Ashes to Ashes (76 page)

In a more interesting, and ultimately baffling, case, Stanley Katz, a principal of the Lieber-Katz ad agency, proposed to Reynolds a long, thin, brown-paper cigarette that had the jaunty look of the slender cigars once smoked by river-boat dandies. Because the proposed brand was to be 120 millimeters, longer by 20 percent than any other on the market, it was dubbed More and, perhaps appropriately, dosed with more tar—22 milligrams—than almost every brand introduced since the first filter tips in the ’Fifties. “Full flavor is what people want,” explained William Hobbs, president of Reynolds Tobacco, “and that’s what Reynolds is going to give them.” This, of course, flew directly in the face of the rationale behind the company’s almost simultaneous launch of ultra-low Now and the massive evidence that more and more of the industry’s customers were beginning to “smoke down”. RJR’s ad copy for More suggested that the smoker got more puffs per cigarette from the brand—thus its name—than any other, but this sort of quantitative sell failed to give the brand a persona or image in keeping with its strikingly different appearance. To the closely following eyes of Virginia Slims brand manager Ellen Merlo at Philip Morris, More had “verve” and real potential, “but their advertising didn’t come near positioning it.” The pitch was flat, and even when a milder version in a paler color was brought out to appeal more to youthful female smokers, it stayed flat: “It’s
beige. It’s slender. It’s special … .” Despite reports showing More to be especially popular with urban black women, no effort was made to turn them massively toward the brand as Kool and Newport had scored with black males. “They never did anything with it—never put any real horsepower behind it,” lamented Katz, More’s creator. “They got it up to a 1 percent market share and then let it go.”

Within the trade RJR’s shortcomings as marketers were no secret but did not become manifest until Philip Morris came on with a surge. In the analytical view of a leading wholesaler, Peter Strauss, at one time president of Metropolitan Tobacco Distributors, a giant in the New York area: “Reynolds took far too many years to shed its isolation down in Winston-Salem. They didn’t even bother to appear at tobacco industry charity affairs—they were a world unto themselves, and any place more than five hundred miles from Winston-Salem might as well have been the moon. Everything about their merchandising, especially the packaging and advertising, reflected small-town thinking. They failed to respond to the changing demographics of smoking and smokers and to the Philip Morris challenge. Instead, they concentrated on the hardware in supermarkets, and in so doing, failed to win the fight for the minds of consumers … .”

IX

RREYNOLDS
, for all its lumbering, unstylish performance as cigarette pitchman, was awash in profits, which qualified it as a prime takeover target in the late ’Sixties for such trophy-hunters as Harold Geneen, who had built International Telephone & Telegraph into a mammoth conglomerate. RJR had to put its excess cash flow to work by moving into non-tobacco ventures and in the process acquiring what the company’s financial people spoke of as “constructive debt”. But what sort of sizable new business made sense to hypercautious North Carolina tobacco people?

Reynolds’s earlier diversification moves had been small, careful sallies into the packaged foods business, buying up narrow but well-known brand lines like Hawaiian Punch fruit drinks, Vermont Maid maple syrup, My*T*Fine puddings, and Chun King Chinese cuisine. But these purchases had hardly made a dent in RJR’s wallet and produced profits that were meager in comparison to margins in the cigarette business. When the company made a major move in 1969, its officers looked like country boys come to town with too much cash in their overalls and just waiting to be taken by a hustler—in this case, a bushwhacker largely of their own creation.

Malcolm McLean was a rough-hewn and little-educated industrial buccaneer who came from Fayetteville, about 120 miles southeast of Winston-Salem,
and had become a multimillionaire partly by hauling RJR cigarettes across the nation, in the process winning many lucrative truck routes from the Interstate Commerce Commission. Presentable enough to get elected to the Reynolds board of directors, he was smart enough to move out of conventional trucking with an idea that revolutionized the long-haul freight business—containerized shipping. The idea was to move crated products in huge containers that traveled overland on flatbed railroad cars or fit onto specially rigged trucks and could then be lifted by derrick and deposited directly in the holds of ships. Among the advantages of the method were lower handling costs, less damage, and much less pilferage (since the containers were never opened until they reached their destination). McLean’s Sea-Land Corporation owned a fleet of nearly forty swift, allegedly very profitable ships by the time he came to his colleagues on the Reynolds board with a proposal that they take over the capital-intensive operation and use their excess cash to finance an expanded fleet of superswift, state-of-the-art ships.

The idea captured the imagination of the Reynolds brass. For one thing, they knew and liked the dynamic McLean, admired him because he was native to those parts yet was so different from them—a free-drinking high roller whose gambles had paid off big—and trusted him to the point that they relied on the financial data and analyses he gave them on Sea-Land’s performance. There was something liberating about the whole idea, perhaps having to do with the romance of the sea, which was not visible from even the uppermost floors of the RJR headquarters building in Winston-Salem. There were skeptics among them who feared entry into a business so alien to their traditional ways of operation and so likely to sop up their profits, but the moment had come, Alec Galloway was persuaded, to take the plunge.

The Sea-Land buy-in cost $550 million, and the meter never stopped clicking thereafter. In 1970, the Reynolds board concurred with the suggestion that it spend an additional $55 million to buy American Independent Oil (Aminoil), doing business out of Saudi Arabia and Kuwait and specializing in bunker fuel, a thick grade used by ships, in order to assure the Sea-Land fleet of a reliable supply of cheap fuel. The new investment added to the anxieties of board members like Charles Wade, who remarked, if none too loudly, “What on earth do the bunch of us down on Fourth and Main in Winston-Salem know about oil in Kuwait, where they’ve got all kinds of intrigue and eat goat?”

Such misgivings did not take long to be borne out. After a brief spell of strong Sea-Land profits, a West Coast shipping strike hit late in 1970 and spread to Gulf and East Coast ports, badly hobbling operations. But such labor difficulties, domestic and foreign, including costs swollen by the need to pass out bribe money to bureaucrats on a regular basis to get any given ship landed, were only the tip of the iceberg. All at once there were new competitors everywhere—German, Dutch, and Japanese especially—many benefiting from
government subsidies, and state-owned cargo fleets launched by Eastern European nations desperately hungry for hard Western currencies and thus willing to undercut Sea-Land’s rates. Gyrating currency exchange rates over the five years it took to expand the Sea-Land fleet helped drive up the cost from a budgeted $38 million to $55 million per ship. And once in operation, their powerful engines used too much oil at their rated 32-knot maximum speed, and so it was dropped to 27 knots, defeating the whole point of their superfast design. On top of which they were now operating only half-full or less, as Japanese electronics makers, among Sea-Land’s biggest early customers, switched to cheaper carriers. As a result, Sea-Land, soon the world’s biggest private shipping fleet, showed profits that varied from narrow to invisible, leaving the Reynolds board with a wretched return on its investment and a corporate sore that would not heal for more than a decade.

A far more prudent use of Reynolds’s surplus cash would have been to build up its efforts in the international tobacco business, but the company lacked the confidence to take the plunge in a serious way, as Philip Morris was then doing. Even a relatively sophisticated executive like “Red” Gray had hesitated to put RJR brands into international play in a decisive way, partly from an unwillingness to risk exporting its expertise and placing its blending skills in the hands of foreign nationals. “Philip Morris was beating our brains out in Europe,” one Reynolds officer recounted, “but you couldn’t send a good old boy to run things over there.” Without a truly European operation in place and a nucleus of its own people to oversee it, Reynolds was in no position, as Philip Morris surely was, to exploit crumbling trade barriers when the Common Market began its operations and a vast continental market took shape.

X

R.
J. REYNOLDS
faltered under Alexander Galloway because for too long it had been ruled by nepotism and cronyism instead of merit, of which, at any rate, there was an insufficient supply. Among the few who recognized the root problem was the house intellectual, Duke man Charles Wade, vice president for personnel and labor relations and a company director. Because he harbored no illusions about ever becoming head of Reynolds and had built a reputation for being smart and politically adroit—skills that got him elected as well to the boards of such Carolina institutional strongholds as the Wachovia Bank, Duke Power, and Duke University—Wade was freer than most of his colleagues to speak his mind, and one of the things he told them was that their badly depleted pool of talent needed to be replenished by outsiders with a less parochial point of view. Especially needed were people to run the non-tobacco
subsidiaries, which were in limbo as disparate entities and essentially out of the parent company’s control. “I love you all,” Wade would tell his fellow officers when the moment seemed right, “but I don’t think we can run all of this with our present people.” It was not an opinion that greatly endeared him to his colleagues, but the message was received.

In 1968, Wade succeeded in bringing on to the Reynolds board an outsider—one of only two non-employee directors at the time—with the wintry aspect of a white-thatched, bespectacled New England schoolmaster. At the time, J. Paul Sticht had been chief operating officer of Cincinnati-based Federated Department Stores, the nation’s premier chain, and brought with him a national outlook and marketing skills that everyone agreed could be useful to RJR. Sticht, once a steelworker in his native Pittsburgh, had risen to shop steward and then pushed himself into the executive ranks by attending Harvard Business School and working in personnel at TWA and Campbell Soup before building his career in retailing at Neiman Marcus in Texas and Filene’s in Boston.

Sticht, anxious not to get himself pegged a Yankee carpetbagger, was respected on the Reynolds board as an amiable, knowledgeable, no-nonsense sort, one who would not risk exploding the tight collegiality among his RJR colleagues by, for example, too vigorously questioning the wisdom of the Sea-Land deal, which was stuck under his nose, as he recalled it, as pretty much of a
fait accompli
. Only when Galloway announced he was stepping aside as chairman in 1972 and indicated that his choice as new chief executive was the financial vice president, David Peoples, did Sticht speak out forcefully. Peoples was perceived by Sticht and others in the company as not much more than a competent accountant with a narrow, bottom-line mentality; in short, he lacked the vision Reynolds so badly needed.

Sticht, who had taken early retirement at Federated Stores at fifty-five—some close to the Lazarus family, who controlled the department-store chain, suggested that Sticht had outlived his usefulness to the company—now found himself one of a four-man search committee of directors to pick a chairman other than Peoples. Surprisingly, except to those who knew that the fires of ambition had not been altogether banked within him, Sticht emerged as the committee’s choice. But to allay latent xenophobia among veteran Reynolds people, Sticht was designated chairman of the board’s executive committee and named co-equal with the new chief operating officer, Reynolds careerist Colin Stokes, whose father had once run the company’s leaf department and had worked with The Founder himself. This “team concept” of leadership may have soothed local sensibilities, but as one prominent Winston-Salem businessman close to Reynolds people put it, “Everyone knew soon it was a lot of bullshit. Colin was like everybody’s grandfather and down-to-earth, while Paul was just the opposite—not warm.” Though they did not embrace Sticht
socially, and vice versa—he tended to pass his spare time during the winter in Palm Beach and during the summer in New Hampshire, and no one pushed to get him speedily accepted at Winston-Salem’s best country club—he was respected as the new broom in the house. Everyone deferred to him, including President Stokes, who, as Sticht recounted, “did go along” with the stronger man’s directives.

In his first years of trying to run Reynolds without audibly cracking the whip, Sticht found himself preoccupied with a pair of problems that antedated his arrival on the scene. One was how best to correct the Sea-Land mistake. “We had a lot of other opportunities far more compatible with Reynolds’s tobacco business,” he recalled, “and we were deprived of the chance to explore them because of the monies tied up in Sea-Land, which was so foreign to the basic skills of the company.” By the time Sticht concluded that Sea-Land had to be sold off, there were few potential takers—at any price.

Sticht’s other draining problem was how to deal with a pair of messy corporate scandals that had attracted the attention of federal authorities. One involved some $25 million in questionable payments—namely, bribes—that the Sea-Land accounting ledgers carried as legitimate business expenses to get their ships unloaded in foreign ports. The other, over far less money, was a good deal more embarrassing: RJR officials were charged with making $90,000 in illegal campaign contributions to Republican presidential candidates from 1964 through 1972. The monies were said to have been paid in the form of personal gifts as high as $10,000 each from individual corporate officials, who were repaid from a company “slush fund,” off-the-book monies drawn from RJR’s overseas accounts. The charges required Sticht to make many trips to Washington in search of a solution that would bring the company a minimum of embarrassment. “It was a major distraction,” he said.