Philip Morris Companies Inc.

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Philip Morris Companies Inc.

120 Park Avenue
New York, New York, 10017
U.S.A.
(212) 880-5000
Fax: (212) 907-5502

Public Company
Incorporated: 1919 as Philip Morris & Co. Ltd., Inc.
Employees: 168,000
Sales: $51.17 billion
Stock Exchanges: New York Amsterdam Antwerp Basel Brussels Frankfurt Geneva Lausanne London Luxembourg Paris Tokyo Zürich

In an industry dogged by health concerns, a shrinking domestic market, and widespread investor fears about its future, Philip Morris Companies Inc. (Morris) continues year after year to achieve record-breaking sales and profits, most of them thanks to the enduring appeal of the Marlboro Man. From a position of relative obscurity in the cigarette business in the early 1960s Philip Morris has ridden Marlboro’s success to leadership of the tobacco world, and in the process accumulated enough cash to finance a series of enormous acquisitions in the food industry. The company most recently annexed both Kraft and General Foods Corporation, and is now the world’s second-largest food concern as well as the largest cigarette maker; and there is little doubt that Morris will continue to wean itself of dependence on the profitable but increasingly embattled tobacco trade.

In 1847 an Englishman named Philip Morris opened a tobacco shop in London’s fashionable Bond Street. When British soldiers returning from the Crimean War made fashionable the smoking of Turkish-style cigarettes, until then exclusively a habit of the poor, Morris was soon busy as a manufacturer as well as merchant of the newly popular product. He brought out a number of successful cigarette brands, including English Ovals, Cambridge, and Oxford Blues, and continued as one of the leading British tobacconists for many years. Morris’s company eventually built a small but stable business in the United States, where its brands sold primarily on the strength of their British cachet. The U.S. market, however, was until 1911 all but owned by the American Tobacco trust, which enjoyed a monopoly in cigarettes comparable to that of John D. Rockefeller’s Standard Oil in the oil business.

When the tobacco cartel was dissolved by court order in 1911, a U.S. financier named George J. Whelan formed Tobacco Products Corporation to absorb a few of the splinter companies not already organized into the new Big Four of tobacco—American Tobacco, R.J. Reynolds, Lorillard, and Liggett & Meyers. His first manufacturing acquisition was the maker of Melachrino cigarettes, a company at which Reuben M. Ellis and Leonard B. McKitterick had made names for themselves as outstanding salesmen. Ellis and McKitterick became vice presidents and stockholders of Tobacco Products Corporation as George Whelan considered their personal knowledge of the many thousand tobacco retailers in the New York area an invaluable asset. When Whelan picked up the U.S. business of Philip Morris Company in 1919 he formed a new company to manage its assets, Philip Morris & Company Ltd., Inc., owned by the shareholders of Tobacco Products Corporation. Ellis and McKitterick thus became part owners and managers of the new Philip Morris brands.

While George Whelan wheeled and dealed his way toward a collapse in 1929, Reuben Ellis ran Morris as its president after 1923, at which time the company had a net income of about $100,000. Ellis’s first important move at Morris was the 1925 introduction of a new premium—20C—cigarette called Marlboro, which did well from the beginning and leveled off at a steady 500 million cigarettes a year. Industry leaders such as Camel and Lucky Strike sold more than 25 billion a year. Marlboro originally was sold as a cigarette primarily for women, the wealthy, and the sophisticated, in complete contrast to its 1955 cowboy-image reincarnation. Leonard McKitterick rejoined Ellis in 1930 after a seven-year absence, and the two men set about buying Morris’s stock from their former employer Whelan, now in retreat from the tobacco business. Whelan sold off all of his tobacco interests, allowing Ellis and McKitterick to gain control of Morris by 1931. The company marketed cigarettes mainly under the names of English Ovals, Marlboro, and Paul Jones; handled a modest amount of pipe tobacco as well; and owned one manufacturing facility in Richmond, Virginia. By any measure, it was a minor competitor in an industry dominated by the remaining pieces of the former American Tobacco trust.

Ellis and McKitterick were both veteran salesmen in the tobacco business, however, which in the 1930s meant that they personally had done business with many thousands of the tobacco jobbers and retailers up and down the East Coast. In a field not yet controlled by the rising mass marketers, such as supermarket chains, those years of handshaking had built for Ellis and McKitterick a powerful store of goodwill among the men who determined which cigarettes were moved expeditiously and pushed at the retail level and those that were allowed to languish. When Ellis and McKitterick launched a new mid-priced cigarette called Philip Morris English Blend in 1933, they could count on the strong support of the jobber network to help them through the difficult introductory period. To further cement their alliance with the jobbers, Morris executives let it be known that they would refrain from selling to the new mass marketers directly, preventing the latter from retailing English Blend at less than the price of 15C set by the jobbers and dealers. The jobbers already were beginning to suffer from price competition with the big chains and readily agreed to Morris’s plan—the jobbers would push English Blend at 15c while Morris guaranteed that the same package would not end up on supermarket shelves at 10C.

As experienced marketers, Ellis and McKitterick came up with several advertising gambits as additional support for their new product. Morris introduced the use of diethylene glycol as a moisture retentive in its cigarettes, adducing as proof of glycol’s milder effect on the human throat a host of more or less scientific evidence gathered by bona fide researchers who were, however, paid for their work by the company. Ellis and McKitterick circulated results of the research among physicians, while settling in their advertisements for the general claim that “scientific tests have proven Philip Morris a milder cigarette.” The company kept up this advertising slant for many years despite skepticism voiced by the Federal Trade Commission, among others. Morris’s second advertising strategy was the revival of an earlier campaign in which a bellhop was told to fetch a pack of Morris cigarettes. The “call for Philip Morris,” slogan used on posters as early as 1919, was updated for radio in 1933 with the recruitment of a bellhop named John Roventini to serve as a living representation of the ad. Roventini, under the name of Johnnie Morris, enjoyed many prosperous years putting in countless appearances in New York and other major cities, while his strident call could be heard every week on radio broadcasts.

John Roventini soon earned himself a large fortune, by bellhop standards, and Morris began its long climb to the top of the cigarette world. Sales of English Blend were strong from its introduction in January of 1933, helping Morris to triple its net income, to $1.5 million, in a single year and by 1935 to challenge Lorillard as the fourth-largest cigarette maker in the United States. Ellis and McKitterick were both dead by 1936, but under Alfred Lyon the company continued its rise, in that year selling 7.5 billion cigarettes and laying firm hold on the industry’s fourth position. Morris was viewed as something of a phenomenon, its combination of marketing expertise and jobber loyalty enabling it to take market share from the much larger and wealthier cigarette leaders such as American Tobacco and Reynolds. Alfred Lyon directed the construction of the industry’s largest and most effective sales force, and though Morris’s special relationship with the jobbers did not last long-supermarkets proving to be the wave of the future—Morris remained a company fueled by its expertise in sales and marketing.

By 1939 sales had reached $64 million, and World War II soon put even more pressure on cigarette production. When Morris sales doubled by 1942, Chairman Lyon and President Otway Chalkey began casting about for some means to expand capacity, especially difficult given the need for large amounts of tobacco cured several years before its use. When Axton-Fisher Tobacco Company of Louisville, Kentucky, was put up for sale in 1945, Morris paid a premium price—$20 million— to win its large stores of tobacco and a second manufacturing plant. The move looked good until the war’s end in August of that year precipitated a huge drop in cigarette consumption, a cut in sales made more painful by Morris’s overestimate of peacetime demand. Many of the company’s biggest orders in the fall of 1945 were left to grow stale on retail racks, and Morris’s net income plummeted just as it floated a new bond issue at the end of the year. Morris withdrew the offering and suffered a certain amount of embarrassment, but the company’s underlying business was sound and it soon bounced back. A massive 1948 advertising campaign claiming that English Blend did not cause “cigarette hangover,” a. previously unknown disorder, led to a fresh gain in market share and profit.

Despite Morris’s success with such advertising claims, the company somehow failed to foresee the most important new development in the cigarette business in many years, the introduction of the milder and less harmful filtered cigarettes. Unlike Morris’s version of mildness, filtered cigarettes were indisputably less damaging to the throat, and increased public awareness of smoking’s real health dangers spurred a rapid shift to filters in the 1950s. Morris was evidently slow to recognize the importance of this innovation, and it was not until 1955 that the company repositioned its old filter entry Marlboro as a cigarette for everyone who responds to the myth of the American cowboy. It took time, however, for the new Marlboro image to take hold, and by 1960 Morris had slipped to sixth and last place among major U.S. tobacco companies, its best-selling entry able to do no better than tenth among the leading brands. It appeared that changing consumer preference had left Morris well out of the new era in tobacco.

Morris had at least three cards yet to play, however. One was the emergence in 1957 of a marketing tactician capable of resurrecting the glory days of Alfred Lyon. Joseph Cullman III took over management of the company in 1957 and guided its amazing growth over the course of the following two decades, much of it earned in the international market. Morris was perhaps the earliest, and certainly became the most successful, of U.S. tobacco companies in foreseeing the potential sales growth in the worldwide cigarette business. In 1960 Cullman appointed George Weissman as director of international operations, and he is generally credited with making Morris the United States’ leading exporter of tobacco products. The company’s third great resource was the Marlboro Man, who would prove in the long run to be likely the most successful advertising image ever created. For whatever combination of reasons—nostalgia for the Old West, clever packaging, tobacco taste—Marlboro almost by itself raised Morris from also-ran to industrial leader during the next quarter century.

While Joseph Cullman attended to Morris’s resurgence in the tobacco business, he also began the first of many attempts to diversify the company’s assets and thereby render it less dependent on a product that was gradually becoming known as a serious health hazard. In the mid-1950s Morris had bought into the flexible packaging and paper manufacturing trades, and in the early 1990s it added American Safety Razor, Burma Shave, and Clark chewing gum, hoping in each case to use Morris’s existing distributor network and marketing experience to sell a wider variety of consumer products. None of these early acquisitions proved to be of great value, with the possible exception of its packaging division, not sold until the mid-1980s, but in 1970 the company added Miller Brewing to its holdings. Miller was then only the seventh-largest brewer in the United States, but the combination of a repositioned High Life beer and the introduction of the United States’ first low-calorie beer, Miller Lite, brought the company all the way up to number two by 1980. On the other hand, Morris’s 1978 purchase of the Seven-Up Company for $520 million was little more than a disaster, and after several failed advertising campaigns the soft drink manufacturer was sold in the mid-1980s.

In the meantime, the Marlboro Man was running wild, carrying Morris up the ranks of cigarette makers with astonishing speed. Throughout the 1960s Marlboro registered yearly leaps in popularity, especially among the growing segment of young people, and by 1973 it was the second most popular cigarette brand in the United States and accounted for roughly two-thirds of Morris’s tobacco business. In 1976 it moved past Reynolds’s Winston as the leader with 94 billion cigarettes sold that year, helping Morris to become the United States’ and the world’s second-largest seller of tobacco. In 1961, Morris had controlled 9.4% of the market; in 1976 that figure topped 25% and continued to rise. All other competitors except Reynolds declined—between the two of them, Morris and Reynolds owned well more than half the market. The two leaders thus found themselves in a very comfortable position, as growing health concerns about smoking made it unlikely that any new competitor would join the tobacco business, while the need for massive, effective advertising made it difficult for the current players to maintain their positions. The net result was abnormally large profits for the two leaders, especially as their dominance of the market really took hold in the 1980s, and they were able to raise prices frequently without fear of being undercut.

Complementing Marlboro’s success was the emergence of two new fields for Morris. The 1975 introduction of Merit brand signaled Morris’s entry into the new low-tar market, a category that would mushroom into ever larger numbers as U.S. smokers became more concerned with the deleterious effects of smoking. Second, under the guidance of George Weissman, the company’s international business had greatly expanded. While the U.S. cigarette market was flat in the 1970s and retreating by the mid-1980s, the international business continued to grow rapidly, and Morris’s Marlboro was soon the world’s best selling cigarette. Thus, two of Morris’s responses to the increased controversy in the United States about smoking were to sell cigarettes with lower tar and to push its brands overseas, where generally less affluent people cared less about the health risks involved. Neither strategy went to the heart of Morris’s fundamental problem, the association of tobacco with disease, and the resultant product liability lawsuits. To ensure its own safety, Morris would eventually have to make a major diversification away from the tobacco business.

To that end, even as Morris passed Reynolds as the largest U.S. cigarette manufacturer it paid $5.75 billion in 1985 to acquire General Foods Corporation, the diversified food products giant. General Foods was large enough to offer Morris a significant source of revenue apart from the tobacco industry, and its reliance on advertising and an intricate distribution system was similar to Morris’s business; but General Foods was a rather lackluster company in a mature industry, and the acquisition did not kindle great enthusiasm among business analysts. They compared it unfavorably to Reynolds’s purchase of Nabisco Brands at about the same time, and predicted that the move would not be sufficient to free Morris of its tobacco habit. In 1987, for example, two years after the General Foods purchase, Morris’s total revenue had reached $27.7 billion and its operating income $4.1 billion. The lion’s share of that income—$2.7 billion—was earned by the domestic tobacco division, where the slackening of competition allowed a luxurious rate of return on its $7.6 billion in sales. By contrast, General Foods’s $10 billion contribution to revenue netted only $700 million in operating income, meaning that it was fully five times as profitable to sell a pack of Marlboros as a box of Jell-O or jar of coffee from General Foods. Indeed, 60% of Morris’s total profit for the year was generated by Marlboro’s popularity at home and abroad.

In 1988 Morris took a more decisive step toward reshaping its corporate profile. For $12.9 billion it acquired Kraft, Inc., an even larger and more dynamic food products corporation. Morris Chairman Hamish Maxwell merged his two food divisions into Kraft General Foods, Inc., the world’s second-largest food company with $24 billion in sales and more than 2,500 different products. Under its chief executive officer Michael Miles, Kraft General underwent a program of labor cuts and efficiency measures designed to raise its earnings level to something approaching that of the tobacco division, and his efforts improved the division’s performance considerably. Along with Miller Brewing’s $3.5 billion in sales—it too is the second-largest competitor in its field—in the early 1990s far more than half of Morris’s revenue was derived from non-tobacco products. It appears likely that Morris will continue to use the extraordinary cash flow generated by its domestic tobacco sales to finance further moves into the food industry, where the relatively low rate of return can be eventually compensated by means of sheer size. It made one such move in 1990, buying Jacobs Suchard, a Swiss maker of coffee and chocolate for $4.1 billion.