THE VIRGINIAN-PILOT
Copyright (c) 1994, Landmark Communications, Inc.
DATE: Monday, August 8, 1994 TAG: 9408080045
SECTION: FRONT PAGE: A01 EDITION: FINAL
SERIES: A Culture in Retreat
SOURCE: BY TOM SHEAN, STAFF WRITER
LENGTH: Long : 156 lines
Three cigar-store Indians - weathered reminders of another era - stand in the lobby like sentinels.
An array of tobacco-industry trade magazines are stacked on a large coffee table near the entrance. And a small golden sign saying ``Thank You for Smoking'' sits on a counter near the receptionist's desk.
Universal Corp.'s devotion to tobacco is immediately evident inside the company's glass-and-concrete headquarters.
What is less obvious is the global reach of Universal's business. From a modern, tree-shaded building on the outskirts of Richmond, the company manages tobacco operations in more than a dozen countries and a network of agents buying and selling tobacco throughout the world.
With cigarette consumption falling in the United States and the cost of U.S. tobacco climbing, Universal and other American-based tobacco merchants are focusing their attention overseas.
``We see a long-term, profitable future in tobacco'' because of the demand for cigarettes in eastern Europe and Asia, said James H. Starkey III, a senior vice president of Universal's principal subsidiary, Universal Leaf Tobacco Co.
Monk-Austin Inc. of Farmville, N.C., is another tobacco merchant anticipating robust sales in eastern Europe and the former republics of the Soviet Union.
Residents of those countries consume 700 billion cigarettes a year, noted Tom Parrish, a Monk-Austin spokesman. That's already more than the 500 billion cigarettes consumed annually in the United States.
Two of the world's four major tobacco merchants - Dibrell Brothers Inc. in Danville, Va., and Standard Commercial Corp. in Wilson, N.C. - already derive more than half of their annual tobacco sales from foreign markets. And more than half of their tobacco-related assets are located overseas.
While Universal continues to invest in its American processing facilities, it also is adding to its overseas operations. During 1993, its expansion drive included:
The purchase of Hungary's largest tobacco-processing company, which had been state-owned.
An agreement to process tobacco in Kazakhstan, which had been part of the Soviet Union.Universal entered the west Asian country with Philip Morris, which contracted to buy Kazakhstan's state-owned cigarette-manufacturing company.
Participation in a tobacco trading and processing venture in China.
``If you're in the tobacco business and you're going to survive, you've got to get yourself into these markets,'' said David L. Beeghly, a securities analyst with the Richmond-based brokerage firm Scott & Stringfellow Inc.
AFTER DECADES OF mergers and consolidations, much of the world's tobacco processing has become concentrated in the hands four American-based companies.
All four - Universal, Monk-Austin, Dibrell Brothers and Standard Commercial - are conduits between farmers and manufacturers of tobacco products. They buy assorted types of tobacco, clean it, cut it, pack it and ship it.
They may buy tobacco from Zimbabwe for cigarette-makers in the United States while buying American tobacco for shipment to Japanese cigarette manufacturers.
In the United States, merchants buy bundles of the brown and yellow tobacco leaves at auctions held throughout the Southeast. In several other countries, including Brazil and Mexico, they buy tobacco directly from farmers before their crops are planted.
For major tobacco merchants, the business has always been international. The predecessor company of Dibrell Brothers, for instance, sold American tobacco in England during the 1890s. By the mid-1920s, Dibrell had an office in Belgium to sell its tobacco throughout northern Europe.
Universal, established in 1918, opened an office in Shanghai in 1925 to sell its tobacco in China.
But the activities of American tobacco merchants have become much more global in recent years. Declining cigarette sales at home, along with the rising cost of American tobacco, have prompted U.S. cigarette manufacturers to buy less expensive tobacco from Brazil and Africa.
Meanwhile, the erosion of trade barriers around the world and the rush by some governments to privatize their state-owned tobacco companies have opened up markets once closed to U.S. tobacco merchants.
However, their pursuit of foreign markets and less costly tobacco has provoked worries in the United States about the loss of tobacco-related jobs and income.
``We've noticed since 1990 that the increase in foreign tobacco has created less demand for American tobacco and fewer jobs,'' said Jack Woods, executive secretary and sales supervisor of the Danville Tobacco Association.
The volume of tobacco handled by Danville's half-dozen warehouses last year had dropped to 49.7 million pounds from a peak of 78 million pounds in 1962, said Woods, whose association promotes tobacco auctions in Danville.
NAMES LIKE UNIVERSAL, Dibrell, Standard Commercial and Monk-Austin lack the widespread recognition that cigarette producers Philip Morris, R.J. Reynolds and Lorillard have. Yet tobacco merchants have been playing a greater production role as cigarette manufacturers turn over purchasing and processing to others.
Earlier this year, R.J. Reynolds Tobacco Co. arranged to have Monk-Austin supply all the U.S. tobacco it needs. Monk-Austin estimated that this arrangement will boost its annual revenues by $200 million to $300 million, or 33 to 50 percent.
Yet Monk-Austin and its rival have to contend with two recent headaches: expectations of a higher excise tax on tobacco products and federal legislation limiting the amount of foreign tobacco that can be used in American-made cigarettes.
A domestic-content law that took effect last January has restricted the amount of overseas tobacco that Philip Morris, R.J. Reynolds and other manufacturers can use in their U.S.-made cigarettes to 25 percent.
Cigarette manufacturers have responded by slashing their orders for tobacco.
``Everybody has been marking time'' amid predictions that the domestic-content legislation will be revised or eliminated, said Parrish of Monk-Austin.
Starkey of Universal said he expects cigarette manufacturers to boost their tobacco orders once the uncertainties about excise taxes and domestic content are addressed. But for now, ``the manufacturers are working with their worst-case scenarios,'' he said.
For tobacco merchants, the domestic-content legislation and expectations of higher taxes could not come at a worse time. In contrast to a shortage of tobacco three years ago, the industry is trying to cope with a worldwide glut, which has depressed prices and battered tobacco merchants' profits.
What triggered the surplus were expectations of soaring cigarette sales in eastern Europe and the countries of the former Soviet Union. Beginning in the early 1990s, farmers in Latin America and Africa expanded their tobacco crops to meet the projected demand.
But as it turned out, the markets in eastern Europe and the former Soviet republics have been much slower to develop than tobacco farmers and merchants expected. While the demand in these countries for milder, better-made cigarettes is considerable, many of their citizens lack the disposable income to afford these American-blend cigarettes.
With 40 million smokers in the United States, tobacco merchants insist they are in no hurry to abandon the American market. However, Monk-Austin will adjust to whatever government restrictions might be imposed on cigarette sales in the United States, Parrish said.
And Starkey at Universal said, ``We have a tremendous investment in this country, $30 million to $35 million, but the fact is, we are an international company.'' MEMO: Tobacco has been ``The Golden Leaf.'' Now, its future looks less
certain. Daily Break/E1
ILLUSTRATION: Staff color photo by JOSEPH JOHN KOTLOWSKI
Laborer Douglas Smith repackages tobacco that was left over from
last year's harvest at a Danville, Va., farm. U.S. cigarette
manufacturers have come to rely on cheaper, foreign-grown tobacco,
while foreign markets are opening to U.S. leaves.
Graphic
GOING OVERSEAS
Source: Recent year-end reports from the companies
For copy of graphic, see microfilm
KEYWORDS: TOBACCO INDUSTRY
by CNB