SA Puffers May Say: Welcome To Marlboro Country (fwd)

[Robert Weissman <rob@essential.org>]

SA Puffers May Say: Welcome To Marlboro Country
But fag peddlers cough nervously as world number one eyes SA
by Stuart Rutherford

SOUTH AFRICA;
Source: Financial Mail, Friday, 7/2/99


02 July 1999

>From Marlboro country to Mandela country, rumours are rampant that the
world's most recognised cigarette is coming to the good old R S of A.
Marlboro cigarette maker Philip Morris (PM) has yet to announce itself,
but has already:

Approached staff of at least one local cigarette company about joining
them;

Stepped up its advertising in international magazines that circulate in
SA;

Talked to SA distributors and importers;

Approached key SA government departments, including the Health Ministry;

Brought stock into the country; and

Progressed with an investigation of how best to enter the SA market.

PM's timing schedule is unknown, but there are some real incentives to
launch in SA now. The Competition Board has just cleared up a long-running
dispute between Rembrandt and Philip Morris over their rights to the
Marlboro brand. Rothmans International and British American Tobacco SA
(Batsa), which jointly control 95% of the SA cigarette market, are to
merge as part of a worldwide deal (see Companies & Markets, January 15 &
May 28). And RJR Nabisco's international tobacco business, third in SA,
has recently been sold to Japan Tobacco for US$8bn.


Just how the new Tobacco Products Control Act Amendment will affect PM is
moot. If implemented, it will ban all tobacco advertising and effectively
freeze market shares in SA. That might encourage PM to rush in and launch
while it can, or it may be considered too politically insensitive.The
entry of PM would be a big deal for SA, where excise taxes have risen 330%
since 1994 and a resulting decline in total sales of 20% over the past
four or five years. PM is the world's number one international tobacco
company, with a 17% market share, with financial firepower and marketing
savvy in abundance.

Batsa MD Steven Jurgens says PM's modus operandi in new markets is always
the same: "When Marlboro enters, it is through imports. They assign an
importer, agent and distributor and open a marketing office. They target
the top end of the market and go for distribution in the entertainment and
convenience trade. They advertise heavily."

Finding a local manufacturer for PM looks doubtful: three companies have
cigarette manufacturing plants in SA: Rothmans; Batsa and Mastermind
Tobacco Company. Mastermind is a small East London-based operation focused
mainly on exporting low-priced cigarettes to Africa.

Batsa currently manufactures Camels, Aspens and Winston cigarettes for RJ
Reynolds in SA under agreement. Rothmans manufactures and markets one PM
brand, Chesterfield, under a long-term licence. But Jurgens and Rothmans
International spokesman Abrie du Plessis both say PM shouldn't expect any
favours.

"I would think that with PM holding 17% of the international market and we
(the merged entity) holding 16%, the competition between us would be so
intense that it would preclude any kind of co-operation," says Du Plessis.

Mastermind did not return the FM's phone calls, but it has had an
agreement to manufacture cigarettes for RJ Reynolds.

The general flux in the market has presented the local companies with real
headaches. "We are monitoring competitive activity closely," says RJ
Reynolds external relations consultant Arnold Peck. "It is difficult to
plan your strategy when there are so many unknowns. We haven't seen what
the merger will bring, and then there is the Tobacco Bill."

Jurgens says he is concerned - by Philip Morris, whom he describes as the
"ultimate competitor", and by the possibility of having a "dark market",
where no advertising is allowed. "We have had plans in place to counter
Philip Morris for some time. We adjust them as we gather more
intelligence," he says. "But we would support our key equities, our
brands."

Jurgens says in a dark market "what remains is price, and price wars. But,
the tobacco industry has learnt in places like Australia that this is not
in the interests of the company or the consumer, who get confused about
the value of the product."

Du Plessis says Rothmans would defend its market share, but adds "we are
not overly concerned; these rumours have been around since the middle of
last year".

The merger between BAT and Rothmans is part of a global consolidation in
the industry.  Jurgens says BAT looked at buying RJR's international
business, but decided against it.  BAT is intent on wresting the world top
spot from Philip Morris. This month, it announced it is considering making
a £7bn cash offer for Imasco, Canada's biggest tobacco company.

Batsa now has the support from minority shareholders to permit the SA
merger. Du Plessis says they intend to reduce the domestic brand portfolio
and cut costs.

Indications are that Rothmans SA MD Jacques Kruger will be taking over the
top position in the merged company, because of his company's dominance -
with 85% of the SA market. Jurgens confirms he will be leaving. "There
will be other opportunities in the group outside SA," he says.

That's a big loss; since Jurgens took control of Batsa in late-1996, the
company has been wildly successful. This is reflected in the share price:
When Jurgens joined Batsa, he was required to buy shares in the company,
so he bought 100 at the market price of R12,50 a share. The buyout offer,
two-and-a-half years later, was R120,00.