Ust Inc. Business Information, Profile, and History

History of Ust Inc.

UST Inc., the top dog in the only part of the U.S. tobacco market experiencing growth, is a holding company for four subsidiaries: United States Smokeless Tobacco Company, International Wine & Spirits Ltd., United States Tobacco Manufacturing Ltd., and United States Smokeless Tobacco Brands. United States Smokeless Tobacco Company is the country's leading producer of moist smokeless tobacco products and is the central business of UST.

Although health concerns cut down on growth in the rest of the tobacco industry, snuff sales were on the increase during the first part of the 1990s, a trend that continued into the new millennium. Snuff is pulverized tobacco that is placed between the cheek and gums. Snuff, practically a UST monopoly, was the fastest growing segment of the U.S. tobacco industry, increasing at 3 to 5 percent a year. UST controls between one-third and one-half of the oral tobacco market, which includes chewing tobacco, dry tobacco, moist snuff, and several other products.

Company History--Beginnings

The formation of the United States Tobacco Company dates back to 1911, when the U.S. government dissolved the tobacco monopoly of James Buchanon Duke. From that dissolution, several cigarette companies, including R.J. Reynolds, Liggett & Myers, and Lorillard, as well as several smaller tobacco concerns, including Weyman-Bruton Co., were formed. Weyman-Burton Co., a snuff manufacturer in 1911, eventually became United States Tobacco Company and came to control about 85 percent of the U.S. snuff market.

Although oral tobacco products have been UST's mainstay, it has been in and out of many businesses. In 1958 it acquired Circus Foods, a candy bar and nut products manufacturer. However, the market was already dominated by Planters, according to Louis Bantle, UST's chief executive officer from 1972 to 1992. Shortly after that, UST purchased pet food company B.A. Bernard and marketed Cadillac dog food. According to Bantle, UST was a few years too late with that venture as well, since Alpo already had established itself as the top-premium dog food company.

W.H. Snyder & Sons, a Pennsylvania cigar company, became a subsidiary of UST in 1965. It was later merged into Wolf Brothers Cigar Co., and the name was changed to House of Windsor, Inc. In 1981, UST acquired the assets of Havano Cigar Corp. of Tampa, Florida, and transferred its operations to House of Windsor. House of Windsor, however, was sold to its employees in 1987. UST continued to produce and market Don Tomas premium cigars, handmade in Honduras, in the early 1990s.

In 1969, United States Tobacco acquired Henry, Leonard & Thomas Inc., which manufactured Dr. Grabow Pre-Smoked pipes. UST added to its pipe business in 1974 by acquiring Mastercraft Pipes, Marxman Imports, Inc., and Manhattan Briar Pipes, Ltd. UST continues to market Borkum Riff, the best-selling brand of imported tobacco in the United States, as well as Dill pipe cleaners.

While UST had been testing the waters in outside industries for decades, the 1980s saw both further diversification and the divestiture of incompatible businesses. In 1980, UST acquired WPBN-TV and WTOM-TV but five years later sold these broadcast holdings. A year later, UST bought Heritage Health, which operated 14 drug- and alcohol-abuse clinics in hospitals. A few years later, however, UST sold it because it was not consistent with the company's core business. It also sold its interests in its pen and pencil company and its cigar company. UST considered its diversification into the premium-wine business a good complement to its core tobacco business, and kept its ownership of Washington-State wineries Chateau Ste. Michelle and Columbia Crest and California's Conn Creek and Villa Mt. Eden.

Old Products and New

UST's top brand, Copenhagen, the world's best-selling brand of moist smokeless tobacco, is one of the oldest-packaged consumer brands in the United States, according to the company. Skoal, a wintergreen-flavored moist smokeless tobacco and UST's other flagship brand, was launched in 1934. While United States Tobacco Company had been making inroads into new regional markets, it was not until the last half of the 1970s that moist smokeless tobacco use and UST sales soared. Between 1974 and 1979, sales had increased by more than 10 percent annually, bringing 1979 United States Tobacco sales to more than $233 million, with 60 percent of that total coming from sales of moist smokeless tobacco products Happy Days, Skoal, and Copenhagen. Its earnings were $32 million, up 15 percent from the year 1978. Most of the company's growth was from sales to young men between the ages of 18 and 35. According to a University of Nebraska study, snuff use increased 30 percent between 1988 and 1992 and one in five male high-school seniors used the smokeless tobacco product. Adolescent tobacco use remained relatively stable throughout the 1990s, and as recently as 1999, smokeless tobacco experienced renewed popularity among teenagers.

According to CEO Louis F. Bantle, the company's primary markets had been "Chicago through North and South Dakota, Minnesota, Montana out to Washington State." UST had not even introduced its products to the Southwest until 1950 or to the Southeast until the mid-1960s. Between 1974 and 1979, sales in the Southeast and Southwest leaped 145 percent and 108 percent respectively. Bantle told Forbes, "If you go to high school in Texas and you don't have a can of snuff in your pocket, you're out." The company growth strategy included ads featuring sports and rodeo stars attesting to the sense of "individuality" expressed by snuff users. Since then, the tobacco industry agreed to stop using athletes in advertising and smokeless tobacco has been banned at some levels of pro baseball and in some college conferences. Some Major League teams banned distribution of free samples in their clubhouses.

Research showed that in the 1970s the moist tobacco market was comprised mostly of men whose work or activities made cigarette smoking inconvenient or even hazardous. Users were miners, lumberjacks, and petroleum workers--men who had to keep their hands free for their work or for whom a burning cigarette could cause fire or explosion. This was a small market compared to the cigarette industry's market, but UST practically had a monopoly on this smokeless market. Bantle predicted that the snuff market would increase to 100 million pounds by the dawn of the century and that most of the users would be people who had quit smoking but could not give up tobacco use. By 1992, males in the southeast, mountain/plain, and southwestern regions had per capita use of more than ten cans of smokeless tobacco annually. The Northeast region had a per capita use of only two cans. UST had an 85 percent share of the moist smokeless tobacco market, the largest segment of the smokeless tobacco market.

In 1983, UST introduced Skoal Bandits, small, "tea-bag" pouches of wintergreen-flavored tobacco designed for novice snuff users. Its four-week $2 million ad campaign for New York City touted the Bandits as an alternative to smoking and invited potential users to "take a pouch instead of a puff." By 1990, Bandits comprised 5 percent of UST's business.

A Health Hazard?

According to FDA Consumer, moist smokeless tobacco use caught on among teens because of UST's aggressive ad campaigns, which specifically targeted them. The campaigns featured popular sports heroes, including the Yankees' pitcher Catfish Hunter, Houston Oilers' running back Earl Campbell, and Dallas Cowboys' running back Walt Garrison. FDA Consumer claimed that with this campaign, "smokeless tobacco became a socially acceptable symbol of virility, machismo and coolness." The article added that UST attracted teens with free samples of low-nicotine and fruit-flavored tobaccos. Although UST had been accused of promoting Skoal and Copenhagen among minors, UST denied the allegation. Walt Garrison also denied the charge. In addition, UST donated money to addiction treatment centers in Maryland and Connecticut.

Although smokeless tobacco had been touted as a non-hazardous alternative to smoking, results of a study published in the Journal of the American Medical Association in June 1999 suggested that smokeless tobacco could be dangerous to consumers' health. University of Miami researchers concluded that smokeless tobacco users were at risk for oral cancer and other diseases, as well as nicotine addiction. "These findings," the article stated, "underscore the need for intensive efforts to prevent children and adolescents from using any tobacco product, including smokeless tobacco." And although a few months later, cigarette manufacturers were admitting that their products were potentially addictive, UST and other smokeless tobacco companies were not. On October 20, 1999, US Newswire reported that Joe Garagiola, national chairman of the National Spit Tobacco Education Program, called specifically for UST to admit the addiction potential of their products: "All the facts are in. Spit tobacco is addictive and its use can lead to very serious health conditions and even death."

By 2002, UST was insisting that it specifically avoided targeting minors with its products and advertising. In a letter to Sports Illustrated in March of that year, President Murray Kessler wrote, "We are the only smokeless tobacco company to sign an agreement to work with various state attorneys general to significantly reduce youth access to tobacco products and have voluntarily adopted an array of advertising and promotional restrictions." Although the health risks of smokeless tobacco, as compared to smoking, have not been studied as extensively, a March 2001 article in the Journal of School Health considered both types of tobacco use when studying the prevalence of use among high-school students. And in 2002, UST asked the Federal Trade Commission to allow it to advertise its products as less hazardous than cigarettes. Matthew Myers, president of Campaign for Tobacco-Free Kids, objected, saying on February 6, 2002 in US Newswire, "A tobacco company that continues to deny the harm caused by its products should not be allowed to make health claims about them."

Tobacco's Day in Court

Like other tobacco products, snuff and chewing tobacco have been criticized as menaces to health. In 1986, Betty Ann Marsee brought a $147 million lawsuit against UST. Marsee claimed her son's death at age 19 from mouth cancer was the direct result of his use of UST's smokeless tobacco. The trial was closely covered by the national news media, bringing the issue of the safety of smokeless tobacco to the public's attention even though Marsee's lawyers were unable to prove that UST was liable for her son's health problems.

Snuff had been touted by UST as a safe alternative to cigarettes, capitalizing on the growing evidence that smoking was responsible for many life-threatening conditions. The 1986 Smokeless Tobacco Act, passed during the same spring the Marsee trial occurred, ended snuff's exemption from the restrictions placed on cigarettes in the 1960s and 1970s. The 1986 law called for three rotating labels warning that the products could cause mouth cancer; that they could cause gum disease and/or tooth loss; and that smokeless tobacco is not a safe alternative to cigarette smoking.

The 1986 legislation enacted an excise tax on smokeless tobacco of about two cents a can, although a nine-cent tax had been proposed by some legislators and anti-tobacco lobbyists. Senate Majority Leader Robert Dole of Kansas promised a hike would be considered if a forthcoming Surgeon General's report on smokeless tobacco was unfavorable. Despite a Surgeon General's report which concluded that "smokeless tobacco can cause cancer and a number of noncancerous oral conditions and can lead to nicotine addiction," the tax remained at two cents until several years later, when it was raised about one cent per can. State excise taxes varied widely, from 65 percent of wholesale price per can in Washington to no tax in a majority of states. Meanwhile, health officials called for an excise tax comparable to that on cigarettes as well as an extra $1.00 or $2.00 per can to discourage teen use of the products.

The 1986 law also imposed a ban on broadcast ads for smokeless products, a tactic popular since the 1950s. However, the act did not allocate sufficient funds to finance the anti-smokeless tobacco campaign that the act legislated. In 1993, Congress did allocate slightly more than $10 million for public education about snuff and other smokeless products. In 1991 alone, however, UST had spent $14 million just to distribute free samples of its products. According to company officials, the individual approach is important because novices need a personal introduction to the use of snuff. In addition, UST spent millions of dollars annually on political contributions and lobbying in Washington to block anti-snuff legislation; the company was one of the largest donors to George W. Bush's campaign for the U.S. presidency. Bantle called legislation and taxes the greatest threats to his company and the industry.

Since the Marsee case, the threat of litigation against UST diminished. A ruling by the National Academy of Sciences concluded that there was no epidemiological or clinical data that proved that moist smokeless tobacco caused cancer. While this ruling was reassuring to investors, it also was likely to deter users or their families from filing suit against the company. A recent Supreme Court ruling that said cigarette companies could not be sued for failure to warn was also likely to be a deterrent to litigation against UST, which now included warnings on its products and began labeling packages "Not for sale to minors" in 1995.

In the mid-1990s, however, litigation against UST was renewed. In 1994, the state of West Virginia filed suit against several tobacco and tobacco-related companies, including UST. In 1995, a federal judge in Oklahoma ruled that tobacco companies could be sued for concealing the addiction potential of their products, clearing the way for a nationwide class-action lawsuit against several companies, UST included. The same year, a suit was filed specifically against smokeless tobacco companies, again including UST, claiming while the companies' products were smokeless, they were still addictive. The financial world reacted immediately, and UST lost share value, sales, and market share that year.

A separate agreement was signed with UST at about the same time. As the majority stakeholder in the smokeless tobacco market, UST was viewed as posing a similar health risk to consumers as companies which manufactured cigarettes. The company agreed to pay $100 million over ten years to the American Legacy Foundation, for the purposes of research into tobacco and addiction prevention. Also in 1998, the city of San Francisco and the Environmental Law Foundation sued UST, as well as five other smokeless tobacco companies and several retailers, for targeting youths in their advertising and sales. And in 2000, UST was required by a federal judge to pay $1.05 billion in damages to its rival Conwood, the outcome of an antitrust case. The company received $1 billion in credit from Goldman, Sachs and the Bank of Nova Scotia, most of which would be used to finance the payment.

A Smokeless Future

Despite health concerns and the threat of litigation, UST expected to benefit from the growing trend toward banning smoking in public places and office buildings. Of the oral tobacco market, which included chewing tobacco, dry tobacco, and moist snuff, moist snuff was the only product showing sales increases. UST controlled half of the oral tobacco market through its 85 percent share of the moist snuff market. UST marketed ten products in its Skoal line, but Copenhagen was responsible for 50 percent of sales. In 2001, the company launched Revel, a snuff packaged in a cigarette-pack-shaped container. The plastic container, and an advertising campaign with the tagline "Anytime. Anywhere," were expressly designed to appeal to cigarette smokers who might find themselves in situations where they were unable to smoke.

The company continued to rely on its core business for its success, with relatively modest contributions from its wine subsidiary and its other smaller concerns, including Dr. Grabow Pre-Smoked pipes, Dill's pipe cleaners, and Cabin Fever Enterprises, which developed, produced, and marketed video programming with a U.S. theme.

In the early 1990s, exports to countries other than Canada accounted for about 1 percent of sales. Moist smokeless tobacco products were little known outside of the United States and Sweden, where they originated. Several nations had imposed stiff restrictions on snuff, including Australia, Hong Kong, Ireland, Israel, New Zealand, Saudi Arabia, Singapore, Tasmania, Thailand, the United Kingdom, and other European nations. However, Bantle considered the international market, especially the countries of Eastern Europe, UST's greatest opportunity for growth. That emphasis continued into the new millennium; as Edward J. Deak, an economist at Fairfield University, told the Connecticut Post in March 2002, "Most of the expansion for tobacco products is going to be outside the United States."

In 1993, Bantle and Ralph L. Rossi, president, chairman, and CEO of U.S. Tobacco's parent company, both retired, making way for Joseph R. Taddeo and Vincent A. Gierer, Jr., to take their respective places. This marked the first significant executive changes at UST in 20 years, but both new executives emphasized that there would be no dramatic changes in how the company was run. Taddeo stated that the company would continue to improve and expand its moist tobacco products, while Gierer noted that changes in the social acceptability of cigarette smoking indicated a particular opportunity for smokeless tobacco. "Some smokers are becoming our customers," he noted in a May 1994 interview with U.S. Distribution Journal. "People like to enjoy the pleasure of tobacco but just can't light up, so they smoke sometimes and they enjoy snuff at other times."

Throughout the 1990s, UST worked to expand its presence and visibility in the smokeless tobacco market. A brighter, more appealing can design for its Skoal brand in 1998, a promotional partnership between Skoal and NASCAR that same year, the launch of the discount Red Seal line in 1997, and a merchandise promotion in 1997 where consumers traded tobacco can lids for Skoal-branded products. Also in 1997, UST introduced its Copenhagen Long Cut brand, as an alternative to the regular fine cut. The recent tobacco-related litigation had inspired a few advertising changes as well; ads for the Skoal Fine Cut Straight brand, introduced in 1996, included labeling warning of the risk of mouth cancer, and prohibiting sale of the product to minors. Other new flavors and products, as well as commercial tie-ins such as concert and sports promotions, attempted to maintain and increase UST's visibility and market share.

In the third quarter of the year 2000, however, UST experienced a drop in tobacco sales. Murray Kessler, just recently appointed president of the company's principal subsidiary, responded with an announced intention of raising corporate earnings 10 percent annually over the following five years. New products, brands, and packaging were reported to be in the works, all with the intention of increasing snuff's social acceptability. Among other innovations, Kessler wished to introduce a non-spit tobacco, as well as new flavors. One of the new flavors, launched in 2001 under the Copenhagen brand, was the Black Bourbon Flavor Smokeless Tobacco. UST also did not neglect its bargain brands, launching a Fine Cut Wintergreen flavor in its value-priced Red Seal line in April 2000. Although in 1999, UST had a 78 percent share of the moist snuff market, and a 38.8 percent share of the smokeless tobacco market overall, a single-digit growth rate and a shrinking price cap spelled trouble for the industry as a whole. Therefore, UST's new marketing and pricing would involve emphasis on value and discount brands. The company also increased the size of its cans of Skoal tobacco, selling the new 1.2-ounce cans at the same price as the older 1-ounce cans. The advertising campaign accompanying the change included the tagline "Skoal ... Always There in a Pinch."

In 2001, the company raised its wholesale prices between 10 to 15 cents a can. It also consolidated its advertising at the Warwick Baker O'Neill agency, which had handled UST's Copenhagen brand for 82 years. Under the new agreement, the agency would also handle advertising for the Skoal and Rooster brands, plus the company's principal subsidiary's name change from United States Tobacco Company to United States Smokeless Tobacco Company. The stated purpose of this name change, which took effect in early 2001, was to more accurately reflect the company's business; according to a February 2001 article in Convenience Store News, "Most consumers believed the subsidiary manufactured cigarettes." President Kessler was quoted in the January 2001 issue of World Tobacco as saying that the new name was "a more accurate reflection of who we are--the world's largest manufacturer and marketer of moist smokeless tobacco products." UST also increased its advertising spending, nearly doubling it from $8 million a year to $14 million a year, in an effort to offset a drop in market share due to competition from other brands. If 1 percent of U.S. cigarette smokers switched to snuff, the company claimed, UST would own 10 percent of the tobacco market overall. In the same World Tobacco article, Kessler stated the company's long-term goal: "Our vision is to have our smoke-free products recognized by adults as the preferred way to experience tobacco satisfaction."

By early 2002, the company was predicting 10 percent earnings growth over the following three years, although it declined to make any concrete statements concerning the potential health risks of smokeless tobacco, as opposed to cigarette smoking. In 2001, the company reported a net income of $491.6 million. A general rise in value for tobacco stocks in 2001 also boded well for UST.

Principal Subsidiaries:International Wine & Spirits Ltd.; Stimson Lane Ltd.; United States Smokeless Tobacco Brands Inc.; United States Smokeless Tobacco Company; United States Tobacco Manufacturing Limited Partnership.

Principal Competitors:Conwood; Swedish Match; Swisher International.

Chronology

• Key Dates:
• 1822: George Weyman, inventor of Copenhagen snuff, opens his tobacco shop in Pittsburgh, Pennsylvania.
• 1870: Following their father's death, William and Benjamin Weyman officially adopt the name Weyman & Bro.
• 1905: Weyman & Bro. is acquired by the American Tobacco Company.
• 1911: Following the breakup of American Tobacco in 1907, Weyman-Bruton Company incorporates.
• 1921: Weyman-Bruton acquires the United States Tobacco Company.
• 1922: Weyman-Bruton becomes the United States Tobacco Company.
• 1934: U.S. Tobacco Company introduces Skoal, a wintergreen-flavored smokeless tobacco.
• 1965: W.H. Snyder & Sons, a Pennsylvania cigar company, becomes a subsidiary of UST.
• 1969: The company acquires Henry, Leonard & Thomas, Inc., manufacturers of Dr. Grabow Pre-Smoked pipes.
• 1970: U.S. Tobacco Company headquarters relocates from New York City to Greenwich, Connecticut.
• 1973: The company's sales top $100 million for the first time.
• 1974: The company enters the wine business by acquiring Chateau Ste. Michelle, Washington State's largest winery.
• 1983: Columbia Crest winery is opened.
• 1987: UST Inc. is established as a holding company with its primary subsidiaries being U.S. Tobacco Company and International Wine & Spirits Ltd; its cigar-making subsidiary, House of Windsor, is sold; and UST is sued by Betty Ann Marsee for $147 million over the death of her 19-year-old son, which she attributes to his use of UST products.
• 1988: U.S. Tobacco Company begins its association with NASCAR by sponsoring the Skoal Bandit Grand National Race Car.
• 1992: UST sales surpass $1 billion.
• 1995: UST begins to print warning labels and "Not for sale to minors" on its product packaging.
• 1996: UST and Philip Morris announce a plan to limit advertising of tobacco products; and a class-action suit is filed in Texas against several tobacco companies, including UST.
• 1998: U.S. Tobacco Company signs a master settlement agreement with 45 state attorneys general, and the company agrees to a set of marketing restrictions.
• 1997: UST launches the value-priced Red Seal brand.
• 1998: UST launches the premium Rooster brand.
• 2000: A federal judge requires UST to pay $1.05 billion in damages to its rival Conwood in an antitrust case.
• 2001: U.S. Tobacco Company changes its name to U.S. Smokeless Tobacco Company; and UST launches Revel, which is packaged in a cigarette-pack-shaped container.