Barbarians at the Gate

by Bryan Burrough

  R. J. Reynolds saw the threat and vowed to fight. “If Buck Duke tries to swallow me he will have the bellyache the balance of his life,” he vowed. Then, inexplicably, Mr. RJ made a secret trip to New York in 1899 and cut a deal that gave Duke’s trust a two-thirds stake in Reynolds Tobacco for $3 million. Apparently Reynolds agreed to sell out because he felt he needed more capital to grow and because he was guaranteed operating control of his company. Buck Duke might think R. J. Reynolds was working for him, but Mr. RJ had other ideas. Under the trust’s control, he went on a buying spree, snapping up a host of local competitors and becoming the biggest employer in North Carolina. The price of that expansion was a regimen of quarterly trips northward to report to Buck Duke’s people, the detested “New York crowd.”

  R. J. Reynolds may have hated Yankee control, but there was no question he thrived under it. He now dreamed up the idea of a nationally distributed pipe tobacco. After supervising its secret mixture, he picked a name for it—Prince Albert, after the popular prince of Wales, who had become the British monarch, Edward VII—and personally hunted down a suitable picture of the prince (at a tea party with Mark Twain) to be used as the model for the label. For the first time, the company retained a big New York agency, N. W. Ayer, to conduct a national ad campaign. In The Saturday Evening Post, Collier’s, and other magazines, Prince Albert was proclaimed as the “Joy Smoke” that “can’t bite your tongue.” In a full-court press on distributors and retailers, Reynolds offered sweet discount incentives for them to load up on Prince Albert and threatened dire consequences if they didn’t. Customers would be very unhappy if they didn’t stock it, the company warned, because “we control the process that takes the tongue blistering bite out of tobacco—so there can’t be even a near substitute.” Much like Nabisco’s experience with Uneeda Biscuit, Mr. RJ’s plan to go national was a huge success. Annual production of Prince Albert grew from 250,000 pounds in 1907 to more than 14 million by 1911.

  But the far bigger news that year was the demise of the carpetbagger, Buck Duke. After years of attempting to break Duke’s stranglehold on the tobacco industry, Teddy Roosevelt’s “trustbusters” finally succeeded. When a U.S. Appeals Court granted Reynolds Tobacco its independence, there was unrestrained joy in Winston-Salem. Reynolds salesmen were told of the trust’s dissolution in a letter headed “News of Freedom.”

  “Now watch me,” a gleeful Mr. RJ told his Moravian executives, “see if I don’t give Buck Duke hell.” A few days later, just as darkness fell over Manhattan, a giant new electrical advertising display was switched on. There, towering over the city, was Prince Albert himself in a great glow, with these words at his feet: “The Nation’s Joy Smoke, R.J. Reynolds Tobacco Company, Winston-Salem, N.C.”

  Free from the grip of Northern interlopers, Mr. RJ immediately moved to ensure that his company would never again fall into the hands of “the New York crowd.” He began force-feeding Reynolds stock to its employees. “You should have an interest in this company,” he told them as he arranged for bank loans to buy stock. Never mind that many workers didn’t want to go into hock; Mr. RJ said he knew what was best, and he did. As the value of Reynolds stock ballooned in coming years, Winston-Salem came to be known as “the city of the reluctant millionaires.”

  Soon Mr. RJ went even further, creating a “Class A” stock—known locally as anticipation stock—designed to put all voting power in the hands of the workers. It paid an extraordinarily rich dividend: 10 percent of all profits in excess of $2.2 million. Workers clamored for the new issue, and many used their salaries to buy all the Class A they could. The annual dividend payment became a kind of local holiday, a time local car dealers and luxury purveyors eagerly awaited. The story was told of a Winston-Salem tyke who received a horde of presents on Christmas morning, only to begin weeping uncontrollably. He said he’d had his heart set on Class A stock. From the early 1920s until the IRS disallowed the Class A in the 1950s, Reynolds employees controlled the majority of the company’s stock.

  In return for its security, Reynolds took special care of its workers. The company loaned employees up to two-thirds the value of their property, operated lunchrooms at cost, and always had ice water on hand in the steamy tobacco factories. It provided day care for the children of women workers—one for the whites, of course, and one for the blacks. Reynolds even ran a supervised rooming house for country girls who came to Winston-Salem to work, and provided housing for another 180 families at cost. Many of these reforms were personally orchestrated by Mr. RJ’s young wife, Katharine.

  In the context of its age, Reynolds was a remarkable institution. At a time when the South was desperately poor and mired in an agrarian economy, here was a company taking an indigenous agricultural product and making it a major industrial business. At a time when southern businesses were generally controlled by absentee Yankee owners, here was a company under local control raining cash on its community. By 1913, a quarter of Winston-Salem’s 25,000 residents worked at RJ Reynolds.

  It was in that year that Mr. RJ, then sixty-three, took his biggest gamble yet on a new product: the cigarette. At the time, there was little demand for manufactured cigarettes in packages because smokers preferred to roll their own. The only brands on the market were regional and weren’t thought to taste very good. But Mr. RJ, fresh off Prince Albert’s success, thought a cigarette with an appealing taste just might sell nationally. Riding herd on the project himself, he experimented with a wide variety of tobaccos before coming up with just the right mix, an exotic blend of locally grown, Kentucky-grown burley, and Turkish tobaccos. Playing up the latter’s mysterious Eastern connotation, he called it Camel, and when the Barnum & Bailey Circus came to Winston-Salem that year, a photographer snapped a picture of a dromedary for the pack.

  Camel got an added boost from N. W. Ayer, which applied the same gusto to it that it had with Prince Albert and Uneeda Biscuit. Ayer introduced the cigarette into each market with a series of teaser ads: first the word “Camels,” then “The Camels are coming!” with the dromedary picture, then “Tomorrow there’ll be more Camels in this town than in all Asia and Africa combined!” and finally “Camel cigarettes are here!” with a description of the cigarette’s virtues and price. It was breathless and brazen and, by modern standards, hokey. But it made the first national cigarette a major event. Reynolds sold twenty Camels for a dime, undercutting other brands by a full nickel. Soon, its nearest three competitors wallowed and died; Camel was a phenomenon. Within a year, Reynolds was selling 425 million packs a year. Camel became the first cigarette brand to be sold by the carton. Reynolds secured the exclusive concession on shipping cigarettes to the American troops fighting World War I in Europe. Mr. RJ had scored again, redefining and revolutionizing the tobacco business.

  Furious competitors tried everything to kill Camel. Buck Duke’s American Tobacco was suspected of spreading rumors that workers in the Camel factory had leprosy and syphilis. Another rumor, that there was saltpeter in Camels, received some currency. Outraged, Mr. RJ fought back, offering $500 rewards for identification of the stories’ source. “The Stench of a Contemptible Slanderer is Repulsive Even to the Nostrils of a Buzzard,” one of his combative posters proclaimed.

  It was his last great fight. In 1918 Mr. RJ succumbed to cancer of the pancreas. But as he was dying, he was pleased with what he had done and confident that, if run correctly, the company would never again slip into the hands of scalawags. “I have written the book,” he said. “All you need to do is follow it.”

  The company’s management soon fell out of family hands. Mr. Will became chairman, but preferred to devote his time to breeding horses. Mr. RJ’s first son, Dick, took more to politics than business, becoming mayor of Winston-Salem and treasurer of the Democratic National Committee. His second, Zachary Smith Reynolds, was a noted playboy and aviator. He married a torch singer named Libby Holman and was shot to death, at age twenty, under strange and scandalous circumstances. His wife was indicted for murder b
ut never tried. His name now graces the Winston-Salem airport.

  The burden of running Reynolds Tobacco fell to a succession of locally grown executives, several handpicked by Mr. RJ before his death. The first was Bowman Gray, a family favorite. Gray was a details man who had neither the dynamism nor the imagination to ignite real growth, but he did keep Reynolds on an even keel, slipping into his downtown office well before dawn each day and staying until well after dusk. His brother, James Gray, was a top banker at Wachovia, and the bank’s interests became indistinguishable from Reynolds’s. (Gray would later come over to run Reynolds.) Wachovia’s executive committee, a select group of Reynoldses and Grays and Moravian elders, became the town’s ruling elite. Its members belonged to the prestigious Old Town Club and summered at Roaring Gap, in the mountains sixty miles away. They married in a tight circle, until the various branches of family trees became thoroughly entangled.

  This, of course, fostered a virulent strain of parochialism that haunts Winston-Salem to this day. A top Reynolds executive during the 1930s got that way in part by marrying Will Reynolds’s niece; he got fired in part because he wouldn’t live in Winston-Salem. Insulated from the outside world, the company was slow to pick up on trends, most seriously when it overlooked an emerging market for women smokers (even though the bank robber Bonnie Parker was known to be a Camel devotee and once toured its factory while on the lam). As a result, Camel forfeited its lead in the cigarette business and was passed as the nation’s best-seller by American Tobacco’s Lucky Strikes in 1929. Aided by a small New York ad agency headed by William Esty, Reynolds launched a furious counterattack and recaptured the top spot in the 1930s. The Reynolds-Esty alliance kept the company’s brands competitive for more than fifty years.

  The little burg was enormously proud of its big company, calling itself “Camel City.” Factory workers in overalls walked into stockbrokers’ offices with paper bags full of cash and “buy” orders for Reynolds Tobacco. A factory worker named Hobert Johnson was one of the company’s biggest shareholders for years, snapping up all the Class A stock he could afford every time some became available. Shares were handed from one generation to the next, with an admonition: “Don’t you ever sell that Reynolds stock.”

  The community’s Moravian values became, if anything, even more imbued in the company. Work: Competitors’ tobacco buyers returned home and goofed off after the eight-month tobacco-auction season. Reynolds’s were assigned to cull the tobacco leaves they had bought, forcing them to contemplate the quality of their labors. Thrift: Reynolds workers were expected to turn in the stub of a pencil to get a new one. A young manager running a small fan in his office on a sultry summer day was admonished to unplug it. A waste of electricity. Ingenuity: The company developed a way to recycle scraps and stems of tobacco to greatly increase the usable amount of each leaf—and greatly increase profits. “Reconstituted tobacco,” as it was called, was considered classic Reynolds: a blend of its manufacturing know-how and its waste-not, want-not culture.

  This was not, to be sure, paradise on the Piedmont. After Bowman Gray died in the mid-1930s, Reynolds endured more than a decade of tepid management. Among the workers there had always been minor grumbling: W-S, as Winston-Salem was sometimes abbreviated, stood for Work and Sleep, they joked. During the forties, the factory work force was briefly unionized; Reynolds spent much of the decade trying to break the union’s back, succeeding only when its leaders were tarred as communists. The distraction cost them, however, as sales fell behind those of archrival American Tobacco.

  But not for long. Under the leadership of Mr. Will’s nephew, John Whitaker, Reynolds entered a new golden age in the 1950s. Having run one of Reynolds’s first cigarette machines years before, Whitaker reinstated stated the sense of family in the company after the difficult union years. He liked to wander the factory floor, greeting workers by name and inquiring after their families. “I remember some mornings pulling up beside Mr. Whitaker in his little brown Studebaker,” a former employee recalled. “He’d give me a wave and I’d give him a wave back. We were going in to work together. We were all after the same thing.” (There was an unwritten rule that Reynolds executives didn’t drive anything bigger than a Buick. Even years later, when David Rockefeller came to Winston-Salem for a speech, an assistant asked that he be provided with a limousine. One couldn’t be found in the entire city.)

  Under Whitaker, Reynolds in 1954 introduced Winston, the first major filtered cigarette; 6.5 billion sold in its first nine months. It followed that triumph with the first mass-marketed menthol cigarette, Salem, which also sold in the billions. In 1959 the two new brands, benevolently named for the city that spawned them, enabled Reynolds’s sales to surge past American Tobacco’s. In Winston-Salem, they danced in the streets.

  Whitaker continued the Reynolds tradition of taking care of its town and its workers. He paid them better than union wage and set up one of the most generous corporate health programs in the country; for a nominal fee, employees and their families got free medical and dental care at a company-sponsored clinic. In the mid-fifties the company and the Reynolds family teamed to move Wake Forest University from its campus 100 miles to the east. The American Tobacco heirs had moved a college to Durham and renamed it Duke University; Reynolds made sure Winston-Salem got the same treatment.

  Life was good then. Reynolds’s Winston, Salem, and Camel were three of the top four bestselling cigarette brands, Prince Albert remained the top-selling pipe tobacco, and a brand called Days Work was the top chewing tobacco. Americans were smoking like chimneys. In 1960, 58 percent of all men and 36 percent of all women smoked. It was often said that Reynolds’s only problem was how to turn out cigarettes fast enough and how to ship all that money back to Wachovia Bank.

  In one respect, it was true. From a corporate executive’s point of view, Reynolds had too much cash on its hands. In 1956 the company amended its charter to allow it for the first time to buy nontobacco businesses. Two years later, it came close to buying a pharmaceutical company named Warner-Lambert. But when Charley Wade, a senior vice president and board member, visited Warner headquarters in New Jersey, he made a shocking discovery: Warner-Lambert’s chairman sailed a company-owned yacht. “I came back and said, ‘This is not for us; these are not our kind of people,’” recalled Wade. The deal died. Others recall it being more complicated than that, with directors also fearing that Warner-Lambert’s unionized work force would prove to be a plague on Reynolds. But the picture captures the mind-set of that era’s Reynolds: frugal, suspicious of outsiders, protective of the status quo, profoundly antiunion. “You just had small-town thinking,” says one retired executive, remembering that some directors “wanted nothing to do with Yankees and unions.”

  During the fifties, Reynolds was one great, happy family. Its executives never forgot that their company was run by the people who got up in the dark of the North Carolina countryside each morning, hopped into pickup trucks, and drove to the Reynolds factories, where they took pride in selecting the right tobacco leaves and knew the innards of each packing machine by heart. When Reynolds had to answer the all-important question of whether a new cigarette would sell, it turned to a panel of 250 of its own employees. The right formula for Winston was selected only after each worker smoked more than 250 trial mixtures. Finally Bowman Gray, Jr., the sales chief at the time, took the final puff. “This is it!” he cried.

  Gray succeeded Whitaker in 1959. He was a typical Reynolds executive of the day. The son of Mr. RJ’s right-hand man, Bowman Sr., he smoked four packs of Winstons daily and had worked for Reynolds since he was eleven, when he spent summers trimming tobacco leaves. After selecting Winston, he trusted his own smoking taste above all. “I do believe if a cigarette appeals to me—I’m a pretty average fella—it might appeal to the population,” Gray told Time magazine in 1960.

  But during the next decade the population was forced to question whether it wanted to smoke any cigarette. Ever since tobacco was first rol
led into cigarettes, there have been people opposed to smoking. King James I of Great Britain called it “the lively image and pattern of hell” and slapped an import tax on tobacco. Louis XIII of France and Czar Michael I of Russia decreed penalties for smoking ranging from death to castration. Pope Urban VIII threatened excommunication for anyone found smoking in church or on church premises. But America’s love affair with tobacco went largely unopposed until 1964, when surgeon general Luther Terry issued his landmark report linking cigarette smoke with cancer. Cigarette sales, which had risen an average of 5 percent a year, fell sharply.

  Growth eventually resumed, but Reynolds saw and heeded the warning. Gray began buying businesses outside the tobacco industry, mostly in the food business, which Reynolds executives saw as an easy mark for their marketing acumen. Anyone who could sell a product linked with cancer, Reynolds executives were fond of saying, “can sell anything.” Reynolds compiled a mixed bag of brands: Hawaiian Punch, Vermont Maid maple syrup, My-T-Fine pudding, Chun King Chinese food, Patio Mexican food.

  Its parochial nature, however, kept Reynolds from pursuing an opportunity that a newfound rival, Philip Morris of New York, was busily exploiting: overseas markets. Philip Morris was making millions selling its lead brand, Marlboro, around the world. Cocky after years of market dominance, Reynolds executives liked to say that from the twenty-second floor of headquarters they could see everything the company owned. “If somebody out there in the world wants a Camel,” they joked, “let them call us.”