Tabacalera, S.A.

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Tabacalera, S.A.

Barquillo 5
28004 Madrid
Spain
(1) 532 7600
Fax: (1) 522–7586

State-Owned Company
Incorporated: 1887 as Compañía Arrendataria de Tabacos
Employees: 8,510
Sales: Pta 593.45 billion (US$6.14 billion)

Tabacalera, S.A. is one of Spain’s largest and oldest companies, and is the dominant force in its principal area of activity, tobacco manufacture and distribution. Protected for more than 300 years by a government-enforced monopoly, the company has been able to build a practically unassailable position in this market, one that looks likely to remain solid despite the recent dismantling of the monopoly.

From its base in the tobacco industry, Tabacalera has begun to diversify into a number of different areas, primarily the food industry, as a result of changes brought by Spain’s membership of the European Economic Community (EEC) and the worldwide decline in tobacco consumption. Although this diversification process has been accompanied by a number of problems, the company’s widespread manufacturing operations and well-developed distribution network, complete with a large fleet of trucks, provide it with a good base on which to expand operations.

Tabacalera is one of the oldest companies in the world, having its roots in the period of Spanish colonization of Central and South America. Tobacco was one of many substances unknown in Europe which the conquistadores discovered as they pushed the boundaries of Spanish domination south from their first settlements in Mexico during the 16th century. Regarded initially as a curiosity with supposedly medicinal properties when ground and inhaled, tobacco was used only in small quantities during the 16th century.

One of the main features of Spanish colonial expansion was the government’s determination to retain tight control of the economic traffic between the colonies and Spain itself. Aimed mainly at ensuring a steady flow of mineral wealth from American mines, this policy limited the number of ports in the colonies that could ship goods to Spain and the number of ports in Spain that could receive them. At the Spanish end, the government designated Seville as the central port for trade with the colonies, controlled by the Casa de Contratación—the hiring house for seafarers—established in 1504.

Seville thus became the center of tobacco imports from the Americas and was one of the first places in Europe where the tobacco plant was cultivated. In the early 17th century, a factory for processing tobacco was built on the banks of the Guadalquivir river near Seville to cater for the growing popularity of snuff—powdered tobacco—among Sevillans.

In 1636 the Spanish government moved to ensure its control of the growing tobacco trade within Spain as well as with the colonies by establishing a monopoly of tobacco production and sales in the kingdoms of Castille and Leon. The government decreed that the trade would be controlled by a new body, the Estanco del Tabaco. Despite considerable changes to its structure and powers in the following three and a half centuries, the Estanco del Tabaco formed the foundation of today’s Tabacalera S.A.

The use of tobacco grew steadily during the late 17th and early 18th centuries, and in 1725 the Estanco del Tabaco decided to build a new factory in Seville to provide for the increasing demand. Although work began in 1728, disputes over the plans and other problems delayed completion of the new factory until 1770. The size of the new Royal Tobacco Factory of Seville and its proximity to the tobacco port made it the most important tobacco manufacturing plant in the world at the time.

As popular tobacco tastes changed in the early 19th century, the Royal Tobacco Factory restructured its operations to stop producing exclusively powdered tobacco, which was being overtaken by smoking tobacco, particularly cigars. The shift to cigar manufacture, a highly labor-intensive process, demanded a large, cheap work force to hand-roll the tobacco leaves. This demand was satisfied by using large numbers of women in the factory, one of the first instances of large-scale involvement of women in industry in Spain, which provided the inspiration for the main character in Mérimée ’s novella, Carmen, which in turn inspired Bizet’s opera of the same name.

The demand created by the emergence of cigars as a popular form of tobacco prompted the Estanco del Tabaco to invest heavily in expanding its productive capacity during the 19th century. With a second factory already established at Cadiz, the Estanco opened nine new factories across the country during the 19th century, creating one of Spain’s biggest and most productive industrial enterprises.

In the mid-19th century, the Spanish government began looking for ways to change the managerial structure of the company to take account of the more sophisticated economic environment, in which the existing structure of direct state control appeared outdated and hampered the delivery of the highest possible profit to the state. Various proposals were put forward from 1844 onwards, and in 1887 the operations were placed under the control of a strictly corporate entity, when the state transferred its monopoly to the central bank, the Bank of Spain, which formed a company, the Compañía Arrendataria de Tabacos, which in turn leased the management of the monopoly from the bank. The new corporate structure was aimed at achieving the greatest efficiency from the operation by distancing it from the government, while ensuring the continuing supply of revenue to the state from the tobacco operations.

The leasing company controlled the tobacco monopoly for the next 60 years, during the tumultuous Spanish Civil War of the 1930s and the final victory of the fascists in 1938. When the contract between the company and the bank came up for its regular review in the early 1940s, the government changed the legal structure of the company once again, opting this time to turn it into a conventional limited company, wholly owned by the state. In March 1945 the limited company Tabacalera, Sociedad Anonima, Compañía Gestora del Monopolio de Tabacos y Servicios Anejos was formed, setting in place the corporate structure that the company retains today.

After three and a half centuries operating in the comfortable environment of a state-enforced monopoly, the company was presented with its greatest challenge in January 1986, when Spain joined the EEC. As part of the requirements for joining the community, the government was obliged to relinquish its monopoly of tobacco production and sales.

This process involved partial privatization, with the state transferring all its assets and acquired rights in the tobacco monopoly to Tabacalera, in exchange for shares issued by the company in November 1986, leaving the state with a controlling stake of 53% of the company’s capital.

Under the new laws, wholesale import and tobacco trading activities for tobacco produced in the EEC—the key to Tabacalera’s monopoly—were liberalized, giving anybody the right to carry out these activities. Although the company continued to manage the monopoly for tobacco products manufactured outside the EEC, and although the state retained control of the retail sales monopoly through its concessionaires, the breaking of the local production monopoly struck at the heart of Tabacalera ’s operations. With this fundamental change and the impending single European market due by 1993, it was clear that the company had to do more than simply continue making and selling tobacco products if it was to survive. The urgency of change was made more pressing by signs that tobacco sales could no longer be counted on to rise as anti-smoking sentiment increased worldwide.

In 1987, under the presidency of Candido Velazquez Gaz-telu, Tabacalera launched a wide-ranging diversification plan aimed at ensuring the company’s future in the less secure post-monopoly commercial environment. Velazquez pushed the company into two new areas—food manufacturing and retail distribution—on the basis that these two sectors were best suited to Tabacalera’s existing operational structure.

After taking a first tentative step into the food industry in 1986 by setting up a snack foods operation, Nabisco Brands España y Portugal, as a joint venture with RJR Nabisco, Tabacalera bought the company completely after Kohlberg Kravis Roberts took over RJR Nabisco in 1988. In the same period, Tabacalera bought a group of companies controlled by the food group Instituto Nacional de Industria. These companies gave the group access to a range of food markets, comprising Spain’s leading milk concentrate and liquid milk producer, Lactaria Española (LESA), meat and preserves company Carnes y Conservas Españolas SA (CARCESA), deep-frozen foods producer Frioalimentos (FRIDARAGO), and Congelados Ibéricos SA (COISA). Tabacalera also bought a controlling share in a pulses company, Comercial Industrial Fernandez (COIFER SA), and a stake in a marine cultivation company, Acuicultura.

The company also moved strongly into retail distribution, buying 75% of retailing business Distribuciones Reus SA (DIRSA)—a company with 325 supermarkets and over 500 franchised shops, which in turn owned another company with a chain of more than a hundred supermarkets. The diversification program made Tabacalera one of Spain’s leading producers of biscuits, powdered and concentrated desserts, and milk packaging, as well as giving it a leading position in the tomato sauces, pulps, conserves, juices, and pulses markets and control of one of the largest networks of retail outlets in the country.

But rather than assure Tabacalera a secure hold on a broader range of operations, the swift diversification program brought with it a number of serious problems. The main one was that, in the rush to acquire new businesses, the company had bought a number of operations which were heavy loss-makers. Tabacalera planned to use the economies of scale provided by such a large group to turn the troubled subsidiaries around, but after two years it became clear that the worst of them were largely unsalvageable and would only hamper the group’s efforts to become more flexible.

Velazquez’s successor as chairman, Miguel Angel del Valle Inclan, who took office in 1989, began a process of rationalizing the group’s food and distribution activities, describing Velazquez’s diversification program as “too ambitious”, as reported by Reuter News Service on June 21, 1990. His aim was to keep only the profitable food subsidiaries, and to acquire businesses in other sectors, so that by 1992 the company’s revenue from non-tobacco activities would match its tobacco revenue.

After owning it for only two years, Tabacalera sold the Dirsa retail chain to the French Promodes group for Pta 12 billion in 1990. In the same year, the company sold its interest in Fridarago and gave up its management of the Tabacos de Filipinas company, which it had entered as part of the diversification plan, but which had incurred losses of Pta 1.4 billion in 1989 and 1990.

The main problem of the diversification was the milk company Lesa, which continued to lose money despite Tabacalera’s injection of large sums to try to improve it. The group provided more than Pta 8 billion to Lesa in the two years after buying it, but in 1990 the milk producer still showed a huge loss of Pta 5.2 billion. Tabacalera offered Lesa for sale, and by April 1991 was holding advanced talks with the French group Union Laitière Normande over the sale of the subsidiary.

After cleaning out the bulk of its unprofitable food operations, Tabacalera moved to consolidate the more lucrative new businesses by merging its Nabisco subsidiary with the Carcesa operation to create a leaner, more efficient food division. Under del Valle, the company also began to diversify into other areas, particularly real estate and tourism. In 1990 Tabacalera took a 33% stake in a joint venture to build a Pta 10 billion tourist complex in the Canary Islands. The company also began to take advantage of its widespread real estate holdings by leasing them out, as well as beginning to use its distribution network to deliver other companies’ products. The most lucrative of these contracts was concluded in 1990, when the West German company Quelle, Europe’s biggest mail-order house, chose to use Tabacalera’s trucks for its Spanish deliveries.

As well as these moves into different markets, the company updated its core tobacco operations during the 1980s to take account of changes in the market. Spanish smokers began to give up their traditional preference for black tobacco in favor of blond Virginian tobacco. By 1985 Virginian tobacco sales in Spain had already risen to 44% of the total and were clearly about to eclipse black tobacco. Tabacalera responded by reorganizing its cultivation and processing to produce more Virginian, which provided a higher profit margin. The company took consideration of this consumption change when it began building a new factory at Cadiz in 1984, much bigger and more efficient than the company’s existing plants.

In preparation for the challenges likely to emerge from the coming of the single European market in 1993, the company signed an agreement with Tabaqueira de Portugal in 1989 to allow cross-marketing of the two companies’ brands in their respective countries. In December 1990 Tabacalera also announced a modernization plan, which would involve the loss of 1,500 jobs, to produce a leaner company in time for the advent of the single market.

The changes brought about by Spain joining the EEC and the challenges posed by the single market have caused the question of Tabacalera’s relationship with the state to be raised once again. In August 1990 del Valle said that the arrival of the single market was a good time to consider whether the state should continue to be the company’s major shareholder (Cinco Dias, August 31, 1990). The question was sharpened by the threat posed to Tabacalera by legislation passed in 1990 banning almost all forms of tobacco advertising. In December 1990 Spanish newspapers reported that Tabacalera was aiming to see a reduction in the state’s stake, allowing the company to be quoted on Spanish stock exchanges by the end of 1992. It is not yet known what proportion of the company’s shares will be quoted.

The growing debate reached its peak in April 1991, when del Valle was forced out of office in what the Financial Times described on April 10, 1991 as “what appears to be the climax of a political confrontation with the Finance Ministry.” He was replaced by German Calvillo Urabayen, president of another government-controlled body, Fomento de Comercio Exterior.

Despite the initial difficulties caused by the loss of its monopoly and the problems created by an over-zealous diversification program, Tabacalera appears to have emerged in a good position to face the more competitive environment of a single European market. Its profits are healthy, its core tobacco business has been reorganized to take account of a changing market, and its expansion into other sectors has become more focused and disciplined after the initial problems. If the question of the company’s relationship with the state can be resolved smoothly and the modernization program implemented without problems, Tabacalera will be well-positioned to become a powerful industrial group in post-1992 Europe.

Principal Subsidiaries

Tabacanaria, SA (Canary Islands); Cigarros de Canarias, SA (Canary Islands); Carnes y Conservas Españoles, SA (Spain); Nabisco Brands España, SA (Spain, 97%); Servicio de Venta Automatica, SA (Spain); Philip Morris España, SA (Canary Islands, 50%); BAT España, SA (Spain, 50%).