Paul Adams: Addicted to innovation, addicted to growth - but not addicted to fags

Meet the tobacco boss who hopes citrus cigarettes, fancy packaging, and 'snus' will keep him in big cigars

Paul Adams is in full swing. He has already lit up a big fat cigar and now he's on his feet, his tall, rotund frame dominating his London office. He isn't only answering questions; he's started asking them as well.

"How do you get premium brands to grow? Because that's where the magic is. That takes a little skill and that's what we're doing. So then you say, 'OK, Paul, I hear that, but how do you do it?' And the answer is innovation - innovation that provides the consumer with incentives that mean it's worth paying more for."

The enthusiasm of British American Tobacco's 53-year-old chief executive is hardly surprising. In his industry you have to be passionate or you'd lose hope. Large segments of society view tobacco groups as nothing short of pedlars of death. The City may take a less ethical view, loving the returns the companies generate. But Western markets are stagnating, competition is stiff, with price wars between manufacturers, and governments are introducing smoking bans.

Hence Adams' passion for innovation. This, he believes, is what will drive growth at BAT, the UK's largest cigarette company and the world's second biggest after Philip Morris. Examples include "snus" (pouches of tobacco that are sucked); cigarettes flavoured with citrus or vanilla; small, thin cigarettes designed to appeal to the occasional smoker; and packets that include space, as Adams describes it, to write down girls' phone numbers.

"We pride ourselves on being the most innovative tobacco company," he adds. "We measure the number of our sales that result from products and packaging that weren't in the market three years ago."

In an industry where promotional activity is now so restricted, Adams has had to learn new tricks. While he may have joined BAT in 1991, his is a marketer's CV, including stints at Pepsi-Cola, Beecham (now part of GlaxoSmithKline) and Colgate-Palmolive. Innovation, then, is his alternative to con- ventional marketing and advertising, though on its own it won't be enough to ensure BAT's long-term growth. So since taking over the top job two years ago, Adams has also been doing the dirty work of axing costs.

The group hit the headlines when it announced the closure of its Southampton plant last year with the loss of 350 jobs and the end of manufacturing in Britain.

Around 20 factories worldwide have already been closed or downsized in the past three years. The Netherlands is currently being reviewed, and most believe Italy is next. BAT spent €2.3bn (£1.6bn) in 2003 acquiring the former Italian state mono-poly ETI, and a moratorium on cost-cutting comes to an end in December - not that Adams will be rushed into anything.

"We haven't addressed that question. The moratorium holds until the end of this year and then we will take a view. But we're looking at our global manufacturing footprint, not just specific areas."

No figure has been put on how much money BAT hopes to derive from reducing the "factory footprint". But it has said it intends to achieve £400m a year in cost savings by 2007 through trimming other overheads such as office and energy costs.

And despite healthy results - first-quarter profits were up from £626m to £668m on the same period last year as many global markets and core brands shined - BAT needs to save money. Apart from the general stagnation in the West, its biggest market, Canada, which accounts for some 12 per cent of group profits, has been hit by a vicious price war. For a long time, BAT's premium brands were the dominant force in the country, but then the cheaper brands introduced by rivals persuaded smokers to abandon them. It has since introduced its own cut-price products, but conditions remain tough.

"We will continue to lose volume," says Adams, "and we may lose some market share, but things are becoming more stable. Canada is a concern but we have a number of markets that are growing."

Another dark cloud, however, is cast by the threat of legal actions. In the US, BAT has ring- fenced itself against any litigation by offloading its American subsidiary via a merger with rival RJ Reynolds. But meanwhile, a big lawsuit is gearing up in Canada: British Columbia has won the right to sue tobacco groups to recover past and future healthcare costs.

Adams is relaxed about this. Yes, of course, BAT will be contesting the action, he says, before adding, with the air of someone who has been through this before: "These legal processes take a great deal of time."

He remains similarly laid back about any criticism of the tobacco industry you choose to throw at him. For example, what about the current strategy of going after the less-regulated emerging markets? Stuff and nonsense, says Adams, who points out that BAT has always had a presence overseas.

Fair enough. But with all this talk of innovation, how about creating a non-addictive, non-harmful cigarette? "We work very hard on reduced-harm products," he says, in a serious-yet-caring tone. "Yes, we do innovate because what we want is people to smoke our brands rather than other brands. But we don't believe people will start smoking simply because we have been innovative with a cigarette."

He admits, though, that unless a "reduced-harm" cigarette has mass-market appeal, there is little point in developing it.

So what about a non-addictive cigarette? Here Adams argues, as many in the industry do, with the contention that people smoke only because they are addicted. He asks me, as a smoker, if I have ever given up. Yes, I say. Sensing triumph, he asks for how long. My answer of a paltry three weeks momentarily throws him, but he soon recovers.

"What about someone who has given up for two years and then starts again? They know all about smoking - they can't be physically addicted. I think it's because people enjoy it." He pauses before conceding: "In the common parlance of addiction, then yes, they can be described as addictive."

Once an occasional cigarette smoker himself, Adams now prefers those chairman-of-the-board cigars. But his faith in the habit, and the money it can bring, still burns brightly.

BIOGRAPHY

BORN 12 March 1953.

EDUCATION Studied business at Ealing College, London.

CAREER

1972: management trainee at Shell.

1978: various positions at Colgate-Palmolive, including marketing manager for oral care.

1983: marketing director, Beecham Products (now part of GlaxoSmithKline).

1985: marketing, sales and distribution director, Mirror Group Newspapers (now Trinity Mirror).

1986: marketing vice-president for Pepsi-Cola Europe.

1991: regional director, Asia Pacific, for British American Tobacco.

1999: regional director, Europe, for BAT.

2001: deputy managing director.

2002: managing director.

2004 to now: chief executive.