BAT bids to catch up in tobacco wars

British American Tobacco (BAT) is test marketing its Lucky Strike Originals mail order catalogue this week in the UK, Holland and Spain. It is the latest step in the company’s battle to diversify into new areas to counter European restrictions on tobacco promotion.

The prize, say observers, is for BAT to transform itself into a company like Richard Branson’s Virgin Group, with various interests under one brand name, spanning everything from pensions to airlines.

The Lucky Strike Originals mail order catalogue, which is already distributed in Germany, sells stylish household goods made exclusively for the brand.

The project is being handled by BAT’s trade market diversification (TMD) company World Investment Company (WIC), which has a turnover of about $100m and a research and development budget of 10m a year.

WIC general manager Dean Sims says: “Depending on how well the tests go, we will go for a full launch early next year.”

WIC is studying plans to take BAT into fashion, as well as extending its parent company’s interests in alcohol and travel.

Sims adds: “It is a reasonable question to ask if BAT will have cigarettes as its core business in the future. But to do that means that BAT must have a vision for the next 25 years. That is what the team here is developing.”

The cigarette multinational has brought in its worldwide director of trade marketing Hans Jurg Niedermann to head WIC. Niedermann is a trusted and senior figure within BAT. And his secondment to WIC means that BAT is taking this area seriously. The question is how seriously?

One former senior BAT executive doubts how effectively the company will be able to divert budgets into brand extensions: “You have to ask yourself whether the company has the will to do this. Whenever it has dabbled in this before, the various territorial operating companies around the world have been able to successfully argue that time and resources should be deployed instead of making inroads into Philip Morris’ Marlboro cigarettes around the world.”

Another bar to stretching its brands is BAT’s own worldwide marketing director Jimmi Rembiszewski, who controls an advertising and promotions budget of around 700m a year. His view is that there are many decades of revenue potential left in BAT’s cigarette production. He also believes that Philip Morris has such a head start in this area that it would be hard for BAT to catch up.

Sims contends: “BAT has considerable resources, but there are a lot of calls on them. However, if we have good ideas BAT will allocate resources to it.”

Sources suggest that WIC will set up a separate company for trademark development to bypass restrictions on tobacco advertising by distancing the brand extensions from the cigarette brands. A BAT spokesman confirms the company is looking at it.

TMD for cigarette companies began with Philip Morris in the early Seventies. It went into Formula One sponsoring the Ferrari and McLaren teams. As Philip Morris executives toured the paddock area they saw that some teams made high quality jackets and jumpers, which were given away to clients.

Philip Morris took up this idea and then extended it. It saw it could transfer the rugged individualism of the Marlboro brand to clothes. Philip Morris now owns over 1,000 Marlboro Classics stores around the world selling hard-wearing casual clothes.

RJ Reynolds, too, has a strong TMD clothes line in its Camel brand. The shoes it makes are particularly fashionable among young adults.

The history of BAT’s TMD is fitful. In the early Seventies its John Player Special brand also sponsored a Formula One team, but BAT failed to make concerted efforts to push the brand into other areas.

BAT has built a coffee bar in Malaysia for its Benson & Hedges brand which it owns outside the UK. And its Kent brand has lent its name to a travel agency in Asia. However none of these ventures have the global impact of Camel boots or a Marlboro Classics pair of jeans.

As one brand consultant says: “BAT has spent the past 30 years trying to follow Philip Morris. The result is that it usually ends up being five to ten years behind it in terms of trade market diversification.”

Raymond Perrier, worldwide brand valuation director of Interbrand Newell & Sorrell, who works on projects for various tobacco companies, says: “Cigarette companies should start thinking of themselves as companies who own a range of powerful brands. And the question they should ask themselves is how can I use those brands? This is a change of culture that many cigarette companies have yet to make.”

Clive Bates, director of the anti-smoking lobby Action on Smoking and Health (ASH), believes the TMD debate is simply a front for cigarette production.

Bates says: “TMD is a very effective form of advertising because the images of various glamorous products are transferred to the cigarettes themselves.”

The European Union (EU) is considering legislation that will ban all forms of commercial communication that promote tobacco. However, EU directives do allow for TMD, as long as the appearance of the goods is distinct from imagery used on their parent tobacco products.

In theory this will mean that the Camel brand name can still appear on boots, but it will not be able to use the same logo as the one on its cigarette packets.

Bates contends: “Tobacco advertising is like a balloon full of money. If you squash it down in one place it bulges somewhere else. And this is why TMD is moving on apace, because cigarette companies realise © the curtain is coming down in Europe, the US, and elsewhere.”

Perrier, on the other hand, sees cigarette companies’ approach to TMD falling into two categories. He argues that the widespread distribution of the Marlboro Classics clothes range is evidence of a viable business. However, there are other TMD’s that have “a less commercially defensibly right to exist.”

Sims flatly denies that WIC’s task will be to advertise BAT cigarette brands. He says: “Any business we start must have the potential to be self-sustaining.”

Sims says that there will be more TMD projects from BAT in the next 18 months. “We are at the vanguard of a new industry. And we are optimistic that BAT will take up trade market diversification in a sustained and controlled way.”

However, TMD is at least 30-years-old. And companies like Chanel, Philip Morris and Virgin were at its vanguard, when the industry was growing up in the late Seventies.

Whether BAT is merely dabbling with TMD or has decided to make a concerted effort in this area will become clear in the coming year.

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