WSJ: Cash-Strapped Eastern Europe Sees Big Tobacco as a Savior

[Robert Weissman <rob@essential.org>]

November 2, 1998 


 Business and Finance - Europe

 Cash-Strapped Eastern Europe
 Sees Big Tobacco as a Savior

 By ERNEST BECK 
 Staff Reporter of THE WALL STREET JOURNAL

 PECS, Hungary -- Laszlo Fonai is proud of the homeless shelter he runs here.
 With its whitewashed walls, tidy rooms and cheery atmosphere, it's a model
 facility in a city that's short of cash for social welfare.

 That's why Mr. Fonai gives thanks to British American Tobacco PLC.

 "We'd be in big trouble without them," says Mr. Fonai. Leading a tour of the
 shelter's well-equipped medical clinic, he praises the world's second-largest
 tobacco company for funding one- fourth of the annual budget for BAT
 House, as the shelter is called.

 Such adulation is common in Eastern Europe. Demonized as a public-health
 menace in the U.S. and many Western European countries, Big Tobacco
 often is lauded as a savior farther east. The industry carefully cultivates its
 image as a corporate do-gooder. In Hungary alone, tobacco money flows to
 hospitals and schools, student scholarship programs and the Red Cross. The
 police and fire brigade get support, too, along with orphanages and the
 disabled, senior citizens, folk dance groups, athletes and cultural
institutions.

 Tackling a New Market

 Corporate largesse and sponsorship isn't unusual, or illegal. For the tobacco
 giants, funding good causes is an integral part of a marketing and
 public-relations makeover that began after the collapse of communism in
 1989. Eastern Europe's tobacco sector opened to privatization and was
 transformed by major players -- like London-based BAT, Germany's
 Reemtsma AG and Philip Morris Cos., the maker of Marlboro -- from a drab
 commodity to a sophisticated consumer product. The Western entrants
 modernized factories and launched brands; advertising went glossy. At the
 same time, the industry won the hearts and minds of the public -- and public
 officials -- by supporting community projects during the troubled transition to
 a market economy. Besides providing jobs, investment and massive tax
 revenues, cigarette manufacturers stepped in with extra contributions as the
 financially strapped state retreated.

 So far, the strategy is working. While smoking levels have fallen in some
 countries in Eastern Europe and high start-up costs have squeezed profits,
 overall consumption in the region grew 6%, to 689 billion cigarettes from
 640 billion, between 1992 and 1996, according to Euromonitor, a
 market-research company in London. By comparison, North American
 consumption slipped 6.5%, to 534 billion cigarettes, Euromonitor says.

 Community sponsorships by tobacco companies aren't without controversy.
 World Health Organization officials are now speaking out forcefully against
 community sponsorships. They worry that tobacco companies are buying
 government support, and trying to sway public opinion to oppose serious
 health measures against the tobacco industry, according to Derek Yach,
 acting project manager for the Geneva-based WHO's Tobacco Free
 Initiative.

 "The industry wants to make the public believe they're philanthropic, and
 doing good deeds," charges Mr. Yach. He says community sponsorship is
 dangerous because it's "far more difficult" to control, and to define in
 legislation, than obvious advertising, like billboards and print ads.

 EU Ad Ban

 BAT officials in London defend the program as a legitimate public-relations
 effort, and say it's important to shoulder the welfare burden in Eastern
 Europe. "We want to be good corporate citizens, and to avoid the impression
 that we are Western occupiers," explains Jimmi Rembiszweski, BAT's
 marketing director. In 1997, BAT spent 10.2 million zloty ($17.1 million) on
 community projects globally, mostly in Eastern Europe and the former Soviet
 Union, because they need money for welfare projects more than the West
 does, the company says.

 The ire of antismoking groups isn't all that cigarette manufacturers have to
 worry about: For the first time, they are also facing challenges to their
 presence and power as Hungary, Poland and the Czech Republic line up for
 European Union membership.

 To qualify, these countries are obliged to harmonize their laws with the EU's
 all-encompassing ban on tobacco advertising and sponsorship. This would
 force the industry to alter its marketing strategies, and crimp plans to launch
 more brands and variations on brands. While it wouldn't outlaw sponsorship
 of community projects -- which are part of corporate, rather than
 product-branding campaigns -- critics contend it would focus attention on
 how cigarette companies hand out cash to try to gain influence.

 Big Investment

 Big Tobacco has much to lose. BAT has invested almost $700 million in the
 region since 1989; the total investment by cigarette companies is an
 estimated $2 billion since then. Western companies had been shut out for half
 a century from a lucrative market where smoking is widespread and largely
 tolerated. Their move into Eastern Europe came at a time when consumption
 in the West was declining, and the industry's advertising tactics were under
 attack from the EU and WHO. It also faces huge legal bills for
 tobacco-liability settlement costs in the U.S.

 For the moment, BAT officials are sanguine. "Let the ad ban come -- we will
 adapt, as we've done before," declares Rolf Bielefeldt, BAT's regional
 consumer regulatory affairs director for Europe. Similar curbs enacted in
 Norway more than two decades ago haven't significantly curtailed smoking
 levels there, he points out.

 The industry confidence stems, too, from the industry's vital role in the
 economy. In Hungary, BAT invested $53 million, part of the total industry's
 $300 million outlay in the country. More than 30,000 Hungarians are
 employed in the sector, which contributes 78 billion forints ($360.8
million) in
 taxes to state coffers, or 3% of the annual state budget.

 In Pecs, BAT is the biggest employer and taxpayer -- and more. At the Pecs
 Diagnostic Center, an ultramodern medical clinic with the only MRI machine
 in the area, patients benefit from high-tech diagnostic equipment, including an
 expensive machine that measures bone density. The hospital director, Bela
 Nemeth, justifies the use of tobacco money, and BAT's 10 million forint
 contribution, part of the company's 100 million forint total donation for
 community projects. "Tobacco fulfills a desire to smoke, and we have a
 desire to cure patients, so we must use all means possible to do that,"
explains
 Mr. Nemeth.

 It's difficult to measure how such programs affect the decisions of government
 officials. But BAT's Mr. Bielefeldt acknowledges that it helps. "When you do
 something for the community, the community will listen to what you want," he
 explains. "This goodwill can help with the authorities, and administrative
 questions, when you need permits for everything, even to fell a tree," he says.

 Zsolt Pava, Pecs's mayor, appreciates BAT, too. "They never refuse our
 request for help, and they take part of the social burden from us," he says.

 'A Dirty Trick'

 Hungary's fledgling antismoking movement also thinks the contributions make
 a difference with lawmakers. "It's deeply immoral, and a dirty trick," accuses
 Erzsebet Gyenizse, the 63-year- old director of the National Antismoking
 Association. She says the donations have helped sway government officials --
 including the chain- smoking former Prime Minister Gyula Horn -- from
 enacting tough antitobacco legislation. A bill to protect nonsmokers, by
 banning smoking in public places and in schools, hospitals and workplaces,
 has finally reached parliament after almost five years of discussion.

 The community approach forges close links with officialdom. In the Hungarian
 city of Eger, where Philip Morris has its factory and has invested $70 million,
 a foundation oversees and rules on grant applications. The city's mayor, and
 the director of the city hospital, are on the foundation's board, along with
 company representatives. Recent recipients of funds: the city hospital,
theater,
 orchestra, the Red Cross and a children's sports program. Philip Morris also
 helped pay for refurbishment of city streets, to provide disabled access. The
 company declined to disclose its community sponsorship budget.

 Peter David, a spokesman for Philip Morris in Hungary, says the company
 has a "moral obligation" to help and does benefit from positive public
relations
 -- but insists it isn't buying influence. Recalling a recent event when Philip
 Morris brought Christmas presents to a homeless shelter in Budapest, he
 says, "people had tears in their eyes when they saw the presents, and they
 knew it came from Philip Morris."

 If an ad ban is enacted, the battle will focus on brand marketing, because
 bans tend to freeze the market. That's why there's been a race to introduce
 new brands, to build brand loyalty with consumers, and to redefine the sector
 by grafting a new, youthful image to what was just another stale, state-run
 industry. (Current voluntary advertising guidelines in Hungary dissuade
 cigarette ads targeted to juveniles, on radio and television, or within 200
 meters of schools and hospitals.)

 Developing Brands

 Under communism, cigarettes had names but not what Western marketers
 call brand values -- special characteristics that consumers can identify with.
 Western companies changed that: BAT, which bought the Hungarian market
 leader, Sopiane, and now controls 39% of Hungary's 22 billion annual
 cigarette market, diversified the indigenous brand with a slew of new
 varieties -- including lights, extra-lights and menthol. It added a cellophane
 wrapper and a snazzy quality seal, because Western brands have them, and
 tinkered with the packaging and cigarette tips. Sopiane got a nickname --
 Szofi -- and to launch its ultralights, posters featured packs floating above a
 Hungarian landscape with the tag line, "your partner in everyday life."

 The goal was to offer consumer choice and attract younger smokers,
 particularly 18- to 30-year-olds, to new brands. "This group is our main
 target. They are critical for brand health," notes BAT's Mr. Rembiszweski. An
 ad ban would force the industry to concentrate on packaging and gimmicks at
 the cash register, which are allowed under the EU rules.

 Promotions would be banned, eliminating a vital marketing tool. Reemtsma,
 for example, had hostesses in wigs and Renaissance costumes push its Astor
 brand in night spots; its West brand is distributed at raves and techno-music
 concerts by girls dressed like space aliens. Marlboros are handed out at
 Budapest bars. BAT's Pall Mall gave smokers willing to try the brand free
 lighters with packs of cigarettes.

 Joe's Bar in Pecs is a typical target. Dark and smoky, and with an American
 Western roadside motif that's popular with university students, it's packed
 with Pall Mall promotions: a neon sign, a cigarette machine and ashtrays
 saying "the night belongs to us." The pitch doesn't always work. "I wouldn't
 switch -- ever," scoffs Tibor Pinter, a 19-year-old business student, who is
 puffing on a Marlboro and downing a beer. Outside Joe's, umbrellas at
 outdoor cafes are emblazoned with Pall Mall and rival Marlboro logos.
 Cigarette makers also vie for exclusive deals with the city's three large
 discos. "We target young people who like to stay up at night," says Zsolt
 Szabo, a BAT sales representative in Pecs.

 Timing at Issue

 Debate in Hungary today centers on when the country should enact the EU
 ban -- quickly, or when the country becomes a member, perhaps in 2005 or
 2006. Andras Patai, secretary general of the Hungarian Association of
 Cigarette Manufacturers, argues for the later date because the industry is
still
 developing. "We support the EU, but Hungary shouldn't forget its own
 economic interests," Mr. Patai says. His association forecasts a ban would
 cost 500 jobs and 4.2 billion forints in tax revenues.

 Mr. Yach, of the WHO's Tobacco Free Initiative, recommends an overall
 ban on all forms of promotion and sponsorship, saying it should probably
 extend to community projects because the industry knows how to squeeze
 out of ad bans by diversifying brands. BAT, for example, is test-marketing a
 Benson & Hedges coffee and coffee-shop chain. "We have to look at other
 ways of controlling their marketing, to show that any activity leads to an
 increase in consumption," explains Mr. Yach.

 Despite the threats, the tobacco industry remains confident. "We will be able
 to defend our rights to market a legal product," proclaims Mr. David, of Philip
 Morris. "Hungarians have smoked for centuries, and they will continue to do
 so."


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