Barbarians at the Gate

by Bryan Burrough

  To some who caught Johnson’s act during this period, he was less a business dynamo than a corporate Eddie Haskell, sucking up to Schaeberle while kicking the Beaver in the teeth. Whatever the case, it worked: Within three years, twenty-one of the company’s top twenty-four officers were Standard Brands men. The Nabisco officers had been killed so softly that Schaeberle never realized what had happened. At meetings, he would say, “It’s so great to see all these young people around the table.”

  As Johnson’s power grew, much of Nabisco’s future began to be planned at all-night drinking sessions at his apartment. The roster hadn’t changed much in ten years. There was Peter Rogers, still The Rook; Martin Emmett, The Big E; and Bob Carbonell, El Supremo, among others. Johnson, The Pope, used the sessions to throw out all manner of ideas—for restructuring the company, for hastening the Old Guard’s exit, for new products. Many were profanely hooted down, and Johnson, sipping Scotch, would cheerfully withdraw and move to the next.

  Even as he reshaped its executive suite, Johnson moved to mold Nabisco’s business mix to his own tastes. On its face it was an impossible task—Nabisco’s vast, entrenched bureaucracy seemed impervious to change—but with his newfound sway over Schaeberle, Johnson made steady progress. It was always Johnson initiating, Schaeberle assenting; Johnson spinning out sweet reason, Schaeberle accepting it. “You know, it just doesn’t make sense to have anything that’s not number one or number two in its industry,” Johnson would say. “That’s right, Ross,” Schaeberle would reply.

  In the last quarter of 1982 alone, Johnson sold J. B. Williams, Freezer Queen frozen foods, Julius Wile wine and spirits, Hygiene Industries shower curtains, and Everlon Fabrics draperies. At the same time, he cut loose some of Standard Brands’s old businesses: Chase & Sanborn and high-fructose syrup. Johnson discovered he was an excellent auctioneer. Nobody thought that J. B. Williams, home of over-the-hill brands such as Geritol and Aqua Velva, would fetch more than $50 million. But Johnson unloaded it for twice that, applying his usual charm and telling potential buyers how badly Nabisco had been running the business. He convinced them that Williams had worlds of unexploited potential. “I learned,” he said, “you always tell people how badly you’ve been running the goddamned company, so they’ve got some upside.”

  As successful as his manipulations were, Johnson could see it would take something like wartime conditions to attain a complete overhaul of Nabisco Brands. To his surprise, he soon reached that juncture in a period that came to be known as “the cookie wars.”

  Nabisco had fairly invited attack on its position atop the multibillion-dollar cookie business. It had grown soft: Its bakeries were old, its profit margins were big, and it dominated its few competitors. The company’s Pearl Harbor came in Kansas City. The attacker was Frito-Lay, the nation’s premier salty-snack maker, home of brands such as Ruffles, Doritos, and Tostitos. Frito-Lay hit the Kansas City shelves in mid-1982 with a new line of soft cookies called Grandma’s. Cocky Frito executives boasted publicly how quickly Grandma’s would thrash Nabisco, which didn’t make a soft cookie. Nabisco’s lock on the cookie business, they predicted, would break, and the $2.5 billion market would become “a Coke-Pepsi kind of thing.” The Frito generals looked as good as their word in the early days, capturing 20 percent of the Kansas City market.

  Even as Johnson scrambled to meet that onslaught, another attacker struck. Procter & Gamble, the Cincinnati consumer goods giant, unveiled its own Duncan Hines line of soft cookies. P&G began construction on a massive bakery, applied for a patent on its cookies, and started its own assault on Kansas City. Within days the city became a cookie-crazed battleground. Spurred on by coupons, special displays, and advertising, Kansas City consumers were buying 20 percent more cookies.

  Nabisco was getting clobbered. But Johnson, as always, remained upbeat and confident. There were problems with soft cookies nobody had yet focused on, he assured Nabisco’s worried directors. He told them how he had eaten some of the competitors’ cookies late one morning, then gone off to lunch depressed because they tasted so good. When he returned later, he found the remaining cookies stale.

  “Well, how stale were they?” a director asked.

  “Ever try biting into a hockey puck?” Johnson replied. Everyone roared. The Pope was already a board favorite.

  At first all Johnson could do to retaliate was to cram more chips into Nabisco’s Chips Ahoy chocolate chip cookies. In the meantime, he used the wartime footing as an excuse to rid the company’s top echelons of its remaining Nabisco veterans. “Look,” he told Schaeberle, “the guys that got you in trouble aren’t going to get you out of it.” Schaeberle, as always, agreed. Peter Rogers was brought in to head the war effort, while Carbonell flogged the R&D people to develop Nabisco’s own soft cookie.

  By mid-1983, Nabisco was ready to counterattack. With the introduction of its own soft cookie entry, Almost Home, it joined the battle for Kansas City. “It was a holocaust,” Johnson would later recall. “P&G would coupon one dollar, we’d coupon a dollar fifty. Bodies flying all over the place.” Johnson didn’t care what the coupons cost. He didn’t care what overtime his salesman put in for. Nabisco was going to take back those shelves.

  In the end Johnson and Nabisco lost the struggle for Kansas City. But they won the war. The two newcomers didn’t have the mass production and distribution systems in place to quickly go national. Once Nabisco had a product, it established impenetrable beachheads in city after city before the competition could arrive. By 1984, the cookie wars were all but over.

  As the smoke cleared, Johnson emerged triumphant, both inside and outside Nabisco. As far as Schaeberle and the board were concerned, he could do no wrong. That year Schaeberle rewarded Johnson by ceding him the title of chief executive. Nabisco’s huge new research center was about to be unveiled, and Johnson, in a spasm of flattery, repaid the favor by naming it the Robert M. Schaeberle Technology Center. Schaeberle was moved. The Merry Men thought it was a brilliant way to put Schaeberle out to pasture. A man who had his name on a building, they reasoned, might as well be dead.

  After only a decade in New York, Johnson had achieved the pinnacle of success: CEO of one of America’s great food companies. He was a new breed of chief executive for a new age of American business. The old-timers at Standard Brands had seen themselves as corporate stewards. “Your company is the ship,” they would say, “the chief executive is only the captain.” That steady-as-she-goes ethos was fine for men scarred by the 1930s and scared to make waves. But Johnson, like many of his peers, hadn’t lived through a Depression, hadn’t fought a world war, and wasn’t about to acknowledge limits. He was no old-style team player but a Broadway Joe or Reggie Jax, an iconoclastic superstar, a cool, television-age man loyal to little but his own whims.

  To outsiders, he was the same old backslapping Ross. In his early fifties, he was tall and slim and wore his silvery hair boyishly long. The only hint of Canada was in his voice: he said “bean” instead of “been,” sprinkled his jokes with the British “bloody,” and occasionally ended a sentence with “eh?”

  But even as he assumed Nabisco’s throne, Johnson seemed to lose interest in running it. Glitz now fascinated him far more than Ritz. If they weren’t off with Gifford and a girlfriend, the Johnsons were on a Mediterranean vacation with Jim Robinson of American Express and his wife Linda, then an up-and-coming Wall Street public relations expert. Among the Johnsons’s closest friends were Canadian Prime Minister Brian Mulroney and his wife, Mila. Mila and Laurie Johnson would prowl Manhattan, power shopping for the prime minister’s residence. Nabisco began sponsoring the Dinah Shore women’s golf tournament, and Johnson transformed it into a star-studded affair. His growing stable of celebrity athletes, now called Team Nabisco, was paraded about at the tournament. Gerald Ford and Bob Hope graced the Pro-Am. Johnson’s friend Oleg Cassini put him on a billboard.

  Johnson had always loved rubbing shoulders with celebrities, of course. But in the past there had b
een a sense that it stemmed from his recognizing the foibles of the upper class. He would return from an elite social occasion in Britain giggling about how the royal family was “all fucked up,” or telling tales of that crazy Maggie Thatcher: “A pisser,” he would chortle. The Merry Men, mired in cookies and crackers, loved it, even while some of them began to worry their man was becoming more an insider of the circles he ridiculed than an outsider.

  If Johnson grew indifferent toward Nabisco, it was because he could no longer see much of a future in it. The cookie wars had changed his thinking; he regarded the battle with Frito-Lay and P&G not as a final victory, but as the successful deflection of a shot fired across his bow. There would be another giant like Procter & Gamble—maybe even P&G itself—that would come after him again. Nabisco, after all, had fatal weaknesses. No amount of work was going to revitalize its aging bakeries anytime soon. Johnson, in fact, never bothered to formulate any kind of master plan for reshaping Nabisco. Years of scrambling had soured him on long-range planning. Instead he spent his time enjoying the high life, putting out corporate fires as they flared, and waiting.

  Someone had once codified the Standard Brands culture into twenty Johnsonisms. Number thirteen was “Recognize that ultimate success comes from opportunistic, bold moves which, by definition, cannot be planned.”

  On a spring day in 1985, less than a year after being tapped Nabisco’s chief, Johnson took a call from J. Tylee Wilson, chairman and chief executive officer of RJ Reynolds Industries, the North Carolina-based tobacco giant. Would Johnson be interested in getting together for lunch? Maybe, Wilson said, they could do some business.

  Chapter

  2

  Imagine you lived in this great old house. You grew up in it, and all your happy memories are in it, and you take special care of it for the next generation. Then one day, you come home to discover it’s been turned into a brothel. That’s how I feel about RJR.

  —A former RJR Nabisco employee in Winston-Salem

  If not for the RJ Reynolds Tobacco Company, the modest skyline of downtown Winston-Salem, North Carolina, would not exist at all. For years the business was headquartered in a twenty-two-story stone building that, when completed in 1929, was considered such an architectural gem it was decided to take the design to New York and execute it on a grander scale: the Empire State Building.

  On one side of the miniature Empire State is the stolid headquarters of Wachovia Bank & Trust. Its vaults stuffed with Reynolds stock and deposits, Wachovia grew to be one of the South’s preeminent banks. On the far side of the Reynolds building is a taller, more modern structure that houses the overflow of employees from headquarters. Two blocks away rises a glass-sheathed skyscraper that is the tallest in town. Its anchor tenant is Womble, Carlyle, Sandridge & Rice, North Carolina’s biggest law firm, whose practice is firmly anchored in Reynolds Tobacco.

  If not for Reynolds, Winston-Salem would be like a lot of other little southern cities of 140,000 souls. Except for the demiskyscrapers, the downtown is largely scruffy—a place of tired old stores and tired old people. Reynolds makes Winston-Salem different.

  From downtown, its influence ripples out in all directions. Travel west, along Interstate 40, where every third billboard is devoted to Reynolds brands, and the Bowman Gray School of Medicine rises into view. An eminent teaching hospital and research center, it is named for the former Reynolds chairman who bequeathed it. Farther west is the exit for Tanglewood, a sprawling park donated to the county by the brother of R. J. Reynolds, William. “Mr. Will,” as he is still known forty years after his death, made it clear that Tanglewood was to be used by the white people of the county.

  Travel north along Reynolda Road toward the estate of R. J. Reynolds himself—“Mr. RJ,” he is called, seventy years after his death. His sprawling mansion, Reynolda House, holds one of the nation’s finest collections of American paintings. Its grounds are host to the city’s most exclusive country club, Old Town. There’s room left over on the estate for the campus of Wake Forest University, which the Reynolds family brought to Winston-Salem from 100 miles away in the 1950s. Along Reynolda Road, the model farm that R. J. Reynolds’s wife—“Mrs. RJ”—once set up has been converted into a collection of toney boutiques, along with the offices that administer the public service component of the Reynolds family fortune. The Z. Smith Reynolds Foundation gives millions each year for good works in North Carolina, as does the Mary Reynolds Babcock Foundation. A fine French restaurant called La Chaudière is housed in the Reynolds farm’s old boiler room and offers Winston and Salem cigarettes to its customers gratis. Many people accept. This is, after all, a town where the occasional sign says, “Thank you for smoking.”

  The Reynolds influence ripples into the poor side of town as well. Mister Will may have better remembered the white people, but he also donated money to start the Kate Bitting Reynolds Hospital for the blacks. (The hospital no longer exists, but the Kate B. Reynolds Trust distributes one-quarter of the income from its 2.4 million RJR shares to the city’s “poor and needy.”) R.J. Reynolds High School, in a rich neighborhood, provides the city’s best secondary education. But James A. Gray High School—named for a former RJR chairman—for years provided good schooling for the lower strata. On its grounds now stands the North Carolina School of the Arts. RJR donations help maintain this well-regarded fine arts training institute.

  On a humid summer morning, when there’s no breeze to carry it away, the pungent smell of tobacco still hangs over downtown Winston-Salem, wafting from the company’s oldest tobacco factory, still in operation down the hill from the little Empire State Building. It serves as one constant reminder why there is a Winston-Salem. A few blocks away, in front of City Hall, stands another: the statue of Richard Joshua Reynolds riding into town on horseback.

  He rode into Winston-Salem in 1874, a twenty-four-year-old Virginian attracted by some of the best tobacco-growing land in the country. At six feet two inches, R. J. Reynolds cut an imposing figure as he moved through the dusty streets of the burgeoning town. He had grown up sixty miles north in Rock Springs, just across the state line. His father owned a chewing-tobacco factory there, and Reynolds spent his youth learning the business. Business wasn’t easy in the hardscrabble world of the post—Civil War South. Cash was scarce and hard-driving ingenuity was required. The young R. J. Reynolds had just that, showing a brilliant talent for bartering. Sent out on the road with a wagonload of chewing tobacco, he returned with an even bigger wagonload of goods in exchange: beeswax, cowhides, sheep pelts, ginseng, carpets, and furniture, along with three or four horses and mules hitched on behind. Back at Rock Springs, it was all auctioned off for a 25 percent profit.

  Although R. J. Reynolds had grown up in the Old South—as a child he hid family horses in the woods to escape marauding Union troops—he was a creature of the emerging New South: less agrarian and more entrepreneurial, less rooted and more restless. The day he rode into town, Reynolds had big plans. He knew the flue-cured leaves in the nearby fields were increasingly popular with tobacco chewers. He knew the town had an auction house that would give him access to supply. And he knew a railroad line there could connect him with markets. Within days he bought a plot of land from the Moravian church for $388, and began building a factory. A year later, in 1875, the RJ Reynolds Tobacco Co. was in business, along with its share of competitors: In this bustling town of 2,500, there were already fifteen tobacco companies.

  Even in this crowded field, R. J. Reynolds distinguished himself. He innovated, becoming the first to devise a way to make chewing tobacco sweeter, by blending in saccharin. He expanded aggressively, always keeping the capacity of his factory well ahead of current production, and he worked hard, for years living above the factory floor. He played hard, too, drinking deeply, gambling heavily, squiring around different women. He literally drove himself hard, making his way through the countryside with a double team of horses for extra speed. (At an 1890 meeting of the Reynolds board, directors authoriz
ed spending $240 a year for Reynolds’s horse team, the equivalent of today’s corporate jet.) The only thing R. J. Reynolds did slowly was speak, in an effort to overcome a lifelong stutter.

  The combination of Mr. RJ’s business acumen with the area’s tenacious Moravian work ethic laid the foundation of the Reynolds corporate culture for decades to come. The Moravians had arrived here in 1753 to settle 100,000 acres of land they bought from Lord Granville of England. These Czechoslovakian immigrants sought not only religious freedom, in the Piedmont region of central Carolina, but also economic self-sufficiency. They were a stubborn, industrious people, skilled at manufacturing and trading and making do. They made Salem important enough that by the 1800s a railroad line ran westward to it from the larger town of Raleigh.

  To a great extent, the policies of Reynolds Tobacco mirrored strong Moravian values. The Moravians believed in the individual subsuming himself for the good of the community, in being conservative in personal bearing as well as in finances. They founded a solid bank called Wachovia, named after a region in the old country, and, when the two towns merged a few years later, gave Winston-Salem a feeling unlike that of other Bible Belt towns. It was more progressive, for the Moravians were great believers in education. They established Salem Female Academy, the first women’s college in the region. R. J. Reynolds and his Moravian workers made a great team, and by the 1890s their company was the clear leader among the area’s many tobacco companies.

  In fact, Reynolds Tobacco grew fast enough that it came to be coveted, as it would a century later, by a ravenous Northern suitor. The 1890s saw the rise of James B. (“Buck”) Duke’s national tobacco trust, which grew by gobbling up regional tobacco companies like RJ Reynolds. Buck Duke’s roots were down the road in Durham, North Carolina, but he had moved his American Tobacco Company to New York to develop the financial contacts that would enable him to expand nationwide. As he became more successful, Duke modeled his tobacco trust after John D. Rockefeller’s Standard Oil and soon effectively controlled the nation’s fledgling cigarette market. Buck Duke then turned his attention to taking over the chewing-tobacco business.