American Brands, Inc.

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American Brands, Inc.

1700 East Putnam Avenue
Old Greenwich, Connecticut 06870
U.S.A.
(203) 698-5000
Fax: (203) 698-0706

Public Company
Incorporated: 1904 as The American Tobacco Company
Employees: 23,000
Sales: $13.78 billion
Stock Exchanges: New York Amsterdam Antwerp Basel Brussels Düsseldorf Frankfurt Geneva London Paris Tokyo Zürich

Once the dominant tobacco company in the world, American Brands, Inc. is a widely diversified conglomerate still dependent on tobacco for the bulk of its income. With interests in everything from computer accessories to life insurance, American has skillfully shifted its activities away from the embattled domestic tobacco market, which faces increasing health concerns and decreasing consumption. Domestic tobacco nevertheless remains an extremely profitable business, and American continues to derive about 30% of its earnings from the lucrative U.S. market.

American Brands traces its origin to the remarkable career of James Buchanan (Buck) Duke, founder of The American Tobacco Company. Duke was born in 1856 on a small farm outside Durham, North Carolina, where his father, Washington Duke, raised crops and livestock. The Duke farm was ravaged by armies of both North and South at the end of the Civil War, and upon his release from a military prison Washington Duke found that his sole remaining asset was a small barn full of bright leaf tobacco. Bright leaf, so called because of its golden color, had only recently been introduced, but its smooth smoking characteristics were already making it a favorite, and its fame was soon spread by the returning soldiers. Duke set out to peddle what leaf he had, and, pleased with the response, he quickly converted his land to tobacco culture, selling his wares under the name Pro Bono Publico, meaning “for the public good” in Latin. In its first year of operation, W. Duke & Sons sold 15,000 pounds of tobacco and netted a very handsome $5,000.

Along with his father, his brother Benjamin, and half-brother Brodie, Buck Duke labored to make the family business succeed, working long hours from childhood and learning every aspect of the tobacco business from crop to smoke. Duke’s timing was fortuitous—bright leaf tobacco became the most prized of all U.S. varieties, and Durham was the epicenter of bright leaf country. By far the best-known brand of bright leaf was Bull Durham, the label of William T. Black-well & Company. Blackwell gained a long lead on the rest of the Durham tobacco merchants, including the Dukes, who did not establish their first true factory in Durham until 1873. The Dukes chose to concentrate their energies on the manufacture and sale of tobacco rather than on raising the crop, which was notoriously erratic in quality and quantity. Buying their leaf from local farmers, the Dukes would cure and then shred or compress the tobacco to form, respectively, smoking or chewing tobacco. As cigarettes were yet hardly known, tobacco smoking was accomplished with a pipe or in cigars, the latter not being made by the Dukes.

Buck Duke attended a business school for six months in 1874, when he was 18, and became an increasingly dominant figure in the family business. Intensely ambitious, single-minded, and aggressive, Duke had no interest in anything less than mastery of the tobacco business. In 1878 Buck, Washington, and Ben Duke formed a partnership with businessman George Watts of Baltimore, Maryland, each contributing equally to the capital base of $70,000. Richard H. Wright joined the partnership two years later. The company was profitable and expanding, but Buck Duke was dissatisfied with its role in second place to Blackwell’s Bull Durham, and in 1881 he decided to enter the new and relatively small field of cigarettes. At the time, there were only four major producers of cigarettes in the United States, and none of them had yet understood the potential importance of mechanized rolling machines and widespread advertising. Duke appreciated the power of both, and set out to catch the four leaders.

Duke located and leased two of the new automatic rollers invented by James Bonsack of Virginia, who agreed to give Duke a permanent discount in exchange for taking a chance on the untested machines. After some adjustments, the machine proved capable of rolling about 200 cigarettes per minute, or 50 times the production of the best hand-rollers. Duke next revamped his packaging, devising the slide and shell box to offer better protection against crushing; and he then marketed his Duke of Durham cigarettes at ten for 5C, or half of the usual price. This combination of excellent bright leaf tobacco, smart packaging, and discount price was an immediate success, and to these tangible virtues Duke soon added the intangible power of advertising. He very early recognized that advertising would determine success in the cigarette business, and throughout the 1880s spent unprecedented amounts of money on promotional gimmicks of every stripe, much to the astonishment, ridicule, and—later—regret of his rivals.

While Richard Wright handled marketing overseas and Edward F. Small built up the western U.S. trade, Duke himself decided in 1884 to meet his competitors head on in New York City, the largest market and manufacturing center of the cigarette business. He moved to the city, established a local factory, and commenced an all-out war against the four leading companies—Allen & Ginter, Kinney Brothers, and Goodwin, all of New York City, and Kimball of Rochester, New York. The Big Four sold 80% of the nation’s 409 million cigarettes in 1880; after a few years of Duke’s relentless campaign, the total market had swollen to 2.2 billion, and W. Duke & Sons owned 38% of it. The Duke name appeared on billboards, storefront windows, and the sides of barns around the country, as well as on some 380,000 chairs Duke distributed free of charge to tobacconists, and by 1889 company sales reached $4.25 million and net income one-tenth of that. Duke had grown to dominance of the cigarette business in a single decade, and was shortly to duplicate the feat worldwide.

Though triumphant, Duke was faced with the prospect of continuing bitter competition and restricted profits. The 32-year-old veteran thereupon proposed a solution that was startling in scope: to merge all five of the competitors, and by joining forces bring to an end the wasteful price warfare. His fellow manufacturers at first balked at the initiative, but they eventually agreed and in January 1890 formed The American Tobacco Company, its $25 million in capital divided among ten incorporators, with J. B. Duke named president. The new company, one of the first true combinations in the history of U.S. business, controlled 80% of the nation’s cigarette business and showed a net profit of $3 million in its first year.

While American Tobacco was a large concern, it was by no means the entire tobacco industry, and having once captured the cigarette business Duke set to work on the rest of the tobacco world. In 1891 American bought out 80% of the relatively minor snuff business; and four years later Duke launched what has come to be known as the “plug wars.” Between 1895 and 1898 American Tobacco waged a prolonged struggle to enter the field of plug, or chewing, tobacco, the largest of the various tobacco markets. With this move Duke made clear the extent of his ambitions, and a number of the original American Tobacco incorporators saw fit to sell their stock rather than join him in what they saw as a foolhardy battle against superior odds. Duke’s ambition proved to be realistic, however, and after three short years of price wars and buyouts he had secured more than 60% of the vast plug market, including such later giants as Lorillard, Liggett & Meyers, and Drummond. Duke’s methods in doing so were much like those he used in the snuff, smoking tobacco, and cigar segments of the industry. Selective price wars were followed by acquisitions, followed by the return of prices to a more profitable and unchallenged level. Many of these practices were in violation of the Sherman Antitrust Act, one of whose more spectacular victims would later be J. B. Duke. For a long time the extent of American Tobacco’s holdings was not obvious, as many of Duke’s 250 acquisitions managed to maintain secrecy about their new affiliation; and neither Congress nor the executive branch of government became interested in taking on the combinations until the first decade of the next century.

At the conclusion of the plug wars in 1898, Duke united his various plug companies into a new holding company called Continental Tobacco Company, most of whose stock was in turn owned by American Tobacco. In 1901 American Tobacco bought itself the largest share of the cigar industry, which however frustrated all efforts at monopoly due to the difficulty and variety of cigar manufacture; and in the same year American Tobacco acquired a controlling interest in what would become the dominant retailer of tobacco in the country, United Cigar Stores Company. Having thus finished off nearly the entire domestic tobacco industry, Duke tightened his grip on his family of holdings, in 1901 forming and retaining the largest shareholding in Consolidated Tobacco Company, which in turn bought up the assets of the former American and Continental companies in a transaction that netted him a tidy profit while also providing more direct corporate control. Finally, Duke began to expand internationally. After a nationwide price war in England against a coalition of the leading British tobacco men, the two sides agreed not to compete in each others’ countries and to pursue jointly the rest of the world’s markets through a company called British-American Tobacco Company, two-thirds of which was won by James Duke and his allies. Even at this early date the overseas retail trade was significant, British-American soon employing some 25,000 salesmen in Asia alone, all of them working under Duke’s director of foreign sales, James A. Thomas.

Duke’s control of United Cigar Stores’ more than 500 outlets gave the public a clearer picture of the extent of Duke’s domain, and his company soon faced rising criticism and opposition, some of it violent. Those in both the industry and the public had reason to dislike Duke and his cartel; Kentucky tobacco growers, for example, their prices repeatedly lowered by the single large buyer in town, banded together in 1906 to burn down a number of the trust’s large tobacco warehouses. More serious was the increasing pressure brought to bear by the U.S. Department of Justice, which took heart under the administration of President Theodore Roosevelt and began a series of antitrust actions against the industrial combines. In 1907 the department filed suit against Duke’s creation, now once again called American Tobacco Company, and in 1911 the Supreme Court agreed that the trust must be dissolved to restore competition to the tobacco industry. Total corporate assets were estimated at more than $500 million.

From the complex dissolution of American Tobacco, designed and overseen by James Duke himself, came the elements of the modern tobacco industry. Spun off as new corporate entities were Liggett & Meyers, Lorillard, R.J. Reynolds, and a new, smaller American Tobacco Company. Each of these four except Reynolds was given assets in all phases of the tobacco business, and Reynolds, the youngest and most aggressive of the companies, soon acquired what it lacked. Control of British-American Tobacco was lost to the British, where it has remained. Duke turned over direction of American Tobacco to Percival S. Hill, one of his veteran lieutenants, and himself went with British-American as chairman and one of its directors. The founder retained large holdings of stock in each of the newly formed spin-offs, and upon his death left a great deal of money to the eponymous Duke University and a score of other charitable causes.

At the time of dissolution, the tobacco industry still exhibited two characteristics soon to be swept aside by modern advertising and changing tastes. The business continued to be dominated by chewing tobacco, and it featured a plethora of brands. In 1903, for example, no fewer than 12,600 brands of chewing tobacco were listed by an industry catalog, along with 2,124 types of cigarettes. In 1913 Joshua Reynolds, founder of R.J. Reynolds, introduced the era of nationally known cigarette brands with his new Camel, a blend of bright leaf and sweet burley tobacco that took the country by storm. Camel was probably the most successful cigarette ever launched, and in 1916 American Tobacco answered with Lucky Strike, while Liggett & Meyers pushed its Chesterfield, and together the blitz of advertising caused an enormous upsurge in national consumption, from 25 billion cigarettes in 1916 to 53 billion three years later. By 1923 cigarettes had passed chewing tobacco as America’s favorite form of nicotine, an evolution helped immeasurably by the growing acceptance of women smokers, for whom the cigarette was the only fashionable smoke.

Under the leadership of Percival Hill and, after 1926, his son George Washington Hill, American Tobacco battled Reynolds for decades in the race for cigarette dominance. Each of the Big Four manufacturers settled on one or, at most, a few brands and spent inordinate amounts of money on advertising in both print and radio formats. The Great Depression years were not as bad for the tobacco companies as they were for many industries; but consumption in 1940 was nevertheless no higher than it had been ten years before, Lucky Strike sales hovering at around 40 billion cigarettes annually. World War II and its attendant anxieties provided an instant sales boost, however, pushing Lucky Strike totals to 60 billion by 1945 and 100 billion a few years later. American Tobacco also found a winner in Pall Mall, which ushered in the “king size,” 85-millimeter, era in 1939 and was soon challenging Lucky Strike and Camel for the top spot. So complete was the triumph of the cigarette that when American Tobacco’s sales reached $764 million in 1946, fully 95% of it was generated by cigarettes.

The immediate postwar years were good for American Tobacco, which upped its overall share of the domestic tobacco market to 32.6% in 1953; but that would prove to be the high-water mark for the company’s cigarette business. The year before, R.J. Reynolds introduced Winston, the first filtered cigarette, and inaugurated the trend toward lighter and less-harmful smokes. American Tobacco replied with its Herbert Tareyton Filters in 1954, but with both Lucky and Pall Mall among the top three sellers overall it felt no urgency about the filter business and did not spend the money and effort needed to establish its brands in the new category. This failure would be crucial in determining the subsequent development of American Tobacco, which never did catch up to its competitors and eventually assumed a minor role in the cigarette world. While Reynolds and later Philip Morris reaped fortunes with Winston and Marlboro, American Tobacco belatedly pushed losers such as Hit Parade, a cigarette so unpopular that the company was reportedly unable to give away free samples.

In the long run, however, American Tobacco’s relative failure in cigarettes may have been a blessing. Beginning in the mid-1960s, the company used the steady cash flow from its remaining tobacco business to make a number of promising acquisitions. Chief among these were Gallaher Limited, one of the United Kingdom’s largest tobacco companies; James B. Beam Distilling Company; Sunshine Biscuits; Duffy-Mott; and several makers of office products. In recognition of the company’s changing profile it was renamed American Brands in 1969, by which date its share of the domestic tobacco market had slipped to 20% and continued to decline. After a handful of other minor acquisitions, American Brands made its largest purchase in 1979, buying The Franklin Life Insurance Company, the tenth-largest life insurer in the United States. By that time nontobacco assets were generating one-third of American Brand’s operating income of $364 million, and the company’s diversification program was generally regarded as a modest success.

American Brands, however, was weakest in the most lucrative of its markets, domestic tobacco. The increasing stigma attached to tobacco sales and the threat of government restrictions have ensured immense profits for those few companies still in the U.S. tobacco business, as no new potential competitors are both willing and able to venture into such troubled waters. Even as the cigarette makers diversify, therefore, domestic tobacco continues to pay up to 35% on every sales dollar, providing cash needed to diversify further out of tobacco. In domestic tobacco, American Brands’ share of the market eventually fell to the neighborhood of 10%. The $1.6 billion in sales generated there in 1990, however, returned more operating income than did the company’s $6.4 billion in overseas tobacco business, where margins are much tighter, and equaled the return of all of the nontobacco divisions taken together.

American Brands fought off a takeover bid by E-II Holdings in the late 1980s, and significantly strengthened its position in liquor and office products. Its liquor division is the United States’ third-largest seller of spirits, its office-products division is billed as the world’s largest, and Gallaher Limited had grown into the leading U.K. tobacco company, far outstripping its parent company’s tobacco sales. Earnings growth had been steady for years at American Brands, whose balanced revenue structure renders the company relatively immune to sudden downturns in any one area.

Principal Subsidiaries

ACCO World Corporation; Acushnet Company; The American Tobacco Company; Jim Beam Brands Company; The Franklin Life Insurance Company; Gallaher Limited (U.K.); Golden Belt Manufacturing Company; Master-Brand Industries, Inc.