NOVEMBER 1989 - VOLUME 10 - NUMBER 11
C O R P O R A T E P R O F I L E
King of the Cancer TradeBy John Summa
U.S. health officials estimate that 350,000 people will die this year from tobacco-related illness, mainly cancer and heart disease. But Philip Morris, the ubiquitous cigarette giant, still unabashedly maintains that there is no "conclusive proof of a cause-and-effect relationship between cigarette smoking and chronic diseases." Philip Morris chairman Hamish Maxwell is a pack-a-day smoker who, despite repeated warnings by the American Medical Association, the U.S. Surgeon General and other reputable health organizations, stands behind the company's contention that cigarettes don't kill.
There is a single explanation for such obstinate behavior in the face of overwhelming medical evidence and opposition: profits. Now ranked 10th in size among Fortune 500 industrial firms, Philip Morris's 1989 revenues are expected to top $44 billion. Its profits, the New York Times reports, are expected to rise about 20 percent above 1988's of $2.34 billion.
To be sure, Philip Morris markets more than just "cancer sticks." Its December 1988 purchase of the food giant Kraft, for $12.9 billion, has turned the tobacco company into a veritable emporium for the American palate. The company also purchased General Foods in 1985 for $5.7 billion. Philip Morris now sells over 130 products induding: baked goods, barbecue sauces, beers (Lowenbrau, Miller), candy, cereals (Post, Fruit de Fibre), coffee (Brim, Maxwell House, Sanka), desserts (Cool Whip), frozen foods, cheeses, pastas and soft drinks.
But tobacco is still the biggest earner, bringing in about 65 percent of the company's profits. The company's cigarette brands include Marlboro, Virginia Slims, Benson & Hedges, Merit and Parliament among several others.
The company started in England in 1847 where Philip Morris operated a shop; Morris began making his own cigarettes seven years later. In 1919, U.S. stockholders gained control of the company and in 1929 it opened its first factory in the United States. It was during the Depression that Philip Morris really cracked the U.S. market. When the companies that once made up the "Tobacco Trust" all raised their prices, Philip Morris launched a campaign to market economy cigarettes. This move was enormously successful. Under the tutelage of marketing genius Joseph Cullman III, the company rapidly grew during the post- World War II expansion of the economy as middle class demand for cigarettes increased. But the opposition to smoking which began in the 1970s and gained steam in the 1980s presents new challenges, and demands that Philip Morris exhibit new flexibility.
Growing public awareness of the dangers of smoking, the requirement that tobacco ads and packages carry health warnings and stricter regulations against public smoking are taking their toll on the tobacco industry. Per capita consumption of cigarettes has declined since the mid-1970s and has fallen at an accelerating rate in the 1980s. Cigarette sales are dropping by 2-3 percent per year in the United States. Increasingly, smokers in the United States are snuffing out their habits.
Preserving the smoking culture
Philip Morris is working hard to keep a smoking culture alive. The cigarette giant advertises very heavily in the print media and sponsors events like the Virginia Slims women's tennis tournament. The company also publishes a glossy magazine for smokers that reaches 12 million readers. According to Philip Morris, the magazine offers a "calm and rational forum for less well-heard points of view on issues of importance to smokers."
Its May-June 1989 issue, for instance, featured Governor James Maffin from North Carolina--the largest tobacco producing state in the country--railing against "higher consumer excise taxes." Other issues have presented articles about athletic smokers, reports about the generosity of Philip Morris in the art world and editorials slamming anti-smoking legislation as an attack on individual rights.
Since 1971, Philip Morris and other tobacco companies have been constrained in their marketing strategies by a federal prohibition on advertising cigarettes on television and radio. Beginning in late 1989, Philip Morris introduced a strategy to circumvent this ban.
In exchange for $600,000, the National Archives agreed to co-sponsor advertisements with the cigarette giant, celebrating the 200th anniversary of the Bill of Rights. The ads feature the original document and voices of prominent people, such as Martin Luther King, Jr., from the Archives' voices collection. At the end of the ads, Philip Morris' sponsorship is noted and the company's logo is displayed.
"The ads are clearly illegal" and designed to increase the sale of Philip Morris' products, says John Banzhaf lll, Executive Director of Action on Smoking and Health (ASH). If the exact same ad ended by saying "'brought to you by the Golden Arches,' no one would doubt it was an ad for McDonalds," states Banzhaf, who is largely responsible for the passage of the 1971 law banning the broadcast of cigarette advertising.
Philip Morris had several reasons for running the ads, critics believe. First, the company hopes to improve its image by associating itself with a revered document, the Bill of Rights. Second, sneaking by the ban on television advertising in this instance will get the company's foot in the door for future ads. If it succeeds in this instance, asks Banzhaf, "what's to stop Virginia Slims from running a one minute tribute to women athletes?" Third, Philip Morris hopes to subtly support its civil liberties argument that citizens have a "right to smoke." The prominence of Martin Luther King, Jr. in the ads is designed to tie restrictions on smokers to restrictions on blacks' civil rights, Banzhaf believes.
The company's huge marketing and public relations expenditures are paying off for Philip Morris. Though industry sales are falling, Philip Morris' sales are expected to rise by up to a half a percent in 1989. Philip Morris has increased its market penetration from 37.8 percent in 1987 to around 40 percent, with Marlboro alone grabbing 25 percent of the total demand.
This success is not just a result of advertisements. The company has also tailored its products to address U.S. health concerns. The most recent example is its test marketing of a new tobacco product: NEXT, a "de-nicotined" tobacco. According to Scott Ballin of the Coalition on Smoking or Health, this is Philip Morris' response to Surgeon General Koop's damning report on nicotine addiction, released two years ago. It hopes to turn the medical evidence to its advantage as tobacco companies did when they came out with low-tar cigarettes following the 1964 Surgeon General warnings about tar in cigarettes. In reality, however, low nicotine cigarettes may be more harmful than regular cigarettes. Because most smokers are addicted to nicotine, Banzhaf explains, if they are smoking a low nicotine brand "they will consciously and unconsciously adjust their smoking behavior" to keep their level of nicotine intake constant. They will smoke more cigarettes and hold smoke longer. Since the low nicotine cigarettes do not contain lower amounts of tar, the consumers of low nicotine cigarettes will actually increase their tar intake.
While the company is working hard to maintain its U.S. sales, it is looking mainly to foreign markets, particularly in the developing world, for future growth.
The reliable medium of television has become the key component of Philip Morris' international marketing strategy. Since the 1971 ban in the United States, cigarette advertising on television has gone international. Though the original Philip Morris Marlboro Man has now become an anti-smoking activist, Philip Morris's new Marlboro Man still rides into the sunset--but only on television screens in the Third World. Many poor citizens in developing countries will end up spending what little money they have on cigarettes.
Philip Morris and other cigarette companies have lobbied hard for the U.S. government to pressure foreign countries to reduce trade barriers to the cigarette trade. The Reagan and Bush Administrations have assented, strong-arming countries which restrict imports of U.S. cigarettes by using a distorted interpretation of U.S. trade law. Section 301 of the U.S. Trade Act of 1974 allows the United States to impose trade barriers on countries which discriminate against U.S. imports; the Reagan and Bush administrations have used this law only reluctantly--except to advance the interests of U.S. cigarette manufacturers over the objections of health activists in foreign countries as well as in the United States. The strategy has been successful: in 1986, Japan removed its barriers; Taiwan did so in 1987; and South Korea lifted its restrictions in 1988. The pressure continues on other Asian countries, notably Thailand.
Japan may offer the biggest prize to cigarette makers like Philip Morris. The government ended its monopoly on making cigarettes several years ago and foreign firms wasted no time moving in. Philip Morris has captured an estimated 7.5 percent of the market and is poised to expand.
Philip Morris and other tobacco companies have identified women and young people as the big growth market in Asia, says Ballin. They are pitching the "You've come a long way, baby" theme in their advertisements in the Asian countries where women are starting to earn money of their own but where few women smoke. About 90 percent of Japan's new smokers are children and about 5,000 youths start smoking each day worldwide.
Philip Morris may also soon expand into Eastern Europe. The company is trying "once again [to] beat out public health officials" in advancing their competing messages, according to Richard Daynard, head of the Tobacco Products Liability Project. "As the nations of Eastern Europe emerge from bondage to the Stalinist system, Marlboro may be there to impose their own bondage," he says.
Making Philip Morris pay?
Along with a rising health consciousness, one of Philip Morris and other tobacco firms' greatest concerns is liability litigation. Terminally ill smokers and their families, or families of the deceased, are challenging cigarette manufacturers in court. By 1987, some 152 suits were filed against makers of cigarettes. The first verdict favorable to a plaintiff was handed down in 1988 in New Jersey, where $400,000 was awarded to Antonio Cipollone, the widower of a cancer victim. In early January 1990, however, a federal appeals court overturned the verdict and ordered a new trial.
The effect the Cippolone ruling will have on Philip Morris and other manufacturers is not clear. Ironically, the appeals court ruling actually broadened the basis on which tobacco victims and their relatives could make claims against tobacco companies and could also lead to larger verdicts against cigarette makers. Daynard says that the decision will make it "much easier to bring suits" against tobacco companies.
He hopes that now Wall Street will respond to the threat of large judgments against tobacco firms and bring tobacco company stock values down. Until now, he says, the companies have persuaded market analysts that the suits will not hurt them.
Concern with liability suits began in 1984, peaked during 1987-88, but has quieted since then, according to Jennifer Coury, a tobacco industry analyst with Shearson Lehman Hutton. "Analysts are not concerned about the recent litigation," Coury states. The costs of litigation are so high that Coury and other analysts believe lawyers will be unwilling to take tobacco cases. Since the original verdict in the Cippolone case, Coury says, "the number of [willing] plaintiffs grew, but lawyers were not willing to take the cases."
It is easy to see why attorneys have been reluctant to handle tobacco liability cases. While the tobacco companies hope to win their cases, a crucial component of their strategy is to make litigation extremely costly. The goal is "basically to make to make it too costly [to bring] suits," explains Daynard. The plaintiffs' lawyers in the Cippolone case, for example, have spent six years on the case and have accumulated $3 million in expenses; the three tobacco company defendants, one of which is Philip Morris, have spent an estimated $50 million. Plaintiffs have to find attorneys who are willing to spare no expense. Daynard and other tobacco opponents hope that the Cippolone ruling will change this, making it less costly to sue and easier to win big verdicts against tobacco manufacturers.
Even if tobacco suits become more prevalent, Philip Morris may be less vulnerable to them than its competitors. "Because [the company's] market share has been rising so precipitously and since lung cancer takes so long to develop," Daynard notes, Philip Morris is a defendant in a low proportion of the cases relative to its current market share.
In the near and medium term future at least, slick advertising, brilliant marketing, international expansion and cagey legal maneuvering seem likely to enable Philip Morris not only to survive but to expand rapidly. Competitors and critics alike recognize that Philip Morris is in a "position of preeminence because they are smarter, quicker and faster than people in other [tobacco] companies," Daynard says. But he adds "The question is whether [Philip Morris's] technical competence should be a reason to ignore the basic moral quality and public health" consequences of the company's product and marketing techniques. The families of millions of deceased smokers should have no difficulty answering this query.