Where there's smoke there are profits: Cigarette smoking may be declining in the US, but not in Brazil, where market leader Souza Cruz and its smoking CEO Flavio de Andrade are taking on all corners in the multi billion-dollar market

Latin CEO: Executive Strategies for the Americas, Dec, 2001 by Larry Luxner

For a lifelong pack-a-day smoker, Andrade appears to be in pretty good shape. The executive begins his days with a 90-minute workout at 6 a.m., then has a quick breakfast before sitting down at his desk. He rarely leaves the office before 8 p.m.

While Andrade doesn't dispute the fact that cigarette smoking causes cancer, he insists the Brazilian government was wrong to completely prohibit cigarette advertising. "The decision was more political than rational," he says. "We were not successful in explaining our position to Congress."

That position--shared by Philip Morris and other cigarette manufacturers--is that the tobacco sector is among Brazil's top industries in terms of job creation and tax payments. Indeed, Souza Cruz is the nation's No. 2 taxpayer (year 2000: US$1.7 billion, second only to Petrobras' US$8.4 billion). However, the Ministry of Health, which pushed for the ban, estimates that 80,000 Brazilians die of cigarette-related cancer every year, costing the public health system roughly 2.5 billion reais (US$1 billion).

The bright side of the ban is that not being allowed to advertise will save the company millions in costs; before the ban took effect, Souza Cruz was spending 5 percent of total revenues on marketing and promotion. Andrade says his company will continue to pour US$20 million a year into sponsorship of auto racing, free jazz festivals and other events until those sponsorships are banned as well.

In the meantime, Souza Cruz is spending a great deal of money on being a good corporate citizen. The company claims it has drastically reduced pesticide use in the cultivation of tobacco seedlings, and it has completely eliminated the use of methyl bromide, a chemical used in cigarette production that damages the ozone layer. Souza Cruz also has contributed money to all manner of worthy causes, from helping preserve historical documents at a Rio de Janeiro museum to eradicating child labor on tobacco farms.

Yet that hasn't stopped the company from being targeted by lawsuits and class actions related to the obvious dangers of cigarette smoking.

"Anti-smoking lawsuits have become popular in Brazil after the US government reached an agreement with US tobacco manufacturers for tobacco-related disease reimbursements," notes Santander's Bretthauer. "We believe that this news, along with other ongoing tobacco-related lawsuits, could be a cloud over Souza Cruz shares in the near term. The company does not expect any outcome in the near future, as these lawsuits should continue for a couple of years, given the slowness of the Brazilian court system."

No matter how bad things get, however, Andrade's company is not likely to exit the cigarette business. Souza Cruz is in tobacco for the long haul, whether it likes it or not.

"They've tried to diversify several times in Brazil and get into all sorts of businesses, like cellulose, but were never successful," says analyst Blocker. "Their culture is one of cigarettes. They've been here forever. That's what they know how to do, and they do it well enough to keep everybody else out."