Professor Mike Lord says Reynolds American’s Business is Less Labor Intensive than it once was

3.15.2012 Article, Business Analytics, Faculty News, General

Reynolds to cut 10% of U.S. workforce of 5,400
By Richard Craver
Reposted from Winston-Salem Journal

R.J. Reynolds Tobacco Co. workers received another lesson Wednesday about the harsh realities of supply and demand coupled with advancing technology.

The company said it was eliminating 10 percent of its U.S. workforce of 5,400, with most affected employees taking voluntary severance packages.

The number of production and salaried employees who lose jobs could be greater than 540 because Reynolds also said the reduction "will be partially offset by the hiring of new employees as and where needed."

"Most of the jobs that will be eliminated through 2014 will be in this area (Forsyth County), as will most of the new-hire positions," spokeswoman Maura Payne said.

Reynolds began doing business analyses after buying Brown & Williamson Tobacco Co. in July 2004. This is fourth layoff since then. The primary reason for the downsizing remains the same — the continuing decline in demand for cigarettes nationwide. Reynolds' cigarette volume was down 5.1 percent for 2011 compared with an industry decline of 3.5 percent.

Before the announcement, the company had 1,960 local employees with Reynolds Tobacco, 400 with RAI Services Co. and 40 with parent company Reynolds American Inc. The last available production workforce count from Reynolds was about 1,355.

Payne said the company, reflecting a recent policy change, would not provide specific numbers on how many salaried and production jobs are being eliminated.

Daniel Delen, president and chief executive of Reynolds American, said the restructuring has three focuses: workforce and production reductions, internal processes that have included outsourcing initiatives, and simplifying price and promotional programs.

The company expects to save $25 million with the workforce restructuring by the end of 2012. Those savings will increase to $70 million annually in 2015.

Delen said that to sustain the growth of its four key brands — Pall Mall, Camel and Natural American Spirit cigarettes and Grizzly moist snuff — "we need to ensure we have the financial resources and employees aligned behind the right programs and processes."

The timing of the cuts — Reynolds warned in January that they were coming — has rubbed some employees and family members raw considering the company made a $1.4 billion profit in 2011, up 25.4 percent from 2010.

Christopher Growe, an analyst with Stifel Nicolaus, said he doesn't expect this will be the last major restructuring at Reynolds as it tries to stay in front of declining cigarette volumes.

He said it also will help make Reynolds American more competitive. Because of various factors, it has the "highest controllable cost per pack" among its domestic tobacco peers.

Michael Lord, an associate professor of management at Wake Forest University, said that because "there is a lid on Reynolds' upside, improving performance becomes largely about gains in efficiency."

"The business no longer is anywhere near as labor-intensive as it once was."

Payne said some production employees will leave as soon as the end of March. Others are being kept on longer to train replacement workers.

The standard severance package consists of two weeks of pay for every year of service, with a minimum of 13 weeks and a maximum of 78 weeks of pay, along with benefits and outplacement help. Some employees received an enhanced "special, one-time" severance package. Before Wednesday's announcement, the company and its subsidiaries had eliminated at least 84 percent of the 15,500 local full-time positions they had in 1983 through at least 19 job-cut announcements.

When asked whether Reynolds expects to bring back affected employees as new hires at a lower wage, Payne said those details will be in employees' severance agreements.

The company said it has not finished a wage analysis. Payne said the average salary and bonus was $70,195 for the 1,320 production and maintenance employees who were eligible to vote on union representation in October.

Payne said the new rates will be more in line with pay at other manufacturers in the Southeast. No current production employees will have their pay rates decreased, and there are no plans to change salaried pay rates, Payne said.

"Often new employees are hired just as much for the new skills required to run more advanced manufacturing processes, not necessarily just to replace more senior employees," Lord said. "But it often can be a mix of both."

Reynolds said severance, benefits and related costs associated with the reduction will be about $110 million, with those costs being charged in the first quarter