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Tuesday, 5th May 2009

Duke actually started business as a simple pedlar of tobacco from a hand-cart. By 1901 it was reputed he had driven out or absorbed over two hundred and fifty US tobacco firms. Then he considered the UK...

I might be over simplifying matters but James B. Duke was the sort of man only the US can produce. He was the most ruthless of tycoons, which can be created by any society, however he started with nothing and clawed his way to the top, which is more common in the US. His forte was the tobacco industry of the 1880's. In 1890 he created the American Tobacco Company by merging together the five largest tobacco companies in America at that time. These being his which had captured something over 40% of the domestic market with Allen & Ginter, Kinney, Wm S. Kimball & Co along with Goodwin & Co. This gave the ATC an initial capital of $5 million. They thought themselves pretty tough.

Actual size: 80mm x 113mm Duke: Tricks with Cards [1887]

Having got control of the American market this remarkable man set his sights on the UK market. (It is a bit self-centred to say this, he was after the world. It just so happened the UK was a big player in this business.) Landing on British soil in September of 1901 it is reputed he marched straight into the Ogdens factory and bought it. Such is the legend of this man I can say that and it was largely true. It did cost $5,348,000(US) to walk in. At the exchange rates of the day this was £818,000.

This had been his second attempt to break into the lucrative British market place.

His first attempts to do so had been thwarted by a law which had been in effect since 1823. This put a large levy on tobacco products that were being imported into the country in anything other than raw state. This meant his American cigarettes were uncompetitively priced.

Just to prove there is nothing new in business "Buck" decided he would get around the law by buying up a British firm. He had tried to by Players but had not succeeded.

Upon meeting JD & WG Player for the first time he is reputed to have said, 'Hello Boys, I'm Duke, from New York, come to buy your business.' The reply is not recorded.

Things started pretty well for Duke and ATC.

With this base he began to issue huge amounts of Tabs and Guinea Gold cards. These were photographic cards of actresses, politicians etc, of the day. The popularity of these cards would have been helped by the fact photography was something relatively new to the populous.

The Guinea Gold brand was a major competitor to the Wills, Wild Woodbine brand.

Gen. Baden Powell. Prominent British Officers [1901]

Finally though Britain woke up to this upstart and got their heads together.

Tobacco Wars

1900-1902 is a period of tobacco history called 'The tobacco wars'. Really it was James B. Duke v The Rest of the World. The end of 1901 saw the birth of the Imperial Tobacco Company (ITC). Formed by Wills and twelve other companies they prepared to do battle. During this period many smaller tobacco companies were carried from the field of play because cigarettes were being sold at less than cost. The battle was that bitter and that important. Just imagine the tobacco running in the gutters.

Unusually the UK manufacturers saw "Buck" as something of a threat, and this is the unusual part, did something about it, very quickly. September 19 1901 saw thirteen of the largest firms meeting at the Queens Hotel, Birmingham. The result of the meeting was the creation of the ITC on December 10, 1901.

The original 13, with there capital commitments brought into the consortium,

  1. WD & HO Wills £7,000,000
  2. Lambert & Butler £751,000
  3. John Player £601,456
  4. Edwards, Ringer & Bigg £372,603
  5. Hignett Bros & Co Ltd £477,038
  6. Hignett's Tobacco Co Ltd £54,183
  7. William Clarke & Son Ltd £403,582
  8. Richmond Cavendish Co Ltd £319,805
  9. Stephen Mitchell & Son £701,000
  10. D & J Macdonald £131,973
  11. F & J Smith £525,803
  12. Adkin & Sons £146,499
  13. Franklyn Davey of Bristol £473,555
One of the many ITC clauses (larger than actual size)

Something of a who was who of the tobacco world. The capital commitments made give a rough idea of the amount of capital these manufacturers were devoted to the production of cigarette cards. Wills was obviously the dominant force in the UK market with the incredibly successful brand, Wills, Wild Woodbine. It is interesting to see Players put in somewhat less money than Lambert & Butler & Stephen Mitchell although the card output from Players was at least on a par with Wills.

Compare the sort of money the British firms could put together with that of the American counterparts.

The following year five more firms were to join,

  1. WA & AC Churchman
  2. WT Davies & Sons
  3. W.Williams & Co
  4. W&F Faulkner Ltd
  5. Mardon, Son & Hall of Bristol

The fifth in the list was the printers which did a great deal of the printing for cigarette cards

The stage was set for the tobacco war. Duke fired the first salvo, offering free gifts, selling at a loss and generally attempting to grab market share. Prices for the brands under his control in the British market were slashed by the region of 50% in some cases. Newspaper advertisements almost reached saturation level in an attempt to woe the British public. ITC (who had decided to retain the individual companies identities within the group) retaliated with a bonus scheme for all its trade customers. This meant they were in for a share of the profits. This is also the period that the cigarette card became important as business strategy and a boom time for collectors of cards.

Duke hit back hard. Traders which signed the Ogdens bonus agreement would be given a share of the entire net profits for 4 years plus £200,000 annually over the same period. He was able to support this kind of 'generosity' because of his recent acquisitions of Murai Bros. & Co, Japan, The American Cigarette Co. Shanghai, The American Tobacco Co of New South Wales and the American Tobacco Co of Victoria.

Financially this was going to be hard to beat so ITC played the nationalistic card with an extensive 'Buy British' campaign. Then the master stroke, 1902, saw a deputation from the ITC going to America in an effort to buy a US tobacco firm. James B Duke had bitten off more than he could chew, facing heavy losses in the UK market he could ill afford competition in his home market. On the 26 September 1902 the ATC agreed to sell Ogdens back to the British (Duke obviously wasn't in to bad a bargaining condition, he sold Ogdens back for $15,000,000.) ITC and ATC was to cease all trading activities in the UK.

Interestingly cigarette cards were a major part of the factions weaponry. Inevitably costs rose for both camps and a truce was called. Once the smoke had settled, the ground was divided. The American Tobacco company could have America and Cuba and the British-American Tobacco Company (B.A.T) could have the rest.

B.A.T was a newly formed company which had come directly out the negotiations. It was a partnership between ATC & ITC. Both Wills & Duke were on the board, followed by three of the Ogden family, C.E Lambert and WG Player. What would you give to have been a fly on the wall at board meetings there.

ITC

This really was only the beginning of the story. Two giants of the industry had agreed to agree and in the process carved up the world between them. It was not quite a monopoly situation but it certainly could be considered a collusive business structure which leads to duopoly. In general such business structures cannot be seen as a good thing for the market.

The tobacco growers in the US might not have been very interested business structures but they knew a bad thing when they saw it. It was for this reason that the president of the Danville Tobacco Association was moved to say, '...producing a condition which was desirable and highly satisfactory to the farmer but that the two Companies had reached an agreement thereby calling off competition and causing a big decline in prices.'

The next few years were taken up with ensuring the efficient supplies of enough tobacco to feed the mills back home. There were always going to be winners and losers in this shake-up. The winners did not complain, the losers did.

The years 1905-1909 were serious for Imperial due to something which they called the 'Western Situation.'

Western tobacco was very important at the turn of the century. It was used for dark shags and pipe tobacco which accounted for four fifths of total sales at the time. The new fangled cigarette only accounting for the final fifth of the market.

Western tobacco was not sold at auction but rather acquired through personal transaction between farmer and buyer. The buyers from various companies would ride around in horse drawn buggies and make agreements with the growers on an individual basis. This was not considered satisfactory amongst growers. Potentially the final straw came when there was a decline in the demand for chewing tobacco (thank goodness) which was traditionally bought from the Kentucky area.

Kentucky and Tennessee farmers attempted to form a union amongst themselves to try and keep prices higher by collective bargaining.

Collective bargaining is only going to truly work if all suppliers agree. Obviously a producer that remained outside the process could sell his crop at a slightly lower price and make a tidy sum of money whilst those within the agreement sell that much less.

Those within the pool felt this was a bit off and took the law into their own hands. This was the era of the group known as the 'Night Riders'. Punishment was handed out to those that refused to enter the pool system of collective bargaining. Under teh cover of darkness the riders would swoop digging out the offending tobacco crop.

Escalation of the situation was inevitable and Imperials was the first to suffer when on Nov 30 1906 a factory in Princeton, Kentucky, operated by John G Orr for ITC was destroyed by fire.

ITC offered a £5000/$8000 reward for finding the culprits.

There were many more smaller incidents but the climax was the raid on Hopkinsville, Kentucky, 7-8 December 1907. A large band rode into town severing telephone/telegraph wires. Violence was commited to people and two factories were burnt to the ground.

The 'Night Riders' were never brought to book but a number of bills were passed which had the effect of reducing the crime level.

On top of all this was the collapse of the banking system in the US 1907-8 but generally speaking ITC came out stronger than it went in.

1930

That is not the end of the story as the depression which first tore through America and then swept through the rest of the world obviously hit the tobacco industry, despite the addictive properties of the product.

ATC returned in 1927 with the purchase of Wix along with the brand Kensitas.

This move was followed by turning Kensitas into a 'coupon' brand. You know the sort of thing, coupons given away in the cigarettes which could be exchanged for gifts.

This was a popular idea, the something for nothing mentality taking over. By 1931 there were 22 coupon schemes struggling for existence.

The Brits lapped the concept up.

Wills refused to yield to this business development and introduced their own scheme. This also is the answer to those rather strange cards you have knocking about which are basically sections of famous paintings which when collected and put together make the completed picture. The idea was to collect them, send them into Wills and you would get a reproduction of that painting. These were issued between 1930 and 1932. Six series in all the final one was 'When did you last see your father.'

Eventually though Wills bowed to market pressure and introduced a coupon brand that same year, 'Four Aces' Within 12 months the mighty Wills had captured 22% of the coupon market. I bet the other manufacturers were really pleased to see them enter the market.

Eventually though the coupon war was proving to be too expensive to continue because of the extra man power it was taking to administer and the big companies got together and signed the peace treaty. The second tobacco war had ended and like the first it was followed by real global conflict.