Universal Corporation (NYSE:UVV) is the world’s leading leaf tobacco merchant and processor. The company’s main business consists of the procurement, processing, packaging, and supply of flue-cured and burley leaf tobacco to tobacco product manufacturers such as Philip Morris. The company was formed in 1918 by Jacquelin P. Taylor from the consolidation of six leaf tobacco dealers, combining resources, talent, supply chain relationships, and buying power. Since Universal’s inception, the company has expanded overseas, notably China and Canada, and has diversified its business conducting several small acquisitions as well as the acquisitions of larger companies such as the Lawyers Title Insurance Company and NV Deli-Maatschappij of Brazil. Universal is a global corporation with its 28,000 employees working in more than 30 countries around the world. Universal has produced strong financial results over recent years with 2010 net revenues of $2.5 billion and a record net income of $168 million, a 28% increase from 2009.. Universal also plays a large role in the processing of oriental tobacco via a 49% ownership stake in one of the largest oriental leaf merchants in the world, Socotab LLC. Additionally, the company’s dark tobacco operations are located in most of the top producing countries around the world, including the U.S., Dominican Republic, Indonesia, the Philippines, and much of South America.
Universal has derived much of its value from its long-standing relationships with customers. Approximately 80% of its volume is sold to customers with whom they have been doing business for several decades, including Philip Morris International, Japan Tobacco, and Imperial Tobacco Group. Universal also provides several services to their customers, the most important of which is the processing of tobacco leaves. Unprocessed, or green, tobacco leaves are more readily perishable, and by providing the service of processing the leaves, customers save a step in their development and packaging of tobacco products.
However, as global leading corporations, Universal and Alliance One are able to provide customers with safer, higher quality products but at a slightly higher price. Also, the two firms’ scale and scope economies enable them to offer more efficient or convenient deals for their suppliers and customers. They are also afforded the opportunity to reach out to distant and concentrated markets and grab market share. Their business processes are more effective and their highly superior procurement figures show their ability to attract the most business from suppliers. For example, as mentioned, Universal itself purchases 40% of United States leaf production.
The tobacco industry as a whole is very competitive, whether regarding farmers, processors, or consumer product manufacturers. With regard to firms like Universal and Alliance, competition is even fiercer. These companies essentially act as middle men in the conversion of tobacco leaf into consumer products. They purchase the leaf from farmers, process it, package it and then sell it to other firms so they can put the leaf into various different product forms such as cigarettes or smokeless chew. Despite this, they have become very important to the industry and are able to generate high margins. However, as some firms are becoming more vertically integrated, their business is exposed to higher risks. It is important for Universal and Alliance to maintain strong bonds with their suppliers and customers in order to keep their business.
The threat of new entrants into the leaf processing market is very high. The market is dominated by Universal and Alliance One, and their smaller competitors are unable to expand significantly. Their smaller-cap competitors compete more on a regional base. There are not significant capital requirements in this market, at least entering on a smaller basis; however, all the major customers have given their business to these two top firms and will continue to do so. They provide services that smaller firms cannot, while also ensuring quality and freshness standards are always met.
Supplier power in this industry is moderate; because the industry is highly concentrated and Universal’s customers consist of large companies such as Philip Morris, customers can demand more convenient pricing standards, exerting significant influence over Universal and Alliance. However, close substitutes are not necessarily easy to come by; buyers do not purchase tobacco leaf from farmers and process it themselves. If they found their suppliers’ pricing to be too high for them—or they break off their business relationship for another reason—they would be forced to invest in equipment and research that would allow them to develop a tobacco processing division. Universal’s suppliers, on the other hand, exert much less power. Their suppliers consist of various tobacco farmers who simply produce the leaf and sell it off; they require buyers that can process the leaf and convert it into final consumer products. Buyers’ of their leaf have substitutes available, and firms like Universal can search globally for better pricing schemes and higher quality leaf.