Imperial Tobacco Group Plc Business Information, Profile, and History

Company Perspectives:

Imperial Tobacco's strategy is based on five key objectives: to focus on tobacco and tobacco-related products, to strengthen our market position in the United Kingdom, to extend our international presence through both organic growth and acquisitions, to pursue opportunities for profitable international development in selected emerging markets, and to continue to increase productivity and control costs through capital investment in new technology.

History of Imperial Tobacco Group Plc

Imperial Tobacco Group PLC is the United Kingdom's leading tobacco company, with extensive international operations: making and marketing cigarettes, cigars, pipes, roll-your-own and pipe tobacco, and cigarette papers in more than 110 markets worldwide. In the United Kingdom, it is the brand leader in cigarettes, cigarette papers, and roll-your-own and pipe tobacco; and the company is number two in cigars. Imperial is the world leader in the roll-your-own tobacco market with Drum, Van Nelle Tabak, and Golden Virginia; and in the cigarette papers market with Rizla. The company has 13 manufacturing sites around the world. Imperial's cigarette brands include Lambert & Butler, Regal, Embassy, John Player (Ireland's market leader), and Superkings; manufacturing takes place in the company's factory in Nottingham, England. Cigars are produced under the Castella, Classic, and Panama names at the company's factory in Bristol, England. In 2001, Imperial Tobacco begins to distribute and market Philip Morris International's Marlboro cigarettes in the United Kingdom.

Early 20th Century: Protectionist Beginnings

At the dawn of the 20th century, the British tobacco industry was thriving, with about 500 tobacco manufacturers and more than 300,000 retail stores specializing in tobacco products and related wares. Operating as individual entities, the manufacturers attracted the attention of James Buchanan (Buck) Duke, head of the American Tobacco Company (ATC). Duke undercut rivals to the point of working at a loss, to persuade smaller competitors to agree with him. In this way, American Tobacco had achieved dominance in the United States and had set its sights on the European continent. The British tobacco industry was aware that ATC had allocated an enormous cash reserve of $30 million toward snatching up individual competitors in the united Kingdom.

Duke arrived on the British tobacco scene in late summer 1901 and promptly bought Ogden's, a factory that made nationally popular pipe tobaccos and cigarettes. Ogden's chairman said, "For every £1 of capital issued by us they have £100, so the contest in a cutting competition, whenever it came, would be unequal." In this context, Duke then approached other companies, including John Player and Sons, Gallaher, and Cope's. Reportedly, he even burst upon the Player brothers (the company's namesake "sons") and said, "Hello, boys. I'm Duke from New York come to take over your business." The ATC chief was rebuffed there and at other companies, but the British tobacco industry was worried. By December 1901, 13 U.K. tobacco firms had answered the challenge by registering as "The Imperial Tobacco Company (of Great Britain and Ireland), Limited." The largest of the 13 contributors was Wills, whose business dated back to 1786. Fittingly, the first chairman of the board was Sir William Henry Wills, Britain's second wealthiest man of the era. Although the 12 other businesses might have had concerns about Wills' dominant position, the new company's structure might have appeased them: When the operations joined Imperial, they ceased to be separate entities and became parts of a single business. However, each firm continued to trade under its own name and was responsible for its own sales and manufacturing.

The battle for the British market began, and predictably, ATC cut prices. Imperial gained a key weapon when it acquired the retail business of Salmon & Cluckstein, which ran a chain of tobacconist shops throughout the country. Imperial also launched a "bonus to customers" plan, by which a slice of the company's profits was allocated to wholesale and retail dealers who signed an agreement. ATC replied to this with a bonus agreement of its own, offering dealers all of Ogden's net profit for four years, plus £200,000 a year for the same time frame.

Imperial was not only holding its ground, but gained the upper hand, and decided to continue the fight on ATC's home turf. Surprisingly, Imperial was welcomed in America. Meanwhile, ATC experienced huge losses in the United Kingdom--in just ten months, Ogden's had lost more than £350,000 on sales totaling £7.5 million, versus Imperial's profit of £5 million in its first year.

In September 1902, ATC raised the white flag: The company turned over Ogden's to Imperial and stopped operations in Great Britain and Ireland. In turn, Imperial halted its U.S. expansion plans, except for buying tobacco leaf. Imperial gained rights to sell American Tobacco's brands in the United Kingdom, and the American company gained rights to sell Imperial brands in its native market. A new company was registered in the U.K., the British-American Tobacco Company Limited, to market both firms' products overseas. But in 1911, after a United States Supreme Court antitrust ruling, American Tobacco split into four companies and sold its interest in BAT. At that point, the 1902 agreement was changed to let Imperial sell some of its brands in the United States. Imperial retained a share in British-American Tobacco for many years.

1920s-1950s: Consolidation

The first 20 years of the 20th century were an era of consolidation for Imperial. Until the end of World War I, the structure of the company remained largely unchanged, with the exception of establishing the American Leaf Buying Organization in 1902, the purchase of the J & F Bell tobacco business in 1904, and two years later, the formation of a firm to process waste products for agricultural use. A look at the numbers of employees at John Player & Sons between the wars gives a sense of the firm's rapid growth: 2,500 in 1914; 5,000 in 1928; and 7,500 by 1939.

During World War I, cigarette consumption rose dramatically, and brands such as Woodbine, known as the "soldier's smoke," were popular in the trenches. In 1918, Imperial explored new areas such as manufacturing cigarette paper, which until then had been nearly a French monopoly. In 1920, Canon's Marsh Tobacco Bonds was established to store bonded tobacco leaf. In 1923 and 1924, Wills' and Players' manufacturing plants were established in Ireland. In 1926 a leaf buying and processing operation was launched in Africa, as was the British Leaf Tobacco Company of Canada. In 1927, Imperial gained a share in the Finlay chain of tobacconist shops (becoming a wholly owned subsidiary in 1963), and in 1930, a controlling interest was bought in Robert Sinclair Ltd., a tobacco wholesaler. Tobacco acquisitions continued throughout the late 1930s, 1940s, and 1950s. As time went on, rationalization gradually whittled the smaller producers into larger units, eventually molding Imperial's 22 constituent companies to three by the end of 1980: W D & H O Wills, John Player & Sons and Ogden's.

Meanwhile, in the 1920s and 1930s, Imperial was waging a different kind of war: the battle of cigarette coupons, which first appeared in the 1920s. Although in 1930, Imperial's chairman spoke out against these promotions, other companies pursued them, and thus ate into Imperial's market share. In the summer of 1932, Imperial launched the Wills Four Aces coupon brand, and by the end of the next year, the brand gained more than one-sixth of the coupon market. More than 320 million coupons were issued, and were redeemed for more than 3 million gifts, but it cost the company almost three-quarters of a million pounds. The vicious competition hurt the industry, and in October 1933, Imperial achieved an agreement with the six largest manufacturers to end coupon trading starting at the end of that year.

During World War II, cigarette sales continued their upward swing, and despite a reduced labor force and limited supplies, Imperial still shipped nearly 12 billion cigarettes and 1,750,000 pounds of pipe tobacco to troops overseas. In the late 1950s, the number of U.K. smokers hit a peak of 23 million.

1960s-1970s: Diversification and Difficulties

By the 1950s, Imperial controlled more than 80 percent of the U.K. tobacco market, but its market share decreased during the next decade because of competition from the Gallaher Group, maker of Benson & Hedges cigarettes. Meanwhile, the first Royal College of Physicians report about the health effects of tobacco was published in 1962. The report recommended restrictions on tobacco advertising, increased taxation on cigarettes, limiting the sale of cigarettes to young people, and providing more information on the tar and nicotine content of cigarettes. Cigarette sales fell for the first time in a decade. In 1964 the government banned cigarette advertising on television, ending a period since 1955, when the first commercials for the Capstan and Woodbine brands were broadcast.

In this cooling climate, Imperial's management sought ways to reduce the company's risk. In the 1960s and 1970s, Imperial began to diversify from its almost complete dependence on tobacco, with somewhat haphazard diversification into food, drink, and leisure operations with acquisitions such as the snack-food company Golden Wonder Crisps (1961), and the Courage & Barclay brewery (1972). To signify this broadened portfolio, the company was renamed Imperial Group in 1973, and Imperial Tobacco Limited was formed as a unit to oversee its tobacco business. By 1979, Imperial Group employed about 100,000 people.

With the oil crisis and recession, the 1970s was Imperial's most challenging decade. The United Kingdom joined the European Economic Community (EEC) in 1973, and by 1978, the resulting changes in the tax system weakened the company's market position. Before joining the EEC, Britain had a system in which the weight of tobacco determined the amount of tax, which favored the market for smaller cigarettes, which Imperial dominated. But the new "end-product" taxation system treated all cigarettes the same, regardless of weight, so that king-size cigarettes were taxed at the same rate as standard-size cigarettes. Gaining more puff for the buck, smokers switched in droves to king-size cigarettes. Before this time, less than one out of every ten cigarettes sold in the United Kingdom was king-size. By 1984 that number jumped to almost eight out of every ten. The impact on Imperial was huge. About two-thirds of cigarettes sold in the United Kingdom before 1976 were Imperial brands, but, as David Churchill wrote in the Financial Times (London), "Imperial was slow to react to these changes." And as a result, other tobacco vendors entered into the fray.

Through the 1970s, Imperial still held a stake in BAT, which focused on exports and the duty-free market, while Imperial's business was limited almost entirely to the United Kingdom and Ireland. In 1973, Imperial and BAT agreed that each would control its own brands in the United Kingdom and Continental Europe. In 1980, Imperial sold off the last of its financial holdings in BAT. Also that year, in a move to lessen Imperial's dependence on U.K. earnings, the company bought the U.S. hotel and restaurant chain Howard Johnson (but sold it to Marriott Hotels in 1985).

Despite the difficulties of the 1970s, that time period did see an achievement: the opening of what the company calls the two most modern tobacco manufacturing centers in the world: the Player's Horizon factory in Nottingham in 1972, followed by the Wills Hartcliffe factory in Bristol in 1974.

1986-1996: The Hanson Era

Imperial Tobacco began the 1980s with a major reorganization, from which the company surfaced as a leaner, more efficient operation. Amid the decline in the tobacco market and the need for greater cost-effectiveness, the company closed four factories and centralized the administrative functions of Wills, Player's, Ogden's, and Imperial Tobacco (Imports). But according to Gareth Davis, who became Imperial's chief executive in 1996, Imperial still was saddled with excessive costs by 1986 when conglomerate Hanson Trust acquired it in a US$4.3 billion hostile takeover. Davis told The Independent's Roger Trapp in a December 6, 2000 article, "Hanson was very good for us. It knocked us into shape."

Right away, Hanson set to work by divesting the patchwork of branded-consumer goods Imperial had assembled, and reshaped the company as a streamlined, low-cost manufacturer of high-quality tobacco--a mission that remains in place. Hanson cut Imperial's tobacco brands from more than 100 to five brand families, a move that decreased its U.K. market share to 33 percent by 1990. It sold Imperial's brewing businesses to Elders IXL (now Foster's Group Limited), and divested the restaurant and food businesses. Between 1986 and 1993, it cut tobacco operations from five factories and 7,500 employees to three factories and 2,600 employees. Faced with a mature market and declining U.K. cigarette consumption, Imperial began expanding overseas in 1994, and by 1996, exports had risen to 15 percent of sales. In light of the founding of the Single European Market in 1993, Imperial's actions were not unusual. The company needed to enhance efficiency and cut production expenses to compete against its Continental counterparts.

In 1990, in an historic ruling, a judge criticized Imperial for its treatment of pensioners. The case arose when participants in the 26,000-member fund were faced with a choice: staying in their plan, which was closed to new members, or switching to another open plan within the group. In the Financial Times of December 6, 1990, Eric Short reported that in 1985, when it became clear that Hanson was pursuing the Imperial Group, the latter had created rules in the plans to prevent the new employer from gaining access to assets of the Imperial Tobacco pension fund. However, in denying access to the acquiring company, the new rules also restricted access to the plan's beneficiaries. The judge ruled that proposals affecting the future of pension plan members have to be made in good faith. The ruling was regarded as a victory for employees.

In 1996, striving to improve its share price, Hanson announced that it was "demerging" its diverse businesses into four independent companies. Imperial would remain committed to its cigarette, cigar, and tobacco business, but it would focus on the U.K., Irish, Continental European, and Asia-Pacific markets. The demerger of Imperial Tobacco took place on October 1, 1996, and Imperial began trading on the London Stock Exchange. Meanwhile, five days before trading was to begin, a group of former smokers came forward with a class-action lawsuit against Imperial Tobacco and Gallaher, who together accounted for 80 percent of cigarette sales in the united Kingdom. The claimants, who suffered from lung cancer, asserted that the tobacco companies failed to fulfill their duty to decrease health risks by reducing tar levels in cigarettes when the link between tar and cancer became clear in the late 1950s.

During the Hanson era, many of Imperial's businesses were sold off and the core tobacco operations were completely reorganized to enhance efficiency and cost-effectiveness. Between 1987 and 1995, productivity nearly tripled, the brand portfolio was streamlined, and market share increased. In 1996, the market capitalization of the newly independent Imperial was £2 billion.

1996-2000: Independent and Thriving

The post-Hanson period began on a roll. Under the direction of new CEO Davis, who apparently never is photographed knowingly without an Imperial product in his fingers, the company acquired Rizla, the world's leading brand of hand-rolling cigarette papers and one of the tobacco industry's oldest players, for £185 million. The deal enhanced Imperial's stance in the hand-rolling market, where Golden Virginia commanded 60 percent of legitimate tobacco sales. Based in the Netherlands, Rizla claimed two-thirds of the world market for hand-rolling tobacco paper, thus broadening Imperial's European presence. Davis told Magnus Grimond of The Independent in a January 29, 1997 article that the company had its eye on Rizla for about five years but had been preoccupied with the demerger.

The following year, Imperial acquired hand-rolling tobacco manufacturer Douwe Egberts Van Nelle from Sara Lee for £652 million. The purchase added the Drum brand to the existing Golden Virginia brand in hand-rolling tobacco. Imperial renamed the operation Van Nelle Tabak. After the two acquisitions, the composition of Imperial's income changed, with one-quarter of profits now coming from outside the United Kingdom. Thanks to these two highly regarded deals, Imperial was admitted to the FTSE 100 Index in December 1998. Imperial also gained a listing on the New York Stock Exchange.

The results for 1998 were positive, with a 12 percent increase in the group's operating profit. Rizla had been integrated, and Van Nelle Tabak had widened the company's international presence. Chairman Tom Kyte said that the profits came in spite of punitive tax increases, which he said contributed to the U.K.'s declining cigarette market, made worse by goods smuggled from EEC countries with lower cigarette taxes. Also that year, Lambert & Butler became the U.K.'s leading cigarette brand family. Meanwhile, Imperial widened its presence in Europe and select emerging markets.

In early 1999, the company revealed plans to close one of three Van Nelle Tabak plants as part of an 18-month project to streamline and control costs in the hand-rolling tobacco operations. Imperial invested in new technology, such as expanding the factory in Nottingham with a £330-million expenditure over the next two and a half years. In 1999, Imperial acquired a portfolio of brands in Australia and New Zealand. Also that year, Imperial launched the lower-priced Richmond King Size, followed by Richmond Superkings in 2000. The company has heralded this brand family as one the most successful introductions by any tobacco manufacturer in recent years.

In February 1999, the biggest legal action ever brought against the U.K. tobacco industry fell apart. In a significant win for the companies, the group of lung cancer victims withdrew their High Court case against Imperial and Gallaher. The tobacco companies agreed not to pursue the claimants for legal costs approaching £14 million as long as they agreed never to sue again. The outcome has been heralded as a legal landmark.

At the end of a decade in which smokers fell out of favor, Imperial came to be rated as one of the U.K.'s largest and most successful companies. At the same time, U.S. investors responded more quickly than their British counterparts to appreciate that Imperial had no exposure to the U.S. market--and U.S. litigation. In a Times (London) article published May 24, 1999, Gareth Davis told Robert Lea there are two things the company will never do: "We will not go into anything outside of tobacco or tobacco-related products--the company has been there, done that and thrown away the T-shirt. And we will not, ever, be going into the U.S.--for the obvious reason." The obvious reason being potential litigation and the possibility of billions of dollars in healthcare settlements as a result.

The Next Century: Going Global

Although born amid British protectionism, Imperial approached its centennial with a cosmopolitan world view. By December 2000, 44 percent of the business was international. And the overseas portion of the workforce had dramatically shifted--from 5 percent at the time of the demerger to almost 50 percent at this juncture. In 2000, the company acquired the Baelen Group, a Belgian manufacturer of roll-your-own tobacco; EFKA, a German manufacturer of cigarette papers and tubes; and Mayfair Vending, a U.K.-based operation that tripled Imperial's cigarette vending business.

The following year transformed the company's stature. In early 2001, Imperial had increased prices across all products in the United Kingdom to offset the impact of market declines, estimated at about 10 percent a year. But with a contract to start distributing Marlboro cigarettes in the United Kingdom for Philip Morris International in September 2001, Imperial overtook its rival Gallaher as the U.K. market leader. By February 2002, Imperial saw its U.K. cigarette market share increase to 48.7 percent. Davis estimated that the Marlboro contract was worth about £10 million a year to Imperial. In 2001, the company also gained a market presence in Africa and Vietnam with its purchase of a 75 percent stake in France's Tobaccor SA, the second largest cigarette manufacturer and distributor in sub-Saharan Africa. In November 2001, Imperial said its full year after-tax profit was up 10 percent, even with cigarette consumption shrinking in its home market. In addition, Imperial's international sales surpassed domestic sales for the first time.

By the end of 2001, Imperial's fifth consecutive year as a public company, the company had made strides in its strategy of generating sustainable profit growth, both by investment in new markets and brands and through acquisitions, supported by a low-cost manufacturing base. In October of that year, the company announced a planned restructuring of its manufacturing and supply chain operations, which would take place over the next 18 months and consume an investment of about £16 million. Meanwhile, Davis praised the British government for its efforts toward ending the illicit cigarette trade, such as the increased number of customs officers scouting out illegal tobacco imports. Looking forward, as with all tobacco companies, Imperial faces continued pressures from regulatory authorities and governments.

Principal Operating Units:Imperial Tobacco International Limited; Imperial Tobacco Limited; John Player & Sons Limited (Ireland); Rizla International BV (The Netherlands); Sinclair Collis Limited.

Principal Competitors: British American Tobacco; Gallaher; Philip Morris International.

Chronology

• Key Dates:
• 1901: The Imperial Tobacco Company is formed.
• 1961: The company diversifies and buys Golden Wonder Crisp Company, a snack-food firm.
• 1972: The company continues to diversify and buys Courage Barclay brewery.
• 1973: The company changes its name to the Imperial Group, with Imperial Tobacco Limited as a division.
• 1980: Imperial sells the last of its stake in British-American Tobacco Company (BAT) and purchases the U.S. hotel and restaurant chain Howard Johnson.
• 1986: Imperial is taken over by the conglomerate Hanson Trust.
• 1994: Imperial begins expanding overseas, exports rise to 15 percent of sales.
• 1996: Imperial demerges its diverse businesses into four independent companies.
• 1996: Imperial begins trading on the London Stock Exchange.
• 1996: Gareth Davis becomes Imperial's chief executive.
• 1997: The company acquires Rizla, a maker of cigarette papers.
• 1998: The company acquires Van Nelle Tabak from Sara Lee, adding the Drum brand to the existing Golden Virginia hand-rolling tobacco brand.
• 1998: Imperial gains a listing on the New York Stock Exchange.
• 1999: Imperial expands its factory in Nottingham, England and acquires a portfolio of brands in Australia and New Zealand.
• 2001: Imperial announces an agreement with Philip Morris to distribute and sell Marlboro cigarettes in the United Kingdom; Imperial gains a market presence in Africa and Vietnam by purchasing a 75 percent interest in France's Tobaccor SA.