Corporate Profile

RJR Nabisco: Transnational Tobacco Trafficker

by Phillip Mattera

THE DOMINANT U.S. CIGARETTE COMPANY until the early 1980s, R.J. Reynolds, - now RJR Nabisco - has been most widely known in recent years as the object of a dramatic takeover battle. That contest, which became a symbol of the financial excesses of the 1980s, resulted in the largest corporate transaction ever consummated: a $25 billion leveraged buyout. The resultant debt, critics charge, has put pressure on RJR to aggressively hawk cigarettes to vulnerable populations - African-Americans, poor women and children in the United States, and people in the Third World and Eastern Europe.

From Camels to Fig Newtons

 RJR's origins can be traced to the arrival of 25-year-old Richard Joshua Reynolds in the town of Winston, North Carolina in 1875. Winston was the production center of the new flue-cured leaf that made the best chewing tobacco. For several decades Reynolds built a prosperous chewing-tobacco business, selling the plugs under dozens of brand names.

 During the 1890s, the company fell prey to the tobacco empire being assembled by James Duke, who controlled the rights to cigarette rolling machines. After the Supreme Court broke up the Tobacco Trust in 1911, R.J. Reynolds, independent once again, charged into the cigarette business. Like many "advances" in the tobacco industry, this initiative took the form of a marketing blitz. Using a massive advertising campaign announcing that "the Camels are coming," the company succeeded in creating the first national cigarette brand.

 Camels became so popular during World War I - thanks in large part to the free samples given to the U.S. troops - that General Pershing himself contacted the company to be sure that the doughboys would not run out of smokes. After the war, the brand was etched onto the U.S. consciousness with the famous slogan "I'd walk a mile for a Camel." That line was most conspicuous on a billboard (which emitted real smoke rings) that stood in New York's Times Square for many years.

RJR, like its brethren in the tobacco industry, took great pains to resist the growing realization of the hazards of smoking - an awareness that began to be created on a large scale by a 1952 article in Reader's Digest. RJR advertised, for example: "More doctors smoke Camels than any other cigarette." While downplaying the significance of the evidence of smoking's hazards, RJR hedged its bets in 1954 by introducing a filtered cigarette brand called Winston, which went on to become one of the perennially best- selling brands in the United States.

 When the pressure on the industry became more intense in the wake of the U.S. Surgeon General's 1964 report, Reynolds began to diversify its operations. Among its purchases were Chun King foods, Del Monte and Sea-Land shipping. In 1970, the company took the word "tobacco" out of its name and rechristened itself R.J. Reynolds Industries.

 RJR accelerated its diversification strategy in the 1980s. In 1982 the target was Heublein, a distilled spirits producer founded in 1875. Heublein sold the first prepared cocktails and survived Prohibition by selling A-1 Steak Sauce. After World War II, the company transformed U.S. drinking habits by heavily promoting vodka and introducing mixed drinks, such as the Bloody Mary, that used the Russian liquor. In 1971, Heublein acquired the Kentucky Fried Chicken fast-food chain.

 Once it had swallowed Heublein, Reynolds turned its appetite to a $5 billion deal: Nabisco Brands. The target was the product of the 1981 merger of Nabisco and Standard Brands. Nabisco itself was born of the merger of two rival baking groups in 1898. Originally known as the National Biscuit Company, it developed the first brand name cracker (Uneeda) and went on to dominate the cookie and cracker market with brands such as Ritz, Oreo and Fig Newton. Standard Brands was built on Fleischmann yeast and gin, Royal baking powder and Chase & Sanborn coffee.

 The transformation of Reynolds continued through the 1980s. In 1986, the Kentucky Fried Chicken operation was sold to PepsiCo and the following year most of the rest of Heublein was purchased by Britain's Grand Metropolitan for $1.2 billion. The Canada Dry and Sunkist soft drinks businesses, which had been acquired only a few years earlier, were sold to Cadbury Schweppes.

 But the real drama came in 1988. A bold proposal by chief executive F. Ross Johnson to take the company private through a leveraged buyout prompted an intense bidding war, as well as a great deal of public criticism of the greed and ruthlessness of the parties maneuvering for control. In the end, the winner was Kohlberg Kravis Roberts & Co. (KKR), which acquired the firm for $25 billion, the largest takeover ever.

 As part of the effort to service the company's gargantuan debt load, nearly $6 billion in assets have been sold off since the KKR takeover. These have included several European and Asian food businesses, Chun King and much of Del Monte Foods. In 1990 and 1991, the company also engaged in an extensive recapitalization, which involved the trade of debt for equity, including the reissuance of common and convertible preferred stock.

 The company's 1990 annual report, the first in three years, tried very hard to dispel the idea that the leveraged buyout had stifled investment and promoted short-term thinking. "The impact has been just the opposite at RJR Nabisco," the report said. "We have a new sense of urgency and entrepreneurial energy." Yet the report put an inordinate emphasis on generating cash flow, vital to the company's struggle to meet its debt payments.

 This quest has made the company obsessive about cutting costs, so today's RJR is a much less flamboyant operation than it was during the days of Ross Johnson, when millions were spent on a fleet of corporate jets. Even so, interest payments keep the company's bottom line solidly in the red.

A pushy pusher

 Through all of its turbulence and diversification efforts, RJR has maintained its core commitment to selling cigarettes, with tobacco sales accounting for 58 percent of the company's 1990 net income. RJR and its subsidiaries and licensees manufacture cigarettes in the United States and 30 other countries. The company's tobacco products are marketed in approximately 160 nations.

The company's leading cigarette brands are Winston, Salem, Doral, Camel and Vantage. Nearly all of RJR's domestic tobacco-manufacturing facilities are located in and around Winston-Salem, North Carolina. Among these is the 2 million-square-foot Tobaccoville plant that went into full operation in 1987.

 Having established itself as the U.S. market leader after World War I, RJR remained the top cigarette company until 1983, when it lost the position to Philip Morris. Savvy marketing of Marlboro and other brands enabled Philip Morris to pass RJR, which market analysts came to view as being a step slower. RJR's 1991 U.S. market share stood at 28 percent.

 Entering the second half of the 1980s, RJR was losing market share to Philip Morris and cheaper, discount cigarettes on the one hand, and, on the other, facing the industry-wide problem of a shrinking market as customers quit smoking or die. The company's problems multiplied with the KKR takeover and resultant debt accrual. Desperate to boost sales, RJR has been "extremely aggressive" since the takeover, says Greg Connolly, director of the Massachusetts state office for Nonsmoking and Health. The company has pursued, with varying degrees of success, a number of controversial marketing strategies over the last five years.

o In 1987, RJR introduced the Premier brand, designed to be a "smokeless" cigarette. The company withdrew Premier from the market in 1989 due to unfavorable consumer response.

 o In 1989, RJR ran a four-page pullout advertisement for its Camel brand which offered tips on "how to impress someone at the beach." The advertisement suggested, "Run into the water, grab someone and drag her back to shore, as if you've saved her from drowning. The more she kicks and screams, the better." In the wake of widespread protests from women's and health advocacy groups, RJR pulled the ad, with RJ Reynolds Tobacco chair James Johnston saying, "The ad should never have been run."

 o In 1990, RJR planned to introduce a cigarette aimed at African-Americans. A wave of protest led by Health and Human Services Secretary Louis Sullivan forced RJR to cancel the brand, known as Uptown, before it was test-marketed. Sullivan blasted the company for "pursuing profits at the expense of the health and well-being of our poor and minority citizens." RJR did not give up Uptown happily. A company official stated, "We regret that a small coalition of anti-smoking zealots apparently believes that black smokers are somehow different from others who choose to smoke."

 o Shortly after the cancellation of Uptown, the Washington Post disclosed RJR plans to market a new brand called Dakota, to be aimed at young, poorly educated, white females. The Dakota revelations drew criticism from Sullivan and other anti-smoking advocates, who again denounced the company for targeting vulnerable populations. The new brand also generated protests from many North and South Dakotans, who formed a group called Dakotans Against Dakota Cigarettes and collected 25,000 signatures on petitions opposing the cigarettes.

RJR denies that Dakota is aimed at women, claiming that it rejected the widely publicized marketing plans. RJR spokesperson Didi Witt says, "The cigarette was never meant to be targeted for any market other than adult male and female smokers, particularly Marlboro smokers." RJR did not withdraw the Dakota brand, and it is currently test-marketing Dakotas in Houston and Phoenix.

 o In late 1990, the company began to mount an aggressive challenge to Philip Morris with the splashy introduction of super-low-tar Camel Ultra Lights. The company earned plaudits from market watchers for introducing the brand before Philip Morris began marketing its Marlboro Ultra Lights nationwide.

 o One of RJR's most successful - and most criticized - strategies has been the use of the cartoon figure "Joe Camel" to promote its Camel brand. The cartoon figure, which appears in a leather jacket and is often surrounded by admiring women, was introduced in 1987 and is credited with bolstering Camel's market share. Joe Camel has generated intense protests from anti-smoking advocates, who claim that the character is designed to appeal to children and teens [see "Addicting the Young"].

Like the rest of the tobacco industry, RJR is also turning to international markets to bolster its sales. Although Philip Morris's international presence is much stronger, RJR's Tobacco International has reasonably good brand presence in much of Europe and some other key foreign markets. In late 1990, RJR and Philip Morris were asked by the Soviet Union to supply 34 billion cigarettes to alleviate a dangerous shortage of tobacco products in the country. The company has also moved to take advantage of the transformation of Eastern Europe by acquiring the Club brand, one of the best-selling cigarettes in the former East Germany. In 1991, it was exploring additional investments in Poland, Hungary and Czechoslovakia [see "The Marlboro Man Goes East"]. RJR is the only U.S. cigarette company with a manufacturing facility in China, the world's largest cigarette market [see "China's Tobacco Wars"].

Labor relations

 R.J. Reynolds has a reputation as one of the most anti-union employers in the country. It has been on the AFL-CIO boycott list for nearly 40 years. Unions have organized the company, but they tend to get dislodged as a result of company resistance. This happened after both World War I and World War II. RJR beat back an organizing effort by the Bakery, Confectionary and Tobacco Workers (BCTW) in 1974, and a 1989 BCTW organizing drive did not lead to an election. Raymond Scannell, research director of the BCTW, says the company remains virulently anti-union, but that it has grown more sophisticated in its tactics. "It is still fair to say that RJR is one of the most anti-union employers in the country," he says. "They have become one of the premier practitioners of what is called Šunion-free' management." Overseas, however, several of the company's tobacco operations are unionized.

The BCTW does represent workers at Nabisco, and the union continued to have a working relationship with the company even after it was taken over by RJR, with relations improving after the KKR takeover. Helped by federal mediators, the company and the union began cooperating on projects such as a $5 million jointly administered fund to help workers learn the higher-tech skills needed in modern bakeries. In recognition of the new labor-management harmony, the company and the BCTW were given an award for "excellence in industrial relations" by the Federal Mediation and Conciliation Service in 1991. Some rank and file workers, however, are not pleased with the results of this labor- management cooperation. In September 1991, BCTW members at a local union in Portland, Oregon, concerned that seniority and job security were being eroded, voted to abandon the team concept.

Deadly hypocrisy

 Any company that markets a product which causes as much death and suffering as cigarettes will naturally draw widespread condemnation. Connolly, of the Massachusetts Office for Nonsmoking and Health, uses words like "despicable," "reckless" and "irresponsible" when he speaks of RJR.

 Ultimately, however, Connolly argues, RJR is most morally culpable for profiting from products that people like Henry Kravis, the main engineer of the KKR takeover of RJR Nabisco, would never use. While the health-conscious Kravis and his peers in high society have rejected smoking, they are marketing cigarettes to, and inflicting severe health problems on, poor and disadvantaged people.