due ¢o report on the
seminar held on 12Ch/13Ch December (mlnuCe 55).
Leaf Costing Guidelines : Mr. Broughcon is due Co report on the
development wlCh Hr. Pilbeam of guidelines on crop costing which can
be applied to avoid over-paylng fazmers. Legal department is also
discussing ~Ch BATCo. a format for scandardised leaf purchase
contracts (minute 56). There is a paper on leaf coats from Souza
CrUZ.
(c)
Leaf Exports : BATCo. and Sou~a Cruz are due co report progreJs on
developing plans co increase Leaf exports (minutes 57-60). There is a
paper on this from Souza Cruz.
9Ca)
KsnagemenC Training : There is a paper from Mr. BroughCon
reviewing progress in developing improved functional training courses
(minutes 65-67). There is also a paper from Souza Cruz on Leaf
training.
Cb) Inter-Company Transfers : Mr. Bramley is due Co report progress
Cminute 68).
I0
Review of Tradlng Results : Z have assumed thac you ~rill w~sh Co
ask each Operation to report briefly on the results for January.
llCa) Environmental Tobacco Smoke : There is a paper from Hr. Prlcchard
(~nute 62).
(b) Fire-Safe Cigarette= : There is a paper from Hr. Pritchard
Cmlnnce 64).
C¢)
Advertising geaCrictlous : You may wish to ask Mr. Brmley and/or
Dr. Schweiczer co report on the latest developments in the EEC (m~nuce
S3).
The dace of the next meeting is Friday, 29th May but there is also a meeting
in Budapest on Wednesday, 20th May, specifically to discuss new markers.
R. Salter
RS/DJS
24Cb February 1992
Enclosures
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Nev Tobacco Ha~ke~
"'L
A meeting was held on 20Oh May 1992 Co review progress on preparing
proposals and progressing investment projects for countries where there are
good opportunities for profitable investment or re-investment in tobacco
markers where the Group does not currently have an active associate or
subsidiary company.
Present:
~ir Patrick Sheehy, Mr. U.G.V. qercer, Mr. B.D. Bramley,
~r. R.J. Pritchard, Mr. A. Monteiro de Castro,
Mr. D.S. Watt.cOon, Mr. R-A. Tomac, ~r. G. 0ltermann,
Dr. R. Salter (Secretary).
1.
The ed.nutee of the previous meeting held on 10th/llth December
1991 were agreed.
General Issues
2.
Brand Registration : The Chairman emphasised the importance of
ensuring thac the Group's major brands are registered £n as many
countries as possible worldwide:-
(a)
Mz. BrRmley reported that the 3ovieC Trades Mark
Registration office had closed on 1st February. Following ~he
closure, ic appeared thac the relevant registrations were nov
valid only for Russia. The position ~n the other Republics was
unclear and representatives were being appointed in each, to
~onitor the situation on behalf of the Group.
(b) Mr. Hercer thought that the Russian registration might also
apply Co the three ~altlc :epubllcs.
3. Mr. de Castro reported ~haC Ho11~od bad been registered in
all Central and Eastern E~ropeau countries° Elsewhere, problems had
been experienced iu the M~ddle East where the ~ndonesiau ~onopoly ~,-ho
owned the rights in Indonesia had been selliug into ocher nmrkets.
~owever, action was in hand to stop Chiso
The Chairman e~phasised the importance of worldwide registration
for ~ollywood, which ~ust be pursued actively, everywhere.
4. Yree : It was noted Chat the programme to register Free,
worldwide, was proceeding buc difficulties had been experienced iu
some markets where Philip Morris owned similar marks such as Freeport.
~razil had been one of these markets but fortunately, Philip Morris
had allowed the registration there co lapse.
The Chairman reiterated the importance of brand registration which
each company should review with their lawyers on a monthly basis. ~t
~as also important for the Group co have local representatives in each
marker ~o ~itor changes in the situation and to act on the Group's
behalf. Where it was possible to do so, the practice of covering the
use of brands on other, non-tobacco, products should also be
continued.
/oeo
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5e
Lessons from Rungary : Mr. Bramley reviewed various aspects of
~he Group's experience in the takeover of Pecsi Dohanygyar. It was
noted that lessons from the takeover which should be taken into account
in future acquisitions were as follows:-
Ca)
Since the upgrading of local brands offers the best immediate
prospects for significant increases in market share and profits,
priority should be given ~o this ahead of programmes to introduce
international brands.
Cb3
The need for management strengthening and training had been
underestimated. Also, the difficulty and cost of simplifying
grade structures and adjusting salaries.
Cc)
The business was under-capitalised and needed more capital,
especially to buLld up leaf stocks.
(d)
Ce)
(f)
Significant expenditure was also required on safety and health
measures but these could be brought in progressively and were not
such an immediate drain on the cash-flow which, because volume had
been higher and profits lower ~han expected was not adequate to
supply ~he additional funds required.
Leaf supply and quality was a critical issue and needed to be
given a high priority.
It was important to keep open as many options as possible for
developing future distribution arrangements.
Cg)
Negotiations on the excise regime should start as early as
possible and the Croup should be pro-active in suggesting to
Cove:-nments how an ideal system should be structured.
7e
Excise Advisory Team : It was agreed that in view of the importance
of excise, Mr. Herter would set up a small team independent of New
Business Development Department, who would offer a service to
Governments, indicating the revenue earning possibilities of tobacco and
o~her products and advising on the optimum structure for excise regimes.
Discussions which the Chairman had with Mr. A~tali and Hr. Freeman at
EBRD suggested that funds could be available to cover the cost of
specific projects undertaken by the team. It was also suggested that
Deloittes, who are though~ to offer a similar service already, might be
called on for advice and help.
Priorit7 Countries
8. Ukraine : It was agreed Chat the next stage in progressing the
proposal to invest in the Ukraine should be a meeting with Mr. Paliychuk
to establish:-
Ca)
The likely procedure for privatisacion and the process for taking
the B.A.T Industries' proposal to the next s~age.
(b)
The formula for converting any investment by B.A,T Industries into
an equity stake.
Cc)
Whether the authorities would be amenable to an approach to
discuss and advise on excise structures.
Cd)
How to provide sufficient information to establish B.A.T
Industries as the preferred partner while avoiding the danger chat ,
the B.A.T Industries' proposal would become the basis for inviting
tenders from other companies.
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9. It was noted that:-
10.
II.
12.
13.
(a)
The initial proposal .must be based on a plan to upgrade local
brands, leaving the introduction of American blends ro a later
stage.
Cb)
The plan must include upgrades for both Chekassy and Priluky,
showing that both factories have an important part to play in the
future.
Co)
It is essential that there are excise systems within which we can
work, and it is strongly preferable that they should provide a
Eramework within which we can make a profit.
(d) The possibility of entering into a joint venture or of taking a
minority stake should only be considered if BAT is the larger
shareholder and would have the option to buy a majority if it were
to be sold. The strong preference is to acquire a majority
position.
(e) The preliminary draft proposal to be discussed with Mr. Paliychuk
will envisage a major upgrading of the primaries in both factories
and a partial upgrading of the secondaries in a first stage, to be
followed by a fur=her upgrading of secondaries in a subsequent
stage.
(f) The re-equipment will be based on reconditioned equipment ex-Browu
Williamson, which will be valued at market price.
.Mr. Pritchard has permission to recondition the equipment. A
schedule of equipment available from Brown & Williamson for this
and other projects is attached as an appendix.
(g) It is hoped that the initial investment will be sufficient to
secure a majority in the equity of the Ukrainian factories which
are currently thought to be producing 24 billion out of total
domestic production of 60 billion, serving an 80 billion market.
Rnsaia : Mr. Tomat reported that negotiations are continuing to
finalise major contracts for the supply of 12.5 billion cigarettes to
the Russian state importing agency. The major problem, which is being
experienced by all importers, is arranging finance. Priority is being
given to arranging payment from funds available from aid progra--nes,
including a special sale of Jockey Club from Argentina, financed by
~unds from an Argentinian aid programme.
The Chairman stressed the need to build-up the Russian business by
supplying from quality sources (US, Brazil, Germany and selected BATCo.
companies) and by ensuring that finance is secure. All business
should be channelled through the Group's offices in Russia and
Mr, Bramley should identify and approve sources of supply from
BATCo. which have regular, high quality supplies. Business must be done
in accordance with this strategy and opportunistic sales must not be
made outside it.
In addition to doing business with the official import agency, contacts
~ere being established with other possible customers operating within
the newly-established commodity exchanges. Mr. Tomat reported that
BAT's own import company, selling in Roubles and then converting the
proceeds, would be established as a pilot operation.
Mr. de Castro also reported an enquiry through a Swiss trader for
the supply of 5 billion Rollywood. This would be progressed at a
meeting arranged for 29th May.
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lb.
16.
17.
18.
19.
~0.
21.
Representation in Russia had been strengthened by furthe:
recruitment and a strategy paper sill be produced in July covering plans
for further strengthening both in Russia and in the other Republics.
Investment posslbilities in Russia were still unclear. & proposal
for a greenflelds investment had been prepared and Mr. He~er
assisted by Mr. Allford will continue to probe the Ministry of
Agriculture and Food, the t~in£stry of Trade, the City Councils in Moscow
and $t. Petersburg, the Privstisation Fund and Vice-President Rushkov to
show the Group's willingness to invest and to try to obtain a positive
response. The investigation may also be extended further to the
authorities in the oil producing dis=rict of Perm.
Acquisition possibilities are being investigated by Mr. ~attertou
assisted by Goldman Sachs. Mr. Tomat is also arranging for visits
to all the factories in the former Soviet Union during the autumn,
concentrating on talking to local factory managers rather than ceutra~
authorities.
Yugoslavia : Zt was noted that the political situation in Yugoslavia
showed no slgns of stabilising and it must be assumed that the current
anarchic situation will continue for ~any years. ~owever, despite the
problems, consumption and output #ere up on last year with the only
significant sufferer being Philip Morris ~hose primary in Sarajevo had
been bombed.
Macedonia : Mr. Watterton is discussing a letter of intent with
Mskedonia Tabak but further progress may be delayed until the
privatisation law for Macedonia is finalised. This is u0t expected to
emerge until the end of the year. It was noted that be:ause of the
political situation, Macedonia Tabak would be valued as a supplier to
the domestic clgare~te market only. However, it would still be an
importan~ exporter of Leaf.
Serbia : It was noted that ~erb£a is still communist and is not
expected to move towards privatisatiou. Mr. Pritchard visited the
Kent licencees NZS and learnt that Philip Morris had offered $115
million for the co.any. Rowever, this had been refused by the RIS
management. It was agreed that the possibilities for investment in NZS
were not worth pursuing at present and Mr. Watterton ~ll cancel his
proposed visit in June. Mr. Pritnhard will continue tO ~nage the
licence and will attempt to prevent ~IS from exporting Ken~ to
Czechoslovakia, in breath of their agreement.
Czechoslovakia : Mr. Wattertou reported that the progress of the
Reemstma acquisition of CTSP and the Philip Morris acquisition of Tabak
would be monitored. BAT will continue to press for the abolition of the
monopoly laws and if these appear likely to be repealed the project to
se~ up a secondary on a greenfielda site ~r~ll be reactivated. It was
~oted that Czechoslovakia was likely to join the European Free Trade
Zone but that tobacco goods will not be covered by this. Full entry to
the EC is not expected for I0 years.
The Chairman said that it must be made clear that the reason BAT did
notbid for the Czechoslovak companies was that the tendering process
was not transparent. It should also be made clear publicly that BAT
believed that this was not in the best interests oE the Czechoslovak
people. Re would be speaking to the Central European News along these
lines and other opportunities should be sought to keep this issue in the
public eye.
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22.
25.
25.
27.
28.
Following the acquisitions, Czechoslovakia would be removed from the
list of countries for priori:y consideration.
Vietnam : It was agreed that because the market was not a monopoly
and because of the continuing restrictions on US companies, who were not
yet allowed to do business in Vietnam, this was a particularly good
opportunity for a BAT investment. However, it was unclear how
enthusiastic Vietaba were to enter into an agreement, as conflicting
views emerged a~ different times. It was important, therefore, that a
permanent resident representative was appointed to moni:or the situation
and to promote BAT's interests.
It was noted that Mr. Wattertou would be visiting Vietnam at the end
of the mouth to put forward proposals agreed by the CPC. On the
assumption that the Vietnamese would not allow development to be based
on the old BAT factory site in Saigon, a first priority would be to
ensure that others would also be excluded from this line of approach.
BAT's o~n proposal would be based on an initial investment to set u9 a
secondary on a greenfields site. This would be a joint venture with
Vietaba, achieved through cross shareholdings. Two VieCaba brands would
%e ceded to the JV which would then register additional ~nternational
Brands ~o broaden the portfolio. The second stage of the proposal would
be to set up a primary in a disused warehouse, thereby creating a
complete production line.
Cambodia : It was noted that Cambodia has a population of 8 million,
and a cigarette ,Imrket of 6 billion, of which 2.6 billion is locally
produced. Tay Choon Rye, BAT's distribution in Singapore has a lease on
the three factories owned by the national monopoly. Tay Choon Rye
wishes to assign the lease to a new joint company A0Z-ovned by the
monopoly 40% by BAT and 20% by Ta7 Choou ~ye who is also prepared to
enter into an agreement that BAT can vo~e his shares.
There are several restrictive clauses in the lease (including price
control) which, ideally, B&T would like to have cancelled. ~owever, it
was agreed that because of the potential effect on the price of the
business elimination of all t~ese clauses should not be a sine quo non
for reaching agreement. Mr. Wetter=on will visit Cambodia in June
to progress these negotiations.
Myanmar : It was noted that although Myaumar has a population of
42 million most of the smoking materials market is for cheroots and ~he
consumption of manufactured cigarettes is only 3 billion of which 1.5
billion are produced locally. The CPC had agreed the parameters for
negotiation on a similar basis to that for Cambodia, leading to another
~0:~0:20 company in which Tay Choon Rye will again cede his voting
rights to B&T.
In addition to the opportunity for cigarette sales Hyaumar offers good
opportunities for Leaf growing and the potential for this line of
~evelopment will also be investigated during Mr. ~a~terton's
forthcominE v~sit in June.
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Lower Priority~uveati~atioua
29. Poland : It was noted that BAT nov has an office and e small sales
staff establlshed in Poland. The Group has also been allocated a quota
of 0.8 billion out of the 6 billion of imports permitted in 1992.
30.
The chaotic political situation in Poland has resulted in a virtual
standstill in legislation and although ic has been agreed in priuciple
that the original proposal to keep the monopoly intact is cot the best
solution, the recent agreement to offer 3 factories for sales (including
Augustow) has not yet been implemented. However, BATCF is ready to
progress the proposal co invest in Augustow as soon as it is possible to
do so.
31.
32.
It was noted that STK have a licencee making and selling Prince in
Poland and that they would be interested to participate with BAT on the
Augustow project if there is an opportunity to do so.
It was s.~reed that Poland should be added to the list of countries for
priority consideration.
33.
Moldova : Mr. Wacterton reported that leaf experiments were
continuing in Moldova and that a letter of intent to broaden this
co-operatiou had been signed. BAT also has a first option if the
Moldovans decide Co sell their cigarette factory.
34.
35.
Estonia : Mr. Bramley reported that although $TK have negotiated
with the Estonian tobacco industry they were not impressed with the
people they met and have not sigued a letter of intent tn continue the
negotiations.
Latvia : STK have, however, signed a letter of intent v£th the
Latvian industry and are discussing the form of future co-operation.
36.
Lithuania : Mr. Herter reported that by agreement ~ith the other
Operating Croups, BATTY had represented BAT in Lithuania, a market of 8
billion served by 2 factories. Good cnntacts had been established and a
plan will be drawn up which will include proposals to close one of the
factories.
37.
38.
Belorussia : Mr. Herter reported that a visit had been made to
3elorussia to establish contact. The consumption in the country is
20 billion cigarettes p.a. and this is served by one factory. Although
the economic prospects of the country are poor, its strategic position
is such chat it could attract considerable aid, especially from the EC.
It was agreed that contact should be maintained.
Bulgaria : Zt was noted that a privatisation law had been passed in
Bulgaria but this has not yet been gazetted. Contacts remain good
through Mr. Rulle's relationship w~th the head of Bulgartabac, Mr.
Dither. The industry remains in problems due to the collapse of exports
to Russia and prospects are uncertain. However, the situation will be
monitored and cnn~act maintained.
39.
Romania : Mr. Pritchard reported that he had visited Romania in
February. Although the country is in a poor state economically, the
tobacco monopoly with whom BAT maintains good relations, appears to be
relatively efficient with a very clean factory. There is no sign of any
movement Cowards privatisation and the main focus of the Group's efforts
will continue to be on imports, including Hollywood from Cyprus.
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40. Albania : There has been a small order from Albania, ~hich will be
visited in the near future.
41.
Tadzhikietan/KiriEh£z£a : M~. Watterton is arranging visits ~0
these two Republics which could be useful suppliers of Leaf and which
are also interested in set:ing up cigarette factories.
42.
Uzbechistan : Mr. Tomat has met a delegation from Uzbechistan
who have said they are interested in the possibility of co-operation
with B.A.T Industries. It was agreed that the team visiting
Tadzhikistan and Kirighizia should also visit Uzbechistan, which will
additionally be visited from Moscow.
Armenia, Georgia, Other Former Soviet Republics : It was noted that
there had been insufficient resource ~o assess the potential in the
other former Soviet Republics. It was agreed that to overcome this
limitation, Mr. Watterton will commission consultants to carry out a
basic fac~ finding investigation in each, covering, inter a~ia, the
current status of ~he industry, the prospects for privacisation and the
[denti~y of potential representatives for the Group.
4&.
Mexico : Mr. Pritchard reported =ha¢ Brown & Willi~nson had been
successful in keeping cigarettes on the agenda for ~he continuing NAFTA
talks. Progress ~n these ~aiks (in which the Mexicans are asking for 20
years continuing protection for their tobacco industry) are slow and no
agreement is expected until well after the US presidential election. In
the meantime, [he situation will continue ~o be monitored.
~5.
Colombia : Mr. Pritchard reported that following changes in the
duties applied to cigarettes, imports were now more competitive.
of Kent, Kool, Hollywood and Belmon~ were all expanding.
Sales
&6.
Mercosur/UruEua7 : Mr. de Castro reported that a meeting w~th
Mr. Mailhos ~sd established that he was interested in selling his
business to B.A.T Industries. ~owever, initial figures supplied by him
suggested that ~he price he was asking may be too high.
~7.
The Chairman asked Mr. de Castro to prepare an early warning
note for the CFC indicating wha~ migh~ be proposed. He should then seek
to put the negotiations on a more formal basis by involving a merchant
bank or independent auditors ~o establish BAT's o~a~ value for the
business,
~8.
Paraguay : Discussions were proceeding with the licencee who holds
the rights to several og the Group's brands with a view to recovering
~hese. The next meeting on this is scheduled for June.
~9.
Argentina : It was noted that the import duty on Brazilian
cigarettes was now only 11%, The Rollywood trademark had been
registered and imports would be increased. The second Brazilian brand
on sale in Argentina was Ritz but this was entering illegally and
regular imports would no~ be established until the trade mark had been
registered. IE this proved difficult, another, similarly priced brand
would be chosen ~o replace Ritz.
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50.
51.
52.
53.
5~.
55.
~6.
57.
58.
59.
It was noted that the Hercosur agreement raised fundamental questions
about the viability of the Argentinian tobacco industry. BAT needed to
establish the full extent of this problem, the implications for ~he
Group and the action which might be taken to meet the resulta-~-
opportunities and challenges. It was agreed that Mr. de Castro
should set up this investigation using Keith Dunt from Millbank and any
other outside advice which he thought to be appropriate. .Mr. Grant
should also be kept informed of progress but because of possibte
conflicts of interest due to the effect on Nobleza, he should not be
directly involved in the team.
It was agreed That, in future, Mercosur and the individual country
developments arising from it should be dealt with as priority projects.
Cuba : Mr. Pritchard reported that although there was a shortage
of cigarettes in Cuba, US trade restrictions meant that this was not a
realistic opportunity for Brown & Williamson. It was agreed that
Mr. de Castro should evaluate Cuba as an opportunity market "for
Souza Cruz.
Thailand : Mr. Pritchard reported that conditions in the Thai
market remained difficult. The tobacco monopoly was run by a retired
general who was close to the ruling party. Hence, any concessions
~reeing trade were difficult to obtain and even more difficult to
sustain over time. Despite this, however, progress continued to be made
in establishing the Group in the market.
Philippines : Mr. Pritchard reported that a Brown & W£111amson
visitor to the Philippines, sent to locate the source of illegal imports
coming out of the country, reported chat Rothmans was seeking another
equity partner with ~hom to co-operate on US brands.
The Chairman asked Mr. Pritchard to prepare an early warning
note for the CPC after which a decision would be taken how to follow-up
with the Philippines company and Rothmans.
Taivan : Mr. Wattercon reported that privatisation of the
Taiwanese tobacco industry was expected within three years. Although no
dramatic developments were expected, it was agreed that the situation
should be monitored through BATUKE and BAT's agen~ in Talwan.
Portugal : It was agreed that moves towards privatisation in
Portugal should also be monitored.
Scandinavia : It was noted that the proposal by STK and Volvo to
form a joint company covering all of Scandinavia now appeared to have
been dropped. The main problems in the region were ~hat Lucky Strike
and Barclay were not progressive in Norway and Sweden, that STK promoted
Lucky Strike [neffectlvely and that this could leave them very
vulnerable when the imposition of the EC 15mE limit on Ist January 1993
will .lead to a need to reformulate Prince. These issues will be dealt
with aT the Tobacco Strategy Review Team meeting on 29th May when
Mr. Pritchard will also report on progress with Barclay in
Scandinavia.
Iran : It was noted that Iran has a population of 70-80 million and
a market of 35-&0 billion cigarettes of which 20 billion are produced
locally, i0 billion are legal imports (80Z BATCF and 20Z Reemstma) and
10 billion illegal imports.
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60. Philip Morris and RJR have set up local of Eices and are pressing for a.
share of the legal imports. R/R are also believed to have submitted a
draft proposal to set up a factory.
61. EATCF have opened an office and are attempting to attract an ex-monopoly
~an to run this. They are also considering whether to respond to a
request co submit a proposal to upgrade an existing local factory from
15 billion to 20 billion capacity. In addition, they are considering a
llnk-up with the Shabel foundation who act as import agents.
62.
53.
64.
65.
36.
It was agreed that the strategy to establish closer relations and a
presence on the ground was likely to be helpfu~ both in maintaining a
good level of exports to Iran and in allowing the Croup to have an
option on any investment opportunities. Mr. Prltchard confirmed
that a link with the Shabel foundation could affect their relations wlth
their agent but he did not see this as a problem. BATCF will keep Brown
& Williamson informed of develovaents so that appropriate action can be
taken.
Representation : Concluding, the Chairman reiterated the importance
of having an accredited representative of the Croup on the ground in all
territories in which the Group had a significant interest, to monitor
and re,oct oa significant political, legal and market develo~aents and
to represent the Group's interests where i= is appropriate to do so.
Outside Advisors : He also stressed the need to make full use of
outside advisors and consultants in order to supplement the necessarily
limited in-house management resources.
Priorities : It was noted that following the changes in priorities
agreed at the meeting, the current list of countries for priority
consideration is:- The Ukraine; Russia; Poland; Macedonia; Vietnam;
Cambodia; Myanmar; Argentina; Paraguay; Uruguay (Mercosur); The
Philippines; and Iran. In addition, priority would also be given to
evaluating the potential in the o~her ex-Soviet Republics and for Souza
Cruz in Cuba.
Other coun=rles where contact will be maintained and the situation
monitored but which are not expected to offer immediate prospects for
investment are:- Czechoslovakia; Romania; Bulgaria; Serbia; Albania;
Thailand; Taiwan; Mexico; Colombia; and Portugal. Exports to these
countries will also continue to be expanded, especially to Thailand and
Colombia.
RS/RB/OJS
3rd June 1992
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DRAFT MINUTES S E C R E T
ITEM 4(b)
New Tobacco Markets
A meeting was held on 20oh Mxy 1992 to review progress on preparing
proposals and progressing invest_men= projects for countries where there are
good opportunities for profitable investment or re-investment in Cobecco
markets where the Group does not currently have an active associate or
subsidiary Company.
Present:
Sir Patrick Sheehy, Hr. U.G.V. Herr.r, Mr. B.D. Bramley,
Mr. "R.J. Pritchard, Hr. A. Monteiro de Castro,
.Hr. D.S. WatterCon, Mr. H-A. TomaC, Dr. G. Oltermann,
Dr.. R. Salter (Secretary).
Io
The ~nutes of the previous meeting held on lOth/llth December
1991 were agreed.
General ~ssnes
2o
Brand Registration : The Chairman e~nphasised the ~nporcance of
ensuring that the Group's major brands are registered in as many
coun~rles as possible worldwide:-
(a)
Mr. Brtuley reported that the Soviet Trades Hark
Registration office had closed on lsC February. Following the
closure, it appeared~thac the relevant registrations were uow
valid only for Russia. The poeitiou in the other Republics was
unclear and representatives were being appointed in each, to
monitor the situation ou behalf of the Croup.
(b) Mr. Herter though~ that the Russiau registration might also
apply to the three Baltic republics.
3o
Mr. de Castro reported that ~ollyvood had been registered in
all Central and Eastern European countries. Elsewhere, problems had
been experienced in the Middle East Here the Indonesian monopoly who
owned the rights in Indonesia had been selling into other markets.
~owever, action was in hand to stop this.
The Chalr~an e~phasised the importance of worldwide registration
for Hollywood, which should be pursued actively.
Free : I~ was noted tha~ the progra~e to register F~ee,
worldwide, was proceeding but difficulties had been experienced in
some markets where Philip Morris owned similar marks such as Freeport.
~razll had been one of these markets but fortunately, Philip Morris
had allowed the registration there ~o lapse.
The Chairman reiterated the importance of brand registration which
each company should review with ~heir lawyers on a monthly basis. Tt
was also ~nporcant for the Croup Co have local representatives in each
market to monitor changes in the sicuatiou and to act on the Group's
behalf. Where it was possible to do so, ~he practice of covering the
use of brands on other, non-tobacco produc~s should also he
continued.
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Lessons from Hungary : F~. Bramley reviewed various aspects of
the Group's experience in the takeover of Pecsi DohanysTar. It was
noted thac lessons from the takeover which should be taken into account
in future acquisitions were as follows:-
(8)
Since the upgrading of local brands offers the best immediate
prospects for significant increases in market share and profits,
priority should be given to this, ahead of programmea to introduce
international brands.
(b)
The need for management strengthening and training had been
underestimated. Also, the dlfflculCy and cost of simplifying
grade structures and adjusting salaries.
(c)
Ca)
(e)
(f)
The business was under-capitalised and needed more capital,
especially to build up leaf stocks. Significant expenditure was
also required on safety and health measures but these could be
brought in progressively and were not such an immediate drain on
the cash-flow which, because volume had been higher and profits
lower than expected was not adequate to supply the additional
funds required.
Leaf supply and quali=y was a critical ~ssue and needed to be
given a high priority.
It was important to keep open as many options as possible for
developing future distribution arrangements.
Negotiations on the excise regime should s~art as early as
possible and the Group should be pro-active in suggesting to
Governments how an ideal system should be structured.
7~
Excise Advisory Team : It was agreed that in view of ~he importance
of excise, Mr. Herter would set up a small team independent of New
Business Developmen~ Department, who would offer a service to
Governments, indicating ~he revenue earning possibilities of tobacco and
other products and advising on ~he optimum structure for excise regimes.
Discussions which ~he Chairman had with Mr. A~tali and Mr. Freeman at
EBRD suggested that funds could be available to cover the cos= of
specific projects undertaken b7 the team. It was also suggested that
Delolttes, who are thought to offer a similar service already, might be
called on for advice and help.
Priority Countries
8. Ukraine : It was agreed that the next stage in progressing the
proposal to invest in the Ukraine should be a ~eeting with Mr. Paliychuk
to establish:-
(a)
The likely procedure for privatisation and the procesa for taking
the B.A.T Industries' proposal to the next stage.
(b)
The formula for converting any investment by B.A.T Iudustries into
an equity stake.
(c)
t~hether the authorities would be amenable to an approach to
discuss and advise on excise structures.
(d)
How to provide sufficient information to establish B.A.T
Industries as the preferred partner while avoiding the danger that
the B.A.T Industries' proposal ~ould become the basis for invitingp
tenders from other companies.
/.e.
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9.
10.
11.
12.
13.
It was noted that:-
(a) The initial proposal ~,st be based on a plan to upgrade local
brands, leaving the introduction of American blends to a later
s rage.
(b)
• '~e plan must include upgrades for both Chekassy and Priluky,
showing that both factories have an important part to play in the
futtEe.
(c) While the plans should stress the need for changes in the systems
of excise, price control, etc., BAT should also be prepared to
work within the existing system.
(d) The possibility of entering into a joint venture or of taking a
minority stake ahead o£ a fuller acquisition should he considered
as possible ways either for avoiding an auction or for placing BAT
in a preferred position if one were to occur.
(e) The preliminary draf~ proposal to be discussed with Mr. Paliychuk
will envisage a major upgrading of the primaries in both factories
and a partial upgrading of the secondaries in a first stage, to be
followed by a further upgrading of secondaries in a subsequent
stage.
Cf)
The re-equipment will be based on reconditioned equipment ex-Brova
& Williams.n, which will be valued at market price. A schedule of
equipment available fro~ Brovu & Williamson for this and other
projects is attached as an appendix.
(g)
It is hoped that the initial investment will be sufficient to
secure a majority in the equity of the Ukrainian factories which
are currently thought to be producing 24 billlon out o£ total
domestic production of 60 billion, serving an 80 billion market.
Russia : Mr, Tomat reported that negotiations are continuing to
finalise major contracts for the supply of 12.5 billion cigarettes to
the Russian state importing agency. The major problem, which is being
experienced by all importers, is arranging finance. Priority is being
given to arranging payment from funds available from aid programme,,
including a special sale of Jockey Club from Argentina, financed by
funds from an Argentinian aid programme.
The Chalrman stressed the need to build-up the Russian business by
supplying from quality sources (US, Brazil, Germany and selected BATCo.
companies) and by ensuring that finance is secure. All businesses
should be channelled through the Group's offices in Russia and
Mr. Bramley should approve any supply from BATCo. companies,
avoiding direct sales by Indonesia etc., wherever it is possible to do
this.
In dddition to doing business with the official import agencyj coutacts
were being established with other possible customers operating within
the newly-established comodity exchanges. Mr. Tomat reported that
BAT's own import company, selling in Roubles and then conver~ing the
proceeds, would be established as a pilot operation.
Mr. de Castro also reported an enquiry through a Swiss trader for
the supply of 5 billion Hollywood. This would be progressed at a
meeting arranged for 29th May.
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BAT INDUSTRIES CONF]I3ENTIAL- CATEGORY l: MINNESOTA TOBACCO LITIGATION
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BAT Industries document for WHO 5 March 1999
- 4-
14.
15.
16.
17.
18.
19.
20.
21.
Eepresentation in Russia had been strengthened by further
recruitment and a strategy paper will be produced in July covering plans
for further strengthening both in Russia and in the other Republics.
~nvestmemt poss{billtlea in Russla were still unclear. A proposal
for a greenfielda investment had been prepared and Mr. HerCer,
assisted by Mr. Allford, will continue co probe the Ministry of
Agriculture and Food, the Ministry of Trade, the City Councils in Moscow
and St. Petersburg, the Privatisation Fund and Vice-President Rushkov to
show the Group's willingness to invest and to cry to obtain a positive
response. The investigation may also be extended further to the
authorities in the oil producing district of ?er~.
Acquisltiou possib ies are being investigated by Mr. Watterton
assisted by Goldmad Sachs. Mr. Tomat is also arranging for visits
to all the factories in the former Soviet Unlou during the autu~m,
concentrating on talking to local factory managers rather than central
authorities.
Yugoslavia : It was noted that the political situation in Yugoslavia
showed no siena of stabilising. It must be assumed, therefore that the
current anarchic situation will continue for many years. However,
despite the problems, consumption and output were up on last year with
the only significant sufferer being Philip Morris whose primary in
Sarajevo had been bombed.
Macedonia : Mr. Watterton is discussing a letter of intent with
Makedonia Tabak but further progress may be delayed until the
privatisa~iou law for Macedonia is finalised. This is not expected to
emerge until the end o~ the year. It was noted that because of the
political situation, Macedonia Tabak would be valued as a supplier to
the domestic cigarette market only. However, iC would still be an
important exporter of Leaf.
Serbia : It was noted that Serbia is still communist and is not
expected co move :owards privatisation. Mr. Prit=hard visit~d--~
Kent licencees HIS and learnt that Philip Morris had offer~$ll5 J
million for the company. However, this had been refused by"~
management. ~t was agreed that the possibilities for investment in NIS
were not worth pursuing at present and Mr. Watterton will cancel his
proposed visit in June. Mr. Frltchard will continue to manage the
licence and will attempt Co prevent NIS from exporting Kent to
Czechoslovakia, in breach of their agreement.
Czecboslmrakia : Mr. Watterton reported that the progress of the
Reemstma acquisition of CSTP and the Philip Morris acquisition of Tabak
would be monitored. BAT will continue co press for the abollCion of the
monopoly laws and if these appear likely to be repealed, the project to
set up a secondary on a greenfields site will be reactivated. It was
noted thaC Czechoslovakia was likely to join the European Free Trade
Zone but that tobacco goods will not be covered by this. Full entry to
She EC is not expected for I0 years.
The Chairman said Chat it must be made clear that the reason BAT did
not bid for the Czechoslovak companies was that the tendering process
was not trausparen=. It should also be made clear publicly that BAT
believed that this was not in the best interests of the Czechoslovak
tfpeople. ~e would be speaking to the Central European News along these
Ilines and other opportunities should be sought to keep this issue in the
[public eye.
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BAT INDUSTRIES CONFIDENTIAL- CATEGORY l: MINNESOTA TOBACCO LITIGATION
BAT Industries document for WHO 5 March 1999
.. . -- 5 m
22.
23.
25.
26.
27.
28.
Following the acquisi=ions, Czechoslovakia would be removed from the
list of cou=tries for priority consideration.
Vietnam~ ~t was agreed Chat because =he marker was no= a wonopoly
and because of the continuing restrictions on US coaz~anles, who were not
yet allowed to do business in Vietnam, this was a particularly good
opportunity for a BAT investment. However, it was unclear how
enchuslaetlc Vinataba were to enter into an agreement, as conflicting
views emerged aC different times. T~ was important, therefore, that a
permanent resident representative was appointed to monitor the situation
and to promote BAT's interests.
Tt was noted Chat Mro WaCtertou would be visiting Vietnam at the end
of the month to put forward proposals agreed by the CPC. On the
assumption thac the Vietnamese would not allow development Co be based
on the old BAT factory site in Saigon, a first priority would be Co
ensure that ochers would also be excluded from this line of approach.
BAT's own proposal would be based on an initial investment co set up a
secondary on a greeufields site. This would be a joint venture with
Vinacaba, achieved through cross shareholdings. Two Vinataba brands
would be ceded to the JV which ~ould then register additional
International Brands to broaden the portfolio. The second stage of the
proposal would be to set up a primary in a disused warehouse, thereby
cresting a complete production line.
Cambodia : It was noted Chat Cambodia has a population of 8 million,
and a cigarette market of 6 billion, of which 2.6 billlon is locally
produced. Tsy Choon Hye, BAT's distribution in Singapore has a lease on
the three factories o~ned by the national monopoly. Tay Choon Hye
wishes to assign the lease to a new joint company 40Z-owned by the
monopoly 40% by BAT aud 20Z by Tay Choon Rye, who is also prepared Co
enter into an agreement that BAT can vote his shares.
There are several restrictive clauses in the lease (including price
control) which, ideally, B~T would like to have cancelled. However, it
was agreed Chat because of the potential effect on the price of the
business, elimination of all these clauses should not be a sine qua non
for reaching agreement. Mr. WatCerton will visit Cambodia in June
to progress these negotiations.
Myanmar : It was no~ed thac although Myanmar has a population of
42 million most of ~he smoking materials marker is for cheroots and the
consumption of manufactured cigarettes is only 3 billion of which 1.5
billion are produced locally. The CPC has agreed the parameters for
negotiatlou on a similar basis to that for Cambodia, leading to another
40:40:20 company in which Tay Choou Hye will again cede his voCing
rights co BAT.
In addition to the opportunity for cigarette sales, Myaumar also offers
good opportunities for Leaf growing. The potential for this line of
development will also be investigated during Mr. ~attertou's
forthcoming visit in June.
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BAT INDUSTRIES CONFIDENTIAL- CATEGORY [: MINNESOTA TOBACCO LITIGATION
BAT Industries document for WHO 5 March 1999
- 6-
Lover ~iorlt7 Znveeti~atio~s
29. Poland : It was no"ed that 3&T no'.,, has an office and a small sales
staf~ established in ~oland. The Group has also been aZlocated a quota
o~ 0,8 billion out o£ the 6 billion of ~npores permitted ~n 1992.
30.
The chaotic political situation in Poland has resulted in a virtual
standstill in leglslatiou and although it has been agreed in principle
that the original proposal to keep the monopoly intact is not the best
solution, the recent agreement to offer 3 factories for sales (including
August.w) has not yet been implemented. However, BATCF is ready CO
progress the proposal to invest in Auguscow as soon as ic is possible Co
do SO.
31.
~t was noted that STK have a licencee making and selling Prince ~u
Poland and that they would be interested to participate with BAT on the
~uguscow project if there is an opportunity Co do so.
32. ~ was agreed that Poland should be added to the list of countries for
priority consideration.
33.
34.
Moldova : lqro WatCerton reported that leaf experiments were
continuing in ~oldova and that a letter of intent to broaden Ch~s
co-operation had been signed. BAT also has a first option of the
Mold.vans decide co sell their cigarette factory.
Estonia : Mr. Brzmley reported that although ST~ have negotiated
with the Estonian tobacco industry/ they were noc impressed with the
people they met and have not signed a letter of intent co continue the
negotiations.
35. Latvia : STX have, however, signed a letter of intent ~th the
Latvian industr~ and are discussing the form of future co-operaClon.
36.
Lithuania : ~, Hatter reported that by agreement with the other
Operating Groups, BATCF had represented BAT in Lithuania, a market of 8
b~llion served by 2 fa:~ories. Good contacts had been established and a
plan will be drawn up which will include proposals to close one of the
factories.
38.
Belorussia : Mr. Hatter reported that a visit had been made to
Belorussia to establish contact. The consumption ~n the country is
20 billion cigarettes p.o. and ~hle is served by one factory. Although
the economic prospects of the country are poor, its strategic position
is such that it could attract considerable aid, especially ~com the EC.
It was agreed chat contact should be maintained.
Bulgaria : Tt was noted that a privatisatiou law had been passed in
3ulgaria but this has not yet been gazetted. Contacts remain good
through Mr. Rulle's relationship with the head of 3ulgarCabac, Mr.
Dichev. The industry remains in problems due to the collapse of exports
Io Russia and prospects are uncertain. However, the situation ~,11 be
monitored and contact maintained.
39.
Romania : Mr. FriCchard reported that he had visited Romania in
~ebruary. Although the country is in a poor state economlcally, the
~obacco monopoly with whom BAT maintains good relations, appears to be
relatively efficient with a very clean factory. There is no sign of any
movement towards privatisation and the main focus of the Group's efforts
w~ll continue to be on imports, including Hollywood from Cyprus.
/.o.
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BAT :INDUSTRIES CONFIDENTIAL- CATEGORY l: MINNESOTA TORACCO LITIGATION
BAT Industries document for WHO 5 March 1999
- 7 -
40.
42.
43.
44.
46.
47.
48.
Albania : There has been a small order from Albania; which
Mr. Pritchard is intendLng to visit in the near future.
Tadzhikistan/[i=ighizia : Mr. Wattertou is arranging visits to
these two Republics which could be useful suppliers of Leaf and which
are also interested in setting up cigarette factories.
Uzbechlstan : Hr. Tomat has met a delegaclou from Uzbechistan
who have said they are interested in the possibility of co-operaeion
with B.A.T Industries. It was agreed that the team visiting
Tadzhikistan and Kirighizia should also visit Uzbechistan, which wil'l
additionally be visited from Moscow.
Armenia, Georgia, OCher Former Soviet Republics : It was noted thaC
there had been insufficient resource to assess the potenCiaI in the
other former Soviet Republics. It was agreed Chat to overcome this
limitation, Hr. Watterton will commission consultants to carry out a
basic fact finding investigation in each, covering, inter alia, the
current status of the industry, the prospects for privatisation and the
identity uf potential representatives for the Group.
Mexico : Hr. Pritchard reported that Brown & Willi~anson had been
successful in keeping cigarettes on the agenda for the continuing NAFTA
talks. Progress in these calks (in which the Mexicans are asking for 20
years continuinE protection for their tobacco industry) are slow and no
agreement is expected until well after the US presidential election. Tn
the meantime, ~he situation will continue to be monitored.
Colombia : Hr. Prltchard reported that following changes in the
duties applied to cigarettes, imports were now more competitive.
of Kent, Kool, Rolly~aood and Belmont were all expanding.
Sales
Mercoeur/UruEuay : Mr. de Castro reported that a meeting with
~r. Mailhos had established that he was interested in selling his
business to B.A.T Industries. However, initial figures supplied by him
suggested that the price he was asking may be too h~gh.
The Chairman asked Hr. de Castro to prepare an early warning
note for the CPC indicating what might be proposed. Re should then seek
to pu~ the negotiations on a more formal basis by involving a merchant
bank or independent auditors to establish BAT's own value for the
business.
Paraguay : Discussions were proceeding with the licencee who holds
the rights Co several of the Group's brands with a view to recovering
these. The next meeting on this is scheduled for June.
Argentina : It was noted that the import duty on Brazilian
cigarettes was now only llZo The Hollywood trade~ark had been
registered and imports would be increased. The second Brazilian brand
on sale in Argentina was Ritz but this was entering illegally and
regular imports would not be established until the trade mark had been
registered. If this proved difficult, another, similarly priced brand
would be chosen to replace Ritz.
De.
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BAT INDUSTRIES CONFIDENTIAL- CATEGORY l: MINNESOTA TOBACCO LITIGATION
BAT Industries document for WHO 5 March 1999
• o -- 8 --
50.
51.
52.
53.
54.
55.
56.
57.
58.
59.
It -~as noted that the Mercosur agreement raised fundamental questions JI
about the viability of the Argentinian tobacco industry. BAT needed to
11
establish the full extent of this problem, the /~nplicacions for the
Croup and. the action which might be taken to meet the resultant
opportunities and challenges. It was agreed that Mr. de Casein
should set up this investigation using Keith Dunt from Millbank and any
other outside advice which he thought to be appropriate. Mr. Grant
should also be kept informed of progress but because of possible
conflicts of interest due to the effect on ~obleza, he should not be
directly involved in the team.
It was agreed that, in future, Mercosur and the individual country
developments arising from it should be dealt with as priority projects.
Cuba : Mr. Pritchard reported that although there was a shortage
of cigarettes in Cuba, US trade restrictions meant that this was not a
realistic opportunity for Brown & Wil[iamson. It was agreed that
Mr. de Castro should evaluate Cuba as an opportunity market for
Souza Cruz.
Tha£1and : Mr. Pritchard reported that conditions in the Thai
market remained dlfflcult. The tobacco monopoly was run by a retired
general who was close to the ruling party. ~ence, any concessions
freeing trade were difficult to obtain and even more difficul~ to
sustain over time. Despite this, however, progress continued to be made
in establishing the Group in the market.
Philippines : Mr. Prltchard reported that a Brown & Williameon
visitor to the Philippines, sent to locate the source 0£ illegal imports
coming out of the country, had identified another company which was
seeking an equity partner eo take over from Rothmans with whom they had
an arrangement currently.
The Chairman asked Mr. PTitchard to prepare an early warning
note for the CPC after which a decision would be taken how to follow-up
with the Philippines company and Rothmans.
Taiwan : Mr. Watterton reported that privatisatiou of the
Taiwanese tobacco industry was expected within three years. Although no
dramatic developments were expected, it was agreed tha~ the situation
should be monitored through BATUKE and BAT's agent in Talwan.
Portugal : It was agreed that moves towards privatisation in
Portugal should also be monitored.
Scandinavia : It was noted that the proposal by STK and Volvo to
form a joint company covering all of Scandinavia now appeared to have
beeu dropped. The main problems in the region ~ere that Lucky Strike
and Barclay were not progressive in Norway and Sweden, thac STK promoted
Lucky Strike ineffectively and that this could leave them very
vulnerable when the imposition of the EC [Smg limit on [st January 1993
will lead to a need to reformulate Prince. These ~asues w~l~ be dealt
with at the Tobacco Strategy Revlew Team meeting on 29th Hay when Mr.
Pritcbard will also report on progress with Barclay in Scandinavia.
Iran : It was noted that Iran has a population of 70-80 million and
a market of 35-~0 billion cigarettes of which 20 billion are produced
locally, 10 billion are legalimports (80% BATCF and 20% Reematma) and
i0 billion illegal imports.
0
BAT INDUSTRIES CONFIDENTIAL- CATEGORY I: MINNESOTA TOBACCO LITIGATION
BAT Industries document for WHO 5 March 1999
-9-
60. Philip ~orris and RJR have sec up local offices and are pressing for a.
share of the legal imports. RdR are also believed to have submitted a
draft proposal to set up a factory.
61. BATCF have opened an o~flce and are attempting co attract an ex-monopoly
~an to run this. They are also considering whether to respond to a
request to submit a proposal to upgrade an existing local factory from
15 billion to 20 b~lion capacity. In addlcion, they are couaideriug a
llnk-up with the $habel foundation who act as import agents.
62.
63.
54.
65.
66.
It was agreed that the strategy to establfsh closer relations and a
presence on the ground was likely to be helpful both in maintalning a
good leve~ of exports to Iran and in allo~,ing the Croup to have an
option on any investment opportunities. F~. Pritchard conflrmed
that a link with the Shabel foundation could affect thelr relations with
~heir agent but he did no: see this as a problem. BATCF will keep Brc~u
& Williamson informed of developments so Chat appropriate action can be
taken.
~epreseutatlou : Concluding, the Chairman reiterated the ~nportance
of having an accredited representative of the Group on the ground in all
~erritories in which the Croup had a si~ificant ~nterest, to ~uitor
and report on significant political, legal and market developments and
to represent the Group's interests where it is appropriate to do so.
liOutside Advisors : Re also s~ressed the need to make full use of
~ou~s£de advisors and consultants in order to supplement the necessarily
|limited in-house management resources.
Priorities : It was no~ed ~ha~ fol~owing the changes ~n prior~tles
agreed at the meeting, the current list of countries for priority
consideration ~s:- The Ukraine; Russia; Poland; ~acedonia; Vietnam;
Cambodia; Myan-~-r; Argentina; Paraguay; Uruguay (~ercosur); The
Philippiuea; and Iran. In addition, priority would also be given to
evaluacing the potential in the ocher ex-Soviet Republics and for Souza
Cruz in Cuba.
Other countries where contact will be maintained and the situaclon
monitored but which are not expected ~o offer immediate prospects for
inves~nent are~- Czechoslovakia; Ko~nia; Bulgaria; Serbia; Albania;
Thailand; Taiwan; Nexico; Colombia; and Portugal. Exports Co these
countries will also coucinue co be expanded, especially co Thailand and
Colombia.
Rsl~s
27th Hay 1992
BAT |NDUSTRIE$ CONFIDENTIAL- CATEGORY ]'- MINNESOTA TORACGO
LmGATION
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BAT Industries document for WHO 5 March 1999
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B&t~ SECOIIDARY EIIUIPHEIIF
FOR
$1rlATEGIC IIESEllVE
DE$CRIPT]OII
IIALIllI GARAIIT 4/flAX 5
!HOLIllS HKg/HAX S
IIOL] ItS OSCAR
(SHALL HIIEEL|
AVAILAUiLil¥
2 - IiOX
4 - 12/92
4 - NON
3 - 12192
7 - 6let
2 - 6194
IO - IlO~
EACII
35.0
39.5
20.0
IIAIIII!CASCADE 2 - I|OW 10.0
IIAIIII I HAGOHA ( 17 - lION 12.0
SASiB 5000 2! - tio~
SASI6 6000 3 - IlOg
3 - 12192
7 - 5193
2 - 5/g4
0 - HOW
2 - ItOH
[IILP I
(EX CAPRI)
IILPI
(EX PETERSBURG)
SALHASSER
CASEPACKER
25 -tlOg
l - 5192
6 - 12192
^,Dr ($ooo)
1ORAL
210,0
633.5
200.0
20.0
204.0
15.2 340.2
19.6 297.0
lZ.7 93.6
30.0 60,0
ZO.O 320.0
$2,376.4
EAc~IEFURBI $tl
200.0
252.0
($ooo)
TOTAL
1.200.0
4.032.0
72.0 720.0
70.0 140.0
72,0 1.224,0
169.2 3.553.2
198.0 2,970
54.8 510;4
IgB.O
30.0
TOTALS
396.0
9GO.O
|15,713.5
+49 40 4151 2255
+J _~---4~--4 1 5 1-.~- ? .~3 E.~T
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26. B5.92 il:Oe
B.A.T: EASTERN EUROPEAN EXPORT & LICENCE SALES by COUNTRY & COMPANY **
B,A.T CF / B & w / B.A.T UKE / SOUZA CRUZ
April 1992 I January-Ap/il 1992 I Years 1990 & 1991
!
~LY SsAU
Ttlr to D,,,te ~t~l ~v~Ik ~LH 1
I
NILIImL *1- ~
I(f[[|~"ll *1" I Nllllaes 61o Z I
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Jm-kw. Jtn-kw. Jm-AW. Tur ToIr Tmw I
I
1~1 tW2 02191
19~1 lq41~ 1~P2.~Pl 1990 1991 +~.~oI
...... +.... .... .........**.... .... .. J...-. .........................
.*-*.................. ... ............. .. ........
~LL~*IA l.k3 ¢~ 0 *--
0 -** 0
,&v 0 **-
O.Z r,~ I~
I.k.T ~ & P4v
1T m 0.1 nw
IX~T TOTAL O & hey
0 11 hey 0 0 n~a
.......... . .... ......................*u.*...,*.*.*.*. . .... .*. ... .... .. ...... o.
............ ..... .... . .... ... .... ..,
IU.GA, I l & ,JL.T CF [k'POIT 0 1I 6..6
A ?3 4.** It. 34} 112.7
I./L. T ¢; LXrcMCC 1 1 3.0
1£ l& 17.8 168 36 * 111..I
. & V O 86 ~
1 202 ~ 179 ,32 -!I.9
I.A.T t~aCf 0 6 ~'~
O 19 ~ 26 21 -11.1
r~a.t ca,2 o & ,~
o 9 rw~ 0 0 "--
....... -+ .... * ........................ . ............ *-*- ........ •
,..*.**-**-..*.. .... e..+**.+..**.*.
£xlPOR T T01AL 0 106 ~.~
5 450& ~ 2113 1131 -61.8
~tLu/3 'r01kL I lg9 "~
21 G22 ++6 3&7 119 -69.2
...... . ................. . ........... I**.**....6....**.. .*...*.*.*.**...*.*..i*...
,*l...--.*'D.*'.------*'. .... • *.. .....
ClS ,.*.T Cf 2b 10 -61.6
~ 1S -9?.6 t?& &TO 3~.?
II & V 1 3o 1o!~.0
4 ~ .-* ~1 93 II.SIJ.
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1 9 ~ 3 6 91.1
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30 O .I00.0 0 50 rmv
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.. o................ ,.... ....
(XPOtl tOTIL ~ &0 --
dl M -87.& 1t~, 1019 AI5.0
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j .........
. .... . ............ . ...... . .... . ...............
¢2~CI~:ILiT4AJ~IA I.A.T {:F CI /.g --
I 101 ~ §3 132 lt.g.£
. & V 0 O ~,
O 10 ~ 15 S2 2r.0.1
|.A*1 ~ T ' - lOg.O
I 0 .71.& 19 7 -4~.7
S~JZ.A ~UZ O 0 ~
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....................... • . .... .. ............ . ............................ ..
...... .......... ...........
EXPt~tT TOTAL t CP ~
:~ 11l~ ~ 88 191 111.?
.....***........ ............. - .... *- ..-.-...*.+~.-.-+ . ...............
. .... ..... ,... ....... ..... ............... . ....
m.~.~Ul y l.~,.? rF I~zPOIT 3 0 ~
6 Z .'r1.7 A2 13 -T0.3
iI.A.T CF ~.l tINt'S 3 A 31.&
11 B -TA.& 32 57 7A.7
• I, v ~. 1 -8£.3
7 1 ,&3.7 2& 13 .AT.6
8.A.T Ua~ $ I -14.T
& Z -&/..3 19 1'~ -24.1
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Otto 10111. 10 6 -30.1
29 13 o56-1 118 gT -11.9
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................... ... .... . .....
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11 11& qN~3.5 136 13 -~I~.1
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4; 1 -6L1 Z~ 16 .~.L
SOJ~X CIl~ 116 0 .100.0
IM 0 -100.0 2?" llUl e~O.O
F.XF~C TOTAL 116 135 ~L1.5
2?9 &50 50.4 t, Tk 1143 163.3
........ .+..+.+..+++.....+++.D+.........--....++.o..o.
i ml-l-+ll,lll+6+llllol.l.l.l +e+l+llla
I+IIIIIlIIIDIlI+ll l+lll**.
It~puuJ Ix l.&.t ¢f 0 9 m
t 74 964.1 6T 711 16.5
I I v 29 I~ 3945.8
81 ~T 379.3 45~ 513 53.5
l.X.v U~ 9 o -t00.0
37 26 40.6 23 57 11~.45
SOUZ,~ CJ~JZ 0 38 r~v
0 131 r~v O 0 -.-
...~...........,.*.. o..... .... ~o. ...... ....... .... *-.-.....**.9,*
.....**~.--.+.-...*-.....-. -.-*-..-
il~llT 'rl0?XL 3~, ZI1 453&. 3
I~I' 617 3~.45 327 ?12 35.3
• ee*.e ...................... ..*ee~el l*oo*~*ee~eeleloe fleecing, ***4eetet~eeeleeel
**e.eeoea*~*eoJ~oeaeo~aele e.lee*e*
~'1,~v l A a.~.; c; io~tT 20 15 -26.3
68 71 3.~P ]186 7345 -39J,
,.A,T ¢F q CKNCE 36 18,7 420.5
12~ SW ~l&.$ 300 829 176.2
O & V EX~1 13 $ -61.1
4T 10 -7I.~ Iu tot, -31.A
I I v ~.l~il=ll 3& 1 .98J
?8 t2 .15+$ 273 3~.S IIUP
8"*.T ~t 2 0 -63.2
12 1 -W,.$ 71 38 -At.&
• *lice+ .... eeeeeeel~ ~ .... 6O+~IOODJIOII leeleeet • Ii~leeee ....... oe~l
eoe~eD~e~e~eell~ee~eeee+~.+ e*~*~.~
~.~ ToT~ ~m ~m +t.+ ~ 'nl 1...0 11,~ tsn z?.+
IlODIqi~4ImImIIIml.IIIIIIlIIIIIII Ilil~IIIII~ImIIIII~ lRlmIi1 lflIHiIfl ~ ~fl II~H
I[U3i~ BJItOPIi I.k.T ce Ix~ltl 45~ 2451 ~7.9
~B07 676 -16.2 983 ~1 13L1
i.X.1 CF LICIN~I 450 1~Z 38.1.9
15& 623 3OO3 5O0 921 ~.2
,.,.I C~ CIAI TOTAL t~ ~33 3.116.1
963 12~PI) ~.9 1t.83 3203 116.©
l I V [XlP~tT /.8 2?3 4568.3
153 MT 68.~.~ 9?6 I~J5 -9.3
I & W LIClMCI 345 I -90.5
;'11 ~ -45.5 ~ ~ 18.~
I Z V 01~40 1~ ~t~ ~45 ~&.0
230 ~9 3~.~ 11L9 1210 *3J
l.X.T ~ 13 12 4.1
60 ?3 2A.3 190 160 -1t.1
T, CU~ "~.~ 166 6.1 .62.3
238 1~3 -3~.1 21' 138 1~.]
............ ...*I.**I *O''m~''eIIIeleO'I Oil" ....OIIIel me*eI.~oeIIm iooli IOi4 *o
..*. .... I. ..... I *I~el.4
I.I.T ITPOIT 10TAL ~TT 580 11L9
1251' 1~ --, ,I,, m+ I ~.'
,.A.f LIC~]IC~ ~OT.U. ?& 193 161.B 233 MS I~!.3 173 12k6 61.1
• ..eo ....... - ....... • .... ~-o--*o-'-- ..... "°'* ........e**..*.*.o...*.
........... .-*-e---.*-~ ........
I.A.T CII IOTJ~. 330 782 I 1~t'2
145q ~7 6&,3 ~0 &+Ill i *,%1
0
L~
BAT INDUSTRIES CONFIDENTIAL- CATEGORY. I" MINNESOTA TOBACCO LITTGATION
BAT Industries document for WHO 5 March 1999
