`Tobacco Companies Have Created Their Own Monster'

Karl M. Von der Heyden was lured to RJR Nabisco Holdings Corp. by then-Chief Executive Louis V. Gerstner Jr. right after the 1989 Kohlberg Kravis Roberts & Co. leveraged buyout. The former Pepsi-Cola USA and H.J. Heinz Co. CFO was a well-regarded financial mechanic with a comprehensive understanding of the branded-foods industry. As chief financial officer, von der Heyden, 57, pared RJR Nabisco's debt and brought it up to investment grade by 1991. After Gerstner abruptly resigned in April to head IBM, von der Heyden became interim co-chairman and chief executive officer with General Counsel Lawrence R. Ricciardi.

Weeks later, industry leader Philip Morris Cos. slashed cigarette prices by 40% on what is now known as Marlboro Friday. In June, former ConAgra Inc. Chairman Charles M. Harper became CEO, and von der Heyden left.

Now considering his next move, von der Heyden took some time out to chat with BUSINESS WEEK Staff Editor Elizabeth Lesly about the tobacco and food


Q To what extent are the dire straits of the tobacco industry really of its own making?

A The tobacco companies have created their own monster. They took prices up way too fast--way faster than any other consumer-goods [product] that I'm aware of. And Philip Morris made a second big mistake: They abruptly, abruptly changed direction and took the price down 40%.

Marlboro Friday was a cataclysmic event for the tobacco companies because all of a sudden, so much profit was taken out of the industry on a permanent basis.

Keep in mind that from the shareholder point of view, the advantage of these stocks--Philip Morris and other consumer stocks--was that they were considered relatively steady.

And Philip Morris taking this abrupt action shattered that whole image, not just for itself but for the other food and tobacco companies as well.

Q What was your first thought when you heard what Philip Morris had done on Marlboro Friday?

A Complete shock. And basically, a feeling...why? Why are they doing this? I still don't understand it, to this day.

Q After working so many years to stabilize RJR Nabisco's finances, what was it like to have so many gains washed away in the past few months?

A The LBO experience, the RJR Nabisco experience, was exhilarating, particularly in the early stages. This has recently been overshadowed. Tobacco is a beleaguered industry. The pressure's just on.

The diversification efforts of tobacco companies in the 1980s into food, which both R.J. Reynolds and Philip Morris pursued, was a flawed strategy. There are very few synergies between tobacco and food, even in the distribution and retail area. So the only reason that these companies did this is [because they feared] the tobacco business one of these days going away.

Q What strategies will branded-goods companies have to use to combat the increased threat by private labels and other lower-cost producers?

A They will have to get the price-value relationship in line. Nobody will be able to sell their stuff if the gap is too large. And there will be an increasing fragmentation of products offered.

The national branded companies will have to be more attuned to the ethnic preferences of consumers in different parts of the country. The branded companies aren't going to allow private labels to take over; they're going to do everything to keep [their dominance] in place.

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