Tabacalera, S.A. - Company Profile, Information, Business Description, History, Background Information on Tabacalera, S.A.

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History of Tabacalera, S.A.

Tabacalera, S.A., is one of Spain's largest and oldest companies, and is a dominant force in its principal area of activity, the manufacture and distribution of tobacco products. Protected for more than 300 years by a government-enforced monopoly, the company was able to build an almost unassailable position in the tobacco market, even after the controlling monopoly was dismantled in the mid-1980s. From its base in the tobacco industry, Tabacalera then began to expand into new product markets, in response to changes brought on by Spain's membership in the European Economic Community (EEC) and the worldwide decline in tobacco consumption. Tabacalera entered the food industry, among other endeavors, in a diversification process that was initially accompanied by a number of problems. Nevertheless, the company's widespread manufacturing operations and an extremely well-developed distribution network, complete with a large fleet of trucks, provide it with a continued strong base on which to operate.

The Early Years: 16th- through 18th-Century Trade

Tabacalera is one of the oldest companies in the world, with its roots in the period of Spanish colonization of Central and South America. Tobacco was one of many substances unknown in Europe before being discovered by the conquistadores as they pushed the new boundaries of Spanish domination south from their first settlements in Mexico during the 16th century. Regarded initially as a curiosity with supposedly medicinal properties when ground and inhaled, tobacco was used in Europe only in small quantities during the 16th century.

One of the main features of Spanish colonial expansion was the government's determination to retain tight control of the economic traffic between the colonies and Spain. Aimed mainly at ensuring a steady flow of mineral wealth from American mines, this policy limited the number of ports in the colonies that could ship goods to Spain, while also limiting the number of ports in Spain that could receive the goods. At the Spanish end, the government designated Seville as the central port for trade with the colonies, and it was controlled by the Casa de Contratacion--the hiring house for seafarers--which was established in 1504. Because of this designation, Seville became the center of tobacco imports from the Americas, and was one of the first places in Europe where the tobacco plant was cultivated. In the early 17th century, a factory for processing tobacco was built on the banks of the Guadalquivir River near Seville to cater to the growing popularity of snuff--powdered tobacco&mdashĀÆong Sevillans.

In 1636, the Spanish government moved to ensure its control of the growing tobacco trade by establishing a monopoly over the production and sale of tobacco in the kingdoms of Castille and Leon. The government decreed that tobacco trade would be controlled by a newly formed body, the Estanco del Tabaco. Despite considerable changes to its structure and powers in the following three and a half centuries, the Estanco del Tabaco formed the foundation of what became present-day Tabacalera, S.A.

Tobacco use grew steadily during the late 17th and early 18th centuries, and in 1725 the Estanco del Tabaco decided to build a new factory in Seville to accommodate the increasing demand. Although construction began in 1728, disputes over the plans and other problems delayed completion of the new factory until 1770. Upon completion, however, the size of the new Royal Tobacco Factory of Seville, along with its proximity to the tobacco port, made it the most important tobacco manufacturing plant in the world at the time.

Restructuring Efforts in the 19th and 20th Centuries

As popular tobacco tastes changed in the early 19th century, the Royal Tobacco Factory in Seville restructured its operations to begin producing cigars in addition to powdered snuff tobacco, which had been produced exclusively for years. The shift to cigar manufacture, brought on by changes in consumer tastes, required a highly labor-intensive process and demanded a large, cheap work force to hand-roll the tobacco leaves. This demand was satisfied by using large numbers of women in the factory, marking one of the first instances of women's large-scale involvement in Spanish industry. This provided the inspiration for the main character in MerimƩe's novella Carmen, which in turn inspired Bizet's opera of the same name.

The demand created by the emergence of cigars as a popular form of tobacco prompted the Estanco del Tabaco to invest heavily in expanding its production capacity during the 19th century. With a second factory already established at Cadiz, the Estanco opened nine more new factories throughout Spain during the 19th century, creating one of the country's biggest and most productive industrial enterprises.

In the mid-19th century, the Spanish government began looking for ways to change the managerial structure of the company. It wished to take advantage of the more sophisticated economic environment, in which direct state control appeared outdated and seemed to hamper delivery of the highest possible profit to the state. Beginning in 1844, various proposals were put forward until finally the operations were placed under the control of a strictly corporate entity in 1887. At that time, the state transferred its monopoly to the central bank, the Bank of Spain, which formed a company called the CompaƱia Arrendataria de Tabacos. This company leased the management of the monopoly from the bank. The new corporate structure was aimed at achieving the greatest efficiency from the operation by distancing it from the government, while at the same time ensuring the continued supply of revenue to the state from the tobacco operations.

The leasing company controlled the tobacco monopoly for the next 60 years, throughout the tumultuous Spanish Civil War of the 1930s and the final victory of the fascists in 1938. When the contract between the company and the bank came up for its regular review in the early 1940s, the government changed the legal structure of the company once again, opting this time to turn it into a company wholly owned by the state. Thus, In March of 1945 a limited company was formed: Tabacalera, Sociedad Anonima, CompaƱia Gestora del Monopolio de Tabacos y Servicios Anejos was formed. This change set in place the corporate structure that the company retains today.

The Late 1900s: Responding to Global Economic Change

After three-and-a-half centuries of operating in the comfortable environment of a state-enforced monopoly, Tabacalera was presented with one of its greatest challenges in January 1986, when Spain opted to join the European Economic Community (EEC). As part of the requirements for joining the community, the Spanish government was obliged to relinquish its monopoly of tobacco production and sales. This process involved the partial privatization of Tabacalera, S.A. The state transferred all of its assets and acquired rights in the tobacco monopoly to Tabacalera, in exchange for shares issued by the company that left the state with a 53 percent controlling stake of the company's capital.

Under the new laws of the EEC, Spain's wholesale import and tobacco trading activities were liberalized, giving anybody the right to carry out these activities, but under strict guidelines. Although Tabacalera continued to manage the Spanish monopoly for tobacco products manufactured outside the EEC, and although the state retained control of the retail sales monopoly through its concessionaires, the breaking of the local production monopoly struck at the heart of Tabacalera's operations. This fundamental change, coupled with the upcoming single European market, made it clear that the company had to do more than simply continue making and selling tobacco products if it was to survive. The urgency of change was made even more pressing by signs that tobacco sales could no longer be counted on to rise due to heightened anti-smoking sentiment worldwide.

In 1987, under the presidency of Candido Velazquez Gaztelu, Tabacalera launched a wide-ranging diversification plan aimed at ensuring the company's future in the less secure post-monopoly commercial environment. Velazquez pushed the company into two new areas--food manufacturing and retail distribution--on the basis that these two sectors were best suited to Tabacalera's existing operational structure.

Tabacalera took its first tentative step into the food industry in 1986 by setting up a snack foods operation, Nabisco Brands EspaƱa y Portugal, as a joint venture with RJR Nabisco. Two years later, Tabacalera actually purchased the company when Kohlberg Kravis Roberts took over RJR Nabisco. In the same time period, Tabacalera bought a group of companies controlled by the Spanish food group Instituto Nacional de Industria. These companies gave Tabacalera access to a wide range of food markets, such as Spain's leading milk concentrate and liquid milk producer, Lactaria EspaƱola (LESA); meat and preserves company Carnes y Conservas EspaƱolas S.A. (CARCESA); deep-frozen foods producer Frioalimentos (FRIDARAGO); and Congelados Ibericos S.A. (COISA). Tabacalera also bought a controlling share in a pulses company, Comercial Industrial Fernandez (COIFER S.A.), and a stake in a marine cultivation company, called Acuicultura. Tabacalera also made a strong move into retail distribution, purchasing 75 percent of retailing business Distribuciones Reus S.A. (DIRSA), a company with 325 supermarkets and over 500 franchised shops. DIRSA was also the owner of another company with a chain of more than 100 supermarkets.

The diversification program made Tabacalera one of Spain's leading producers of items such as biscuits, powdered and concentrated desserts, and milk packaging, while it also gave the company a leading position in the tomato sauces, pulps, conserves, juices, and pulses markets and control of one of the largest networks of retail outlets in Spain.

Unfortunately, rather than assure Tabacalera a secure hold on a broader range of operations, the swiftness of the diversification program brought with it a number of serious problems. Namely, in the rush to acquire new businesses, the company had bought a number of operations which were heavy loss-makers. Tabacalera planned to use the economies of scale provided by such a large group to turn the troubled subsidiaries around, but after two years it became clear that the worst of them were largely unsalvageable and would only hamper the group's efforts to become more flexible.

Therefore, Velazquez's successor as chairman, Miguel Angel del Valle Inclan, took office in 1989 and began a process of rationalizing the group's food and distribution activities. He described Velazquez's diversification program as "too ambitious", as reported by Reuter News Service on June 21, 1990. The new aim was to keep only the profitable food subsidiaries, divest the rest, and acquire businesses in other sectors so that the company's revenue from non-tobacco activities would match its tobacco revenue.

Accompanying these moves into different markets, Tabacalera also updated its core tobacco operations during the 1980s to account for changes in the market. Spanish smokers had begun to give up their traditional preference for black tobacco in favor of blond Virginian tobacco. By 1985, Virginian tobacco sales in Spain had already risen to 44 percent of the total tobacco sales, and were on the verge of surpassing those of black tobacco. Tabacalera responded by reorganizing its cultivation and processing operations to produce more Virginian tobacco, which provided a higher profit margin. The company took consideration of this consumption change when it began building a new factory at Cadiz in 1984, much bigger and more efficient than the company's existing plants. Furthermore, in preparation for the challenges likely to emerge due to the upcoming single European market in 1993, the company signed an agreement with Tabaqueira de Portugal in 1989 to allow cross-marketing of the two companies' brands in their respective countries. In December 1990 Tabacalera also announced a modernization plan, which would involve the termination of 1,500 jobs to produce a leaner company in time for the advent of the single market.

The 1990s and Beyond

In 1990, Tabacalera sold the DIRSA retail chain for Pta 12 billion to the French Promodes group, after owning it for only two years. In the same year, the company sold its interest in FRIDARAGO, and gave up its management of the Tabacos de Filipinas company, which had incurred losses of Pta 1.4 billion in 1989 and 1990.

The main problem brought on by the diversification was the milk company, LESA, which continued to lose money despite Tabacalera's investment of large sums to improve it. The company provided more than Pta 8 billion to LESA in the two years following the purchase, but by 1990 the milk producer still showed a huge loss of Pta 5.2 billion. Tabacalera put LESA up for sale, and by April 1991 was holding advanced talks with the French group Union LaitiĆØre Normande over the sale of the subsidiary. Also in 1991, Tabacalera changed the name of its Nabisco Brands subsidiaries to Royal Brands.

After cleaning out the bulk of its unprofitable food operations, Tabacalera attempted to consolidate the lucrative remaining businesses by merging the Royal Brands subsidiary with the Carcesa operation to create a leaner, more efficient food division. Under del Valle, the company also began to diversify into other areas: particularly real estate and tourism. In 1990, Tabacalera took a 33 percent stake in a joint venture to build a Pta 10 billion tourist complex in the Canary Islands. It also began to take advantage of its widespread real estate holdings by leasing them out, as well as by using its distribution network to deliver other companies' products. The most lucrative of these contracts was that of the West German company Quelle, Europe's biggest mail-order house, who chose to use Tabacalera's trucks for its Spanish deliveries.

The changes brought about by Spain joining the EEC, combined with the challenges posed by the European single market, caused the question of Tabacalera's relationship with the state to be raised once again. In August 1990, del Valle had stated his belief that the arrival of the single market was a good time to consider whether the state should continue to be the company's major shareholder. The question was sharpened when Spanish legislation was passed in 1990 banning almost all forms of tobacco advertising. Later that year, Spanish newspapers reported that Tabacalera desired a reduction in the state's stake, which would allow the company to be quoted on Spanish stock exchanges by the end of 1992.

The growing debate reached its peak in April 1991, when del Valle was forced out of office in what the Financial Times (April 10, 1991) described as "the climax of a political confrontation with the Finance Ministry." He was replaced by German Calvillo Urabayen, president of another government-controlled body: Fomento de Comercio Exterior. Meanwhile, many news sources were giving the impression that the Spanish government was actually considering the idea of selling a portion of its stake in Tabacalera, as well as its stakes in other large state-controlled companies, as a means of earning money to reduce the country's deficit.

By 1993, however, Tabacalera remained a company that was primarily held and controlled by the government. Rather than wait to see if a government business privatization plan would affect the company and help generate growth, Tabacalera instead focused its attention once again on continued restructuring efforts. It entered into a joint venture with RJR Nabisco Holdings Corp. in July 1993, in which each company held a 50 percent stake in the Royal Brands food operations. The deal was structured so that RJR Nabisco would have the option of purchasing the remaining 50 percent of Royal Brands in early 1994, which it did in May of that year. In selling Royal Brands off, Tabacalera signaled its renewed focus on its tobacco products and its desire to continue divesting other peripheral operations acquired in the 1980s.

The following year, Tabacalera was facing a mature market in its homeland of Spain. Although existing Spanish laws gave the company unique distribution rights which translated to a monopoly of sorts, the company knew that it needed to expand globally in order to sustain growth. Therefore, it purchased a 51 percent stake in Culbro Corp.'s General Cigar Company, which gave Tabacalera an entry into the United States' cigar market, which was one of the world's largest and fastest-growing markets. The purchase helped Tabacalera position itself for future growth and distribution expansion, even in the face of the fact that Spain's government was still see-sawing on the idea of relinquishing a portion of its controlling stock in Tabacalera to the public.

By mid-1996, Tabacalera had made moves to sell off the remainder of its food businesses and focus solely on the production and distribution of tobacco, the product it began with over three centuries earlier. The company launched a new cigarette brand in France, called Montecristo, in its continued effort to expand distribution beyond the borders of Spain.

Despite the initial difficulties caused by an over-zealous diversification program a decade earlier, by the closing years of the 20th century Tabacalera appeared to have emerged in a good position to face the more competitive environment of a single European market. Its profits were healthy, its core tobacco business was reorganized to accommodate a changing market, and its expansion into other less lucrative sectors was successfully abandoned. The question of the company's future relationship with the state remained the only unresolved issue, but posed no immediate problems. Therefore, it appeared that Tabacalera would be well-positioned to continue as a powerful industrial group into not only 21st-century Europe, but the entire world.

Principal Subsidiaries: Servicio de Venta Automatica, S.A.; Exportadora de Tabaco de Ceuta y Melilla, S.A. (TABACMESA); La Lactaria EspaƱola, S.A. (LESA Group); Hebra Promocion e Inversiones, S.A.; I.T. Brands Corp.; Interprestige, S.A.; Tabacalera France S.A.R.L.; Tabapress, S.A. (93%); Darsa Gaditana, S.A. (89%); Food Premier, S.A. (51%); CITA Tabacos de Canarias, S.A. (CITA Group) (50%); Grupo Tabaquero Canario, S.A. (50%); Tabaco Canary Islands, S.A. (50%); BAT EspaƱa, S.A. (B.A.T.E. Group) (50%); RJR EspaƱa, S.L. (50%); Eagle Star Gestora de Fondos de Pensiones, S.A. (49%); Inbatex Holdings Worldwide, S.A. (31%); Compania EspaƱola de Tabaco en Rama, S.A. (CETARSA) (20%)

Additional Details

Further Reference

Du Bois, Peter C., "A U.K. Analyst is Bullish on Spain," Barron's, July 3, 1989, p. 36.Phalon, Richard, "Smoke Rings," Forbes, August 28, 1995, p. 92."RJR Nabisco Buys Full Stake in Spain's Royal Brands," Reuter Business Report, May 9, 1994.Schwimmer, Anne, "Spanish Issues Expected," Pensions & Investments, October 28, 1991, p. 38."Tabacalera, Selling Stakes in Food Firms, Focuses on Tobacco," Wall Street Journal, September 20, 1996, p. B5C.Torres Mulas, R. & D. Hortas, Tabacalera: 350 AƱos Despues, Madrid: Tabacalera, 1987.Welling, Kathryn M., "Ahead of the Herd," Barron's, February 13, 1995, p. 22.

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