In the past, the native tobacco industry has been dominated by smuggling controversies. Today, reporter Peter Kuitenbrouwer reveals a partnership between native Canadian entrepreneurs and investment bankers that has become an export success story -- and a growing source of tax revenue for the government.
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SIX NATIONS MOHAWK TERRITORY, Ont. - There is a riot of noise: the clatter of machinery mixed with a blast of rock music from a boom box. With a pitchfork, a woman in uniform -- a blue shirt and matching baseball cap -- feeds tobacco into a hopper. A rattling green machine forces the tobacco into a continuous tube of paper, cuts it into cigarettes, and glues on filtres. Several other workers, all black-haired Mohawk Indians in matching shirts and caps, remove imperfect specimens and pull off plastic trays of fresh-made cigarettes.
"This machine makes 1,500 to 1,800 cigarettes a minute," explains Steve Williams, president of Grand River Enterprises. "That's very slow."
He leads the way to a quieter stretch of the sprawling factory, where a much bigger piece of equipment hums, a Molins TF3P, painted in a muted beige. Tobacco arrives, carried on a current of air through steel pipes, and the cigarettes flash by on a belt, then automatically into packages. Completed packages of cigarettes zip past on another belt and into cartons. A technician in a lab coat watches through a plexiglas window.
"This is one of the new ones that makes 8,000 a minute," says Mr. Williams. "This machine cost $1.3-million -- U.S.!"
This is the brave new world of cigarette manufacturing. Until recently, three big foreign players dominated Canada's tobacco industry: U.K.-owned Imperial Tobacco Canada; U.S.-controlled Rothmans Benson & Hedges; and Japanese-owned JTI-Macdonald Corp. But now two dozen small manufacturers, the largest two native-owned, are grabbing market share with cheaper cigarettes. Brands such as Virginia Select, Bailey's, Tabec and Smoking, which sell for $1 to $1.25 less a pack than leading brands, are quickly gaining market share.
A report from BMO Nesbitt Burns analyst Karim Salamatian says discount brands made up 12% share of all cigarettes shipped in Canada in the last quarter of 2002, up from 2% of the market in 2001.
"For the quarter," Mr. Salamatian notes, "discount brand volumes doubled while volumes of the big three declined by 16%."
The three largest of the new tobacco companies are Grand River Enterprises, Tabac ADL of Mashteuiatsh, Que., and Bastos du Canada Ltie, based in Louiseville, Que., near Trois Rivihres. These new competitors are willing to sell cigarettes at a lower margin, but their production costs are also lower. At Grand River Enterprises, workers start at $9 an hour, compared to about $40 an hour for workers at the Imperial Tobacco Canada plant in Guelph, Ont.
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Natives invented the tobacco business; small wonder they've stayed in the industry ever since. In the early 1990s, natives across Canada became known as conduits for cut-rate cigarettes, made by the big manufacturers and then shipped, duty-free, out of Canada. The cigarettes were smuggled back in, and then sold out of "smoke shops" on reservations. In 1994, governments dropped taxes -- which succeeded in taking away most of the profits from smuggled cigarettes.
Six Nations, Canada's biggest Indian reservation, was a centre for sales of smuggled cigarettes. In the early '90s, "we had 100 smoke shops creating 400 or 500 jobs," recalls Mr. Williams, who served as chief here from 1991 to 1996. "I said, 'Put your money into something else guys, because this isn't going to last forever.' "
Seven native businessmen pooled their resources, and in 1995, Grand River Enterprises (named for the river which slices the territory) was born. It was tough at first. Ottawa refused to grant the company a licence to make cigarettes. The reserve borders Canada's tobacco-growing heartland, but the Ontario Flue-Cured Tobacco Marketing Board -- which controls sale of the vast majority of Canada's tobacco crop -- refused to sell it to the Mohawks. Plus, Grand River Enterprises, also known as GRE, could not buy second-hand cigarette-making machines: Big tobacco companies confirm that they go to great efforts to make sure their old equipment is destroyed rather than see it fall into the hands of competitors.
When GRE first began selling cigarettes, "We were unclear of applicable taxes owing as a native manufacturer, so we paid a monetary enhancement to a community fund. The federal government challenged our position. There was a mutually agreed upon settlement, and in 1997 we were granted a federal manufacturing licence." Since then, GRE says it has remitted $96-million in excise tax to Ottawa. Federal tax authorities do not comment on details of remittances.
Armed with a federal licence to make cigarettes, GRE applied again to buy Ontario tobacco. This time, Mr. Williams says, the marketing board said big cigarette-makers had reserved all available tobacco for five years. Finally last year, GRE won permission to bid on Ontario tobacco leaf lots; it bought one million pounds.
"Late last fall they made a request to buy tobacco," says Gary Godlie, chairman of the tobacco marketing board. "We managed to get them on the auction this past February. That was very encouraging, to have another buyer on the floor. We welcome their business and want to do business in the future."
Today GRE has all the hallmarks of a successful, rapidly growing company. On a recent weekday, the gravel parking lot is jammed with cars and trucks. The FedEx truck is here. Beside the plant -- a collection of low buildings covered with aluminum siding -- sits a line of tractor trailer boxes. And crews are at work completing a new building, which will double the size of the plant, to 140,000 square feet, allowing GRE to process its own tobacco. The company employs 136 people, all but a few of them natives. The company estimates its assets, including plant, equipment, equipment on order, and cash, at $43-million.
"These are brilliant business people," says Andrew McConnell, a regional vice-president at Royal Bank, which has been lending money to GRE since 1994. "We are extremely proud of what GRE has accomplished. They are a Canadian success story. The key is to get down the cost per pack. The commitments they've made to automation are impressive."
In January, 2001, GRE produced 4,500 cases of cigarettes, each holding 10,000 cigarettes . In January, 2002, the firm pumped out 10,200 cases. January this year, that number rose to 25,600 cases, or 250 million cigarettes. Mr. Williams shows an excise remittance form dated April 20, 2003 -- on that date GRE remitted $2,966,489.15 to the Government of Canada.
"The largest advantage we enjoy is the number of skilled and educated workers that are looking for employment and are looking to support native business," says Jerry Montour, GRE chief executive. "These people are very bright."
Today GRE exports 80% of its production, tax free, producing "private label" brands such as Seneca, which it sends by truck in sealed containers to free trade zones in California, Florida, Idaho, Nebraska, Nevada, New York and Oklahoma. The U.S. importers pay duty at the zone and then resell the cigarettes.
GRE also makes brands for sale in Canada, such as Sago, D.K.'s and Putter's Light -- a pack of 25 sells for $5 in the smoke shop at the entrance to this plant. It also has won provincial permission to sell its cigarettes to non-natives, through convenience stores, in every province east of Ontario, plus the Yukon.
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Guy Boulianne, national sales director of ADL Tobacco, meets a reporter in the well-appointed lobby of a condominium tower on the shore of Lake Ontario in downtown Toronto. He wears a turtleneck, sports coat and tasseled loafers. Soft-spoken, with a warm smile and a firm handshake, Mr. Boulianne is the picture of a confident businessman. He leads the way to a private club in the building, orders two drinks, and settles into a tall-backed armchair.
This is the new face of the tobacco business in Canada.
Mr. Boulianne, a Montagnais Indian, was born on the Mashteuiatsh reservation north of Quebec City. At 10 he moved to Montreal, where he grew up. He went to work in the grocery business, rising to management; from 1989 to 1995 he worked for Sobeys in eastern Quebec.
"In 1995 my cousin Alan called me up and said, 'Guy, you know the retail business market,' and after that my wife and I joined the ADL retail team."
Founded on the Mashteuiatsh reserve in 1994 to sell fine-cut tobacco, ADL began manufacturing cigarettes in 1998, creating the brands Bailey's and Virginia Select. The company has grown quickly, and Mr. Boulianne says ADL, of which he is now a partner, is the fourth-largest cigarette company in Canada, employing 175 people, including a sales force of 24. Last year the Federal Business Development Bank proclaimed ADL the "Company of the Year," in the Lac St-Jean region.
"Smokers are choosing generic brands," says Mr. Boulianne. "The value brand category of cigarettes grew more quickly than any of us expected."
ADL's cigarettes, Mr. Boulianne says, cost $5 to $8 a carton less than the major brands. "For a smoker, that's a lot of money, and that's why our market share grew so fast." The company now sells cigarettes through corner stores and all major grocery chains, in Ontario, Quebec and Atlantic Canada.
Two years ago, in a bid to build the company's market share in Ontario, Mr. Boulianne moved to Toronto with his wife and two young children. Every morning, the children catch the ferry to attend school on Toronto Island, while Mr. Boulianne sets up golf appointments and meets with supermarket chains, promoting sales of his brands.
"We make good business and we are happy," he says. "We made our budget, thanks to God. We continue. We don't want to make too much noise." His sales techniques are the same as any successful retailer: "We're careful to create relationships with our customers. You scratch my back, I'll scratch yours."
ADL sells almost exclusively off-reserve, remitting the same taxes to Ottawa and the provinces as the major cigarette-makers. ADL can sell cigarettes for less, says Mr. Boulianne, because its costs are lower. "The majors spend a lot on promotion, and their salaries are much higher. We don't need to spend money on marketing, and we don't work with brand-new equipment."
"Who were the first to sell tobacco in Canada? Natives. So now we've come back to it, and we develop a lot. We are here to stay."
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But not all of the new players are native-owned. Bastos du Canada Ltee. is the current incarnation of a firm that's been making cigarettes in Louiseville, about 100 kilometres east of Montreal, since 1967. Seita, the French company that markets Gitanes and Gauloise brand cigarettes, built the factory.
Private interests bought the company in 1987, and now Bastos, with about 50 employees produces its own brand, Smoking, along with several generic brands: Gipsy, produced for Loblaws, Celesta brand for Sobeys and Dakar brand for the Metro grocery chain in Quebec. The company uses only Canadian tobacco.
"Business is good," says Gilbert Cantin, general manager at Bastos. "[But] we're seeing more competition from the big tobacco companies, who dropped the prices of some brands."
A similar phenomenon is playing out in the United States, where deep discount brands such as Bronco, Roger and USA Gold have grown quickly, from about 3% of the U.S. market in 1998 to 10% today. In response, such big companies as Philip Morris and Brown & Williamson have cut the price of premium brands like Camel and Marlboro, with huge costs to the bottom line.
In an April report for BMO Nesbitt Burns, analyst Mr. Salamatian predicts: "The challenging environment for the major North American tobacco manufacturers is likely to persist through the balance of 2003 and 2004, as unprecedented taxation and retail price levels will continue to motivate tobacco consumers to switch to discount brands."
Back at Six Nations, Mr. Montour can't believe his good fortune. His company is growing by leaps and bounds and it has even branched out to produce bottled water. As he speaks to a reporter in his office just above the factory floor, a woman in the corner is pulling out shoebox-sized bricks of cash, which are part of the proceeds from the business.
Mr. Montour says his company has invested in manpower, putting employees through law school, graphic design school and mechanical engineering degrees.
"We're perfecting our ability to compete more efficiently on a global scale," he says.
For many years, he notes, natives in the tobacco business were seen as nefarious characters who avoided taxes and stayed one step ahead of the police. That has all changed now.
"People come in here and they expect us to be wearing bandannas and holding guns," he says. "People ask, 'What about the RCMP?' And I say 'What about 'em?' If they come in long enough they're going to help us load a truck. We ain't got time for that shit anymore." |
