Philip Morris Companies, Inc.

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Philip Morris Companies, Inc.

founded: 1919 as philip morris & company, ltd., inc.

Contact Information:

headquarters: 120 park ave.

new york, ny 10017 phone: (212)880-5000 fax: (212)878-2167

OVERVIEW

Philip Morris Companies, Inc., maker of Marlboro, the world's best-selling cigarette, is the leading U.S. cigarette manufacturer and the largest corporation in the tobacco industry. With its beginnings in an industry later plagued by scandal, health concerns, increased regulation, heavy taxation, and litigation, Philip Morris continues to post record-breaking profits and sales year after year, becoming one of the top 10 corporations in the United States. In order to maintain this position in a climate increasingly hostile toward the tobacco industry, Philip Morris began diversifying its interests and expanding into international markets. With its acquisitions of Miller Brewing in 1970, General Foods Corporation in 1985, and Kraft, Inc. in 1988, Philip Morris became the world's largest food corporation and the biggest beverage company in North America in terms of revenue, profit, and shareholder equity.

Philip Morris produces a host of famed brand names. In addition to its Marlboro brand, the company manufactures cigarettes under the brand names Merit and Virginia Slims. Its Kraft General Foods subsidiary sells products under the brand names Kraft, General Foods, Jell-O,Tombstone, Oscar Mayer, and Louis Rich, among others. Its Miller Brewing subsidiary manufactures beer under the Miller, Lowenbrau, Meister Brau, Icehouse, Red Dog, and Milwaukee's Best brand names.

Though initially a minor player in the tobacco industry, expert sales and marketing strategies enabled Philip Morris to compete with such large, wealthy tobacco companies as R.J. Reynolds and Liggett. In 1925 Philip Morris introduced the Marlboro cigarette, marketed primarily to women. In 1955 this cigarette would be reborn in the shape of a rugged American cowboy—one of the most successful advertising images ever created. Marlboro almost single handedly raised Philip Morris from a position of relative obscurity in the 1960s to one of industry dominance two decades later.

COMPANY FINANCES

Philip Morris is the world's leading producer of packaged consumer goods. In 1997 the company captured almost 49 percent of cigarette sales in the United States, up 1.2 percent from the previous year. Its Marlboro brand secured more than 35 percent of the market, an increase of 2 percentage points from 1996. Philip Morris's worldwide sales in 1997 totalled more than $72 billion. Fifty-five percent of the company's sales came from tobacco, 38 percent were provided by its food divisions, and 6 percent of its total sales came from its Miller Brewing operations. While most of its sales were domestic, 45 percent came from outside of the United States.

From the early to the late 1990s, Philip Morris showed a steady increase in net income from $3.5 billion in 1993 to $5.4 billion in 1995 to $6.3 billion in 1997. Earnings per share rose from $1.81 in 1994 to $2.17 in 1995 to $2.58 in 1997. Similarly, Philip Morris's annual dividend rose from $0.95 in 1994 to $1.40 in 1996 to $1.60 in 1997. The company's price-earning (P/E) ratio rose from 11.9 in 1994 to 18.7 in 1997. Philip Morris's financial goals must include minimizing the effects of any possible national settlement of tobacco litigation. In September of 1997, in what some analysts saw as a means of raising money to pay for a national settlement—or settlements with individual states and litigants—Philip Morris raised wholesale cigarette prices in "the single biggest across-the-board increase taken by the industry, excluding those for excise taxes," according to Sanford C. Bernstein & Co. analyst Gary Black.

ANALYSTS' OPINIONS

The hundreds of liability lawsuits filed by individuals and state governments against the tobacco industry put great pressure on "Big Tobacco" to reach settlement agreements. By 1996 U.S. tobacco companies had already spent tens of millions of dollars defending themselves, and tobacco share prices were depressed by at least 50 percent, according to tobacco analysts. In September of that year Gary D. Black, a tobacco analyst at Sanford C. Bernstein & Co., claimed that Philip Morris's market value was discounted by $60 billion because of litigation risk.

In March of 1997 Liggett Group Inc. shook up the tobacco industry by reaching an unprecedented settlement with 22 states. Bennett Lebow, Liggett's chief executive officer, said that the company admitted that cigarette smoking causes health problems, including lung cancer, heart and vascular disease, and emphysema. He also stated that "nicotine is addictive." In response to the settlement and Lebow's public statements, tobacco stocks plummeted. Within 10 days, Philip Morris's shares fell 20 percent, losing 28 points, but still remaining up about 30 percent from 1996. Despite this mounting pressure it remained difficult to see how an indus-trywide settlement between tobacco companies and plaintiffs could be effected. Nevertheless, on June 20, 1997, the tobacco industry signed a landmark settlement with 40 states that would require the companies to pay $368.5 billion over 25 years in compensation for the cost to states of treating smokers for smoking-related illnesses and to fund smoking cessation and education programs. The settlement, parts of which require ratification by Congress, would resolve all outstanding state lawsuits and 17 additional class-action suits against the tobacco industry and would prohibit any future class-action suits. Further, the settlement would require profound restrictions on tobacco marketing, advertising, and sales, particularly as they relate to minors.

Shortly after the signing of the national settlement, tobacco companies began reaching settlements with individual states. On July 3, 1997, Mississippi and the tobacco industry agreed on a $3.4 billion settlement; the following month Florida followed suit, agreeing out of court to an $11.3 billion figure to be paid out over 25 years. Both deals would be overridden by the national settlement were it to be passed by Congress and signed by the president.

In February 1998 Martin Feldman, analyst at Salomon Smith Barney, stated that "[c]urrent valuations of Philip Morris stock reflect exaggerated levels of uncertainty; and even on the basis that the current litigation threats continue, we believe that attractive returns from the current price will be generated over the next 12 months." The investment firm subsequently reiterated its "1H (Buy, High Risk)" recommendation on Philip Morris stock.

In April 1998 the tobacco industry rejected a version of the settlement as amended by the U.S. Senate. This version imposed much stricter provisions on Big Tobacco, including an additional $147.5 billion, which would bring the total payment to $516 billion to be paid out over 25 years. In addition, the new Senate version of the settlement would raise the cost of cigarettes by $1.10 a pack to discourage teen smoking and would not guarantee the immunity from future lawsuits as did the June 1997 version of the settlement. Massachusetts Senator John Kerry called the tobacco industry's rejection of the new settlement "silly" and said that it would be likely to "instill greater anger in the Congress and the American people."

Despite these concerns, in 1997 Philip Morris USA, the company's domestic tobacco business, turned in a stellar performance, capturing almost half of U.S. cigarette sales. As the twentieth century came to a close, Philip Morris's future was unclear, yet not likely to exclude tobacco. Despite increasing regulations at home and abroad, the U.S. market was stable: though the percentage of U.S. citizens who smoke dropped from 42.6 in 1966 to 25.5 by 1990, it hovered at that level through the late 1990s. Moreover, as Marc. I. Cohen, an analyst at Goldman, Sachs & Co., noted, tobacco companies could continue growing "even if the overall pie shrinks" by expanding into other countries and gaining access to markets traditionally closed to them.

Eliminating the tobacco industry, if that were somehow possible, would result in the loss of tobacco taxes that provide billions of dollars and a crucial source of income for both developed and undeveloped countries. For example, in 1993 Philip Morris paid $12.9 billion in U.S. excise and income taxes. For this reason alone, despite its unpopularity, the tobacco industry won't be disappearing away any time soon.

FAST FACTS: About Philip Morris Companies, Inc.

Ownership: Philip Morris Companies, Inc. is a publicly owned company traded on the New York Stock Exchange.

Ticker symbol: MO

Officers: Geoffrey C. Bible, Chmn. & CEO, 59, 1997 base salary $2,812,500; Murray H. Bring, VChmn., Exec. VP External Affairs, & Gen. Counsel, 62, 1997 base salary (prior to promotion) $1,495,000; William H. Webb, COO, 57, $1,308,750 base salary (prior to promotion)

Employees: 154,000

Principal Subsidiary Companies: Philip Morris Companies, Inc. is a holding company whose subsidiaries include: Philip Morris Inc.; Kraft Foods, Inc. (constituted by Kraft Foods North America and Kraft Foods International); Miller Brewing Company; and Philip Morris International, Inc.

Chief Competitors: As the dominant company in the U.S. food industry and the world's tobacco market, Philip Morris has numerous powerful competitors. Primary among these are: ConAgra, Inc., the second-ranked U.S. food company; Anheuser-Busch Companies, Inc., the largest U.S. beer maker; and RJR Nabisco Holdings Corp., a leading U.S. food company and the parent company of R.J. Reynolds, the second-largest U.S. cigarette manufacturer.

HISTORY

Englishman Philip Morris opened his tobacco shop in London in 1847. Within 10 years, Morris was manufacturing his own cigarettes and soon became one of the leading British tobacconists with a number of successful cigarette brands. When Morris died in 1873 his heirs sold the company to William Thomson, who introduced Philip Morris brands to the United States in 1902. But the U.S. tobacco market was not receptive to Philip Morris cigarette brands. In the United States cigarette smoking was unpopular, considered a vulgar method of consuming tobacco and an activity primarily for women. During this time the tobacco market was dominated by the American Tobacco Company—a powerful monopoly that produced more than 75 percent of the country's total volume of tobacco products—and there was no room for additional manufacturers. In 1911 the Supreme Court ruled that the monopoly was in violation of the Sherman Antitrust Act and ordered it divided into 16 independent corporations. The U.S. market for cigarettes remained small until 1917 when the United States entered World War I and issued cigarettes to its soldiers. Once the habit of cigarette smoking caught on with men—doubling the industry's potential customer base—sales skyrocketed and cigarettes became the dominant branch of the tobacco industry.

After the breakup of the American Tobacco Company, four companies came to dominate the industry, controlling more than 95 percent of the tobacco market: the restructured American Tobacco Company, R.J. Reynolds Tobacco Company, P. Lorillard Company, and Liggett & Meyers Tobacco Company. In 1919 an American investor purchased the rights to leading Philip Morris brands and formed Philip Morris & Company Ltd., Inc. to manage its assets. Six years later Philip Morris introduced a premium cigarette called Marlboro that sold well from the beginning, eventually leveling off at sales of 500 million cigarettes a year; industry leaders Camel and Lucky Strike each sold more than 25 billion cigarettes annually. Within a decade, Philip Morris was manufacturing cigarettes in Richmond, Virginia.

Through wise management and expertise in marketing, Philip Morris rose quickly in the industry and by the end of the 1940s became the fourth-largest U.S. cigarette manufacturer. In the 1950s filtered cigarettes became popular and Philip Morris revived its old Marlboro brand, now represented by a rugged American cowboy. This image did not catch on immediately, however, and by 1960, Philip Morris had slipped to sixth place among major U.S. tobacco companies. In the meantime, medical reports linking smoking to health problems were beginning to emerge and the U.S. cigarette industry began to suffer. In 1970 Philip Morris purchased the then seventh-ranked U.S. brewer, Miller Brewing, and Marlboro was beginning to take hold, registering yearly gains. In 1976 Marlboro sales totalled 94 billion cigarettes, passing R.J. Reynold's Winston as the most popular U.S. cigarette brand. While sales of all competitors but R.J. Reynolds declined during the 1970s, Philip Morris continued to rise on the strength of its Marlboro brand, which accounted for more than two-thirds of its tobacco business.

CHRONOLOGY: Key Dates for Philip Morris Companies, Inc.

1847:: Englishman Philip Morris opens his tobacco shop in London
1873:: Philip Morris dies and the company is sold to William Thomas
1902:: Philip Morris cigarettes are introduced into the U.S.
1919:: American investor purchases the rights to Philip Morris brands and forms Philip Morris & Company Ltd., Inc.
1925:: Marlboro brand is introduced as a cigarette for women, the wealthy, and the sophisticated
1945:: Philip Morris buys Fisher Tobacco Company for $20
1955:: Marlboro retools its image and introduces the Marlboro Man
1970:: Acquires Miller Brewing
1975:: Introduces Merit brand low-tar cigarettes
1976:: Marlboro becomes most popular U.S. cigarette brand
1983:: Philip Morris becomes largest U.S. cigarette manufacturer
1985:: Acquires General Foods Corp.
1987:: Marlboro is the world's best selling cigarette
1988:: Acquires Kraft, Inc.
1994:: Marlboro Country Store is introduced to sell brand items

By 1983 Philip Morris had replaced R.J. Reynolds as the largest U.S. cigarette manufacturer, and by 1987 Marlboro was the world's best-selling cigarette, generating 60 percent of Philip Morris's total profit. In the early 1980s Miller Brewing rose to second place among the world's brewers and Philip Morris continued to diversify its assets. In 1985 it purchased food and coffee giant General Foods Corporation and in 1988, in the fifth-largest corporate acquisition in history, Philip Morris bought Kraft Inc.—an even larger and more dynamic company than General Foods. Philip Morris then merged the companies into Kraft General Foods, Inc., to create the world's second-largest food company and become the industry leader in the mid-1990s. Toward the end of the 1990s Philip Morris was one of the top corporations in the United States.

STRATEGY

Philip Morris's success is largely due to expertise in management, sales, and marketing. Early expansion into overseas markets helped Philip Morris become the United States' leading exporter of tobacco products. Because it also had the foresight to diversify its assets beginning in the 1950s, thereby lessening its dependence on cigarettes—a product increasingly associated with health hazards—Philip Morris was able to survive the decaying image of the tobacco industry. By the mid-1990s, 58 percent of Philip Morris's revenue was derived from nontobacco sources. At the end of 1997, to strengthen its Kraft Foods International, the weakest of its principal operating companies, Philip Morris announced that it would restructure its international food business and cut 2,500 overseas jobs, about 2 percent of its total workforce. In February of 1998 Philip Morris launched similar streamlining efforts in the light of continuing declines in U.S. cigarette smoking when it announced that it would offer voluntary early retirement and separation packages to 1,900 salaried and hourly employees, primarily in its domestic tobacco manufacturing operations in Virginia and Kentucky. The company expected these programs to generate annual pretax savings of about $160 million, starting in 1999.

INFLUENCES

Almost from its inception Philip Morris relied on expert marketing and sales. In 1931 two veteran salesmen in the tobacco industry, Reuben Ellis and Leonard McKitterick, gained control of Philip Morris and used their sales expertise and connections in the tobacco industry to begin to capture a share of the market. In 1933 Ellis and McKitterick came up with several advertising gambits, the most successful of which was the revival of an old advertising slogan Philip Morris once used on posters—"Call for Philip Morris"—now updated for radio. Bellhop John Roventini, under the name of Johnnie Morris, became the incarnation of the ad, putting in numerous public appearances and calling for Philip Morris every week on radio broadcasts. That year, Philip Morris tripled its net income to $1.5 million. Within two years Philip Morris challenged Lorillard as the fourth largest U.S. cigarette manufacturer.

Because it failed to anticipate the importance of the new filtered cigarette market in the 1950s, Philip Morris entered relatively late, in 1955, with its revived, and revised, Marlboro brand. Again, the company created a living representation of its cigarette: the Marlboro Man, a romantic image evocative of the old American West. The worldwide success of this cigarette propelled Philip Morris to the top of the tobacco industry.

As medical reports linking cigarette smoking to health problems began to surface in the 1950s, Philip Morris began expanding into overseas markets where there was little or no regulation. At the same time, the company began diversifying its assets to lessen its dependence on cigarettes. As more and more medical evidence of health hazards involved with cigarette smoking emerged during the 1970s and 1980s, Philip Morris responded in three ways: first, in 1975 it introduced a lowtar brand of cigarettes, Merit; second, it increased its expansion into overseas cigarette markets; and finally, it continued to diversify its assets, buying into food, coffee, and beverage markets. This strategy of expansion and diversification continued toward the end of the 1990s as lawsuits, allegations of deception, and U.S. and foreign regulation all increased, continuing to beleaguer the tobacco industry.

CURRENT TRENDS

As the twentieth century came to a close, Philip Morris continued diversification and overseas expansion. In 1995 it created a new management group to oversee manufacturing and research for its tobacco, food, and beer products worldwide. From 1992 to 1996 Philip Morris tobacco exports increased by more than 40 percent. To keep up with overseas demand, in 1996 the company announced that it would have to expand its Cabarrus County, North Carolina, cigarette factory.

In the early 1990s Philip Morris's Marlboro brand began to lose some of its share of the U.S. market, and the company launched several efforts to stanch further deterioration. In April of 1993 Philip Morris announced it was cutting the price of Marlboros by $.40 a pack. Although this strategy initially reduced Philip Morris's domestic tobacco earnings by $2.3 billion, by early 1994 it was apparent the strategy had worked: Marlboro's share of the U.S. market rebounded from 20 percent, prior to its price-cutting, to 25 percent, higher than it had been since 1989.

To keep its Marlboro brand strong in the United States, Philip Morris initiated additional promotions in the mid-1990s. In the spring of 1994 Philip Morris introduced the Marlboro Country Store—a mail-order promotion enabling smokers to redeem empty Marlboro packs for Western wear and accessories carrying the Marlboro logo. By means of this maneuver, Philip Morris expected to build its database of smokers and turn millions of people into advertisements. In 1995 Marlboro's share of the cigarette market reached 31 percent, evidence of the success of these efforts. The following year Philip Morris sponsored 20 five-day trips in a specially built train for 100 winners of a sweepstakes drawing. The train, called the Marlboro Unlimited, was composed of 20 cars including glass-domed passenger cars, staterooms, a movie theater, a discotheque, and hot tubs. Later in 1996 Philip Morris announced its plan to publish a glossy magazine targeted at young men aged 21 to 29 to promote Marlboro cigarettes.

In the mid-1990s Philip Morris found itself at the center of a growing number of controversies. Along with the numerous lawsuits filed against the company, in June 1995, documents emerged showing that Philip Morris had studied the effects of nicotine levels in cigarettes over a 15-year period to determine smokers' preferences. While the company admitted to such study, it denied manipulating nicotine concentration in its cigarettes. This was a crucial point: federal law stated that if a manufacturer intentionally used a substance to "affect the structure or function of the body," that substance must be regulated as a drug. The documents raised a question dogging the industry: if nicotine is a drug, then mustn't cigarettes as nicotine delivery systems be regulated as drugs? In March of the following year the Food and Drug Administration released an affidavit in which a former Philip Morris researcher claimed that Philip Morris knew that nicotine was addictive and used this knowledge in manipulating nicotine levels in its cigarettes. Later in 1996 the Wall Street Journal reported the appearance of documents indicating that in the 1970s Philip Morris "insulate[d] the company's most sensitive scientific research by requiring it to be shipped overseas and, in some cases, destroyed." Philip Morris officials declined to comment.

To combat its negative image, Philip Morris made several clever public relations moves including founding the Alexandria, Virginia-based National Smokers Alliance, the country's leading smokers' rights group and a major force in public smoking conflicts in California and elsewhere. Further, along with other members of the tobacco industry, Philip Morris sponsored a web site (http://www.tobaccoresolution.com) where they have posted documents relating to the tobacco settlement, including more than a dozen pro-tobacco Op-Ed pieces.

PRODUCTS

In October 1997 Philip Morris announced that it would begin testing a new cigarette smoking system it was tentatively calling "The Accord," which consists of a beeper- sized four-ounce box into which all but the filter tip of a specially designed cigarette is placed. The "Puff Activated Lighter," as the box is called, contains a battery-powered electronically controlled lighter. The tobacco from the special "Accord" cigarette burns only when a smoker puffs on the device. Producing no ashes, no sidestream smoke, and virtually no lingering odor, the Accord would be marketed as a product providing traditional smoking pleasure for people who need to curb their smoking—for example, people "who voluntarily restrict their smoking at home or in the car or because their spouse doesn't like it," according to John R. Nelson, the senior vice president of business development for Philip Morris USA. Philip Morris plans to sell the Puff Activated Lighter, a battery recharger, and a pack of Accord cigarettes in starter sets for $50 and to make the system available in test markets by the end of 1998.

GLOBAL PRESENCE

Along with other tobacco manufacturers, Philip Morris counted on making up for the tightening restrictions and shrinking markets in the West by moving into the huge, expanding markets in Asia, eastern Europe, South America, Africa, and the Middle East. By the mid-1990s, however, antitobacco regulations seemed to be spreading overseas and smoking restrictions appeared to be taking hold. In October 1996 the city of Tianjin became the twenty-seventh city in China (where 39 percent of the population were smokers) to institute a ban on public smoking. By late 1996 Mexico, Hungary, Latvia, Brazil, Belgium, and South Africa were all considering, or had enacted, limits on tobacco advertising. At the same time, countries in which smoking had long been accepted and tolerated, including Poland and Nicaragua, had adopted smoking restrictions. Still, in 1997 Philip Morris's international tobacco business turned in an outstanding performance, deepening its global penetration in premium, mid-priced, and discount segments of the market.

While busy keeping its Marlboro brand healthy at home and abroad, Philip Morris continued its expansion into foreign food and tobacco markets in the 1990s—acquiring RJR Nabisco's North American cold cereal operation; buying a 20-percent interest in Canada's largest brewer, Molson; purchasing a controlling interest in Poland's largest tobacco operation, ZPT Krakow; and investing in tobacco companies in Hungary, the Czech Republic, Lithuania, Russia, and Kazakhstan.

SOURCES OF INFORMATION

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on the internet at: http://nt1.irin.com/irin/detail.cfm/moor write: shareholder publications, philip morris companies inc., 120 park ave., new york, ny 10017