Chapter 10, Part 2

By Frank Tursi, Susan E. White and Steve McQuilkin
JOURNAL REPORTERS
© Winston-Salem Journal

When Alex Galloway looked around the table during board meetings, he saw familiar faces who knew the tobacco business inside and out. Problem was, he saw little else. Most of the board members were company executives, men he knew and had worked with for years. (Fisher footnote; observations on Reynolds leaders and information about how RJR fared against its competition.)

Bob Rechholtz was brought in to help set up a modern marketing department. (Journal File Photo)

Like Galloway, David Peoples was a numbers guy, brought along by Bowman Gray Jr. as a potential successor. Because of their common background in finance, Galloway leaned on Peoples for advice.

Peoples was intelligent, incisive, unflappable.

''He would wait and wait and wait while somebody ranted and raved, and when they finished he would just very gently go to the heart of the matter, pick it apart and then it would become obvious to everybody what the answer was,'' said John Dowdle, a former company treasurer. ''He was a hell of a nice guy to work for.''

And Peoples served another vital function: He was able to stand up to Henry Ramm, the dour general counsel.

The R.J. Reynolds Tobacco Co. was once the largest cigarette company in the United States with a powerhouse of best-selling brands: Winston, Salem and Camel. But times changed, and as the case against smoking became more pronounced in the 1960s, RJR failed to adapt to the marketplace. Its rivals would eventually rush past it, and RJR's efforts to catch up would have a profound impact on the company and the cigarette industry.

Peoples could not argue with Ramm on the legal merits. Instead, he would catch Ramm in inconsistencies, backing him into a corner from time to time by bringing up advice Ramm had given in the past that seemed to conflict with what he was now saying.

Ramm had long since reached his peak in the company and would retire at the end of 1970. Lawyers had risen to the top ranks of other tobacco companies, but Reynolds maintained its preference for men from sales or manufacturing.

''He was probably the senior member of the board of directors, and it had been made quite clear to Henry that he would never be chairman or anything like that,'' Dowdle said. ''He was as far as he was going to get.''

Bill Smith had moved quickly up the ranks of salesmen during the 1950s and was named sales manager in 1959. A year later, at 41, he became a board member. By 1970, he was the president and chief executive of Reynolds Tobacco and a director of the newly formed R.J. Reynolds Industries, the holding company that oversaw the tobacco business and the company's recent acquisitions, Sea-Land Shipping Services and Aminoil.

Smith's strength was his expertise in sales. He had risen to the boardroom from the street. What he lacked in creativity he made up for in hustle. As one former executive described him, he was ''a bag-carrying salesman, the epitome of the Peter Principle,'' who had attained his position by putting in the time. He was honest and personable, a team player. He supported Reynolds' development of a marketing department in the late 1960s, but always kept his bias for sales.

Colin Stokes had risen along with Smith, but on the manufacturing side. He was universally described as scrupulous, caring and unassuming, although not a particularly strong leader.

Bill Hobbs was another manufacturing executive whose career had closely tracked Stokes'. Both had put in time in most of the major branches of manufacturing and knew everything about making a cigarette.

Hobbs had started as a factory hand in 1936, ''pulling sacks of tobacco off hogsheads'' for 40 cents an hour. He went off to war, came back and began moving up through manufacturing. He became president of the tobacco company in 1973. He is credited with setting up centralized cost controls, a modern production schedule and reporting system. Like Stokes and John C. Whitaker, Hobbs liked to stroll through his manufacturing empire and talk to workers.

Rounding out the insiders was Charlie Wade, the personnel and legislative affairs chief. Like Ramm, Wade knew he was never going to be president or chairman. He frequently traveled to New York and Washington and was more comfortable in the outside world than many of his peers at Reynolds.

Wade was the company's public face, often on the podium when Reynolds was giving money to a worthy cause or receiving an award. But Wade knew little about making and selling cigarettes. And his high profile irked some executives.

During Galloway's reign, Wade faced a pressing problem. David Peoples did not like him, and Peoples was the next in line. So Charlie Wade began to think about a way to ensure his own survival. It would have dramatic results.

Winds of Change

If the view inside the Reynolds Building was perhaps too familiar, the world beyond Fourth and Main streets was changing. Anti-smoking groups were gathering more money and becoming better organized. Thousands of adults had quit smoking.

More troubling was the outlook for future sales. Many young people were not taking up the habit _ a stigma was growing on what had been a rite of passage. Many people who did smoke were seeking low-tar cigarettes as an alternative to quitting.

Tobacco companies could no longer count on growth driven simply by an increase in population. To survive in this new landscape, tobacco companies had to entice smokers to switch brands, which was difficult because smokers tended to be very loyal consumers. To lure switchers and hang on to potential quitters, the companies introduced a host of new brands and styles, each aimed at a specific type of smoker. For the most part, the idea of a one-size-fits-all brand, such as Winston, was fast becoming outdated.

As the cigarette market took on a different shape, two cultures collided within the stone walls of the Reynolds Building. One favored change; one resisted it.

The hotbed during this time was the fledgling marketing department. It had been born in the mid-1960s when a small group of executives realized that the company needed to modernize the way it selected and executed its advertising plans.

Until the late 1960s, the company had run all of its advertising through one agency, the William Esty Co. That agency was supervised by a committee of top executives and the account was managed day-to-day by RJR's advertising manager. The company had no marketing department until about 1964.

''William Esty, for all practical purposes, was Reynolds' marketing and advertising department,'' said Bob Rechholtz, a former vice president of marketing at RJR. ''They did everything.''

That system worked well when there were relatively few brands and smoking was socially acceptable and on the upswing.

''But then the world became a lot more complicated very quickly,'' Rechholtz said.

Since the late 1950s, management experts had been preaching the need for more sophisticated marketing plans, but many companies, including Reynolds, were slow to embrace the new discipline. The experts taught that consumer-products companies needed to study the psychology behind buying decisions. For a corporation such as Reynolds, raised on a credo of ''you make it, we'll sell it,'' this was a break with the past.

The changes at Reynolds were led by Howard Gray, another cousin of Bowman Gray Jr., and Rechholtz, Howard Gray's brash young lieutenant. They pushed for a modern marketing department that would blend in-house marketing research, outside research, and the brand-management system that Rechholtz had become familiar with during his time at Procter & Gamble Co. Howard Gray and Rechholtz persuaded the powers that be into breaking the company's exclusive relationship with Esty, which had lasted more than 30 years. Reynolds began interviewing other advertising agencies.

Bowman Gray Jr. was receptive to this new thinking. He supported Howard Gray's promotion to a new position, marketing manager, in the mid-1960s. And he remained firm when the chairman of the Esty agency came to Winston-Salem to personally argue against bringing in other advertising agencies.

Howard Gray and Rechholtz began building a marketing team, bringing in product managers and others from the outside. For the first time, there were marketing teams for each major brand. At the end of 1967, Howard Gray retired and Rechholtz was moved up to vice president of marketing.

Rechholtz was a Northerner, born in New York, and had served a stint in Cincinnati with Procter & Gamble Co. But he had some familiarity with the South. He had gone to school at the University of North Carolina at Chapel Hill.

He was a new type of boss, often arrogant and known to light into subordinates. Rechholtz's maverick style sometimes grated on many of the Old Guard, who nevertheless supported his changes.

''I wasn't as tolerant as I should have been or as understanding of tradition and history and the fact that a lot of good people worked at Reynolds and were products of their times and had some difficulty in adjusting to this new world,'' Rechholtz said.

Under Rechholtz, the marketing staff mushroomed, from 30 employees to 400. The men and women he hired were professionals who competed among themselves for money to support their particular brands. This every-man-for-himself attitude was foreign to Reynolds. Rechholtz encouraged the attitude because he believed that self-interest was a strong motivating force.

In the late 1960s, the marketing department pushed the need for a low-tar brand to meet consumers' wishes for a ''safer'' cigarette. Bill Hobbs and the manufacturing side delivered what many considered a sure winner: Vantage.

The brand was launched in 1970 with promising results. Sales were hurt slightly by the 1971 ban on TV advertising but picked back up on strong print advertising from Leiber-Katz, one of RJR's new advertising agencies. For six years, Vantage would dominate the low-tar category.

But Rechholtz quickly found himself under more pressure by the early 1970s. Bowman Gray Jr. was dead, and his relationship with Smith, who oversaw marketing and sales, was sometimes strained. More than that, the changes Rechholtz made didn't seem to halt the rise of Philip Morris' Marlboro brand. And in the menthol market, Kool was advancing rapidly and about to take the lead from Salem.

From Rechholtz's standpoint, it wasn't fun anymore. The tobacco companies had been kicked off television and radio, the two most exciting mediums. At the same time, anti-smoking activists had started to paint tobacco executives as killers who were more concerned about profits than health. Rechholotz quit in November 1972.

That year, Marlboro became the best-selling cigarette brand overseas. The handwriting was on the wall. Galloway and others feared it was only a matter of time before the brand would knock Winston off its perch.

Without such executives as Howard Gray and Rechholtz, the marketing revolution seemed to idle in park.

During the rest of the 1970s, the marketing department would rev its engines numerous times, but its efforts wouldn't go anywhere until another infusion of new thinking arrived at the end of the decade.