Rothmans UK Holdings Limited History

Address:

15 Hill Street
London W1X 7FB
England

Telephone: (071) 491-4366
Fax: (071) 493-8404

Wholly Owned Subsidiary of Compagnie Financier Richemont AG
Incorporated: 1903 as Carreras, Limited
Employees: 29,600
Sales: £2.4 billion (1996 est.)
SICs: 2111 Cigarettes; 2121 Cigars

Company History:

Although it holds only about two percent of the global cigarette market, Rothmans UK Holdings Limited ranks among the world's top four tobacco companies. In spite of high taxes, grave health concerns linked to tobacco use, and strict limits on advertising its products, Rothmans continued to achieve profitable growth in the early 1990s by targeting overseas growth, especially in Asia and Eastern Europe.

Rothmans International was established in 1972 under the direction of Dr. Anton Rupert, a South African who headed the Rembrandt Group, one of South Africa's largest enterprises, with interests in mining, textiles, and brewing as well as tobacco. Rembrandt (now Compagnie Financier Richemont AG) expanded its activities outside South Africa by buying into Rothmans Limited in 1954 and Carreras in 1958. It was Rupert's philosophy to allow these companies to operate independently, but with the companies beginning to duplicate resources and compete against each other, the formation of Rothmans International seemed preferable.

This organizational scheme held until 1993, when a group restructuring separated the company into Vendome, in charge of the luxury brands, and Rothmans International plc, the tobacco interests. In 1995, the Richemont Group acquired all of Rothmans' outstanding shares, making it a wholly owned subsidiary.

Origins in the 19th-Century

By 1972 Rothmans Limited had been in existence, in one form or another, for more than 80 years. Its founder, Louis Rothman, was born into the tobacco industry. His family owned a large tobacco factory in the Ukraine, and he became an apprentice there. He emigrated to London in 1887, at the age of 18, and easily found work in the British tobacco industry. At that time there was a demand for handmade cigarettes using the blends of Balkan, Crimean, Turkish, and Oriental tobaccos which Rothman had learned how to make during his apprenticeship.

In 1890, he opened his own business, a small kiosk on Fleet Street, selling to the reporters and printers of the area by day and making his cigarettes by night. He also built his reputation by supplying to wealthy businessmen and aristocrats. This enabled him to open two more shops, but it was not until 1900 that he had a proper showroom on Pall Mall, from which he launched his Pall Mall brand of cigarettes.

The success of Rothman's Pall Mall, Royal Favourites, and other brands in the United Kingdom allowed him to extend the business into overseas markets. By 1902 he was exporting to South Africa, the Netherlands, India, and Australia. In 1903 his company was incorporated under the name of Rothmans of Pall Mall in order to distinguish it from his brother Marx's tobacco business. In 1906 Louis created the menthol cigarette, by inserting menthol crystals into the ends of the cigarettes. He also developed a better filter for his Russian cigarettes, known as the "Barber's Neck," which did not leave loose pieces of tobacco touching the lips as earlier filters had. By 1905 Rothmans of Pall Mall was supplying tobacco products to the British royal family and extended its services to the royal family of Spain in 1910. When Louis went on to open a new store in Regent Street, his brother Marx joined the business, but by 1913 the partnership broke up, with Marx controlling the Regent Street operations and Louis the Pall Mall business. Later that year, Louis acquired a new factory in London and entered into partnership with his friend Markus Weinberg as the Yenidje Tobacco Company Limited.

Shift to Mass Production during World War I

The early stages of World War I were difficult for the new company. The markets for special blends of Turkish tobacco and handmade cigarettes were in decline, while demand for the cheaper, mass-produced Virginia brands and cigarettes was increasing. Weinberg did not agree with Louis Rothman's proposal to move into this market and the business folded in 1916, after a court case which ended with Louis reviving Rothmans of Pall Mall. Like other tobacco companies, Rothmans contributed to the war effort by supplying duty-free cigarettes to British troops. Louis also concentrated on reorganizing his factory to incorporate new methods of producing Virginia cigarettes.

After the war, in 1919, Louis Rothman brought his son Sidney into the business as an apprentice. Sidney became a partner in 1923, initially concentrating on expanding the company's advertising. The company had advertised in tobacco journals since 1908 but now began to use the national newspapers and leading periodicals. By 1921 such new Rothmans brands as the Marksman and Rhodesian Virginia were reaching a large market through the Rothman Diary Service, which offered customers lower prices for large orders. The use of Rhodesian tobacco was a reflection of a change in government policy. In response to the growing popularity of American tobacco, the British government was trying to encourage the import of tobacco from such Commonwealth states as Rhodesia and Nyasaland, India, and Canada by cutting the tariff on unmanufactured tobacco from these countries. The opening of six more shops in the heart of London between 1923 and 1926 indicates Rothmans's increasing commercial impact. In 1926, a new subsidiary, Rothmans (India) Limited, was established in Bombay. Louis Rothman died in 1926, at the age of 57, but his company's record of success continued under his son's management.

The company opened new premises in Liverpool in 1927. It was the first of many shops to open outside London. Meanwhile its mail order service was doing well, and in 1928 it introduced a new scheme of coupons for the Rothmans Direct Supply Association, which supplied many items, ranging from gardening tools to furniture, at discount prices, including a service inscribing customers' initials in gold leaf. Many manufacturers were reducing their prices at this time, forcing Rothmans to follow suit. Although the company experienced heavy competition at home, its exports were increasing with sales to China, South America, and particularly the territories of the British Empire. In 1929 Rothmans Limited, a public company, was formed, with Sidney Rothman as its first chairman and managing director. With the capital from the new shareholders, shops were established in Glasgow, Manchester, and Bristol, selling the new brands of cigarettes White Horse and Dance Time, as well as Louis D'or and Tuya tobaccos. Throughout the 1930s the company continued to develop new methods of filtration for cigarettes.

Rothmans was persuaded to drop its coupon scheme in 1933, with compensation from one of the larger tobacco companies, as restrictive practices were introduced by the Tobacco Trade Association of which Rothmans was not a member. However, expansion continued. By 1935 Rothmans had additional branches in Hull, Manchester, Birmingham, and Cambridge. Overseas, it had an office in Cuba and had established a factory in Ceylon (now Sri Lanka), though this closed after only two years because of a shortage of staff. The introduction of the famous Consulate Menthol Filter-Tipped Virginia brand secured the company's reputation, while the acquisition of Martins of Piccadilly and its associates, in 1937, secured its supplies of leaf tobacco for the duration of the international crisis of the late 1930s and World War II which followed it. During the war Rothmans supplied parcels to British troops and prisoners of war. Its tins became famous for their adaptation to various uses, for example as material for wireless sets in the prison-camps.

Postwar Merger with Rembrandt Group, Carreras

After the war Rothmans Limited made the important decision to look overseas for funds to finance expansion. It had started discussions with the newly founded Rembrandt Tobacco Company, part of Dr. Anton Rupert's Rembrandt Group, on making Rothmans cigarettes in South Africa, and production began in 1951. The decision to associate with this South African company significantly changed Rothmans's position within the tobacco industry: by 1954 Rembrandt was in effective control.

Rothmans's association with Carreras, a significantly older company, began four years later. Don Jose Carreras-y-Ferrer, its founder, came from a family of tobacco producers in Spain whose business dated back to the 18th century. He traveled to London in 1843 seeking political asylum and soon gained a reputation as a maker of fine cigars, which were just starting to become popular. His son Don Jose Joaquin concentrated on blending tobacco and snuff and opened a shop off Leicester Square in 1852. By 1874, Carreras was producing a thousand brands of tobacco products.

The company remained a family business until it was taken over by W. J. Yapp in 1894. Yapp had been involved in the shoe leather industry but saw the economic potential of tobacco. Like Louis Rothman he saw the importance of marketing and achieved great success with the Carreras pipe tobacco Craven Mixture. In 1897 he managed to get the novelist and playwright J. M. Barrie to endorse the product. Barrie confirmed that the fictional Arcadia Mixture featured in his book My Lady Nicotine was in fact Craven Mixture. Carreras continued to use the endorsement for another 40 years. Yapp ran the company until 1903 when Bernhard Baron joined as director of what now became a public company. Baron had come from the United States with his cigarette-making machine looking for a company to use it. He had been turned down by the larger companies but Carreras offered him his opportunity in 1904 by setting up Carreras and Marcianus Limited, an associated company concentrating on the production of machine-made cigarettes. Baron and his family gained a controlling interest in Carreras, which introduced new brands such as Black Cat, Carreras Ovals, and Seven Up. In 1904 Carreras was the first tobacco firm to introduce coupons for customers to redeem for gifts, in the packets of the new Black Cat cigarettes. This innovation was such a success that new premises were needed to cope with the demand. Many other companies, including Rothmans, took up the idea. In 1909, the Baron automatic pipe filler cartridges brought Carreras new custom among pipe smokers.

During World War I, Carreras supplied cigarettes to the troops but, unlike Rothmans, it added to the containers such items as French dictionaries and grammar books. In 1921 Carreras produced the first machine-made cork tip cigarette, Craven A. The demand for cigarettes grew, and a new factory was needed. The Arcadia Works, which opened in 1928 in London, was unique in its design and organization. It was the first cigarette factory in Britain to have air conditioning, a dust extraction plant, and a welfare service for its workers.

In 1931 Carreras introduced Clubs, a smaller than standard cigarette sold with redeemable coupons for gifts, which was such a success that 14 factories were needed to meet demand. The "coupons war" which followed led some of the tobacco companies to approach the government and seek to have the coupons banned as detrimental to the public interest. An official report issued in 1933 concluded that there was no real problem, since cigarettes with coupons accounted for only one percent of total retail sales. The coupon war came to an end when the major tobacco companies formed the Tobacco Trade Association: Carreras was a founding member.

During World War II, the allocation of leaf tobacco to the various companies was rationed by the government. Some of the small companies felt that the system favored the majors, but Carreras enjoyed good relations with such large companies as Imperial and Gallaher. Tobacco consumption increased sharply during the war, and with import restrictions maintained until the early 1950s it became difficult for the industry to meet the demands of consumers. In 1953 Carreras acquired Murray, Sons & Company of Belfast, which still manufactures today. Carreras also moved to a new plant in Essex at that time. The new plant overstretched the resources of the company, and in 1958 the Baron family sold its shares to the Rembrandt Tobacco Corporation (S.A.) Limited, which merged the company with Rothmans to create Carreras Rothmans Limited. By the 1960s the tobacco companies were spending heavily on television commercials, but in 1965 commercials for cigarettes were banned, though commercials for cigars continued until December 1991. Carreras Rothmans and its rivals reverted to using coupon schemes and began to sponsor sports events and the arts.

Creation of Rothmans International in 1972

The Third World offered new markets and resources, and in 1966 Carreras Rothmans was one of the first tobacco companies to operate in Brazil, though its venture there was subsequently sold. The beginning of the 1970s saw a series of takeovers in the tobacco industry, to which Rembrandt responded with the creation of Rothmans International in 1972, bringing together Carreras Rothmans of the United Kingdom, Martin Brinkmann of West Germany, the Belgian company Tabacofina, and Turmac of the Netherlands. Anton Rupert controlled Rothmans International through his Luxembourg-based company, the Rupert Foundation, which in turn controlled Rothmans Tobacco (Holdings), the owner of 44 percent of the equity and 50 percent of the votes and convertible stock at that time.

Rothmans International began to diversify away from tobacco products in 1978 when it acquired Rothmans of Pall Mall Canada with its holdings in the Carling O'Keefe brewery. In 1967 Carreras acquired 51 percent of Alfred Dunhill Limited, a rival tobacco firm that was well established in the Netherlands, Denmark, Switzerland, Germany, and France. Alfred Dunhill Limited later widened its range to include toiletries, men's wear, and other luxury items.

By the mid-1970s, cigarette sales were dropping as the issue of smokers' health came to the fore. Less than half of the world's cigarette market was controlled by half a dozen multinationals, including Rothmans International. Markets in the United States and Europe were saturated, and it was the markets of the Third World in which Rothmans now sought to build its presence, discussing the formation of a joint venture with the American firm R.J. Reynolds, the world's third largest cigarette producer. Rothmans by this time was an attractive associate for any large company, holding more than 40 percent of the markets in Ireland, the Netherlands, and Belgium, 18 percent in West Germany, 13 percent in the United Kingdom, 75 percent in New Zealand, 36 percent in Australia, and 26 percent in Canada. R.J. Reynolds, makers of such brands as Camel and Winston, saw great potential in the proposal, but it was abandoned when Rupert decided to sell 25 percent of the company to Reynolds's main competitor, Philip Morris, noted for its Marlboro cigarettes, and the second largest tobacco company in the world.

In 1983 Rothmans acquired an interest in Cartier Monde, which specializes in jewelry, watches, and other luxury accessories. In the United Kingdom, Carreras Rothmans Limited changed its operating name to Rothmans (UK) Limited in 1984, then to Rothmans International Tobacco (UK) Limited in 1986. In 1987 Rothmans decided to sell its 50 percent share in the Carling O'Keefe brewery in Canada, which was not meeting expectations. In 1988 the Rembrandt Group decided to restructure its international activities with the formation of a new holding company based in Switzerland, Compagnie Financier Richemont (CFR), which has only 39 shareholders. Rembrandt wanted to separate its international operations and its South African activities to concentrate on developing its interests in Europe during the development of the single European market. This reorganization meant that Richemont held 33 percent of Rothmans International plc. This rose to 63.2 percent in 1990 when Richemont bought back Philip Morris's shares. Rothmans International then acquired the Dutch company Theodorus Niemeyer, makers of fine cut and pipe tobaccos such as Samson and Sail, increased its holding in Dunhill to 56.9 percent, and in 1991 signed an agreement with the China Tobacco Corporation to produce Rothmans and Dunhill brands in China.

Group Restructuring in 1993

Richemont restructured its holdings again in 1993, separating its luxury brands from its tobacco interests via an exchange of shares. The decoupling, which created Vendome to manage the luxury brands and Rothmans International plc to control the tobacco interests, marked a major shift in the group's marketing strategy. Marketing magazine noted that Richemont's "exploitation of the links between tobacco brands and luxury goods was the foundation of its success" in the 1980s. However, health concerns regarding tobacco began to tarnish the image of the stylish smoker in the early 1990s, and marketers for both groups of products began to favor the demerger.

Despite the many negative factors Rothmans faced--high taxes, heavy competition, negative press, a shrinking market, and strict limits on advertising--the company found ways to maintain growth and profitability in the early to mid-1990s. For example, British legislation banned targeting minors, using humor, and "suggesting that [smoking is] healthy, attractive, safe, relaxing, or a key to social or sexual success." Rothmans battled domestic difficulties with the introduction of Royals as a budget brand offering packs of 25 cigarettes and Black Cat cheap smokes in 1991. Rothmans also continued to pursue its longstanding overseas strategy, focusing on countries like India and the nations of the former Soviet Union, where smoking remained prevalent, especially among adult men.

As a wholly owned subsidiary of Richemont beginning in 1995, Rothmans stopped releasing company-specific public relations information. Nevertheless, it could be surmised that the company's strengths in its home market, early and vigorous pursuit of international growth, and emphasis on targeted marketing, will help it survive the rigors of the tobacco industry in the 1990s.

Principal Subsidiaries:Tabacofina-Vander Elst N.V. (Belgium); Tobacco Exporters International Limited (United Kingdom); Martin Brinkmann AG (Germany); Turmac Tobacco Company B.V. (Netherlands); Murray, Sons and Company Limited (United Kingdom).

Rothmans UK Holdings Limited History

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