Brown and Williamson Tobacco Corporation
Brown and Williamson Tobacco Corporation
Wholly Owned Subsidiary of B.A.T. Industries PLC
Sales: $3.50 billion
SICs: 2111 Cigarettes; 2131 Chewing & Smoking Tobacco
Brown and Williamson Tobacco Corporation, a subsidiary of London-based B.A.T. Industries PLC, is the third largest manufacturer and marketer of cigarettes in the United States. With leading brands like Kool and Viceroy, the company was selling more than 90 billion cigarettes annually in 1994. B.A.T. merged Brown and Williamson and The American Tobacco Company in 1994, which boosted Brown and Williamson’s market share from 11.3 to 17 percent.
Brown and Williamson (B&W) was founded in 1894 in the tobacco heartland of Winston-Salem, North Carolina. The business was started by George Brown and Robert Williamson, who formed a partnership before incorporating the company as Brown & Williamson Tobacco Company in 1906. In the beginning, B&W concentrated on specialty products like Bloodhound, Brown & Williamson’s Sun Cured and Red Juice chewing tobaccos. After establishing those successful brands during the early 1900s, B&W assumed a leadership position in the pipe tobacco segment when it purchased the Sir Walter Raleigh brand. That brand had been marketed on a regional basis by the J.G. Flynt Tobacco Company since 1884. B&W purchased it in 1925 and began distributing it nationally. Sir Walter Raleigh eventually became one of B&W’s hallmark brands.
About the same time that it began marketing Sir Walter Raleigh pipe tobacco, B&W moved into the burgeoning cigarette market. Cigarettes had been a relatively small segment of the tobacco market prior to the turn of the century. They had first become popular with women during the 1800s as an alternative to cigars and plug, twist, and pipe tobacco. After cigarettes were issued to U.S. soldiers during World War I, though, demand began to escalate. B&W launched an aggressive drive into the cigarette industry following the war. Strong sales of cigarettes and other tobacco products created healthy profit growth at B&W, which caught the eye of outside investors. In 1927, London-based B.A.T. Industries PLC purchased B&W to operate as one of its subsidiaries. B.A.T. expanded B&W’s name to Brown and Williamson Tobacco Corporation in 1927, and in 1928 and 1929 added extensive manufacturing facilities in Louisville, Kentucky. At that time, B&W moved its headquarters from Winston-Salem to Louisville.
B&W made its mark on the cigarette industry during the 1930s with a number of brands and products. Importantly, B&W introduced Kool brand cigarettes, which were the first menthol cigarettes marketed nationally in the United States. B&W also began selling Viceroy cigarettes, which were eventually credited with popularizing the filter-tip. Both Viceroy and Kool became mainstay brands for B&W and helped to make it a growing force in U.S. tobacco. Besides those brands, B&W brought out Bugler and Kite cigarette tobacco in the mid-1930s. B&W’s Bugler Thrift Kit was the first roll-your-own kit sold in the country. B&W achieved another first with the introduction of the economy-priced pack of cigarettes. Dubbed Wings, the brand sold for just ten cents per pack (compared to 15 cents for most other brands at the time), making it a big hit during the Great Depression. Wings was also the first cigarette package to utilize an outer wrap of moisture-proof cellophane.
Innovation and market growth buoyed B&W throughout the 1930s and 1940s. In fact, the legion of smokers in the United States spiraled upward after World War II and during the 1950s. At the same time, new influences began to shape the tobacco industry. Reports citing potential health risks associated with smoking cast a shadow on the industry. The results of the reported health risks were that tobacco taxes were increased, advertising channels for cigarette marketers were reduced, and smokers’ preferences began to change. Among the most notable changes in preferences during the 1950s and 1960s was the switch to filter-tipped cigarettes. B&W, a pioneer in the filter-tip segment, responded with filter-tip versions of most of its cigarettes. Furthermore, B&W introduced the first filter made of cellulose acetate, which became a feature of its Viceroy Kings brand.
Despite negative health reports, smoking increased throughout the 1950s and most of the 1960s. By the mid-1960s more than 40 percent of the entire U.S. population was smoking cigarettes regularly. B&W benefited not only from increased smoking, but also from market share gains. Its most successful brand was Kool, which had struck gold in certain market niches, becoming the “king” of the menthol market. Studies also indicated that Kool dominated the African American market, about 70 percent of which smoked menthol cigarettes. By the early 1970s, Kool was controlling a whopping ten percent of the entire U.S. cigarette market. Augmenting the highly successful Kool brand during the early 1970s was a line-up of new low-tar brands, including Kool Milds, Viceroy Extra Milds, and Raleigh Extra Milds. Those brand introductions helped B&W grab a 17 percent share of the entire U.S. cigarette market by the mid-1970s.
Although B&W enjoyed some significant successes during the late 1960s and early 1970s, it also began to face some serious internal and external challenges. Importantly, in the late 1960s the percentage of Americans who smoked began to decline. The descent was largely a corollary of a 1964 Federal Government mandate that required manufacturers to post health warnings on cigarette packages and advertisements. Subsequent government controls, most notably the 1971 ban on television advertising, exacerbated the dilemma and the share of smokers began to decline gradually; by the early 1990s, the percentage would fall to about 25 percent. Another blow came in 1983, when cigarette taxes vaulted 100 percent. That increase, moreover, was followed by a string of tax increases that devastated the domestic cigarette industry.
Although the share of the U.S. smoking population declined during the late 1960s and early 1970s, the actual number of cigarettes sold continued to grow at a heady clip. Total U.S. cigarette consumption grew from about 500 billion in 1965 to nearly 650 billion by 1980. Unfortunately, according to some critics, B&W failed to take full advantage of the increased industry volume. The problem was largely attributable to stalled growth of its core Kool brand. In 1975 B&W’s Kool began to lose market share to such rivals as Salem. Importantly, B&W had failed to translate its successful “Come to Kool” advertising campaign from television to print following the Federal ban on cigarette television advertising. B&W tried during the early 1970s to attract younger smokers to Kool by associating the brand with jazz music, but kids were favoring rock ‘n roll. Meanwhile, competing brands like Newport employed more successful marketing tactics and managed to steal Kool market share.
Between 1975 and 1985, Kool’s share of the total cigarette market plunged from 10.3 percent to less than seven percent. B&W tried to supplant lost sales with other products, but it achieved only moderate success. In 1981, for example, B&W introduced a new low-tar cigarette called Barclay, investing $100 million in the product launch to get Barclay off to a good start. Unfortunately, B&W had understated Barclay’s tar content, and the Federal Trade Commission forced the company to revise the ads. Barclay’s growth stagnated following the ad change. B&W’s successes during the early and mid-1980s included product introductions geared for the value segment of the cigarette market, which began surging following big tax increases in the early 1980s. But gains in that niche failed to generate growth. In fact, B&W’s total share of the U.S. cigarette market toppled from 17 percent in 1976 to about 12 percent ten years later.
For the first time since the turn of the century, cigarette purchases began declining in the early 1980s. Indeed, sales volume in the United States slipped steadily during the 1980s from nearly 650 billion cigarettes in 1980 to about 500 billion in 1990. That trend, combined with lagging market share gains at B&W, mandated a new strategic direction for the company. To that end, B&W promoted Thomas E. Sandefur Jr. to president of the company in 1984. The 45-year-old Sandefur was a tobacco industry veteran, having worked for R.J. Reynolds Tobacco Co. from 1963 to 1982. He joined B&W with the understanding that he would eventually become head of the company. From 1982 to 1984 Sandefur worked to grow B&W’s international operations as senior vice-president of international marketing. Sandefur worked under Chief Executive Raymond J. Pritchard (a native of Wales and former B.A.T. Industries executive) but was a major influence on the company’s strategic direction.
Sandefur was known as capable, demanding, and shrewd. He grew up in Perry, Georgia, and earned a business degree at Georgia Southern College. Recruited by R. J. Reynolds as a salesman, he moved quickly up the corporate ladder on the marketing side of the business. Among his successes at R. J. Reynolds was a line of hugely successful low-tar brands including NOW and Camel Lights. Impressed by his success at Reynolds, B&W lured Sandefur away in 1982 and began grooming him for the top spot. Sandefur was also known as a tobacco hard-liner who vehemently opposed government regulation of his trade. And he was known for trying to keep a very low public profile, despite occasional appearances (in caricature) in the Doonesbury comic strip. Even in his work for civic organizations—he was active in a number of civic organizations, particularly the Boy Scouts—Sandefur tried to minimize his public exposure.
When Sandefur took the helm in 1984 he initiated his drive to turn the company around. Specifically, he launched an aggressive bid to increase B&W’s shipments overseas, where cigarette sales were growing, and to boost B&W’s efforts in the surging U.S. low-priced cigarette segment. Toward the latter goal, B&W began marketing as value-oriented brands Viceroy, GPC Approved (a plain label brand), Raleigh Extra, and Richland, among others. On the international front, B&W moved aggressively into cigarette markets in Asia, Africa, South America, the Middle East, Europe, Japan, and Puerto Rico. Meanwhile, Sandefur and other B&W executives continued to battle the army of Federal bureaucrats assaulting the tobacco industry. In April 1994, Sandefur and other tobacco industry executives were brought in front of a Senate subcommittee, interrogated, and lambasted for their role in promoting smoking. Sandefur and other executives reportedly denied that cigarettes were addictive at the hearing.
Despite government entanglement, Sandefur managed to boost B&W’s performance during the late 1980s and early 1990s. International sales, for example, bolted 150 percent between 1986 and 1991 and B&W’s control of the U.S. cigarette export business surged to 20 percent. By 1991, in fact, B&W’s international business represented a full 45 percent of the company’s total sales volume. B&W also assumed a leading role in the value-priced cigarette segment, with 21.2 percent of the total market in 1991. Meanwhile, B&W continued to innovate by introducing the first super-slim cigarette—Capri—in 1988. Throughout the late 1980s and early 1990s, moreover, B&W restructured its operations and management as part of an overall effort to cut costs and streamline operations. The net result was that B&W managed to hoist revenues to about $3.5 billion by the early 1990s and to increase profit margins.
When CEO Pritchard retired in 1993, Sandefur assumed full leadership of the company. He continued to restructure, expand internationally, and chase the value market. In 1994, in a major industry merger, B.A.T. (B&W’s parent company) acquired The American Tobacco Company and integrated its operations into those of B&W. American Tobacco, which was once the unmitigated behemoth of the U.S. tobacco industry, controlled about seven percent of the U.S. cigarette market. Thus, the acquisition gave B&W a total of more than 18 percent of the U.S. market in 1995, making it the third largest cigarette manufacturer and marketer in the United States. American Tobacco owned well-known brands including Lucky Strike, Pall Mall, Misty, Montclair, Tareyton, and Private Stock. Those bolstered B&W’s successful brands, which in 1995 included Kool, GPC, Capri, and Viceroy. In addition to cigarettes, B&W marketed loose cigarette tobacco, pipe tobacco, plug chewing tobacco, and snuff.
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