Chapter 19, Part 1

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

Paul Sticht could be forgiven for being a little upset.

As the chairman and chief executive of R.J. Reynolds Industries he had used the profits from cigarettes to assemble a global industrial empire. Its range extended from sprawling ports in Hong Kong to pineapple plantations in Costa Rica. Sales were up. So were profits.

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.

But Wall Street just didn't get it. RJR's stock sold at a discount. The analysts who followed the company were divided. Either they were unsure of what RJR had become, or they were all too sure and didn't like it.

Sticht's solution was a field trip of sorts. (Fortune footnote; discussion of tour of RJR's nontobacco businesses.)

In December 1981 _ and at a cost of $100,000 _ the company chartered a jet on loan from the Rolling Stones tour and flew 52 analysts and institutional investors out to California to kick the tires on the new Reynolds Industries. If they liked what they saw, went the reasoning, they'd pump the stock and get it heading up again. In between the complimentary beer, the rack of lamb and sushi, the money men and women scrambled up drilling platforms run by RJR's Aminoil division. They traveled by yacht past Sea-Land's docks in Oakland. They even got to stay on the Queen Mary, berthed in Long Beach, where they heard Sticht hold forth on RJR's future. ''Global presence is not just a catchword for us,'' he said. ''It's a goal.''

But the analysts weren't biting. They wanted to know what RJR was doing to keep its lead in the domestic cigarette market, a lead that was shrinking each year.

''Market share,'' muttered Tylee Wilson, the company's president. ''All the analysts think about is bloody market share. You heard one of them say if we lost the No. 1 position in cigarettes, he'd withdraw his recommendation. It is somewhat shortsighted not to take notice of some of our improvements and realize we have a little better control perhaps over our destiny than is perceived.''

images/tob19a2.jpg" width=200 height=135 border=0 alt="RJR"> Workers put final touches on the R.J. Reynolds World Headquarters in late 1976. (Journal File Photo)

RJR certainly gave the appearance of a company in control. It had revenues of nearly $12 billion, profits of $1.5 billion. Its top executives worked out of a stunning, modern headquarters. In its reflection could be seen the Whitaker Park cigarette factory across Reynolds Boulevard that produced much of the company's wealth. But there were cracks in the foundation of the bedrock business, and they had been there for years. The tobacco company's marketing was often ineffective, its manufacturing often shoddy. Its brands weren't winning over new smokers. The implications were severe.

A strategic plan from 1979 had laid the problem bare: R.J. Reynolds Tobacco Co.'s market share was stagnant and had been for 10 years. Philip Morris was growing 3 to 4 percent a year. ''Therefore,'' the report said, ''RJRTC's leadership position in the U.S. cigarette market is in jeopardy. Loss of this position would have profoundly negative effects on RJRTC and RJRI.''

So there were two tasks at hand. One was building Paul Sticht's global empire. The other was keeping the golden goose laying eggs.

Slicing and Dicing ''It was a fearsome time, because it was the very moment that Reynolds found itself in probably the most critical juncture in its history, and it didn't realize it,'' said Larry Wassong, who spent 15 years in the 1970s and 1980s handling RJR's advertising at the William Esty agency in New York.

But there was more to the struggle than the loss of the tube. The cigarette market was changing. The days of a one-size-fits-all brand were vanishing. Low-tar cigarettes were taking over. In response, cigarette companies flooded the market with new brands or different versions of existing brands, each one carving the pie into smaller pieces. In 1977, for example, there were 59 new products introduced, two-thirds of them low-tar cigarettes. By 1982, low-tar smokes would capture half the market, up from a third five years before.

Reynolds had dominated the low-tar market since it introduced Vantage in 1970, but by the mid-1970s the brand had lost its pop. The problem was that many smokers wanted the benefits of a low-tar cigarette without the dowdy image that went with it.

Philip Morris had hit on the idea when it launched Marlboro Lights. It was the cowboy without the cough, and it took off. Philip Morris used the money saved from television to lock in billboards on the highways around big cities, making the Marlboro Man a part of the daily commute. Four years later, Marlboro would be the best-selling cigarette in America. The company had perfected the idea of a brand family, allowing smokers to have different products and styles without switching brands and images.

Reynolds was slow to respond. It was playing the role once performed by American Tobacco Co., which had hemmed and hawed over filters a generation earlier when Reynolds introduced Winston. That indecision had spelled American's slow death as a cigarette company. Winston Lights finally came out in 1974, and RJR sold 90 billion Winstons. The next year, the brand's volume began falling.

Winston had been RJR's Chevrolet, pitched to male and female smokers in middle America. It was ill-suited to take on Philip Morris' range-riding Marlboro. Wassong saw opportunity with Camel. He and Tommy Sandefur, then the company's director of advertising, began pitching the idea of Camel Lights to top management. Old marketing reports were dragged out, and the pair was rebuffed.

'' `You can't have a light Camel,' '' Wassong remembers being told. ''They would say, `Camel stands for the toughest cigarette in the world.' ''

The company's top dogs had a better idea. It was called Real.

A Costly Failure

Like many a bad idea, Real had been born out of fear. In 1976, Philip Morris introduced Merit, a low-tar brand that took off. It captured 1.3 percent of the market that first year. American had seen a resurgence with its Carlton brand. RJR's Vantage was still selling well, but at a time when overall cigarette volume was flat, the concern at Reynolds was that too many of those Merit and Carlton smokers were former RJR customers.

Real was rushed through the development stage and shrouded in secrecy. Its code name was ''Project RL'', and Alexy P. Ritchy, the director of the undertaking, said that the company ''used all the techniques of military intelligence'' during development, including tightly controlled access and misinformation when leaks started to occur. (New York Times footnote; Ritchy quote, analysis of Real's launch.)

Real's blend was novel. It had no chemicals and the flavorings were all natural. For a country that was starting to clamor for health food and checking labels in supermarkets for preservatives, Real seemed like a winner. It went national in June 1977, backed by a $40 million ad campaign, the biggest rollout in the history of consumer products.

Reynolds officials were confident. Charles Tucker, the group vice president of marketing, boasted to an international conference of marketing executives that June that RJR's smarts and savvy were helping the company win the cigarette wars of the mid-1970s, which he called ''the most expensive poker game in the world.''

''We have two distinct advantages in this poker game. . . . One, we're playing with a stacked deck, and two, the cards are marked. Through marketing research we have included the consumer and his thoughts and reactions in every step of this product's development. We know where the trends and corresponding consumer wants are. We also know how to answer these wants in the most effective and efficient manner, thanks to our research techniques.''

Tucker said that 10,000 smokers had tried Real and a majority preferred it over the competition.

Wilson didn't buy that research. At the time he was chairman of RJR's international tobacco division, and he warned Sticht to be careful. ''We were sitting over on the international side and we took all of the Real research and the storyboards and all that and we put it up against consumers in all the sophisticated markets, which was primarily Europe and we even tried it out in Brazil. And it just wouldn't fly. It wouldn't fly from a research point of view. Now there were some that say had you read the research on Real you never would have launched it. But people got emotionally committed to it, this was going to be the blockbuster of all time.

''It was manufacturer talk, that's what it was. It didn't taste different. It didn't mean anything. It didn't fulfill any need that the cigarette smoker, regardless of age, had out there.''{{pr}}

Wilson's warning proved correct. Real was a flop. Smokers tried it but didn't switch. By year's end it had only .4 percent of the market, less than half of what the company had predicted. RJR quickly swapped advertising themes, replacing the all-natural pitch with one that emphasized ''low tar and taste.''

As Real limped along, Reynolds officials wore their game faces, insisting the introduction was a success. Privately, the company was already switching horses. Camel Lights were introduced in 1978, using a blend that relied on the Real formula. Real limped along until 1980, then was killed.

Bill Hobbs was chairman and chief executive of the tobacco company at the time. Real was his baby. ''I guess it was me,'' he said. ''I'm probably the one who was pushing it more than anyone else. But it was a good cigarette. We had the tar and nicotine levels that we wanted. It was a good product. But it was so different, Real was a whole new idea, and it just didn't take. . . . People stuck to their own standard things. So we just said, well, if that's what they want then let's give it to them. . . . Let's give them a Camel Light. So we came out with a Camel and we sold them like crazy.''

Wassong said: ''What no one was addressing was the key point in cigarette marketing which was image. The absolute truth in cigarette marketing is that a pack of cigarettes is a badge. At least it is when you're under 50. When you're over 50 a pack of cigarettes should be low tar and not make you cough as much.''

Sticht was worried. The Real debacle -- pushed by the company's Old Guard -- wasn't going to help RJR increase market share, hovering around 33 percent. The housecleaning would begin.

Musical Chairs

Tucker couldn't remain as head of marketing. He had only six years with the company and was pushed over to public affairs in 1978. Hobbs _ nearing retirement _ was different, a more delicate situation. He was a manufacturing man who worked his way up through the ranks, a loyal follower of the Reynolds Way. But he needed help on the marketing end of the business.

Sticht's solution was an outsider, Morgan Hunter. He had sold coffee for Procter & Gamble and worked for American Cynamid, a pesticide company. Hunter became the president of Reynolds Tobacco in October 1977. His marketing head was Bob Anderson, who came to RJR from Lever Brothers, a soap-seller. He would last a year.

Even today there is bitter disagreement over whether the outsiders such as Hunter and Anderson _ known to their detractors as ''G-D toothpaste salesmen'' _ were the downfall of the tobacco company or were merely unable to correct the blunders of their tradition-bound predecessors.

John Dowdle, the treasurer of R.J. Reynolds Industries in the 1970s, said: ''One of the differences between Philip Morris and RJR was the fact that, when the outsiders came in and took over RJR, they did not perpetuate people in the tobacco business in running the tobacco business, and Philip Morris always did. The outsiders felt that anybody with marketing skills can run the tobacco business. And my answer to that is `bullshit.' ''

It was a revolving door, he said, ''with people coming in from here, there and yonder who had no damn knowledge of the tobacco business, and coming in there with all sorts of fanfare, going to set the world on fire, changing this and doing that and so forth, and the people who had been in the business all their life are sitting there shaking their heads and saying this won't work, but nobody was asking them.''

Bill Smith, a former chairman of the tobacco company, is more diplomatic. He said: ''From that group and some of the people that Sticht brought in, he brought in two or three for the tobacco business and for other businesses. Not one of them stayed for any length of time except Tylee Wilson, or were successful.''

Hunter stepped into a company with no clear direction and looking over its shoulder constantly. RJR's own taste tests showed that even Winston smokers preferred Marlboro. To fight back, Reynolds kept changing the Winston ad campaigns, confusing customers. Sticking with a theme might have helped, but Hunter said: ''You're damned if you do and you're damned if you don't. Why would you stick with a campaign that is seeing the brand go down, down, down, down? And hope always springs eternal. You always think the next campaign may be the one that will break it loose.''

Hunter's frustration mounted. One morning he called Wilson at home and said he needed to talk. Everything he had learned at Procter & Gamble wasn't working at Reynolds, Hunter said.

Wilson told him, ''Morgan, that's because this is not the soap business.''

A few months later, in April 1979, Hunter would leave Reynolds and become president of Scott Paper Co.

''His experience in RJR to him was extremely frustrating,'' Wilson said. ''He didn't understand where the tobacco business was leveraged.''

RJR's strengths were in its huge and capable sales force, which still had strong ties with retailers. But its marketing was weak, and in a business where volume was starting to level off and would begin declining after 1981, the game had changed from supplying demand to creating demand.

''My involvement came on the heels of the Real fiasco,'' Wilson said. ''And my conclusion was that the domestic tobacco company, from a marketing point of view, it was not disciplined, and by discipline I don't mean in a military sense. I mean in marketing discipline.''

Sticht had turned to Wilson in 1978, installing him as the executive vice president of Reynolds Industries to oversee the domestic and international tobacco companies. Wilson's first big personnel move was to bring in his marketing pro from international, Jerry Long, who joined the domestic tobacco company in early 1979. Ed Horrigan, Wilson's successor at international, would follow in early 1980. They found a company searching for answers in the wrong places and unwilling to confront hard truths.

`You Have to Believe'

''When I got here in '79, I was an absolute, lousy, no-good son-of-a-bitch,'' said Long. ''I didn't come from Philip Morris or some other asshole place.''

But his five years in international and five years in foods didn't count for much. ''I was still a stranger. I was still an outsider. I was still a person who didn't know what the hell I was doing. I wasn't a tobacco man. I didn't start off in a factory or as a salesman. If you didn't spend five years on a maker or packer, how the hell would you know about that. That was a belief. It was belief like you were in a seminary taught to be a priest. You have to believe in Christ. You have to believe in God. You show one bit of heresy that you don't believe in that kind of stuff and you're out.''

Chief among Long's gripes was the quality gap between Winston and Marlboro, the latter of which he speaks of in almost reverential terms. ''They were beautiful. They were an absolute physical marvel.''

Winstons were another story. ''Some of them were tight. Some of them were loose. The ends on some of them looked like you hit them with a hammer. Every Philip Morris package was like a package that looked like it came out of Tiffany's.''

Reynolds' manufacturing plants were showing their age. Whitaker Park was nearly 20 years old, and many of the making-and-packing machines couldn't run at top speeds and still maintain quality. The company's overtime bill soared because the extra demand had to be met on Saturday and Sunday shifts. There had been little investment in new, faster machines. Instead, the company's machine shop turned out replacement parts to save money.

It was misplaced frugality, said Gerry Gunzenhauser, at the time the comptroller of the tobacco company. The manufacturing men didn't grasp the problem. At one meeting, an old tobacco man said he didn't understand all the fuss. ''Who cares if there's a loose end,'' the man said. ''That's the end the customer lights anyway?''

Long is blunt about who dropped the ball. ''We had a senior management and a board of directors, to be fair about it, who did not do a thing from 1970 all the way to 1980,'' he said. {{pr}}

The board had been told only what management wanted it to hear, said Long. ''We were the outsiders. Tylee Wilson, Horrigan and Jerry. We were the three no-good Yankee sons-of-bitches, and what did we know. We didn't know shit. I was told that again and again.''

Instead of better cigarette equipment, the tobacco company's profits were plowed into a dizzying array of companies. Reynolds Industries bought Burmah Oil in 1976 for $522 million to merge with its Aminoil subsidiary. Three years later, it picked up Del Monte Corp. for $618 million. And the Sea-Land deal was still a headache. By 1980, Reynolds had spent $2 billion on Sea-Land's ships and docks. The investment wasn't paying off, and Sticht couldn't find a buyer. Still trying to make sense of that jumble, Reynolds entered the liquor and restaurant business in 1982 when it bought Heublein for $1.36 billion. Along the way, it tried to buy Anheuser Busch but backed out when the price got too high.

Sticht acknowledges that diversification and other events took their toll. ''You kind of set your priorities. You're talking about a pretty complex (deal to) straighten out while we still had momentum. . . . I know we went from $2.5 billion to $15 billion at the same time we were going through all these legal problems . . . and on trying to figure a way to get out of Sea-Land, and then Aminoil.

''People think of this in very simplistic terms. You've got to look at all of those things that were out there. It's easy to say, I should have done something about this. I agree with you, I should have. But if I would have done that, I wouldn't have done this. So, on the whole, I guess history will be the judge.''

Long, Horrigan, and other tobacco executives began making presentations to the board for an upgrade of RJR's manufacturing plants. In 1980, Reynolds announced that it would spend $1 billion to build the largest and most advanced cigarette plant in the world on land in northern Forsyth County. It was near a little crossroads with the fitting name of Tobaccoville.