Chapter 22, Part 1

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

It had been a good run for the R.J. Reynolds Tobacco Co., 25 years atop the brutally competitive U.S. cigarette industry. But in 1983 it was ending. The cowboy pushed by the city slickers from New York had won.

From then on, Philip Morris would be No. 1. Reynolds would be the valiant No. 2.

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.

''In the final days there was an absolute panic,'' said Gerry Gunzenhauser, the company's chief financial officer at the time. ''I can remember when it was obvious they were going to overtake us and it was going to be in the next year, people like Paul Sticht (the chairman and chief executive of R.J. Reynolds Industries) were virtually coming out of his tree. `How could you let this happen.' Well, it's not like it happened overnight.''

Larry Wassong, RJR's longtime account manager at the William Esty advertising agency, said: ''It was a black day. I'm surprised people didn't leap out of windows at the Reynolds Building.''

In another time and another place, the executives in charge of tobacco -- J. Tylee Wilson, Ed Horrigan and Jerry Long -- might have been worried about keeping their jobs. Not now. They had other ideas. They were after promotions.

Horrigan, the chairman and chief executive of Reynolds Tobacco, got the telephone call at 3 on a winter morning in 1983. Rodney Austin, the vice president for human resources at Reynolds Industries, was on the line, and he sounded desperate.

He told Horrigan that Sticht was moving to name Hicks Waldron as chief executive of Reynolds Industries unless Horrigan, Wilson and Long intervened. Wilson was president of Reynolds Industries. Long was the president of the tobacco company. Waldron was the new kid on the block, brought in the previous year when Reynolds bought Heublein Inc., a liquor company that also owned Kentucky Fried Chicken.

''You guys have to bury the hatchet,'' said Austin. ''You guys have to get together and decide who's going to be CEO.''

Sticht had turned 65 on Oct. 17, 1982. It was the company's retirement age, but he was having trouble letting go of the reins and picking a successor. He told the board -- which gave him an extension -- that he had been too busy overseeing RJR's diversification to figure out who should take his place. Some weeks Wilson was the favorite. Other weeks it was Joe Abely, the vice chairman of the board, or Waldron, an executive vice president.

''Sticht never had anybody in the running. He never intended for anybody to take his place,'' Horrigan said. ''He wanted to get Viagra or something so he could go on forever.''

Marshall B. Bass, a former senior vice president at RJR, said he doesn't think that Sticht ever fully trusted Wilson because he never named him chief operating officer, which would have designated him as the clear number two. "I'd go into his office to ask him something and he'd tell me, 'You know, I'm not the chief operating officer.' He was implying something to me.

The financial world buzzed with the rumors from the World Headquarters building. Even Horrigan was mentioned as a dark-horse candidate. Over drinks one night at a restaurant in Brazil, Wilson brought up that scenario and told Horrigan that he'd work for him. Horrigan demurred, saying he was happy where he was and wanted Wilson to get the job.{{pr}

And then came Austin's wakeup call. A plan was hatched, a daring move that Sticht most certainly would have applauded if it hadn't been directed toward him. The deal was this: Wilson, Horrigan and Long went to Sticht and said they would resign if Wilson didn't get the job. }

Even some 15 years later, Horrigan enjoys telling the story. ''I wrote the playbook. I told Betty (his wife), `We may be out of here.' I think he's a wonderful man, Hicks Waldron; it wasn't even that I aspired to the job; it was that Ty was in line to succeed Paul, and there were a lot of people who didn't like Ty and they all thought Hicks looked good to them.'' Horrigan thought differently. His contacts in the liquor industry, where he had worked before coming to Reynolds, told him that Waldron didn't have what it took to run RJR. ''I had the book. Up here,'' he said, pointing to his head. ''So we united. And you might call it a rebellion.''

Sticht didn't like the power play. Horrigan and Wilson controlled only two votes -- their own -- out of 19 on the board of directors. Most of the other members were Sticht's appointees. He turned up the heat.

Horrigan and Colin Stokes, the retired chairman of the board, shared a golf cart that spring while out in Palm Springs, Calif. Stokes began lobbying Horrigan to go with Waldron. Wilson had problems, Stokes said. ''The board really looks with favor on Hicks. I don't understand why you can't work for him.''

Horrigan stood his ground. ''Colin, I can't,'' he said. ''I'm sorry. I can't work for Hicks Waldron. He's a nice man, but I'm not there. I've staked myself out, but that's where I am.''

Sticht would have to accept the deal. In the midst of perhaps the toughest year in the cigarette industry since the first surgeon general's report came out in 1964, the company couldn't afford to lose its three top tobacco executives. Waldron resigned July 26 to become the chief executive of Avon Products. Wilson became the chief executive of Reynolds that September and chairman in April 1984.

Sticht insists that nobody forced his hand. ''I will say this. Hicks Waldron, he had all the trappings of a top executive. And he had the opportunity to head out and be the chief executive of Avon and he took it, before we were in a position to commit one way or the other. Certainly Hicks was a candidate, one of the candidates we should pick from.''

When Wilson became chairman, Horrigan took Wilson's job, and Long took Horrigan's and joined the board of directors. Sticht remained with the board and became the chairman of its executive committee. He now had time on his hands, time to watch Wilson dismantle the empire he had built.

Judgment Day

RJR's day of reckoning with Philip Morris was a long time coming. As early as 1979, analysts who followed the cigarette industry began predicting a role reversal at the top, perhaps as soon as 1981.

Publicly, Reynolds officials dismissed the predictions. They acknowledged problems in the late 1970s but said that the company was now running smoothly. It might not be gaining market share from Philip Morris, but it was picking up points from Lorillard and Brown & Williamson.

Privately, the company was paddling like crazy to keep ahead. The honchos over at the tobacco company were trying every trick to stave off Philip Morris. They had adopted their rival's tactics of using the same campaign for all the different styles of a single brand. They had focused their marketing on low-tar cigarettes and the big cities, where the growth was. They had made questionable deals with wholesalers. And they had spent money. Beginning in 1980, Reynolds began pouring money into advertising for its flagship brands of Winston, Salem and Camel and for new brands, such as Bright, Sterling and Century, which would go nowhere. They would spend $380 million in 1983 alone, 42 percent of the industry total. Four years earlier, they had spent $212 million, 31 percent of the total.

The needle had moved a bit, at first. RJR's volume inched up slightly in 1981 and 1982. With discipline and a bit of luck, maybe Reynolds could right the ship, block Philip Morris' momentum and keep its lead.

Bright, introduced in late 1982, was typical of the company's efforts. It was a new kind of menthol, heavy on mint flavoring and advertised as having ''mouth-cooling freshness.'' Backing it up was an expensive advertising and coupon campaign to encourage people to try the cigarette. Bright ran into problems from the start. For one thing, a third of its smokers had smoked Salems, RJR's second-biggest brand and the No. 1 menthol.

And like with the Real debacle six years earlier, RJR had rushed Bright to market, this time because it had heard that Philip Morris was developing a similar menthol cigarette. ''We knew from insider information that the two companies pooh-poohing us the most were busting their rear ends to develop a knockoff product,'' Long said in 1983.

Reynolds spent more than $30 million supporting Bright in the first six months of 1983. Company officials called it a winner, ''We've got the basis for a good, long-term product,'' said Jim Johnston, then RJR's executive vice president of marketing.

He was wrong. When the coupons stopped and the billboards came down, sales dropped. Bright was killed in 1987.

And that was the problem. The amount of money Reynolds was spending in the early 1980s to keep ahead of Philip Morris in market share had lowered the company's profit margins. It created a problem for executives such as Long. From a morale standpoint, staying on top was important. From a financial standpoint, the costs seemed questionable.

''Reynolds may just be forestalling the inevitable,'' one securities analyst said. ''Obviously, Reynolds is interested in being number one in terms of image. But if they lost it, it wouldn't be the end of the earth.''

The hammer would fall in 1983. It was a tough year for the industry and a disastrous one for Reynolds. Profits fell. So did volume and market share. The company paid 1,064 employees to quit. Reynolds would end the year as number two, an event marked by conspicuous silence in Winston-Salem. Some 15 years later, many RJR executives still have a hard time understanding how it all came to be.

''You can also say that Philip Morris fell into a mud hole and came out smelling like a rose because for whatever reason -- and maybe it was just pure dumb luck -- that cowboy was just dead center bullseye and people responded,'' said David Fishel, a longtime Reynolds public-relations executive. ''Reynolds could not and was never able to come up with something anywhere close to that powerful.''

Jerry Long bristles at the suggestion that Philip Morris was lucky. ''That irritates me,'' he said. ''I've had people call me lucky and that infuriated me because anything I ever did was done deliberately. . . . You make your own luck and you have to be willing to take risks and you have to be trying alternatives whatever they may be. You also must be willing to admit mistakes before putting any more money into it. Then you either you dump it, you sell it, you get the hell out of it and you start to try something else.''

• Coming Saturday: The Taxman Cometh