Some of the most aggressive and ruthlessly efficient lobbying groups of our times operate under the most benign names. Greenpeace has delightfully hippy overtones, suggesting a craft sale in the village hall and home for tea with the tillerman, rather than SBS-style inflatables under the bows of Canadian destroyers. Friends of the Earth sounds friendly, rather than a cell-structured organisation of considerable political power.
Action on Smoking & Health sounds like a self-help group that occasionally organises sponsored walks, rather than a highly organised opponent of tobacco groups, staffed by health zealots. Sometimes, one feels that the Spanish Inquisition would have got a lot further had it called itself Friends of Pope Sixtus IV, or Action on Religion, God & Heresy (ARGH).
These musings arise from last week’s news that US consumer products group American Brands is finally quitting the tobacco industry completely by disposing of Gallaher, Britain’s largest cigarette manufacturer. There can be little or no doubt that the move has less to do with industrial logic than it does with the pressure brought to bear by US lawyers, acting on behalf of anti-tobacco campaigners who are bringing multibillion-dollar lawsuits, with growing success, against cigarette makers.
This is no place to get into libertarian arguments, so I will confine myself to commercial ones. The first thing to note is that environmental and health lobbyists are not simply a nuisance. They do not merely disrupt or restrict the market for companies such as Gallaher, but really do affect the perception and consequently the value of the companies they oppose.
In this context, note that the Wall Street quote in American Brands leapt nearly $3.50 to close on $48 in the immediate wake of the Gallaher announcement. That, as they say in the States, ain’t hay – but it sure as hell is tobacco. Anti-tobacco campaigners are keenly aware that potential litigation liabilities are not just hitting their targets’ budgets and insurance companies, but also hitting them where it really hurts – in shareholders’ earnings.
In terms of the commercial effect of the health lobby, we’re entitled to ask where it will all end. Gallaher is (or was) by far the most profitable part of American Brands, last year clocking net profits of $231.5m on sales of $4.08bn, compared with non-tobacco operations that turned in net profits of $122.4m on a turnover of $4.38bn.
Now, the health lobby may have no case to make against ACCO paper clips or Cobra golf clubs, both of which are in the American Brands portfolio, but Jim Beam bourbon and Whyte & Mackay whisky are also in there.
You will have noticed that health (and safety) lobbyists have increasingly endeavoured to do to the drinks sector what the anti-smoking movement has done to the tobacco companies. With all the doomsday psychology on the new millennium, it is only a matter of time before cirrhosis warnings appear on bottles and spirits advertising is statutorily banned, rather than voluntarily withheld as it largely is now. We already see the “passive-drinking” equivalent of the passive-smoking scares, through claims made for “drink-related” deaths and injuries (meaning violence and accidents).
The whisky industry is particularly vulnerable as the health consciousness first leads to a switch to white spirits, such as vodka, while the health lobbyists press for lower recommended threshholds for safe drinking and, ultimately, to wean drinkers off the sauce altogether.
The only value judgment I would make on this is that, if equities are long-term investments, then shareholders should be divesting their holdings in companies such as American Brands in the US, Highland Distilleries in Britain (whose figures this week demonstrate that its highly successful Famous Grouse is building market share in a shrinking market) and Imperial Tobacco, now it is demerged from Hanson.
Furthermore, the experience of American Brands serves as a salutary tale for those who would believe that a corporate identity can transcend undesirable, unfashionable, or unacceptable brands. Two years ago, American Brands quit the US tobacco industry by selling American Tobacco to Britain’s BAT Industries for some $1bn (600m), retaining only Gallaher, which manufactures and markets the UK’s top brands, Benson & Hedges and Silk Cut.
Yet so ingrained was the association of American Brands with tobacco in the US that it has now felt enjoined to dispose of its British tobacco interests and change its name to Fortune Brands. In similar vein, I have often wondered whether Distillers would have had any effect on its valuation had it changed its name after the Thalidomide tragedy in the Sixties. I simply don’t know, but it will be interesting to see how Fortune fares.
The longer-term trend must be for conglomerates increasingly to spin off their pariah brands. Now that Hanson has demerged Imps and Gallaher is to be independent of American Brands, it will be worth following the fates of constituent parts of BAT Industries, Philip Morris and RJR Nabisco.
British leisure groups have increasingly quit brewing and distilling for rather different reasons, but I am convinced that the health-and-legal-efficiency pressures will build there too. It may not be a corporate environment that will ultimately be highly effective in commercial terms, nor one that most of us want, but the lobbyists and lawyers will have their day.