British American Tobacco: At the wheel of industry change

The tobacco industry is one that has undergone enormous change over the past two decades and continues to evolve. The onus has very much been on established names like British American Tobacco to adjust, in the face of changing attitudes to tobacco, new labelling, production margins and the fight against illegal tobacco trade.

In early May, The Times of London reported that British American Tobacco (BAT), Britain’s largest tobacco group, had asked Deutsche Bank to work with UBS regarding possible financial deals in the United States.

cigarett-factoryThe article stated that British American Tobacco hired the banker to advise the company on possible acquisitions and deals. The Times listed possible opportunities with publicly-traded companies Reynolds and Lorillard.

Whilst any such deals would have implications in the UK and North America, the effects could well be felt much further afield, including in Southern Africa, where the company has long maintained manufacturing bases.

British American Tobacco South Africa is a part of the British American Tobacco Group of companies, which operates in more than 180 countries worldwide.

In South Africa, the business in its present form came into being following the global merger of Rothmans International, partly owned by the Rembrandt Group, and London-based British American Tobacco plc.

Today BAT is responsible for more than 20 brands and manufactures the cigarette chosen by about nine in ten of the country’s six-and-a-half million adult smokers, including: Dunhill, Kent, Peter Stuyvesant and Rothmans. As such, BAT South Africa is the leading tobacco manufacturer in the country and can boast a market share in excess of 85 per cent of the legal cigarette industry.The impact of BAT in South Africa is such that the company purchases in excess of 90 per cent of the annual South African tobacco crop for both local and export production.

The company operates five trade marketing regions across South Africa, with its head office based in Stellenbosch and employs in excess of 2,500 people. The company’s Heidelberg factory produces approximately 27 billion sticks each year, for the local market and for export.

Two years ago, Dirk Eloff, the new Head of Operations for the South African Area, described his operations:

“Our Heidelberg Factory is one of the big hubs within the EEMEA region of BAT and globally this is an important production facility. We therefore aim to set operational benchmarks here that can be reciprocated across the EEMEA region and by BAT facilities elsewhere in the world.

shutterstock_31630756“It doesn’t matter what you are manufacturing, the principles remain the same: to make a quality product, when the customer wants it, to optimise prices and to do so in a safe and efficient environment. If I look at our Heidelberg plant there are some aspects where we are very competitive and other areas where we have a bit of work to do.”

South Africa remains a key element to BAT’s success and the company indicates that BAT South Africa has a market share of over 80 per cent and employs over 2,500 South Africans and has an indirect impact on thousands more through its supply chain.

“The Heidelberg Factory in South Africa is one of BAT Group’s strategic factories and the 8th largest manufacturing facility in the Group with a production capacity of more than 27 billion cigarettes per annum,” the company states.

“70 per cent of production is for the local market and 30 per cent is for exports to over 27 countries. BAT South Africa’s Heidelberg Factory is the largest employer in the Lesedi Municipality creating around 1,300 job opportunities within the area.

“R600 million has been invested in upgrading the Heidelberg factory as well up-skilling the operation’s workforce over the past 6 years,” the company continues.

In August 2013, BAT announced that its South African subsidiary was entering the final phase of a R1 billion expansion project to enhance sales, marketing and distribution operations. The project, which started in 2011, has seen significant infrastructure investment across South Africa and the creation of approximately 800 new jobs in Gauteng, Kwa-Zulu Natal and the Western Cape.

Kingsley Wheaton, Group Corporate and Regulatory Affairs Director for British American Tobacco plc, who is visiting South Africa this week, stated: “This investment is a clear illustration of our confidence in South Africa and our commitment to this important market. South Africa already houses one of our strategic factories in Heidelberg, Gauteng, and this investment project will complement that by adding new trade marketing and distribution capabilities.”

The investment was made by BAT South Africa despite the tobacco industry facing an increasing number of challenges in South Africa including rising levels of tobacco trafficking, and an increasingly uncertain regulatory environment.

Wheaton continued: “While we are excited about our South African operations we are equally concerned at the alarmingly high incidence of tobacco trafficking in the country. Unless it is addressed, the illegal tobacco trade has the potential to undermine, not only the infrastructure and human resource investments made by legitimate companies such as ours, but the South African Government’s own agenda to regulate tobacco, given tobacco traffickers rarely comply with the laws of the land.”

He added: “We engage with a number of stakeholders including government, through the Tobacco Institute of Southern Africa, to curb the problem. The collaborative efforts of this group, to date, have demonstrated what can be done when the public and private sectors work together to achieve common goals.

“We believe it is critical for the tobacco industry and the South African Government to increase this collaboration if we are to find solutions which ensure an environment where law-abiding companies can continue to thrive and contribute to the broader South African economy. It is also encouraging that the South African Minister of Health has signed the World Health Organisation’s Global Protocol to Eliminate Illicit Trade in Tobacco.”

“We will continue to work with all stakeholders to address the illegal tobacco trade problem, as well as doing all we can to ensure our presence in the market, and our recent investment helps to grow the South African economy,” Wheaton concluded.