American Tobacco Company

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American Tobacco Company

The formation of the American Tobacco Company in New Jersey in 1890 and its forced dissolution by legal decree in 1911 stand as landmark events in the business history of the United States. During this twenty-one year period, the company created by James Buchanan (Buck) Duke utterly dominated the American tobacco market. The company's manufacturing methods, its system of distribution, and its brand promotion campaigns helped pioneer the era of mass consumption in the United States. Ironically, however, American Tobacco's ultimate legacy has proved to be the London-based British-American Tobacco Company (now British American Tobacco), a joint venture that it formed in conjunction with the Imperial Tobacco Company in 1902, which eventually bought out its American founder for $1 billion in 1994.

Origins

The mechanization of cigarette production during the 1880s facilitated tremendous advances in the volume of output, and by the end of the decade cigarette manufacturing in America had become concentrated into the hands of a small group of enterprises. The firm that emerged as the industry leader during this period was the Durham-based company of W. Duke, Sons & Co. Under the leadership of the dynamic Buck Duke, by 1889 this firm had moved ahead of the more established cigarette manufacturers through a combination of cost-effective production and astute marketing.

As in other industries where mechanization encouraged a move toward large-scale production, Duke's firm collaborated with its four leading competitors to bid down the price of leaf. Informal cartel arrangements of this kind drew a hostile political response and led Congress to enact legislation designed to prevent such interfirm cooperation through the Sherman Act of 1890. However, at about the same time the state of New Jersey enacted a set of laws that allowed the formation of holding companies. This latter development enabled a single holding company to be formed that effectively merged the operations of a group of previously independent firms. Taking advantage of this new company legislation, Duke was able to persuade his leading competitors to pool operations and rationalize their production facilities to gain maximum benefits from the new form of cigarette production.

Growth and Dissolution

The American Tobacco Company was thus a five-firm merger—W. Duke, Sons & Co., Allen & Ginter, Kinney Tobacco Co., William S. Kimball & Co., and Goodwin & Co.—that created a manufacturing concern with a virtual monopoly of production over machine-made cigarettes. Duke used American Tobacco's strength in the cigarette segment to extend its control across the market for tobacco goods as a whole, setting up a network of distribution facilities under the company's own management. A modern corporate enterprise was created in which specialized divisions managed the various functions of sales, production, finance, and procurement. In the mid-1890s the American Tobacco Company made substantial inroads into the market for chewing tobacco ( plug ), acquiring in the process control of firms such as R.J. Reynolds and Liggett & Myers. The company also expanded rapidly abroad, initially through the development of an export trade but later through a strategy of mergers and acquisition.

The Sherman Antitrust Act

P resident Benjamin Harrison and Congress enacted the Sherman Antitrust Act in 1890 in response to public concern over the dominance of monopolies, or trusts, in American business. Written by Senator John Sherman, the law stipulates that "every contract, combination, or conspiracy, in restraint of trade or commerce among the several states, or with foreign nations, is hereby declared illegal." The law was not enforced until the administration of President Theodore Roosevelt, which began in 1901.

On 19 July 1907 the Justice Department filed a petition against the tobacco trust American Tobacco Company for violating the Sherman Act. In United States v. American Tobacco Co. the company was found guilty under the Sherman Antitrust Act of 1890 of monopolizing the cigarette industry through "unreasonable" business practices, among them buying out competitors, excluding competitors from access to wholesalers, and rapacious pricing. The decision was finalized on 29 May 1911, and American Tobacco was split into sixteen successor companies.

The victory of the U.S. government in this case forever changed American business and the development of antitrust law. Further, it demonstrated the government's interest in promoting competition in U.S. markets.

After 1900, however, American Tobacco began to experience a number of difficulties. Duke's pioneering use of acquisitions to develop the company's foreign markets ran into serious opposition. In Germany its products were boycotted. In Japan, where its purchase of a controlling interest in the Kyoto-based Murai Brothers Tobacco Company was the first-ever case of a foreign takeover, the government introduced legislation that culminated in American Tobacco's expulsion in 1904. And in Britain, where its export trade was supplemented through the purchase of the Ogden Tobacco Company in 1901, the leading British tobacco manufacturers banded together to oppose the American invader. The Imperial Tobacco Company, formed as an alliance of thirteen leading British tobacco firms, waged a commercial war with American Tobacco that ended with the formation of the London-registered British-American Tobacco Company in September 1902. This new company was handed control of all the foreign-related assets and trademarks of both the American Tobacco Company and Imperial and, under Duke's chairmanship, developed into a vast multinational enterprise.

In fact, Duke's attention was soon shifted back to domestic affairs as antitrust pressures began to gain increasing political momentum following the successful prosecution of the Northern Securities holding company in 1904 under the Sherman Act. In 1907 the American Justice Department convened a grand jury to investigate charges of trade restraint leveled against American Tobacco and its executives. In November 1911 the Supreme Court ordered the company to be broken up into a number of independent, competing concerns. The company was also forced to sell its majority holding in British American Tobacco. Under the terms of the dissolution, the majority of the company's cigarette manufacturing capacity was divided up between three successor firms: Liggett & Myers, Lorillard, and a reconstituted American Tobacco Company.

Loss of Leadership and Diversification

The subdivision of assets between the successor companies left the reformed American Tobacco Company with a substantial market share, for it retained many of its successful cigarette brands, notably Pall Mall. Duke stepped down as chairman and was replaced by Percival S. Hill, a longtime accomplice from Durham. In the competitive melee that followed the dissolution, however, it was the newly independent R.J. Reynolds that emerged as the leading cigarette manufacturer in the United States. Focussing their entire marketing effort on a single brand, Reynolds in 1913 launched Camel cigarettes, which quickly captured one-third of the market. American Tobacco countered with the brand Lucky Strike and gradually clawed back market leadership under the more progressive management of Percival Hill's son George Washington Hill.

By the time the younger Hill died in 1946, American Tobacco had consolidated its position of market leader. However, the failure of the company under his long-term successor, Paul Hahn, to deliver a successful filter-tipped brand during the 1950s in response to the stimulus of the health scares fatally weakened its brand portfolio. Despite the fact that the unfiltered Pall Mall remained the leading individual cigarette brand until 1966, American Tobacco's hegemony in the U.S. cigarette market was drawing to a close. Hahn's successor, Robert Walker, failed to rectify the problem despite numerous brand launches during the 1960s.

Although the company acquired a significant interest in the successful U.K. cigarette manufacturer Gallaher during the late 1960s, under Walker's management American Tobacco ultimately began to look for investment opportunities outside the tobacco industry. By the end of the 1960s the firm's non-cigarette business—consisting mainly of wine and spirits (Jim Beam whiskey), office equipment (Acco office products), and golf equipment (Titleist brand)—amounted to 23 percent of its sales volume, and in 1969 it formed American Brands as a new diversified holding company. Continuing this strategy, American Brands sold American Tobacco to British American in 1994 and exited from the tobacco industry completely by spinning off its shareholding in Gallaher in 1997, assuming the new corporate title of Fortune Brands.

See Also Antismoking Movement From 1950; British American Tobacco; Globalization; Lucky Strike.

▌ HOWARD COX

BIBLIOGRAPHY

Cox, Reavies. Competition in the American Tobacco Industry, 1911–1932. New York: Columbia University Press, 1933.

Durden, Robert F. The Dukes of Durham, 1865–1929. Durham, N.C.: Duke University Press, 1975.

Kluger, Richard. Ashes to Ashes: America's Hundred-Year Cigarette War, the Public Health, and the Unabashed Triumph of Philip Morris. New York, Alfred Knopf, 1996.

Porter, P. G. "Origins of the American Tobacco Company." Business History Review 43, no. 1 (1969): 59–76.

Sobel, Robert. They Satisfy: The Cigarette in American Life. New York: Anchor Press/Doubleday, 1978.

Tennant, Richard B. The American Cigarette Industry: A Study in Economic Analysis and Public Policy. New Haven, Conn.: Yale University Press, 1950.

cartel a group of related business that join together to limit competition and fix prices of a certain product.

plug a small, compressed cake of flavored tobacco usually cut into pieces for chewing.

acquisition the purchase—sometimes called a merger—of a smaller company by a larger one. During the late twentieth century, major tobacco companies diversified their holdings through acquisition of non-tobacco products.

market share the fraction, usually expressed as a percentage, of total commerce for a given product controlled by a single brand; the consumer patronage for a given brand or style of product.

hegemony control or superior influence over.

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