Authors: Richard Kluger
His name had a Southern sound to it, but J. Tylee Wilson was a native of suburban northern New Jersey and a graduate of Lafayette College in Pennsylvania; he had been a top executive at the Chesebrough-Pond cosmetics and pharmaceutical house in Connecticut when Sticht brought him in to RJR in 1974 to pull together its international operations, including tobacco. Wilson was a tall, lean man with a narrow, patrician head and nervous mannerisms—he was forever fingering his shirt collar and brushing back his hair—that hinted at inner tensions. “He was a guy you could give a tough job to, and he’d get it done,” Sticht remembered.
But Ty Wilson often did his job with the abrasive directness of an army drillmaster—a vestige of his military service, training infantrymen at Fort Benning, Georgia—and had a way of sometimes turning rude in social circumstances and indiscreet when he drank. Hardworking and buttoned up, he manifested little interest in company chitchat or give-and-take with even his more able subordinates. New York advertising executive Stanley Katz, who ran one of the agencies Reynolds had begun using to spark up its cigarette sales, found Wilson highly opinionated and harboring the attitude that the ad agencies had been handed too large a say in the company’s marketing decisions. Boutique or niche brands of cigarettes that advanced market share by small increments held little fascination for him; the key for Wilson was in solid execution of core-brand sales. Those who failed to perform he did not hesitate to fire, including some he had befriended. When he called a meeting for 10 in the morning, you were well advised to be in your seat by 9:56—and if you were late, he damn well wanted to know why. Anxious subordinates due to make oral presentations in front of him were known to practice for days to get it just right. In short, Wilson was a demanding organization man who ran things by the book—and it was a book devoid of romance. He was named president of Reynolds in 1979, when Sticht became chief executive officer in title as well as in fact.
Quickly advanced along with Wilson was Edward J. Horrigan, equally tough, blunt, and hardworking, who was put in charge of domestic tobacco operations in 1980 after having worked on the international side for two years. A proud and combative Brooklynite who had won an athletic scholarship to the University of Connecticut and a medal for heroism in the Korean War, Horrigan was a bulldog of a man whom many found less than lovable; all, though, acknowledged his fierce loyalty to those who stood with him. He had come to Winston-Salem from Northwest Industries in Chicago, where he had been a ranking executive in the liquor division. Street-smart but sometimes inclined to miss the nuances of a problem area, the nonsmoking Horrigan threw all his considerable energies into rousing Reynolds Tobacco upon being named its president. When presented with the company’s long-range plan book that showed it being overtaken within a few years by Philip Morris, “I ordered
them to take that out of the book.” Horrigan recounted; he thought predictions of their own downfall were “unconscionable”.
For his key marketing and sales aide, Horrigan installed another rough battler out of metropolitan New York—Gerald Long, whose in-your-face managerial style and inelegant speech made clear what he expected from his subordinates. Some of them said of Long that he ate his young. “I may be a damn Yankee,” he told the good ol’ boys around him, “but I’m
your
damn Yankee.” Wilson, Horrigan, and Long, those three unplayful musketeers, were a far cry from the Southern geniality and honeyed accent of a Bowman Gray and his courtly ilk; they were in fact a lot closer in manner and spirit to The Founder, cob-rough Dick Reynolds himself—only they had little feel for tobacco.
Horrigan, alternately called “Big Ed” (for his feisty presence, not his stature) and “Little Caesar” (never to his face), pushed hard for investment in the aging cigarette factories, an end to sloppy production habits, and a correction in false economies like the overuse of reconstituted leaf, which gave too harsh a taste to some brands. The company’s prime need, though, was for marketing innovation instead of dependency on RJR’s sales force. Horrigan, however, was more gifted as a manager than as a merchandiser; he killed off a number of also-ran brands, and when Wilson showed little enthusiasm for lavishing ad dollars on More, the long, brown-paper brand being aimed at upwardly mobile black women, or the new mint-flavored Bright, Horrigan directed the resources toward firing up the core brands. But there was little magic or imagery to the presentation, no “Marlboro Country” fantasyland—“armpit advertising” was what Stanley Katz privately called the new campaigns with a blue-collar pitch aimed right between the eyes. The dead-on, joyless ads “removed aspiration from the mix,” Katz believed. And when they failed to ignite consumer activity, they were scrapped, and a full-scale drive was undertaken to reposition the whole Reynolds stable of brands for youth appeal instead of for the company’s traditional older and aging clientele. Winston ads featured mountain climbers and helicopter pilots and text lines loaded with aspiration, like “America’s Best” and “Excellence. The best live up to it.” What any of it had to do with smoking was unclear. RJR’s big menthol brand was said to stir “Salem Spirit” among skiers and other outdoors enthusiasts. Vantage put aside its siren song to the cerebral
(i.e.
, health-conscious) smoker and offered instead the “Taste of Success,” showing young, well-heeled professionals as satisfied users. A boxed filter version of Camel was introduced, and considerable ad money went into Camel Lights, termed “Unexpectedly Mild” (as if to remind smokers that the hoary parent brand still packed a 19-milligram wallop of tar).
By 1984, RJR had become the nation’s fourth heaviest advertiser, spending at a rate of more than half a billion dollars a year but still bringing little verve
or originality to the effort. “All he cared about were the numbers,” Katz said of Horrigan, whose outlay of energy, at least, he greatly admired. Cigarette sales were not advancing. To prod them, Horrigan and Gerald Long took a pair of radical measures that jarred the company’s tobacco veterans.
The first amounted to a high-stakes scam. By the end of 1982, Philip Morris had closed to within a fraction of a single market share point of Reynolds, and Horrigan’s dilemma intensified. As one big East Coast wholesaler characterized the fading industry leader’s response, “When you’re No. 1 and you see it slipping away, you’ll do anything to hang on.” What RJR did was to intensify its “trade-loading,” a practice common in the food and beverage business for products with a long shelf life when prices were about to be raised. Jobbers were advised of the impending boost a month or so ahead of the effective date and invited, even encouraged, to load up on their inventory in the interim so they would have an abundant supply to sell to consumers at a wider profit margin when the new prices were posted. The frequent hikes the industry began to introduce around the increased federal cigarette tax provided the ideal environment to push the loading approach on the trade. It helped cigarette wholesalers who survived on sliver-thin profit margins—a 1 percent net on sales was considered splendid in a business where fierce competitive conditions prevented aggressive pricing to retailers; an extra fifty cents or so garnered per trade-loaded carton sold was a big help to jobbers. And since their cigarette inventories were returnable at a 100 percent refund, the only risk to wholesalers who trade-loaded heavily was the carrying charges on their excess orders.
For Reynolds the loading strategy was helpful in trying to protect the company’s reported market share, which would have been hard to calculate if it were based on actual point-of-purchase sales in an industry where so many transactions occurred at small outlets like newsstands and corner groceries that lacked scanner technology and modern record-keeping capability. Instead, reported cigarette sales—and market shares—were calculated solely on manufacturers’ shipments to wholesalers and corroborated by federal tax stamp sales. So long, then, as RJR was willing to absorb that eight-cent-per-pack (sixteen cents from 1983 on) stamp cost, all of its trade-loaded sales pushed onto wholesalers’ shelves, however badly crowded, were listed as legitimate purchases. But they were not, in fact, net sales—they were only gross revenues, and the manufacturer eventually had to buy back any unsold inventory. To complement its “push” of product at trade-loading jobbers, Reynolds had to spend extra to spur consumer “pull” on those bulging inventories by more advertising, store displays, and couponing in the form of $1.50- or even $2-off stickers on cartons heaped on retail shelves, all in an effort to hold on to the critical one-third of the market that commanded the respect of store managers and Wall Street investors alike.
“Nobody worried that it was artificial,” Jerry Long would later tell
Fortune
magazine, speaking of the trade-loading push and the fact that the reported sales resulting from it were conditional. The main trouble with trade-loading was that it was like check-kiting or borrowing from a loan shark—sooner or later you had to pay up or keep going deeper and deeper into the hole, where your remains were one day likely to be found. It might have worked well enough if cigarette sales had been growing, but Reynolds was loading into a gently but steadily eroding market in which several of its own brands were the worst sufferers. The only way for the company to sustain the appearance of holding its market share ajgainst still surging Philip Morris was to load more and more each time prices were raised, thereby building ever heavier inventories that too often turned stale on jobbers’ shelves and tasted harsh when they finally reached consumers—or required a major payback to wholesalers when they returned the trade-loaded units unsold. Thus, RJR may have technically retained its lead in market share for two or three extra years through the loading device, but it was costing Reynolds more and more per sale. Overstock reached a mountainous 18 billion units by the end of the 1980s, the equivalent of about three market share points above the daunting truth. By then the cost, of the gambit was no longer tolerable.
Still more troubling to the RJR veterans was the decision by their corporate officers, tobacco neophytes to a man, to break away from the single-tier pricing that had been in effect since the end of the Depression-era cigarette wars nearly half a century earlier. Little Liggett, down to a 3 percent share of the cigarette market by 1981, had taken the plunge into “generics,” unadvertised brands cheaply packaged in plain black-and-white wrappers with bland names like Scotch Buy and Cost Cutter picked by supermarket chains that offered them at a discount of up to 30 percent below premium-priced brands. The savings became increasingly attractive to smokers as the cigarette companies kept jacking up their prices even after the U.S. economy drifted into a recession. The ever rising prices on regular brands, yielding higher profit margins to manufacturers, meant that Liggett could still make good money on its discount brands so long as it shaved marketing costs to the bone by plain packaging and no advertising.
The industry leaders, fearing a price war just when they were maximizing their profits, were not eager to follow Liggett into discount cigarettes. But they were also wary of letting Liggett steal a march on them and, by selling a lot of less profitable units, work its way back into the thick of the market share scramble. Reynolds’s wishful position was expressed by James W. Johnston, the young executive vice president of RJR Tobacco under Horrigan, who told
Time
magazine, “In my judgment, you’ve got to have the link between the consumer and an identifiable brand name. I predict that the success of generics will be shortlived.”
That earnest belief was mocked by Liggettts snappy sales figures for its discount
units. Reynolds, increasingly desperate to preserve its hairline market-share lead over Philip Morris, compromised. It risked encouraging the discount movement in 1983 by bringing out Century, with twenty-five cigarettes per pack at the same price as regular twenty-per-pack brands, amounting to a discount of 20 percent per smoke. The Century 25s, using expanded leaf that allowed 10 percent less tobacco per cigarette, could be marketed to earn 70 percent of the profit margin of full-priced brands and seemed to be worth the gamble. They rapidly grabbed an encouraging 1 percent of the market, leading Horrigan and Long to conclude that if Reynolds was going to be a serious player in discount brands, it ought to become the dominant force in the sector. Horrigan told Ty Wilson he wanted to dust off Doral, the low-tar entry of a decade earlier that had failed to sustain itself, and bring it out as a discount brand with a recognizable name. Wilson, uneasy at the threat that discount sales posed to profits on full-priced brands, told Horrigan to go ahead if he was sure of himself. And if he proved wrong, Wilson added menacingly, his goose would be charred.
Doral took off at an even greater velocity than Century, and within a short time RJR held 40 percent of the discount sector. Jim Johnston, who had been too public in expressing his disagreement with both the discounting and trade-loading decisions, was fired. But neither of Horrigan’s tactics, sacrificing profit margins for volume, could fend off Philip Morris for long; RJR’s overall unit sales fell 10 percent in 1983, as the New York manufacturer swept by. Reynolds cigarette sales, due partly to the loading factor, remained steady over the next five years, but Philip Morris kept edging further and further ahead.
VII
FOR
all its tobacco problems, R. J. Reynolds Industries was still swimming in profits. There was enough cash flow to cover any number of past mistakes, of which the most serious continued to be the disappointing earnings of Sea-Land, by the late ’Seventies the world’s largest cargo-ship line in terms of gross tonnage carried and a highly cost-efficient operation. But many of its rivals had caught up with Sea-Land in container-ship technology and were subsidized by foreign governments, so that the Reynolds subsidiary often found itself being underbid by 20 to 30 percent. With its earnings dwindling or erratic, Sticht could not unload Sea-Land except for what he felt was a giveaway price; he saw no alternative to doctoring the carrier and biding his time until its fortunes changed.