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ONE-ON-ONE - December
2002
by Ed G. Lane
'Society's Expectations from Industry,
and Tobacco Specifically, Have Changed'
Brown & Williamson CEO Discusses corporate Responsibility
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Susan M. Ivey
As president and chief executive officer of Louisville-based
Brown & Williamson Tobacco Corporation, Susan Ivey runs
the third largest manufacturer and marketer of cigarettes in
the U.S. The Brown & Williamson company is a subsidiary
of British American Tobacco plc, based in London.
Ivey has served as the
head of international brands and manager of the global strategies
for State Express 555, Lucky Strike, Kent, Benson & Hedges,
Pall Mall and regional brands including John Player Gold Leaf
and Barclay. Notably, Ivey was also marketing director for British
American Tobacco in China from 1994-1996.
Ivey is an executive committee
member of Bellarmine University and Greater Louisville Inc.
and involved in the Greater Metro United Way of Louisville as
campaign chair for 2003.
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Ed Lane: Brown & Williamson was founded in 1893. In 1927, Brown
& Williamson (B&W) became a subsidiary of British American Tobacco
(BAT) – a London-based corporation. That same year, B&W also
relocated its U.S. operations to Louisville from Winston-Salem, NC.
Why did B&W originally move to Louisville?
Susan Ivey: At that time,
Kentucky was the second largest tobacco-growing state, and Louisville
had the river and the port. When B&W moved, our employees took
the Saturday train to Louisville and started work on the following
Monday. B&W was quite an industrious company, even in those days.
We’ve been in Louisville ever since and had a factory here until
the early 1980s.
EL: Is that when B&W opened
a manufacturing facility in Georgia?
SI: Yes, B&W’s only
manufacturing facility is now in Macon, GA.
EL: With the efforts of community
leaders and Greater Louisville, Inc., Louisville and Jefferson county
are experiencing a period of resurgence. Why is Louisville faring so
well?
SI: I’m delighted to
see the growth in Louisville. As you may know, I lived here from 1981
until 1990. I then went overseas for 10 years and came back in the
middle of 1999. And certainly during the ’80s there were several
attempts in Louisville to revitalize the downtown. The Galleria project
was one of the first efforts and Brown & Williamson stepped up
to that. We were actually going to move out to the east end and we
took this building and have been committed ever since that time to
downtown Louisville.
As we have established a vision
for the city, Louisville has made a lot of progress. We’re not
Nashville or Indianapolis yet, but we’re going in the right direction.
The merger is underway and Louisville has a solid base of employment
and employers with outstanding commitment to the community. Louisville
has a good platform in terms of the arts, social systems and philanthropic
organizations. To ensure that Louisville can attract the talent that
is needed to keep businesses like Brown-Forman, Tricon, B&W, UPS
and the healthcare industry here in Louisville, it’s important
that the city thrive and invest and become more of an urban center.
EL: You’re recruiting
people from around the world to work for your company. How important
are arts and education in this effort?
SI: When you are recruiting
people with families, the education system is critical and certainly
something everyone evaluates. The arts, and even restaurant facilities,
are very important because businesses are recruiting graduate students
and MBAs to the community – many who do not yet have families.
To have a thriving young professional environment is important to
that long-term recruiting effort.
EL: What benefits do you see
will be created when the city and the county merge together?
SI: The benefits of the synergy
will be inevitable – not only economically but also in terms
of focus. One entity focused behind a common goal is – almost
without exception – better than two entities that perhaps have
different visions.
EL: Burley tobacco has been
a major component of Kentucky’s economy since the 1800s. What do
you perceive to be the long-term future for tobacco growers in Kentucky?
SI: Kentucky is still the
second largest state in the union for tobacco. U.S. tobacco will always
be a critical component of U.S. cigarette trademarks. I’m making
the assumption that U.S. burley doesn’t price itself totally
out of the world market. U.S. burley is not easy to find elsewhere;
it’s not that substitutable and gives our products the flavor
and the quality that our consumers enjoy. This applies not only to
our products in the United States but also to the cigarettes that
are exported.
EL: British American Tobacco
is the second largest tobacco company in the world and has facilities
worldwide. Does B&W serve or market to a specific geographical area?
SI: I run only the U.S. business,
but our B&W factory in Macon does make certain brands and blends
that are shipped overseas. B&W supplies the Japan market, almost
in total for British American Tobacco, and we also have other exports
that go to the Middle East and Europe.
EL: What is the finished product?
SI: It’s fully-made,
packed cigarettes with the appropriate warning for that destination.
EL: How has “contract
buying” changed the tobacco industry and what are the benefits
of this program to B&W?
SI: It’s interesting
because last January this program didn’t exist, certainly for
Brown & Williamson. One of our competitors started a portion of
its business in contract growing and B&W decided that we better
get out there and contract our farmers.
B&W could have been without
adequate tobacco, but more critically without the quality and particular
grades of tobacco that we use in our blends. In 2001, B&W contracted
about 80 percent of its requirements and bought the remaining 20 percent
at auction.
Our contract growing requirements
are bigger than just for Brown & Williamson U.S.A. On behalf of
British American Tobacco, we also contract the U.S. tobacco that our
sister companies want to use in their local manufacture. BAT’s
U.S. tobacco usage is greater than B&W’s domestic cigarette
volume.
Contract systems have been
used in other parts of the world and BAT is quite familiar with contract
arrangements, which was good for us. Now, we buy the whole plant from
the farmer. Trying to get other people who want the bottom, if you
want the top, and trading with you to get your recipes right, worked
out for us much better than we expected in 2001. The risk in the contract
system is that there is waste, but B&W has been able to minimize
that waste. Relationships between tobacco farmers and Export Leaf,
which is our leaf division, have always been strong. BAT buys tobacco
in northern Georgia, Kentucky, Virginia and West Virginia. We’ve
been pleased with the way the contract system has developed.
EL: How will this program
affect tobacco warehousemen and auctions?
SI: Tobacco will always be
auctioned. So, there will still be an auction system, but it will
be much consolidated.
EL: How has contracting affected
the price of tobacco?
SI: It’s actually gone
up slightly. And that’s because contact buyers had to become
middlemen, in a sense. We had to create the infrastructure to take
on the tobacco, the transportation still costs, and we had to be competitive
with the pricing. In the future, there could be some more efficiency
in the market, but I don’t think contracting is going to be a
big cost saver.
EL: What happens when a farmer
sells his crop to B&W?
SI: The leaf is brought into
Wilson, NC, which is where B&W does the processing. And then it
is stored, because you don’t take tobacco out of the ground,
run it through those machines, and then send it to the factory. B&W
has storages in Blacksburg, SC and Richmond, VA. Normally the tobacco
is stored 12 to 15 months and cured. Tobacco is an organic product,
so it rests, and then it’s delivered to the factory.
EL: How many employees does
B&W have in the U.S. and Kentucky and what are long-term employment
trends at B&W?
SI: We have about 5,000 employees
nationwide. Here in Louisville, we have about 400 that are full-time
staff and then about another 200 contractors, so we’re employing
about 600 people in Louisville.
EL: What is the benefit of
using contract labor?
SI: Efficiency. For example,
B&W uses the Pitney-Bowes organization as a facilitator of our
services, and they bring a lot to the party. Having an external view
of your processes helps you determine how they can be done more efficiently.
EL: How is B&W’s
sales force organized?
SI: B&W has 22 section
offices and 1,500 to 1,600 people in our field sales organization.
EL: Because of bad publicity
regarding health issues and tobacco, has B&W had a difficult time
recruiting new employees?
SI: About five to eight years
ago it was more of an issue than it is today. People are very clear
on, “yes, I will join the tobacco industry,” or “no,
I will not.” Certainly there are a lot of people who choose not
to work in a controversial industry, not just tobacco but of any kind,
and then there are people who look at the company’s policies
and the company’s position and understand the issues that they’re
joining and come quite open to that. And I would say B&W had a
bigger problem with the tech drain. There was simply no talent available
during the past three years. And now, of course, in the past year
and a half we’ve gotten every MBA graduate that we’ve offered.
They’re coming.
EL: BAT’s most recent
financial report for the period ending September 30th showed operating
profits to be down by one percent, but overall profits were up about
eight percent due to lower interest rates and the absence of exceptional
charges. Worldwide, BAT’s cigarette volumes declined four percent
or about 23 billion units. So, how do you see the worldwide trend going?
SI: Well, there are two components
at play. In established and more mature markets, the volume is declining
around one to two percent per annum. But, that doesn’t mean there’s
not a fight for market share, which of course can grow volume. In
the less mature markets, consumers are switching from local brand
business to international cigarette brands. So, there are opportunities
for share growth for the big international players like British American
Tobacco which operates in more than 180 countries around the world.
EL: Some governments operate
tobacco companies and there seems to be an interest in privatizing that
business. Is that one of the growth areas BAT is investigating?
SI: I can’t really speak
for the shareholder, but BAT – even in its recent third quarter
results announcements – has always talked about acquisition and
merger growth as part of its strategy to become the worlds No. 1 tobacco
company.
EL: Brown & Williamson’s
slogan is “a responsible company in a controversial industry.”
Could you describe what that means specifically?
SI: Sure. The phrase is used
actually across BAT. It’s a recognition of the controversiality
of the industry. British American Tobacco and Brown & Williamson
have been committed to being a good corporate citizen, to being socially
responsible in the way it goes to market with its products and responsive
to the communities where it works and lives. B&W supports a constructive
dialogue in an attempt to societally come to terms with tobacco as
a product category.
Tobacco is a legal product,
it’s smoked by legal aged adults, and we have a legal right to
be able to communicate about this product. What has happened is that
society’s expectations from industry, and tobacco specifically,
have changed over the years. And the tolerance that people have for
the way the industry has gone to market have changed over the years.
B&W’s slogan is our commitment not to market to kids, to
make sure our consumers have the information they need to make adult
choices, and to engage in a social reporting process that encourages
a dialogue with various stakeholders. Is B&W going to shut the
doors tomorrow morning? No we are not, nor should we. But we are trying
to find a basis of understanding to be able to have some dialogue
to see if we can’t co-exist in society, where we meet each others’
expectations, understanding that smoking is a personal adult choice.
EL: Some medical doctors have
stated that regular smoking can reduce a person’s life span by
five to 20 years. How do you deal with that? What is B&W’s
position regarding health issues facing smokers?
SI: At Brown & Williamson,
we were the first to be as clear as anyone could be to say that it
is our position that smoking causes disease. And that is very clearly
stated. We were the first to put these positions out on the Web site.
And we’ve always said that smoking was a very risky behavior
but, of course, that answer was not seen as sufficient and clear in
communication. And of course we were looking at it, at that time,
from sort of a manufacturer’s perspective. If I knew what it
was in smoking that made some people sick and some people not, I’d
love to be able to take it out of the cigarette. But nobody knows
that after 150 years of research. And we’re very clear that based
on epidemiological evidence, certainly smoking can cause disease.
Our position is to be certain that consumers have the knowledge they
need to make personal choices about smoking.
EL: Tobacco companies continue
to be sued by consumers who allege that cigarettes have caused illnesses
and premature death. Tobacco companies have successfully defended against
these claims. What is the outlook for future health-related litigation?
SI: We’ve had individual
lawsuits against tobacco companies since sometime in the ‘50s.
And I believe we’ll always have individual lawsuits to deal with.
What is going away and will continue to go away are class-action lawsuits.
We continue to see courts disband these classes because it’s
simply an inappropriate mechanism.
EL: Under the Master Settlement
Agreement that the major tobacco companies entered into with the 46
state attorneys general, how much does Brown & Williamson have to
pay under that agreement?
SI: Our payments are based
on B&W’s market share (percent of all cigarettes sold in
U.S.). Since 1998, B&W has paid over $2.8 billion dollars under
the agreement.
EL: Is the amount paid annually,
monthly, in a lump sum?
SI: It’s paid in arrears;
payments are due for the preceding year in April. The liability is
accrued quarterly and it’s big numbers. B&W had to design
a turn-around strategy for the sustainability of the organization
because big numbers like that really whack you around.
EL: Please define B&W’s
current business strategy, “Fight for Growth.”
SI: B&W’s plan is
to make sure that it has products that are superior to its competition
in the segments in which we have elected to compete. We couldn’t
compete in all segments, so B&W had to focus on specific brands.
EL: With regard to the marketing
of tobacco, are point-of-sale efforts the most critical since advertising
is limited?
SI: Yes, there’s a real
battle at retail because B&W can’t use outdoor – that
was lost in the Master Settlement Agreement. We do have some magazine
advertising, but B&W self-restricts that medium to limit the exposure
to under-age. Direct marketing to adult smokers and being able to
interface with those adults in nightclubs and restaurants is also
effective.
EL: What is B&W’s
position on banning smoking in public buildings, restaurants, and bars?
SI: I’m a proponent of
having smoking and non-smoking places, particularly in restaurants,
because the non-smoker should have the choice. For B&W, the bars
are an opportunity to interact with consumers where they can enjoy
or try our product.
EL: For how many years will
the Master Settlement Agreement (MSA) be in place?
SI: It’s really in perpetuity.
Now, there are pieces of the MSA that go away. Those are called the
up-front payments that only the “big four” tobacco companies
were subjected to.
EL: There’s a suggestion
going around now that Kentucky may raise taxes on cigarettes because
the state had a major revenue shortfall and no money left in the “rainy
day” account. What impact would a 50- to 75-cent a pack increase
have?
SI: That’s a huge tax
increase. Politicians need to sit back and recognize the role that
tobacco plays in the state of Kentucky. It has been traditional and
is the case today, that the big tobacco states – North Carolina,
Virginia and Kentucky – have had relatively low tobacco taxes.
These states benefit versus the non-tobacco producing states in terms
of sales, jobs, and the rollover of money generated from tobacco.
In the end, the politicians, who represent the people, need to decide
the state’s tax policy. Cigarette taxes are regressive; I’m
opposed to them.
EL: What does the future hold
for B&W?
SI: B&W is proud to be
the only major cigarette manufacturer in Kentucky. Phillip Morris
pulled out of Louisville; they’re gone. B&W is committed
to helping create a thriving economy in Louisville and the Commonwealth
of Kentucky.
Ed G. Lane is chief executive of Lane Consultants Inc. and publisher
of The Lane Report.
edlane@lanereport.com
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