Two tobacco industry deals done in the past week show that, despite
reports of its imminent demise, the tobacco market and its brands are
still very much in the land of the living.
First it was announced that Joe Camel is heading east, after RJR Nabisco
sold off its tobacco business, RJ Reynolds International, which owns the
Camel brand, to Japan Tobacco for a cool dollars 8bn (pounds 5bn). Then,
24 hours later, Gallaher announced that it had acquired RJ Reynolds in
the UK for an undisclosed sum.
Gallaher, already the UK’s biggest tobacco company, gains brands such as
Dorchester and Dickens & Grant in the package. It also gets the
distribution rights to Camel and More.
The UK deal is a consolation prize for Gallaher, which was part of a
Philip Morris-led consortium bidding for Nabisco’s international
The prize went instead to Japan Tobacco, which takes control of the
Camel, Winston and Salem brands around the world, with the exception of
the US and the UK markets.
Financial reaction to the deal was immediate; Japan Tobacco’s share
price fell 4.7% as analysts questioned the price paid and the ability of
the Japanese to exploit the brands internationally. Other observers,
however, believe that the deal is a strategic masterstroke for both
’It is a perfect solution to both companies’ needs,’ says one
’Japan Tobacco has the financial clout, while Reynolds International had
the brands, but not the cash or inclination to support them properly
outside the US market.’
The acquisitions see tobacco following the example of other markets,
where mega-firms are being created, hungry for improved margins.
In January, British American Tobacco bought Rothmans for pounds 5.3bn,
strengthening its hand to take on Philip Morris on the global field.
The latest deal frees RJ Reynolds to focus on the US market, where it
will retain its core brands. It has also split off its domestic tobacco
company from its Nabisco food company, diminishing its connections
between tobacco and food products and putting it on a surer economic
footing for dealing with the dual pressures in the US of
anti-advertising legislation and the threat of litigation over deaths
and illness through smoking.
For Japan Tobacco, which is two-thirds owned by the Japanese government,
it offers opportunities for new markets around the globe, with
infrastructure and brands already in place.
Carol Makovich, spokeswoman for RJR Nabisco, said the deal resulted from
the company’s acknowledgement that it was not supporting its brands
’This is the culmination of several years of looking at what would be
best for these businesses. We did not have the resources needed to
support brands in international markets. The business lacked scale and
the situation had to be addressed.’
Where does this leave the brands, both in the US and globally? In the US
it will be a case of improved business as usual. The deal will allow
monies to be poured into improving the balance sheet of the domestic
tobacco business and will probably lead to increased marketing
But it is a sensitive subject, given the level of anti-tobacco activity
in the US, and the company declined to talk about its marketing
Globally, the change of ownership is likely to signal significant
changes to the level of marketing support behind these brands - and to
the brands consumers may be offered.
The new owners will be keen to keep the RJ Reynolds management structure
largely in place. Two key figures are Pierre de Labouchere, president
and chief executive officer, and Nick Masson, senior vice-president of
marketing, both based in Geneva.
The deal buys the Japanese access to both the developed markets of
Western Europe, and importantly the Eastern Central European markets
such as Romania and Russia.
Japan Tobacco controls around 80% of its own domestic market and is the
fourth biggest tobacco player in the world. The deal could also see its
core brand, Mild Seven, rolled out into new international markets.
Axel Gietz, vice-president of media relations for RJR International,
says it is too early to discuss details of how the marketing operation
would be affected.
However, he added: ’Our understanding is that much of the current RJR
management will be retained, but of course there will be an infusion of
He says that up to now there had been a lack of cash flow to build the
brands and that the new Japanese owners would add support.
’Both operations bring different things to the table, RJR has a presence
in markets where Japan Tobacco would like to be, while Japan Tobacco has
a huge presence in Asia.’
As for the agency arrangements for the brands, Gietz said that those
would be clarified shortly.
At present there are two agency networks working on three main brand;
Ammirati Puris Lintas on Winston, and McCann-Erickson with Camel and
It is not known whether advertising arrangements in the UK will be
affected by the change. The bulk of Gallaher’s business in the UK is
handled by M&C Saatchi.
As for Japan Tobacco, it is unlikely that the new Japanese owners will
be rushing to hold a review of ad agencies that are so familiar with
their brands and also able to execute international strategies.
The muscle that these super-tobacco companies can now bring to the
market could also signal a major reassessment of tobacco stock and the
whole market’s future.
’People keep saying that tobacco is dead and that people will stop
smoking,’ said one source, ’but the fact is that people like it.
’The other truth is that despite the hype we still look to be at least
two years away from a European ban on tobacco advertising. That gives
the major players plenty of opportunity to establish their brands, and
search for new ways of building them - even after a ban kicks in.’
World cigarette sales
Company Units (bn) Market
Philip Morris 947.1 18.24
British American Tobacco 712.0 13.71
RJ Reynolds 316.0 6.08
Japan Tobacco 288.3 5.55
Rothmans International 187.0 3.60
Reemtsma 119.4 2.30
KT & G 94.3 1.82
Tekel 74.5 1.43
Seita 54.8 1.06
Tabacalera 46.0 0.89
Others 2354.4 45.33
Source: World Tobacco, 1997/Excludes China National Tobacco Corp,
estimated at 1700 billion cigarettes a year