Freemiums, Baseball trading cards, automatic cigarette machines, smoke breaks, Buck Duck and Duke University all in one podcast.
Dave Young:
Welcome to the Empire Builders Podcast, teaching business owners the not so secret techniques that took famous businesses from mom and pop to major brands. Stephen Semple is a marketing consultant, story collector, and storyteller. I’m Stephen’s sidekick and business partner Dave Young. Before we get into today’s episode, word from our sponsor, which is, well, it’s us, but we’re highlighting ads we’ve written and produced for our clients. So here’s one of those.
[Mother’s Brewing Ad]
Dave Young:
Welcome to the Empire Builders Podcast. Stephen, when you told me today’s topic, part of me is like, really? Are we going, and then part of me is like, which one of these guys is this? So you said American Tobacco Company?
Stephen Semple:
Yes.
Dave Young:
I’m just going to have to jump on and follow along because I’m not a smoker. Never have been. There’s always been some interesting things prior to the 1970s, at least in tobacco advertising. So let’s see what you got.
Stephen Semple:
We’re going to talk about some of the things they did in the early stages, which is really amazing. But then they went on to do some really, really terrible business practices. They created this big conglomeration and they treat growers really terribly and did a lot of awful things and eventually got broken up because of the monopolistic nature that they were doing stuff. So there is a terrible history to American Tobacco Company, but the origin of the American Tobacco Company is really quite interesting and we can learn a lot. And look, this is what this podcast is about. This podcast is about how did the empire get built in the early stages, the innovative things that they did that was really cool and interesting, not the crappy things that they did later. And the tobacco industry is a lot.
Dave Young:
So how far back are we turning the meter on the way back machine?
Stephen Semple:
1870s.
Dave Young:
Oh, way back. And so we’re in post-Civil War South where they’re raising tobacco. Just trying to set the stage and see where we’re, so post-civil war. Yeah, you’re right. This is going to get messy and weird.
Stephen Semple:
Yeah, and this is the company that really revolutionized the tobacco industry. Because what they did is they popularized the cigarette. Because at one time, cigarettes were less than 1% of tobacco sales. Today they represent like 90% of tobacco sales.
Dave Young:
And so back prior to this it, I’m just trying to think of how tobacco use, it was a commodity crop and people what bought packaged tobacco and then did whatever it rolled their own…
Stephen Semple:
Well, pipes were popular, chewing tobacco was popular, snuff and cigars were all popular. And in terms of pipe and chewing tobacco, what would happen is a wholesaler would buy tobacco from the growers and then would basically sell it to the store. So there was really no brand beyond the local. And again, most of it was cigars. Pipes was the most popular and chewing tobacco and snuff and tobacco cigarettes at the time of the starting of this story was less than 1%. So basically a rounding error.
Dave Young:
Pre-rolled, pre-packaged cigarettes, you could probably buy.
Stephen Semple:
No, you would still be buying it and rolling it yourself. You’d be buying the paper and rolling it yourself. Yeah, yeah. There was probably some rolled around. But again, when it’s such a small portion of the market, it was hard to kind of figure out what the breakdown of all those things were. And this company, American Tobacco Company, was created by Buck Duke, who at his peak, went on to become the fifth richest man on the planet.
Dave Young:
Buck Duke. Can you ask for a tougher name? Buck Duke.
Stephen Semple:
Buck Duke. Yep.
Dave Young:
His middle name Rock? All right. So he’s Duke University. It’s that Duke.
Stephen Semple:
Yep, Duke University. Same Duke. Same Duke. This goes back to really the early days of America. In the 1870s, men, women, children, everyone was using tobacco. And it was assumed at this time, tobacco in all forms was good for you. That was the assumption. And this is how big tobacco use was. Tobacco was taxed and it was so important that 30% of total tax revenues came from the tax on tobacco.
Dave Young:
Wow.
Stephen Semple:
Yeah. And as we talked about this time, there were no brands beyond local. So in comes Buck Duke, and he’s a salesman on the road for the family business. The family has a tobacco shop called Pro Bono Publico. There’s a great name, hey? Pro Bono Publico.
Dave Young:
Why wasn’t it just called Buck Dukes?
Stephen Semple:
I don’t know. So he’s on the road selling the tobacco, and he’s really struggling to find new customers. It’s very competitive. And he notices this, and this is a game changer. He notices that factory workers are smoking cigarettes on their break. And remember, cigarettes are considered a novelty item really for women at the time. But here’s what he observed. Workers only get 10 minutes for a break, which is not long enough to smoke a pipe or smoke a cigar. But you could smoke a cigarette in that time.
Dave Young:
We’re talking about a nicotine delivery system.
Stephen Semple:
Yes.
Dave Young:
Right.
Stephen Semple:
Yeah.
Dave Young:
So everybody’s addicted to nicotine. And if you have a 10-minute break in your factory job, you need a quicker delivery system. And that’s what he was observing, right?
Stephen Semple:
Yeah, and here’s what he observed. You could literally smoke a cigarette in the time it takes to fill, tamp and light a pipe and forget a cigar. A cigar is a long time. And this was right at the start of industrialization in America. So even this whole thing of people coming and working in factories was a fairly new thing. There was literally thousands of men working long hours with short breaks. But this trend was growing. The other part you could look at and go, there is going to be more factory workers and they all have this short break. And he saw this as an opportunity.
Dave Young:
Yeah, huge opportunity.
Stephen Semple:
Yeah.
Dave Young:
That’s [inaudible 00:06:56] this brilliant insight.
Stephen Semple:
This is what I really admired when I saw, is that he saw this thing and he went that direction. So he decided to make cigarettes. So he hires the workforce he needs, he finds 125 cigarette rollers and brings them to North Carolina. And most of them are Jewish immigrants from Russia. Cigarettes are popular in Russia. And a good roller could roll about four cigarettes in a minute. So he introduces pre-rolled cigarettes into the family shop, but he also needs to find a way to promote them elsewhere. And so what he decides to do is to put baseball trading cards into the package as a freemium.
Dave Young:
Nice.
Stephen Semple:
So I don’t know whether they were the first to do the baseball trading cards, but if they weren’t the first, basically one of the first to do this whole idea of a trading card inside a product to help sell them.
Dave Young:
It used to be like chewing gum, right? That was the big thing with trading cards. So probably about the same time. But yeah, especially guys, you’ve got a product that people are, because of the addiction, going to be buying over and over and over as long as they have the addiction or are alive.
Stephen Semple:
The mindset was not that this was an addiction, right?
Dave Young:
No, it was they enjoyed it.
Stephen Semple:
Correct.
Dave Young:
Yeah.
Stephen Semple:
Correct. And the other thing that was brilliant about putting the trading cards into a package of tobacco, it also protected the cigarettes during transportation. So it actually solved a double purpose. And they started to selling it under the brand W. Duke and Sons. And it becomes the first branded cigarettes in the country. He invests $800,000, which would be like tens of millions today into ads and cards. So they heavily promote this and it works. And the business grows. By 1884, he is selling 90 million cigarettes a year.
Dave Young:
Wow.
Stephen Semple:
It is so popular that they start falling behind in production. They’re weeks behind in delivery, but they’re at full capacity. They can’t find more workers. They don’t have space for more workers. So here’s the next stroke of brilliance.
Dave Young:
Stay tuned. We’re going to wrap up this story and tell you how to apply this lesson to your business right after this.
[Empire Builders Ad]
Dave Young:
Let’s pick up our story where we left off. And trust me, you haven’t missed a thing.
Stephen Semple:
He comes across an idea that had been submitted in a competition. And it’s an automated cigarette rolling machine that was created by James Bonsack called the Bonsack Machine. It had won this competition, but the prize money was never awarded. He decides this is the solution, but he also wants to be closer to where the action is and New York is emerging as the financial capital of the United States. So he decides to open a fully automated factory in New York that’s heavy on it. Builds this factory, buys a bunch of the machines, borrows tons of money. So they’re deeply in debt and the machines don’t work. In fact, they had the machines for months and they’re not working.
It got to the stage where Buck almost lost the company. They reached the point where they were out of cash and they had $12,000 come in due. So he’s staring down this debt challenge, he bet the future. And he’s struggling to get these machines to fricking work. Plus there’s no guarantee that even if they get the machine to work that a mechanically rolled cigarette would sell. There’s no guarantee. But he got the machine working. And when he got it working, this was a game changer. Single machine would roll 200 cigarettes in a minute and he bought 24 of them.
Dave Young:
Oh man.
Stephen Semple:
So it was basically doing the same amount of work, these 24 machines were doing the same amount of work that over a thousand workers would do. He could make 824 million cigarettes in a year. Within a year, he’s controlling 90% of the cigarette market. And by 1890, he’s basically 10% of the market. It’s enough that it moves them into one of the top five tobacco companies.
Dave Young:
That’s amazing. That’s amazing. And in my mind, as you tell all this, I got to wonder, and this, I know this isn’t part of the story, but what happened to the Russian Jewish people that he moved out? Are they still there? Did they follow him back to New York? I know that’s not part of the story though.
Stephen Semple:
I’m going to, given some of the things he did later as he got larger, he was unbelievably ruthless. I’m going to assume he just fired those people.
Dave Young:
I’m guessing that there’s probably a really cool historical podcast that’s covered, why are there Jews in, is it North Carolina, South Carolina?
Stephen Semple:
North Carolina.
Dave Young:
North Carolina. Why, how did they get there, right? It’s like, oh well…
Stephen Semple:
This is how.
Dave Young:
Meet Buck Duke.
Stephen Semple:
Yeah. So there’s a certain point he decides he wants to get it even bigger so he goes on a price war ’cause he has this big price advantage due to automation. And he gets to the point where he bullies the other tobacco companies to join forces with them. And he makes the deal to them all fall under a conglomerate umbrella, American Tobacco. This was the first company to do this whole idea of pull together a whole pile of people to really control the business. Now it does get broken up under antitrust legislation later, but Buck Duke popularized the cigarette through this observation of this thing that he saw going on.
Here’s the ironic thing. He hated cigarettes. He hated cigarettes. He was not a cigarette smoker and never became a cigarette smoker. Didn’t like cigarettes. He enjoyed smoking a cigar. He was never a cigarette smoker. That’s the irony in it. This is the whole thing, how many times have we heard stories where the real lesson here is observing a consumer behavior and filling that need saying, wow, this is what the consumer’s looking for. And it’s never from a focus group interview, it’s never like, hey, we’ve interviewed consumers and consumers say they want cigarettes. It was from watching the world and then seeing two trends, not only these consumers, there’s going to be a lot more of these consumers over time because we are industrializing.
Dave Young:
People wanted to use some tobacco during their short little time period that they had in a 10-minute break. This all comes down to removing some friction, right? There’s some friction in how to use a tobacco product in a short period of time. And man, cigarettes still fill that need.
Stephen Semple:
They do. They do to this day.
Dave Young:
You see anybody that still smokes, you see them duck out for a quick cigarette break. Five, 10 minutes, they’re back.
Stephen Semple:
Absolutely. It’s this whole thing of being really attuned to the needs of your customer and the changes that are going on. And as you said, eliminating those frictions, making things easier, more convenient, more accessible. And even when you’re in the service industry and in some podcasts in the future, where service providers have also done that same thing of making it easier and just observing that consumer behavior and consumer desire and seeing an unfilled need and filling it.
And then his next innovation was automating, right? Coming across this machine and going, we should automate this process. Now, maybe he would’ve been better to buy one machine and get it working before building the factory and bring 24 of them, we might be telling a very different business of things that tip just a slightly different direction. But I still have to give him credit for seeing that because it would be easy to sit there and go, oh no, tobacco has to be hand-rolled because we’ve always done it that way. How often have we heard businesses, oh no, we’ve always done it that way? He was very innovative, very looking out at the world and bringing those things to the business. And look, it turned him into, at the peak, he was the fifth wealthiest man on the planet.
Dave Young:
An industrialist, one of his era’s, we didn’t call him oligarchs back then, but when he takes his talent and then starts to control the industry that he’s in.
Stephen Semple:
That’s when things are not as good. The early days are where I admire him.
Dave Young:
Yeah, no, I admire the innovation. The antitrust, basically, they build these big, they called them trusts. That’s why, we don’t think of it. We think of antitrust and we don’t think of breaking up corporations, but it’s these industries that ganged together and did pricing together. They weren’t necessarily all owned together, but they cooperated as competitors in a way that kept all the other competitors out. And I think they called the organization a trust. It happened in the whiskey world, right?
Stephen Semple:
Yeah, happened in a lot of industries. Yeah.
Dave Young:
They used to confuse me. I used to think, well, the antitrust, I don’t, we think trust today, we think, oh, well, grandpa’s got a trust that he’s leaving us. It’s like it’s not that kind of trust.
Stephen Semple:
So Duke University has got an interesting background when it comes to all of this stuff as well.
Dave Young:
Go big tobacco. Yeah. Great story. Interesting take on innovation. Just one of those products that’s not as popular today as it used to be. Thankfully, I enjoyed learning about it. Thank you, Stephen.
Stephen Semple:
All right. Thanks, David.
Dave Young:
Thanks for listening to the podcast. Please share us, subscribe on your favorite podcast app and leave us a big fat juicy five-star rating and review. And if you have any questions about this or any other podcast episode, email to questions at theempirebuilderspodcast.com.
