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Mr. Douglas Lafferty, General Manager of British American Tobacco Serbia and Montenegro

Tobacco has been smoked for at least the last three thousand years. Christopher Columbus found it when he landed in the Americas in 1492, but ancient temple carvings show tobacco being smoked in Central America as long ago as 1,000 BC. Ever since it arrived in Europe in the late 15th century, tobacco has divided opinions, sparked controversy and generated substantial revenue through tax. Not long after it reached Europe, it was being described in terms ranging from “vile custom of manifold abuses” and “feast for the fiend” to “the divine herb” and “cornucopia of all earthly pleasure”. Today, the tobacco industry produces more than 5,400 billion cigarettes a year globally. British American Tobacco is the most international tobacco company, with brands sold in more than 180 markets. British American Tobacco has been in business for more than 100 years, trading through the turbulence of wars, revolutions and nationalizations as well as all the controversy surrounding smoking. The business was established in 1902, as a joint venture between the UK’s Imperial Tobacco Company and the American Tobacco Company founded by James ‘Buck’ Duke. Despite its name, derived from the home bases of its two founding companies, British American Tobacco was established to trade outside both the UK and the USA, and grew from its roots in dozens of countries across Africa, Asia, Latin America and continental Europe. BAT was “born international” and has developed over a century’s expertise in operating locally in diverse cultures around the world. In Serbia, BAT is present for 15 years. It functioned as a representative office until 2003, when a major milestone happened – the acquisition of Tobaco Industry Vranje (DIV).

Douglas Lafferty

We had an honor to talk to Mr. Douglas Lafferty, new General Manager of British American Tobacco Serbia and Montenegro. Since he came to Serbia recently, this is his first interview for Serbian press. Mr. Lafferty, could you tell something about yourself: where were you born, where did you grow up, about schools you attended? I’m originally from the UK. I was born in Liverpool but grew up in a city called Winchester which was once, many years ago, the capital of England. School was never far from home until I left Winchester for the bright lights of London where I studied for a degree in Management Studies at Royal Holloway College of the University of London. What was your career ladder like? I suppose so far, it has been fairly steep! BAT is the only company I have ever really worked for and I joined the company as a Management Trainee in London in 2001. My career has been a mix of hard work, an appetite to develop myself and of course a bit of luck thrown in for good measure. So far it’s been an interesting career and I love the international aspect of it. Serbia is my third International Assignment following nearly 3 years in Greece and 18 months in Romania. You have been in the position of BAT General Manager for Serbia and Montenegro since 1st of November 2010. What are your first impressions? First impressions count so it’s fortunate that mine are positive. I’m joining an organization with a real desire to succeed and I genuinely believe that we will go from strength to strength in the coming years. There have already been some interesting challenges to deal with but that’s what keeps the job and role dynamic. I also have to say that my family has settled quickly in Serbia and their first impressions about the new surroundings are equally as important as mine! Again, so far, so good. Your company has invested EUR 115 million in DIV so far. It is one of the biggest investments in Serbia. What are your company’s future plans regarding investing in DIV? As you’ve correctly mentioned, British American Tobacco has invested more than 115 million € into the Vranje factory since 2003. This has included the building of a new production facility, installation of infrastructure and production equipment, introduction of new quality standards, as well as investment into people training. Unfortunately, due to inadequacies of the Serbian market, after seven years since the acquisition of the factory we have not seen the results we expected. Additionally, consequences of the economic crisis can still be felt, and they certainly had an impact on our performances in the past couple of years. For all of these reasons, our future efforts will primarily be focused on improving our market position and changing the market dynamics. We think that it’s absolutely legitimate to expect that, after 7 years and 200 million euro invested into Serbia, BAT should start operating with a profit and start paying off the investment which was by no means insignificant. What were BAT’s business results in the last year in Serbia and globally? To what extent did economic crises affected BAT’s business in Serbia and region? On a local level, there have been various impacts and I would be surprised to hear many companies say that the economic crisis had not had a knock on effect. Obviously, there have been financial pressures driven by the currency fluctuations, and purchasing power has also been impacted which often results in consumers switching to more affordable products. Similarly we have also witnessed an increase in Illicit Trade which is not only a problem between markets in East and West Europe but a growing concern for the business across all geographies. As for BAT in Serbia, 2010 was a year in which we have made changes in our portfolio strategy, focusing on brands like Dunhill and Pall Mall to deliver the growth of our local business. Almost a year after the strategy change I can safely say that the expected results are visible – our sales and market share in all relevant segments are showing increase throughout the year. With right strategy put in place, I firmly believe that BAT Serbia will be a sustainably profitable business in the shortest period of time. You know what they say, ‘in every crisis there is an opportunity’. Globally, BAT remains extremely healthy and results for this year are encouraging, despite the external environment remaining challenging. Our share price has a clear positive trend with most analysts suggesting the «buy» option for it. The reasons behind this share price growth are clear and undeniable – our Group strategy is working and the investors have confidence that it will continue to do so. Could you compare your company’s business in Serbia to SEE business? Operating at SEE level and operating in Serbia are two different ways of doing business, yet very interdependent. However, at the end of the day, all the people working on both levels of the organization have one ultimate goal – to help BAT be the best. Now, the nature of roles and responsibilities is clearly different at end market level, not only in BAT but also in any other company, than at a more central level but that’s all natural in today’s global business. I’ve experienced both ways of operating, as well as working in our Global Headquarters in London, and as I’ve stated there is a common goal on all levels – to contribute to BAT in every possible way to become No 1 wherever it operates. EU has reached recently some very strict laws against consumption of tobacco products in public, within citizens’ protection against tobacco smoke, aiming at improvement of the quality of life and environmental protection. To what extent has implementation of this law affected your company’s business and do you expect it to affect your business in Serbia, considering that the law has come into force recently? BAT is always in favor of the balanced regulation and we believe that the new Public Place Smoking Law is a good example for that. If you look at effects of total public place smoking bans, many examples from around the world show that even the most rigorous regulations did not have any significant long term effect on tobacco industry volumes. However, the real loser of such radical solutions was in all cases the hospitality industry which recorded a drastic fall in turnover, subsequently resulting in increased unemployment rates in hospitality sector. I can clearly confirm that since I am coming from the UK, a country which is one of the few in Europe with total smoking ban in all enclosed areas. BAT, as a responsible company, fully supports a total smoking ban in cultural, health and educational institutions, but in our opinion, in other areas, such as the hospitality sector, a compromise solution must be found. By compromise we mean a balanced regulation that will suit the needs of both smokers and non-smokers. We support the adopted solution and we are already seeing that it is possible to be implemented in practice. I need to underline that majority of EU member states are having similar regulation in this area like the one that came into force in Serbia in November. To speak about the results is still early, considering that the Law has been in force for little over a month. I believe that we could have the first reliable information on the actual effects of the Law in about half a year. What is your opinion on efficiency of implementation of this law both in Europe and Serbia and on its results achieved in practice so far? Generally speaking, implementation of any law in the EU is very efficient; therefore it is the same with implementation of laws banning smoking in public places. The main question here is not the mere measure of effective and efficient implementation, but what is the final outcome for both smokers and non-smokers. In some countries the regulators, in our opinion, are more forceful in their intentions to exclude smokers from all public places. In those cases there is always a group which suffers significant negative consequences – clear evidence was seen in Ireland where the hospitality industry experienced a huge decrease in turnover and never completely recovered. I strongly believe that we will not see the same situation in Serbia because the provisions of the Law really balance the interests of all affected parties. We are really looking forward to see the full enforcement of the adopted Law. Within corporate responsibility, your company has invested significant funds helping local community. What particular action has the company conducted before your appointment and what are future investment plans to that direction in Serbia? British American Tobacco has been one of the pioneers of corporate social investment in Serbia. Together with some other responsible companies, BAT was a founder of Business Leaders Forum in Serbia, leading CSR organization in country. As a clear evidence of our CSR efforts in Serbia in the past, BAT got many awards for its efforts, both on national and local level. Based on British American Tobacco p.l.c. Business Principles that cover key issues that, in our opinion, underpin Corporate Social Responsibility for a multinational business we believe that constant and constructive engagement with all stakeholders should be ongoing, adding value to the communities in which we operate is vital, relevant and meaningful information about our products should continue to be available, that our brands and products should be marketed responsibly. These principles directed corporate social activities of British American Tobacco Serbia since 2003. We undertook many projects and I would like to point out a few that I believe made a difference for the communities and for the country as well. Firstly, for six consecutive years, BAT is awarding the best small entrepreneur in Pčinjski okrug, where our factory is located. In cooperation with Serbian Chamber of Commerce, Regional agency for economic development and entrepreneurship and Entrepreneurs association of Vranje, BAT is continually supporting the most successful small entrepreneurs with the intention to additionally stimulate economic and social growth of Vranje and Serbia. Another campaign that we are especially proud of is YSP, or Youth Smoking Prevention campaign that we ran late last year with great results and feedback from our stakeholders. Namely, British American Tobacco is categorically opposed to minors consuming tobacco products, because we believe that cigarettes should be available to only adult smokers who have a developed ability to make informed decisions and who have a developed consciousness about the potential risks that smoking brings. Based on that, BAT carried out an activity of educating the retailers through personal contact, various print materials and one of the results is that, almost on every kiosk in Serbia, we can see “We do not sell cigarettes to minors” stickers. Last but not least, in cooperation with Belgrade Culture Network we organized “Festival without cigarette buts” action on Belgrade Beer Fest, aiming to raise awareness among smokers about the importance of changing their behavior when it comes to conscienceless discarding of cigarette buts. As for further investments, we will try to follow the same pattern we had so far. Basic strategy of your company’s development internationally has been growth, productivity and responsibility. How has that been conducted in Serbia? Serbia is not different than rest of the BAT world, therefore every single activity we undertake needs to be in accordance with our global strategy. In all of the aspects of our strategy that you’ve mentioned we have achieved significant results. Our international brands have seen a steady growth, especially in 2010, creating a very good foundation for upcoming years which will certainly be dynamic. As we have stated earlier, BAT Serbia did not make profits since 2003, however we are definitely moving in the right direction in that sense. Productivity of the factory has increased considerably after all the investments during these seven years, and I’ve already said something about our corporate social responsibility. Since consumption of your product affects deterioration of health and environmental contamination, what do you do globally to reduce such negative effects? How does your company participate globally in creation of regulations and providing help to reach laws which could regulate adequately business of tobacco industry worldwide? Tobacco consumption poses real risks to health, so we agree that tobacco products should be regulated in appropriate ways. We support, and want to help deliver, balanced tobacco regulation and we want to participate and support governments with advice on and compliance with effective future laws. Truly effective tobacco regulation needs co-operation between governments and the industry. As a company that operates in more than 180 markets, we have much experience and expertise to contribute to helping regulators address the key issues surrounding our product – e.g. under-age access, illicit trade, product information, product safety, involuntary exposure to smoke. As estimated by WHO, number of smokers will have increased worldwide by more than one hundred million by the end of 21st century, despite all laws, prohibitions, warnings, NGO’s pressure, explanations, information...What else could and should be done in order to reduce number of smokers globally? Although we certainly are completely aware of the risks that our product poses to health, we are not an organization that is specialized in providing expert health solutions. The main part of our activities related to this subject is informing adult consumers that made a conscious decision to purchase our brand on all the risks involved in our product. An illegal cigarette trafficking is one of the major problems of tobacco industry. How does your company combat and what is the situation in Serbia like? Overall, through effective management of the varied issues associated with illicit trade our objective is to raise awareness of the size of the illicit problem, the loss to government revenues, the social and economic impact on society, and the links with organized crime. One of our highlights from 2010 was the signing of Cooperation Agreement with the European Commission and the 27 member states of the European Union to proactively and collaboratively tackle the escalating problem of illicit trade. We will be working alongside the European Commission and the law enforcement authorities of the EU Member States to cooperate in a number of key areas including information sharing, joint investigations and coordinated intelligence gathering, culminating in concrete enforcement action on the problem of illicit trade. This agreement is an exciting milestone for BAT and is an important addition to the work that we have been doing for many years as we continue the global fight against illicit trade. In Serbia, because of the price differences we have with certain neighboring EU countries there is a tendency of increased cigarette smuggling. This issue might jeopardize Serbian reputation within EU and therefore, we are working actively on both sides together with all relevant state bodies to bring the problems to a minimum level. In order to prevent illegal tobacco products trafficking in the Serbia, Government has conducted excise policy protecting producers but collecting taxes, as well. What is your comment on Serbian excise policy? What changes, if any, would you make in that law? Price and excise policies are of vital importance, not only for tobacco companies but also for Governments, given the significance of tobacco companies’ contribution to the state budget. For example, tobacco excise is contributing almost 12% to the Serbian budget this year. Therefore, I believe that excise policy should always be balanced and, particularly in the case of Serbia, in line with further harmonization to the EU system. To that end, it was surprise when we recently learned the Ministry of Finance had made a decision to alter last year’s agreement which was articulated through Law on excise, and which was supposed to be in place until the end of 2012. In doing so, Ministry of Finance and the Serbian Government made a decision which, if implemented, might destabilize the tobacco industry, potentially lead to increased inflow of cigarettes in Serbia and hence jeopardize Government revenues in the mid term. The most important element for the government is to ensure its excise revenues are secured going forward and I believe that through evolving the current excise system to one that allows for a more predictable and sustainable level of excise the government would be able to achieve that whilst also ensuring stability and predictability for the industry. Creating this type of environment is a key prerequisite for attracting foreign investors in any country. We always promote that, especially through our role as a founder and a Board member of the Forign Investors Council. Perhaps more importantly, as the biggest UK investor in Serbia, we have always been ambassadors of Serbia and promoted it as an attractive investment destination in all the international forums that we are a part of. For all these reasons, and despite tense situations we had in the last month, we extend an invitation and we would appreciate to have an open dialogue with the Government of Serbia about the new excise calendar for the upcoming years. Another very important law limiting tobacco industry business in Serbia is the law on advertising of tobacco products. The new Advertising law is in its final stages – could you tell us what is your opinion on the proposal? We are very interested to see more clarification on the issues we have faced in the previous years. The first draft of the new Advertising law indicates that certain progress will be made compared to the previous Advertising law and that there will be appropriate interpretations of tobacco advertising activities. In turn, this will ensure a predictable environment for all the tobacco companies to compete in. A more predictable advertising environment is also a prerequisite for successful positioning of every cigarette brand, not only BAT’s. BAT is the second largest tobacco company worldwide, also holding the second largest market share globally. It is present in 180 countries and employs 56.000 people. How many employees do you have in Serbia and have you planed new vacancies in the future? Currently there are around 300 employees in BAT Serbia, taking into account both our Commercial Unit and our factory. I believe that this number is optimal from a productivity point of view and also considering our short-term business plans. However, in this volatile and dynamic environment one can never safely predict what will happen. What’s for sure, predictability of the regulatory environment is a key element in our further operations in Serbia. How do you spend your spare time in Serbia? So far there hasn’t been much of that! However, there are a few ways that I like to spend my spare time. Sport is a big passion of mine and whilst my playing days are nearing an end I still like to have a game of football when I can, whilst I also enjoy golf and skiing. My other big passions are my family and traveling so I’m very much looking forward to spending some time with them to explore Serbia, and the rest of the region. If you could start it all over, would you change anything in your career? It’s funny; I wrote an article on this very subject for an internal communication just last year. The honest answer is yes! I would have loved to have made a career out of being a professional sportsman but unfortunately my talents didn’t quite extend that far. Having said that, I’m extremely happy where I am and consider myself very fortunate to be building a career in a fantastic company such as BAT. It really is a great place to work, challenging but fun, and being given the opportunity to live and experience life in different countries is something I am extremely grateful for.