TOBACCO GROWERS LINK ARMS

Spread of smoking and advertising bans spur unity drive

YOU know something is up when European farmers start aligning themselves
with those in the developing world. Such is the situation in the tobacco
industry where European growers last week attended the annual meeting of
the International Tobacco Growers' Association (Itga) for the first time.

Unitab, the European tobacco farmers' trade body has not associated itself
with its global counterpart, Itga, in the past because of mutual mistrust.
Unitab members have not wanted to mingle with the competition, which often
produces better quality tobacco more cheaply, while Itga members have been
disparaging of European farmers who live off European Commission subsidies
and do not face competitive market pressures in the same way.

After last weeks meeting, however, the years of antipathy have been
forgotten, replaced by a refocusing on the common enemies they face. David
Walder, who is retiring as chief executive of Itga, to be replaced by a
Unitab man, says: "The most important message coming out of this conference
is that we have a new working relationship with Unitab which recognises the
common ground that there is between us.

"There are new threats to the overall size of the market to do with
legislative control, such as more restrictions on where you can smoke and
advertising restrictions. We can work together on these."

The most obvious threat to the European tobacco industry is the European
Union's ban on advertising and sponsorship which is to be introduced
progressively from 2002. But last week's rapprochement is also evidence
that the other difficulties facing tobacco growers worldwide are beginning
to have an impact on those in Europe much more seriously. Unitab's first
response to these new threats has been to align itself with Itga.

Peter Halen, director of the union of French tobacco co-operatives, France
Tabac and a Unitab member says: "We have had few contacts with them in the
past, so this is strange for us. We have had different problems in Europe
associated with the subsidy but now we can share the problems which we have
with the anti-smoking groups and with the attitude of the cigarette
companies which buy our product."

There are about 150,000 tobacco farmers in Europe - mostly in Greece and
Italy but also in Spain, France, Portugal, Belgium and even Germany - and
they share more than Ecu 1 billion ($1.19bn) annually. But in July,
although the subsidies - which represent about three times as much as the
farmers make from the sale of their product - were agreed for the next five
years, a stipulation was introduced for the first time that part of the
money should go towards research into what crops Europe's tobacco farmers
might grow instead.

Apart from the advertising ban, European growers also face a World Health
Organisation anti-tobacco initiative, revitalised with the appointment of
Dr Gro Harlem Brundland, a former Norwegian prime minister, as
director-general of the Geneva-based organisation. A key aspect of its work
will be directed towards getting farmers to switch away from tobacco to
other products.

Derek Yach, the project manager, says: "A number of international agencies
have pledged funding for crop diversification. In Europe we have the
opposite: Ecu 1 bn going to tobacco farmers under the Common Agricultural
Policy. It is one of the great scandals of public health."

The growers' trade bodies say no crops are as easy to grow - or as
profitable - as tobacco. Not only are gross margins much higher on tobacco
than on other crops, such as maize or cotton, but tobacco prices also have
a much higher degree of stability.

The World Bank has forecast that prices will increase by 21 per cent
between 1990 and 2005, compared with 15 per cent for maize.

Haien of France Tabac says: "We know the alternatives and they make no
sense as the market for these products is full."

Itga points to social benefits of the tobacco industry, which is the
world's biggest non-food crop and is grown in more than 100 countries.
Tobacco production is a labour-intensive business involving 33 million
people worldwide, compared with fewer than two million each for maize and
sugar cane. Tobacco can easily be grown by unskilled labour.

In Europe, the subsidies provide little incentive for the farmers to look
for alternative crops. Subsidies were originally introduced to help improve
the quality and therefore reduce the continent's reliance on imports -
currently about 70 per cent of the tobacco smoked. But what has happened,
say industry sources, is that the cigarette manufacturers know how much aid
the farmers receive and simply pay them less.

Hence the subsidy is going to the cigarette manufacturer. Meanwhile
situations are arising, such as in Hungary and Austria, where the same
tobacco grown on different sides of the border sells for 100 per cent more
or less - depending on whether its grower gets a subsidy or not.

The inevitable conflict between farmers and manufacturers reduces the
chances of any alliance between the two sides of the industry. Indeed, the
fact that tobacco companies are passing problems on to growers is one of
the driving forces behind the new farmers' alliance.

"We are seeing a squeeze on tobacco prices," says David Walder. "The
cigarette companies are being more cautious in their buying, as they are
experiencing additional costs associated with legislation against them and
are trying to make savings where they can."

Growers must hope, therefore, that the cigarette companies' efforts to
maintain profits by getting round the advertising ban are successful. The
manufacturers have three years to find a new way of spending their $160
million promotional budget before the ban starts. They seem to be pinning
their hopes on brand diversification.

For tobacco companies, diversification offers more than simply an
opportunity to sell something else on the back of an established cigarette
brand. What matters is keeping the brand name in the public eye.
Advertising for Marlboro clothing, for example, will also serve to promote
Marlboro cigarettes. It recently emerged that British American Tobacco is
testing Benson & Hedges coffee, which it hopes it can advertise with the
same gold imagery in the same gold packets, as its cigarettes but without
the health warning.

Such "indirect advertising" often successfully evades regulation. In
Malaysia, for example, where a tobacco advertising ban was introduced five
years ago but indirect advertising is still allowed, four tobacco-related
"brand-stretched" products are now among the biggest advertisers: Peter
Stuyvesant Travel, Benson & Hedges Bistros, Dunhill Accessories and Salem
Cool Planet. Cigarette sales continue to increase.

Protesters claim that such activities are a cynical way to boost the
cigarette brand and have nothing to do with launching new products.

The tobacco companies dispute the claim. Suzanne Meldrum, head of corporate
communications at British American Tobacco, says: "It is ridiculous to say
we are using brand diversification to get round the ad ban. It is nothing
to do with selling cigarettes. This is a well-established marketing
activity in its own right."

Indirect advertising has already hit Britain. London buses are advertising
"Marlboro Classics" clothing, for example.

Similarly the Rizla cigarette paper brand is being extensively advertised.
Why spend millions promoting a product that sells for next to nothing and
has a stranglehold on its market anyway? The company was acquired by
Imperial Tobacco in January last year and is an indirect way of advertising
rolling tobacco.

The new EU directive banning tobacco advertising may also hit such indirect
advertising. It covers all "commercial communication" which has the effect
of promoting a tobacco product. But it does permit advertising of
brand-stretched goods if the appearance of the brand is "clearly distinct"
from that of the tobacco brand and if it is already "used in good faith"
for non-tobacco products before the introduction of the ban.

As the advertising of brand-stretched goods may become more difficult, the
industry has been developing the idea of "image-stretching". Tobacco
companies have spent millions building strong brand imagery around colours
- - purple, black, red or gold, depending on your brand.

One day they hope, merely seeing a certain colour will be enough to prompt
consumers into buying their products.

Checked-by: Mike Gogulski