Fortune Brands, Inc. History

Company Perspectives:

Behind our brands is a heritage of innovation few can match. In 1795, a grain mill operator named Jacob Beam filled his first barrel of bourbon ... and more than two centuries later, the bourbon that bears his great-grandson's name remains true to its unsurpassed authenticity. In 1904, a company founded by a jewelry repairman improved the workplace with the invention of the ring binder ... and Wilson Jones still sells hundreds of millions of them year after year. In 1924, Master Lock founder Harry Soref invented the laminated padlock ... and it remains the "Tough Under Fire" market leader today. In 1935, two college class-mates, Phil Young and Fred Bommer, set out to create a superior golf ball; they named it Titleist and began the longest-running success story in golf. In 1937, a young inventor named Al Moen created the single-handle faucet; billions of dollars in sales later, Moen is a household name and our single largest brand. The same spirit of innovation that inspired these pioneers runs through our operations today. We see building our brands for internal growth as our best investment. So to leverage the imagination of our inventors, researchers and developers, we invest heavily in product development to deliver next-generation innovations to consumers.

Key Dates:

1890:

The American Tobacco Company is formed.

1911:

The U.S. Supreme Court orders the dissolution of the American Tobacco Company.

1969:

After diversifying into alcohol, office products, and other non-tobacco businesses earlier in the decade, American Tobacco changes its name to American Brands.

1979:

American Brands acquires The Franklin Life Insurance Company.

1991:

American Brands greatly increases its distilled spirits business by acquiring seven brands from Seagram Company.

1994:

American Brands exits the tobacco business.

1996:

American Brands changes its name to Fortune Brands, Inc.

1999:

Fortune Brands acquires Schrock Cabinet Co.

2002:

Omega Holdings, Inc., the fourth-largest cabinet maker in the United States, is acquired.

2003:

Fortune acquires Therma-Tru Holdings, Inc., the leading brand of residential entry doors in the United States, in a $924 million transaction.

Company History:

Fortune Brands, Inc., is a widely diversified conglomerate with principal businesses in distilled spirits, home products, hardware, office supplies, and golf equipment. Most of its brands are either number one or number two in their market categories. Fortune's brands include Jim Beam, the world's best-selling bourbon, Swingline staplers, Acco paper clips, Master Lock padlocks, Moen faucets, and Titleist and Pinnacle golf balls. Fortune was a major player in the tobacco industry until the late 1990s, when it sold its domestic and foreign tobacco interests and got out of that business entirely. Nearly 20 of the company's brands generate more than $100 million in sales.

Early History

Fortune 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 been introduced only recently, but its smooth smoking characteristics were already making it a favorite, and its fame was soon spread by the returning war veterans. 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. Blackwell & 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 cured and then shred or compressed the tobacco to form, respectively, smoking or chewing tobacco. As cigarettes were hardly yet 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 he 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. He then marketed his Duke of Durham cigarettes at ten for five cents, or half of the usual price. This combination of excellent bright leaf tobacco, smart packaging, and a 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 percent 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 percent 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. By 1889, company sales reached $4.25 million and net income was one-tenth of that. Duke had grown to dominance of the cigarette business in a single decade and, shortly, was 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 percent of the nation's cigarette business and showed a net profit of $3 million in its first year.

Whereas 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 Tobacco bought out 80 percent of the relatively minor snuff business; 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 percent 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; 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 because of the difficulty and variety of cigar manufacture; 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 other's 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 employed 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. With the exception of Reynolds, these companies were 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.

Growth during World War II

At the time of its 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. The blitz of advertising that followed 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 form of smoking.

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. Consumption in 1940 was nevertheless no higher than it had been ten years before, with 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" era of 85-millimeter cigarettes in 1939 and soon was 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 percent of it was generated by cigarettes.

Postwar Years

The immediate postwar years were good for American Tobacco, which upped its overall share of the domestic tobacco market to 32.6 percent in 1953. However, 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 Gallagher Ltd., 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 percent 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, non-tobacco assets were generating one-third of American Brands' operating income of $364 million, and the company's diversification program generally was 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 willing to venture into such troubled waters. Even as the cigarette makers diversify, therefore, domestic tobacco continues to pay up to 35 percent 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 ten percent. 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 were much tighter and equaled the return of all of the non-tobacco 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 was the third-largest seller of spirits in the United States, its office products division was billed as the world's largest, and Gallagher 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 rendered the company relatively immune to sudden downturns in any one area.

Without Tobacco in the 1990s

In 1991, American Brands strengthened its hold on the distilled spirits market by acquiring seven brands from the Seagram Company. American spent $372.5 million for the brands, which represented approximately one-quarter of giant Seagram's sales in the United States. In the midst of a turndown in liquor consumption, Seagram had decided that those who were drinking less should drink better. Thus, it wanted to unload some of its less prestigious brands. American, however, was deliberately pursuing the opposite tack, aiming for more budget-conscious consumers. The brands it took over from Seagram were the American whiskies Calvert Extra and Kessler, Canadian whisky Lord Calvert, Calvert gin, Ronrico rum, Wolfschmidt vodka, and Leroux liquor. The acquisition made American's subsidiary Jim Beam Brand Company the third largest spirits company in the United States. American's strategy seemed profitable. Though its new liquor brands and its tobacco brands lacked both snob appeal and great market share, they did make money. Profits rose to record levels in 1991, with a rise of almost 40 percent for the year. Liquor sales, bucked by the Seagram acquisition, rose 12 percent, and tobacco sales rose all of 1 percent. This small rise, however, was the first increase for American since 1965.

By mid-1992, American Brands was confident that it had found a way to hang onto its tobacco business despite hard times for the industry. The threat of lawsuits and overall decline in smoking made conditions harsh domestically, and U.S. tobacco sales overall were declining by about 3 percent annually. However, American energetically pursued a low-price strategy. It introduced several new brands, all priced at several dollars less per carton than leading brands like Marlboro and Winston. Though American's Pall Mall was fading, with sales dropping almost 20 percent in 1991, its new Misty and Montclair racked up sales. Extensive advertising trumpeted the new brands' principal virtue: they were cheap. Similarly, in its spirits division, American's marketers claimed that its brands were just as good as the ones that cost more. The company seemed to have hit on a winning strategy, so it was somewhat of a surprise when in April 1994 American sold off all its American tobacco business. B.A.T. Industries, long ago the British sister of Duke's American Tobacco, bought up American Brands' tobacco holdings for $1 billion. Tobacco had made up 58 percent of revenues and 66 percent of profits for American in 1991. Now it was out of tobacco altogether except for one British cigarette manufacturer, Gallagher.

Six months after B.A.T. bought the tobacco division, American also sold off its profitable insurance subsidiary, Franklin Life Insurance Co. Franklin was bought by American General Corp. in a deal estimated to be worth $1.2 billion. Franklin had assets of $6.2 billion and had a strong market share, principally in small towns and with middle-income blue-collar customers. The company was a money-maker for its parent, yet it was American's only financial service unit, and in many ways American looked better without it. After divesting Franklin, American focused on consumer goods, which were still were fairly mixed, from golf shoes to gin.

The company then changed its name in 1996, from American Brands to Fortune Brands. This came after the company sold the last vestige of its tobacco business, its British unit, Gallagher. The company was concerned that investors still associated its old name with a tobacco company. For example, when a smoker in Florida won a substantial jury award against another tobacco company in August 1995, American's stock suffered. The newly named company's CEO, Thomas Hays, explained the rationale behind the choice, saying, "People talk a lot about something being fortunate or making a fortune, which is certainly what we want to do for our shareholders" (from a December 9, 1996 interview in Fortune magazine).

By the late 1990s, Fortune was rather different from what it had been ten years earlier. After getting rid of its tobacco holdings, Fortune began buying up companies in the home and office products area, such as Schrock Cabinet Co. and Apollo Presentation Products, a maker of overhead projectors. It also bought in the liquor segment, picking up Geyser Peak Winery in 1998 and entering an agreement in 1999 with two European liquor companies to jointly distribute their spirits worldwide. Fortune also vowed to better manage the brands in its portfolio, and in 1999 took a charge of $1.2 billion to restructure and write down goodwill. The company also announced it would cut costs by reducing its corporate staff by one-third and moving its headquarters to Lincolnshire, Illinois, where its office products division already was located.

Acquisitions Fuel Growth in the 21st Century

Fortune's impressive collection of leading brands performed admirably at the turn of the century, encouraging management to expand even as the economy slipped into a recession. The company completed nearly a dozen acquisitions during the early years of the century's first decade, focusing its most significant efforts on expanding its home and hardware segment, the company's fast-growing business and the source of nearly half of its annual revenues. In 2002, Fortune spent $538 million to acquire Omega Holdings, Inc., a leading manufacturer of cabinetry. Omega ranked as the fourth-largest cabinet maker in the country, with its addition to Fortune's operations adding custom and frameless semi-custom lines to the company's cabinetry offerings. In 2003, the company's acquisitive activity intensified considerably, as it bolstered its brand holdings in both the home and hardware segment and the spirits and wine segment. In April, Fortune acquired American Lock Company, a manufacturer of commercial locks. In June, it acquired Capital Cabinet Corporation, which supplied cabinets to the construction market in the Southwest. In July, the company acquired Wild Horse Winery, a producer of ultra-premium California wines. By far the largest acquisition of the year was completed in November, when Fortune spent $924 million to acquire the leading manufacturer of residential entry doors in the United States, Therma-Tru Holdings, Inc.

After a half-century of diversifying beyond tobacco, Fortune's reinvention of itself proved to be a highly successful accomplishment. Between 2000 and 2003, the company's annual revenue increased nearly $500 million, reaching $6.21 billion after the more than $1 billion spent on acquisitions in 2003. Profits were increasing robustly, with the nearly $580 million in net income posted in 2003 testifying to the strength of the company's market leading brands. As the company prepared for the future, it was expected to leverage the strength of its existing brands to acquire other leading brands in its four sectors of operation. As it did so, the assiduous brand management and marketing that made its past a success was expected deliver equal success to the company's endeavors in the years ahead.

Principal Subsidiaries: Acco World Corporation; Acco Brands, Inc.; Masterbrand Industries, Inc.; Jim Beam Brands Worldwide, Inc.; Acushnet Company.

Principal Divisions: Home and Hardware; Spirits and Wine; Golf; Office Products.

Principal Competitors: Brown-Forman Corporation; Diageo PLC; Masco Corporation.

Further Reading:

• "American Brands' Net Fell 93% in 4th Period," Wall Street Journal, January 28, 1991, p. C8.
• "American Brands Profit Sets Record," New York Times, January 25, 1992, p. 39.
• Barrett, Amy, and Ernest Beck, "Fortune in Pact with Remy and Highland," Wall Street Journal, March 31, 1999, p. B4.
• Choe, Howard, "Fortune Brands: More Than Just Lucky," Business Week Online, June 7, 2003, p. 6.
• "Consumers Enjoy Lap of Luxury," Investor's Business Daily, October 27, 2003, p. A7.
• Fairclough, George, "Fortune Brands To Take Charge of $1.2 Billion," Wall Street Journal, April 28, 1999, p. C24.
• "Fortune Brands Inc.," Wood & Wood Products, January 2004, p. 16.
• Lieber, Ronald B., "'What? Fortune Makes Golf Balls?,'" Fortune, December 9, 1996, p. 40.
• MacFadyen, Kenneth, "Kenner Remodels Portfolio," Buyouts, November 17, 2003.
• Rice, Fay, "How To Win with a Value Strategy," Fortune, July 27, 1992, pp. 94-95.
• Saporito, Bill, "Who'll Drink What Post-Recession?," Fortune, December 2, 1991, p. 13.
• Scism, Leslie, "American General Corp. Seeks To Buy Life-Insurance Unit of American Brands," Wall Street Journal, November 29, 1994, p. A3.
• Shapiro, Eben, "Seagram Is Selling 7 Liquor Brands," New York Times, November 1, 1991, p. D1.
• "Sold American!"--The First Fifty Years, New York: American Tobacco Company, 1954.
• Steinmetz, Greg, "B.A.T. To Buy Rival American Brands Division," Wall Street Journal, April 27, 1994, pp. A3, A4.
• Thomaselli, Rich, "Fortune Smiles on Increased Ad Spending: Defies Sour Economy to Boost Brands," Crain's Chicago Business, July 15, 2002, p. 7.
• "U.S.: Fortune Brands Raises Targets after Q1," Just-Drinks.Com, April 26, 2004, p. 35.
• Winkler, John K., Tobacco Tycoon: The Story of James Buchanan Duke, New York: Random House, 1942.

Source: International Directory of Company Histories, Vol.68. St. James Press, 2005.