Chapter 18, Part 1

By Frank Tursi, Susan E. White and Ken Otterbourg
JOURNAL REPORTERS
© 1999 Winston-Salem Journal

When they had to talk about important company matters outside the stuffy confines of the Reynolds Building, Tylee Wilson and Jerry Long would often get together at Staley's steakhouse. They'd have some drinks, munch on a few pickled watermelon rinds and then get down to work.

In 1975, Wilson met Long at the restaurant with a more pressing situation than usual. He was the president of RJR Foods and had just been asked to begin a new assignment, as chief executive of R.J. Reynolds Tobacco International, a new division that would begin operating in 1976. He wanted Long, his top marketing executive at RJR Foods, to join him as the head of international marketing.

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.

The offer stunned Long. ''At that time, I wasn't much of a smoker,'' he said. ''I may have smoked a pack of cigarettes a week. I was a casual smoker. I didn't know much about tobacco.''

But Long accepted, and during the next four years he would plunge into a world far removed from the selfless piety of the Reynolds Way. The global cigarette business was a bare-knuckled battle, and Reynolds was entering the fight late.

''I grew up as an American marketing guy and sales guy and really and truly was a purist,'' Long said. ''I might as well have been a minister or a priest, because American business tactics compared to international business tactics are demonstratively different. International, anything goes.''

Beyond the Moat

In the loosest sense, Reynolds had been an international cigarette company for years.

The soldiers who went overseas in World Wars I and II had brought their favorite brands with them, including Camels.

And Reynolds had bought half interest in a German cigarette maker back in 1960, setting up a base in the center of Europe.

But by and large, Reynolds treated overseas sales as gravy.

It was mainly an export business, run out of Winston-Salem by executives who didn't know much or care to know much about the likes and dislikes of foreign smokers. It was the world beyond the moat.

And through the 1960s that system seemed just fine. Reynolds was the dominant company in a U.S. market that was still growing 1 to 2 percent a year.

''We were much too late,'' conceded Bill Smith, a former president of R.J. Reynolds Tobacco Co.

''We were making so much damn money and having such a good time'' that no one saw the need to rush into foreign markets.

''Management here was late to recognize it,'' said Dale Sisel, a former president of the international tobacco unit who was chief financial officer of the division in the 1970s. And when the company started to do something in 1969, ''we probably moved too slowly.''

The few executives who wanted to move forcefully into international markets would be met by the stern rebuke of Henry Ramm, the company's powerful general counsel. By almost all accounts, Ramm was the most persistent opponent of foreign sales, and his views almost always carried the day.

For all his culture and worldliness, Ramm was dead set against RJR setting up shop in foreign countries. His fear, according to Dee Smith, another former president of the international tobacco business, was that RJR's assets would be nationalized, or taken over by foreign governments.

It wasn't just in the Third World or Far East that Ramm had that fear. It extended to Europe as well.

Ramm had more than his own opinion to back up his position.

''He had this old indenture that had been issued way the hell back, it was 5 percent money or something like that,'' said John Dowdle, a former treasurer of Reynolds Industries.

''And as long as it was outstanding, according to Henry, we could not engage in any business outside the country, or we could only do it in certain ways.

''What we ultimately did was that, when the first opportunity came to call that indenture, even though the interest rate was low, we called the damn thing and got it out of there so Henry could not throw it in our face every time we wanted to do something.''

Although history would prove Ramm's caution had some merit, his single-mindedness and the board's agreement with his position blocked RJR's overseas expansion at a key time, when the company was a powerhouse and its competition was less entrenched.

''So he kept nixing all of these deals and Philip Morris would just sit there gobbling them up one by one by one,'' Dowdle said.

''We dilly-dallied around. . . .

''At that time we were head and shoulders above Philip Morris.''

The Tent and the Crown

During the 1960s and early '70s, as Reynolds plowed its profits into shipping and oil companies, Philip Morris took another tack. Except for the $227 million purchase of Miller Brewing Co. in 1969, the company used the proceeds from the sale of cigarettes here to build an overseas business. It was built around a single brand: Marlboro. What Philip Morris was selling was a symbol of America, its freedom and ideals. And it worked even in countries where Philip Morris couldn't advertise with the cowboy. Across Europe, the Marlboro logo -- the white triangle beneath the red border -- was everywhere.

''That tent became so important in billboards, so important in everything,'' said Long. ''You know the Nike symbol? The first worldwide symbol was the tent. They then determined that they were going to make that work. One thing about Philip Morris which was much different than at RJR was continuity . . . the ability to stick with a plan.''

Philip Morris wasn't the only tough rival overseas. The leader was British-American Tobacco Co. Since 1927, it had operated in the United States through Brown & Williamson Tobacco Corp., but it was a far different company abroad. (Kluger footnote; account of Philip Morris' international exploits.)

''Our mistake was that we thought that what we saw in Brown & Williamson in the United States was an extension over there,'' said Long. ''It was not. The B&W operation could have been the Boy Scouts in the United States while over there what we ran across was the Marine Corps. It was a whole different operation.''

BAT had built its empire following the British Crown. From India to Australia, BAT was the dominant foreign cigarette company, sometimes with as much as an 80 percent market share. And in countries such as Brazil, where the Union Jack had never been planted, BAT had cut deals decades earlier that put it far ahead of competitors.

Joining BAT in carving up the world market was Rothmans International, run from South Africa and England by Anthony Edward Rupert. Rothmans was a true bootstrap operation, cobbled together over 25 years by Rupert, a one-time chemistry professor who preferred to be called Dr. Rupert. It had dozens of licensing agreements and partnerships around the world and strong brands in the upper-end markets of Europe, Latin America and Africa. It was no wonder that RJR felt a little overwhelmed by the world beyond its shores. In most markets, it was starting out in fourth or fifth place. That was a position the company just wasn't used to.

Paul Sticht's World View

When Paul Sticht joined the board of Reynolds Tobacco in 1968, he found himself at a company that wasn't thinking about its place in the global marketplace ''This was one of my biggest criticisms of RJR as a director,'' he said. ''They weren't taking advantage of what was happening in the world.''

Sticht considered himself an internationalist. In his previous jobs, at Federated Department Stores and as head of international sales for Campbell Soup Co., he had gained an understanding of world markets. He knew RJR had its work cut out. During the next five years, as his role at the company grew, he would begin forcing that view upon other managers or -- more often -- finding new executives who agreed with his view.

Even Wilson, who can't find much nice to say about Sticht, is clear about who deserves credit for shaking RJR out of its provincial slumber. ''This was visionary on Sticht's part -- he was absolutely right,'' said Wilson. ''Here we are a domestic tobacco company with an extremely powerful franchise in the United States and we had very little, a very small franchise outside of the United States although we had operations outside of the United States. And we were running it as a division of the domestic tobacco company which is getting no attention whatsoever from anybody other than the people in Europe who were running it. There was no strategy here to get it to grow and yet the international segment of cigarette consumption around the world is the fastest growing.''

When Sticht arrived, the international business reported to the domestic tobacco company. There was a European sales division in Geneva, but everything else was run out of Winston-Salem. It was an arrangement that bred problems and resentment. The Europeans looked down at the Winston-Salem executives as peasants. The locals here in turn couldn't understand why overseas sales -- burdened by smaller production runs and government meddling -- didn't return the same hefty profit margins as domestic sales.

For much of the 1960s and early 1970s, international tobacco sales were controlled by Jacques Borin. An old hand in the European cigarette business, he had gotten the job by flying to Winston-Salem and telling the Old Guard that Philip Morris was winning the overseas war and that he could put an end to it.

Borin reported to Smith but was left alone. ''There was sort of a personality and cultural gap between the two,'' Sisel said. ''He and Bill were just poles apart in terms of perspective -- in the way they saw business and the way they did things.''

Borin wasn't trained in the Reynolds Way. An autocratic Belgian with a short temper, he would stalk the sales office in Geneva, yelling at underlings. But he had an eye for cutting deals, and under his direction RJR began moving forcefully in Europe and elsewhere, lining up partners and gaining footholds.

By 1973, Reynolds was selling cigarettes in 100 countries. It had factories in Germany, Switzerland and Mexico and licensing agreements with Peru, the Netherlands, Austria and the Philippines. A fifth country was coming on line. It was Iran, seen as a stable nation with a rising standard of living and a growing appetite for American products.

Personality aside, Borin's shortcoming was that he didn't keep a good eye on the books. In one instance, an executive didn't turn over rebate money to the company. And RJR's political scandal had roots in Europe; some of the cash the company used to make illegal campaign contributions was traced back to international tobacco.

That was unacceptable to Sticht. By 1975 he was president of Reynolds Industries, and he wanted an international tobacco company that had tight financial controls, a clear mission and would be run from Winston-Salem as an equal to the domestic company. Borin resigned, and Sticht brought in the bright and blunt head of RJR Foods, Tylee Wilson, for the new post.

• Coming Saturday: The Yank Offensive