Duke Dynasty: The Legacy of the American Tobacco Monopoly, Part Two

**Douglas Ott** (0:05)
Preferred Shares is a podcast started by three guys interested in business, history and business history. We follow our interests and go down the rabbit holes of current and bygone topics. We'll talk about individual companies, product wars, famous founders, forgotten failures and anything else that strikes our fancy. To find our episodes and show notes, please visit our website at preferredsharespodcast.com.
The hosts for the podcast are Devin LaSarre, Douglas Ott and Lawrence Hamtil. Devin is a private investor with a background in design and brand development and is the author of the Invariant newsletter. Douglas is a founder and chief investment officer at Andvari Associates, a registered investment advisor. Lawrence is a co-founder and principal at Fortune Financial Advisors, also a registered advisor. All opinions expressed by the podcast hosts and guests are solely their own opinions and do not reflect the opinions of their respective employers. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of Andvari and Fortune Financial may have positions in any of the securities discussed in this podcast.
Hello, and welcome to episode 35 of the Preferred Shares Podcast. I'm Douglas Ott, and as always, I'm joined by my co-hosts, Devin LaSarre and Lawrence Hamtil. This podcast is the second and final part on a series on the American Tobacco Company and the founding Duke family. Part one, we covered the founding of the family tobacco business, and then the unbelievable hardships the family endured and overcame during and after the Civil War to restart their family business. We left off in part one in 1890 with Buck Duke's formation of the American Tobacco Company which became the dominant force in all the major forms of tobacco in the United States. In part two of our series, we start with the creation of the American Tobacco Company in 1890, and continue with all the important details following that. We hope you enjoy.

**Devin LaSarre** (2:24)
On January 31st, 1980, the American Tobacco Company was formed, incorporating in New Jersey. The top five firms included in the ATC were W. Duke Sons and Company, based out of Durham, North Carolina, Allen and Ginter, based in Richmond, Virginia, WS. Kimball and Company, based in Rochester, New York, and Kinney Tobacco and Goodwin and Company, each based in New York, New York.
These five firms together produced more than 90% of all cigarettes in the United States.

**Douglas Ott** (3:00)
All right, so Devin, obvious follow up question here. What percent of cigarettes were of the total tobacco trade in the US.?

**Devin LaSarre** (3:08)
I don't have it right in front of me, but going off of memory, I believe right at this moment, cigarettes were maybe 3-4% of all tobacco used in the country.
Looking back at the time, smoking tobacco, it being pipes, and then chewing tobacco and cigars were all meaningful categories. And cigarettes while growing, I mean, when we say infancy, a much smaller part of the market, radically smaller than they are today.

**Douglas Ott** (3:36)
Next question, with these top five firms, the five largest firms in the US at the time, is it safe to assume that Duke was the largest shareholder of the ATC?

**Devin LaSarre** (3:47)
Yes, I mean, he was definitely in control. The company was capitalized at 25 million. Buck, he was 33 years old at the time, and he was elected president. His brother Benjamin was vice president. George Watts from their company was appointed secretary treasurer. The board of directors included the Duke brothers, Watts, Lewis Ginter from Allen and Ginter, and then representatives from the other businesses. And during its first year, ATC, American Tobacco Company, was listed on the New York Stock Exchange. Ultimately, Buck controlled the business.
There was the board, but essentially everyone did as Buck said. Having the lion's share of the cigarette market meant that the advertising war was no more, and along with that, underperforming brands were cut, and production was shifted to the most efficient factories. Spending was rationalized, and those related funds were freed and redeployed elsewhere. And every dollar was most definitely redirected to devastating effect. The American Tobacco Company wasn't satisifed with just dominating cigarettes. They wanted to destroy competition across the industry in its entirety. In 1894, ATC entered the plug tobacco market. Now why this category? Well, chewing tobacco was larger, it was steadily growing. There were many steps of production that could be mechanized. And most importantly, the market was highly fragmented with clusters of independent manufacturers all around the country. So ATC began an acquisition spree, first acquiring five firms that manufactured smoking tobacco, snuff and plug tobacco, then began what would be known as the plug war. ATC identified what it called its fighting brands, which were brands capable of taking on competition in certain local and regional markets. ATC slashed the prices of its fighting brands. And for the next four years through 1898, the company lost more than $4 million on plug tobacco. Now, this is a lot of money, but Duke wasn't concerned in the slightest. As he saw it, there was no end date for how long cigarette profits could subsidize this. Larger independents were still profitable, but their profits and market share were continually being eroded. Now, contextualizing how incredible it was that their profits were shrinking, consider between 1894 and 1897, plug tobacco volumes in the United States increased from 9 million pounds to roughly 38 million pounds. So much like the largest cigarette manufacturers, ultimately these major plug manufacturers capitulated and joined Duke.