Tobacco Companies Unite to Split World Markets Summary

  • Last updated on November 10, 2022

The American Tobacco Company, a classic trust, and Britain’s Imperial Tobacco Company combined to form the British-American Tobacco Company and agreed to divide world markets.

Summary of Event

Establishment of the first American Tobacco Company (dissolved in 1911) and passage of the Sherman Antitrust Act Sherman Antitrust Act (1890) occurred almost simultaneously in 1890. The two events revealed the two principal sides of the unprecedented thrust of the United States toward the premier position among the world’s industrial and financial giants. One side, manifested initially by evolution of the country’s great railroad empires during the last third of the nineteenth century and then by the trustification of scores of enterprises (tobacco among them), reflected individual as well as national pride in sheer size, productivity, power, and economic freedom, attended by all of their social, political, and economic consequences. The other side registered widespread populist inclinations and the fears of interest groups that perceived corporate trusts and monopolies as threats to themselves and to the U.S. economic system and its spirit of free competition. Tobacco industry American Tobacco Company Imperial Tobacco Company British-American Tobacco Company[British American Tobacco Company] Mergers;international [kw]Tobacco Companies Unite to Split World Markets (Sept. 27, 1902) [kw]Markets, Tobacco Companies Unite to Split World (Sept. 27, 1902) Tobacco industry American Tobacco Company Imperial Tobacco Company British-American Tobacco Company[British American Tobacco Company] Mergers;international [g]England;Sept. 27, 1902: Tobacco Companies Unite to Split World Markets[00560] [g]United States;Sept. 27, 1902: Tobacco Companies Unite to Split World Markets[00560] [c]Trade and commerce;Sept. 27, 1902: Tobacco Companies Unite to Split World Markets[00560] Duke, James Buchanan Whitney, William Collins Wills, William Henry

Within two decades, the American Tobacco Company became a classic trust with international ramifications. It sprang from the entrepreneurial drive and genius of James Buchanan Duke, who was born poor near Durham, North Carolina, in 1856. His family, particularly his father, Washington Duke, had considerable experience in the complexities of tobacco culture and marketing. When Duke finished his modest education at the Eastman Business College in Poughkeepsie, New York, he joined his father in 1878 in the business enterprise of W. Duke Sons and Company. The company devoted its manufacturing efforts chiefly to cigarettes, which had gained popularity rapidly after the Civil War. Although the Dukes prospered, their sales for years regularly lagged far behind those of leading brands such as W. T. Blackwell’s famed Bull Durham line.

What propelled the Duke firm to leadership among the nation’s cigarette manufacturers Cigarette industry by 1890 was James’s gamble a few years earlier on the acquisition of secret contractual rights to James A. Bonsack’s cigarette-making machine, the first of several that would ensure the company’s technological edge on competitors. Eager to direct the firm’s interests personally, James Duke moved to New York in 1884. In 1890, he founded the American Tobacco Company (chartered in New Jersey), which represented a merger of five of the country’s principal cigarette makers. American Tobacco controlled 90 percent of the nation’s cigarette business and had annual profits exceeding $4 million.

Duke’s subsequent campaigns were aimed at driving all manufacturers of tobacco products, competitors or not, either out of business or into sellouts, mergers, or other forms of control by his firm. Employing the profits from American Tobacco’s cigarette business, Duke sought primacy over the plug tobacco (compressed cakes of chewing tobacco) trade. A corporate battle from 1894 to 1897 involved American Tobacco’s purchase of five firms that produced smoking tobacco, snuff, cheroot, and plug tobacco. These firms provided the wedge for American Tobacco’s successful entrance into plug production. Continuing reliance on cigarette profits to finance his battle, Duke underpriced many competitors and so wearied others, such as Richard Joshua “Josh” Reynolds’s Liggett & Myers, that in 1898 he was able to absorb them into a new plug combination, the Continental Tobacco Company, essentially a holding company dominated by Duke and his American Tobacco directors.

Almost simultaneously, powerful eastern financiers, including William Collins Whitney, Thomas Fortune Ryan, and P. A. B. Widener, acquired two major smoking tobacco firms, along with stock in others, to form the Union Tobacco Company. In this case too a deal was struck, and Union was sold to Duke for $12.5 million. The financiers obtained or retained directorships in American and in Continental, and Duke enjoyed access to the financiers’ vast capital resources. By 1900, Duke’s Continental Tobacco and American Tobacco were producing 62 percent of the nation’s plug tobacco, 59 percent of its smoking tobacco, 80 percent of its snuff, and more than 92 percent of its cigarettes. Only cigar manufacturing, an anomaly because large cigars were handmade products, lay substantially outside Duke’s control.

Integrating American Tobacco and Continental, Duke and his cohorts formed the Consolidated Tobacco Company (a holding company) in 1901. With augmented capital, the company turned to overseas markets. It was no stranger to these, for in the 1890’s Duke had established dealerships in Australia, Canada, Germany, Japan, and England. Declining profits in England, however, persuaded Duke to mount a serious invasion of the British market that began with Consolidated’s purchase of Ogden’s Limited, a major British tobacco manufacturer.

James Buchanan Duke.

Instantaneously alarmed, thirteen of Britain’s largest tobacco manufacturers combined to form the Imperial Tobacco Company of Great Britain and Ireland, Limited. These manufacturers included the formidable firms of W. D. & H. O. Wills, John Player and Sons, Lambert & Butler, Hignett’s Tobacco Company, and J. & D. MacDonald of Glasgow, led by William Henry Wills. To hold its turf, Imperial early in 1902 proffered bonuses to businesses that consented to boycott American Tobacco’s products, hoping thereby to marshal the allegiance of Britain’s major retailers. Through Ogden’s, Duke countered by agreeing to distribute the entire net profits from his firm’s British sales over the next four years, plus an additional £200,000 annually to retailers who handled American’s products. Although Imperial initially threatened to counterattack by establishing factories in the United States, seven months after its formation it entered into a contractual agreement with American Tobacco. Under terms of the agreement, reached on September 27, 1902, the two great combinations parceled out world markets between them.

Significance

Negotiations between Duke’s trusts and the Imperial combination presided over by Wills produced two documents. The first provided for the transfer of Ogden’s and all of its assets to Imperial, so that the American trust and the British combination could proceed with profitable territorial divisions. To achieve this, a second document created a new corporation, the British-American Tobacco Company, Limited. The new company was subject to joint but unequal ownership by American (the controlling partner) and Imperial and controlled the export trade.

Imperial retained the right to purchase and cure the U.S. tobacco leaf that was essential to its British operations but consented not to sell its products in the United States or in American dependencies, such as Cuba, Hawaii, Puerto Rico, and the Philippines, except when in company with American or its subsidiaries. American Tobacco, in return, agreed to refrain from interference in Imperial’s domestic markets, except when and if Imperial interests invited it to do so. The British-American Tobacco Company, as the designated authority over international markets and exports of Imperial, Ogden’s, American Tobacco, Continental Tobacco, Consolidated Tobacco, and American Cigar Company, was authorized to purchase all the assets—tangible and intangible—of the export businesses already managed by these companies. These included, for example, W. D. & H. O. Wills’s Australian division as well as American Tobacco’s German subsidiary, George A. Jasmatzi Company, along with many others around the globe.

Capitalized at $2.3 million, two-thirds of which in 1904 belonged to Duke’s American Tobacco, and further buttressed by the capitalization of constituent companies of the combination in excess of $235 million, British-American soon conducted export business of its constituent companies in every country in which tobacco was not a state monopoly or in which tariffs or taxes—as in Germany, France, Italy, and Japan—largely precluded extensive or profitable sales.

British-American enjoyed immense advantages in many international markets. When it commenced operation in 1903, it produced 89 percent of the world’s snuff, 84 percent of its cigarettes, about 76 percent of its fine-cut and its plug tobacco, and 67 percent of its smoking tobacco and little cigars. As time and market dictated, it sold its products under its own name or under the various brand names of the companies for which it exported. As had been the practice of both American Tobacco and Imperial, British-American showed no compunction about marketing its brands as if they were the products of independent companies or even of competitors’ manufacture. Advertising campaigns were heavily subsidized. Special, sometimes secret, incentives and rebates were offered to brokers and to dealers. British-American resorted to local price cutting through “fighting brands” when it wanted to undercut a competitor’s price. Competitive brands frequently were imitated, and customers themselves were beguiled by such bonuses as free cigarettes and coupons.

James Duke’s irrepressible leadership marked every operation throughout his tobacco empire. With the affairs of American Tobacco and its ancillary trusts well in hand by 1903, he turned eagerly to the new prospects offered by British-American. Europe offered few profitable enticements for the enterprise, but the contrary was true of mainland Asia and nearby islands. Duke devoted close attention to the cultivation and expansion of markets in these areas.

Like many American entrepreneurs in the years around the opening of the twentieth century, Duke shared the dream of almost limitless profits to be garnered from the dense populations of the Far East. The countries there did not present identical pictures of market potential. The tobacco trade in Japan was what the government decided it was. The markets of India and Australia, like those in nearly all parts of the British Empire, already had been richly developed by Imperial Tobacco prior to 1902. China was another matter. It was fast being carved into spheres of influence by Western as well as by Japanese governments and special interests during the last years of the nineteenth century and early decades of the twentieth. Britain’s strongholds on mainland China centered on Shanghai and the access it afforded to the sixty to seventy million people who lived along the first thousand miles of the Yangtze River. This was the prime market and potentially the world’s richest and most expansible export market for British-American Tobacco.

The tobacco-smoking habit had come to China, as it had to the West, in the seventeenth century. By the early 1900’s, this habit was satisfied overwhelmingly in China by cigarettes, British-American’s specialty. The Chinese were witness, therefore, to every promotional tactic Duke had employed so successfully elsewhere, including massive advertising and the distribution of millions of free cigarettes to entice brokers, dealers, and customers. There was no lack of competition. The Chinese also manufactured cigarettes and other tobacco products. The Jian family’s Nanyang Tobacco Company, for example, capably withstood competition from British-American into the 1920’s. It finally failed as a result of tax policies of the Chinese government.

British-American was a persistent, omnipresent force in many markets. When the Japanese, for example, opened the Manchurian port of Dalny (now known as Dairen), Duke’s export trust immediately opened for business there, offering substantially underpriced wares to beat the Japanese competition. British-American succeeded worldwide and continued to do so after its legal “dissolution,” along with that of the rest of Duke’s American Tobacco empire, by the U.S. Supreme Court in 1911. United States v. American Tobacco Company (1911) In fact, substantively very little changed as a result of the Supreme Court’s antitrust decision against American Tobacco. Between 1910 and 1920, Duke companies accounted for the lion’s share of U.S. exports of tobacco. Tobacco industry American Tobacco Company Imperial Tobacco Company British-American Tobacco Company[British American Tobacco Company] Mergers;international

Further Reading
  • citation-type="booksimple"

    xlink:type="simple">Cox, Howard. The Global Cigarette: Origins and Evolution of British American Tobacco, 1880-1945. New York: Oxford University Press, 2000. An authoritative account of the British-American Tobacco Company’s evolution and growth until World War II. Based on archival materials from a wide variety of sources, including the company’s own records.
  • citation-type="booksimple"

    xlink:type="simple">Durden, Robert F. Bold Entrepreneur: A Life of James B. Duke. Durham, N.C.: Carolina Academic Press, 2003. This scholarly biography of James Buchanan Duke includes information about his philanthropy and his avid pursuit of horticulture as well as his success in business.
  • citation-type="booksimple"

    xlink:type="simple">_______. The Dukes of Durham, 1865-1929. 1975. Reprint. Durham, N.C.: Duke University Press, 1987. A solid, engaging study of the fascinating James Duke, his family, and his intimates. Good material on Duke’s dealings with Ogden’s and creation of British-American. Many excellent photos. Ample notes replace bibliography. Useful index.
  • citation-type="booksimple"

    xlink:type="simple">Jacobstein, Meyer. The Tobacco Industry in the United States. New York: Columbia University Press, 1907. A still useful, readable, and widely available study with extensive coverage of American Tobacco and British-American. Many statistical tables. Ample informative notes, but no bibliography or index.
  • citation-type="booksimple"

    xlink:type="simple">Jones, Eliot. The Trust Problem in the United States. New York: Macmillan, 1923. Old but very valuable. Chapter 8 is excellent on the development of the Duke empire and useful on British-American. Tables, ample notes, extensive and still-pertinent bibliography. Fine index. Solid, clear, objective approach.
  • citation-type="booksimple"

    xlink:type="simple">Ripley, William Z., ed. Trusts, Pools, and Corporations. Boston: Ginn, 1916. Useful because of its fine selection of documents on many of the great trusts. Chapter 8 deals with the Environmental Tobacco empire and its expansion by means of British-American, using U.S. Bureau of Corporations documents. Informative, easy to read, and valuable; a standby among scholars and laypersons alike. Includes tables and notes.
  • citation-type="booksimple"

    xlink:type="simple">Seager, Henry R., and Charles A. Gulick. Trust and Corporation Problems. 1929. Reprint. New York: Ayer, 1988. Chapters 1-6 provide splendid background on the emergence of trusts and the arguments for and against them. Chapters 10 and 11 deal in detail with American Tobacco and its related companies, including the deal to form British-American. Some tables, full notes, extensive and still-valid bibliography, and fine index.
  • citation-type="booksimple"

    xlink:type="simple">Stevens, William S., ed. Industrial Combinations and Trusts. New York: Macmillan, 1913. Edited documents and commentary relevant to the development of major trusts. Chapters 7 and 8 are extremely valuable in that they include the Imperial-American Tobacco agreements. Tables, some notes, no bibliography or index.
  • citation-type="booksimple"

    xlink:type="simple">Whitney, Simon N. Antitrust Policies: American Experience in Twenty Industries. 2 vols. New York: Twentieth Century Fund, 1958. Sophisticated and authoritative, yet readable. Chapter 11 deals with the Tobacco Trust, American Tobacco, Imperial, and British-American. Centers on the dissolution of American Tobacco. Useful notes replace a bibliography. Some tables and an excellent index.

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