Philip Morris Companies Teaching Notes*

33. Philip Morris Companies

Teaching Notes^*

Philip Morris Companies was incorporated in Virginia on March 1, 1985 as the holding company for the diverse consumer product businesses of Philip Morris, Inc. Philip Morris (PM) is best known as a manufacturer and marketer of cigarettes. In fact, PM is the largest cigarette company in the U.S. with a 42 percent share of the 70 billion dollar industry. However, over the past thirty years the company has been pursuing a systematic diversification strategy so that, in addition to cigarettes, the company now ranks as the second largest beer brewer in the U.S. and the second largest food processing company in the world. The company’s brands include Clark Chewing gum, Louis Kemp Seafood, Miller, Miller Lite, Lowenbrau, Jell-O, Oscar Meyer, Sealtest, Maxwell House, Oroweat Baked Goods, Light Touch Deserts, and Marlboro, Virginia Slims, Bucks, Benson & Hedges, Merit, and Parliament.

Philip Morris has been able to fund its numerous acquisitions through its high margin tobacco products. It was able to utilize its marketing expertise, developed in the intensely competitive cigarette industry of the late 1950s and early 1960s, to quickly grow acquisitions such as Miller Brewing into “top two” industry market share positions.

The company’s goal is to be the most successful consumer packaged goods company in the world by meeting emerging consumer trends, expanding geographically, and manufacturing and marketing globally. The company’s strategy appears to be working as PM is currently the largest and most profitable consumer products company in the world. As of 1992 Philip Morris ranks seventh on Fortune’s list of largest U.S. manufacturers with sales approaching $50 billion.

Despite its track record of success there are ominous signals that the company’s lifeline, tobacco, is nearing the end of its life cycle. The future of the tobacco industry, particularly domestically, is cloudy. With numerous product liability lawsuits pending and increasing anti-smoking sentiments PM must face the increasingly realistic possibility that cigarette smokers will become virtually nonexistent. Thus, the company cannot expect that tobacco profits will continue to fund its major acquisitions into consumer product businesses.

Teaching Objectives

The case deals with the systematic diversification of a tobacco company into an industry leader in food processing and brewing. The central issue facing Philip Morris today is its inevitable weaning from the tremendously profitable tobacco industry and to a lesser extent from the brewing industry. Tobacco has been experiencing decline for the past two decades whereas brewing has experienced stagnant growth for the past five years. With 7 cigarette manufacturing facilities in or near Richmond, the company must face restructuring if demand continues to dwindle. In short, how can the firm position itself for post-cigarette survival even as its brewing business also declines.

The case contains information concerning PM’s three primary businesses: food processing, brewing, and tobacco. The case requires careful analysis of remote environmental factors from a multinational perspective. The company has concluded that the domestic cigarette market is drying up. Can foreign markets be reached expeditiously to provide sufficient profits before they too are subjected to tightening regulation and heightened consumer awareness of the perils of smoking?

The best use of the case is to task student groups with developing industry scenarios for tobacco, brewing, and food processing. The scenarios should be developed with respect to emerging regulatory, sociological, demographic, technological, and economic trends. For each scenario the students should assess probability of occurrence and formulate strategies for each SBU accordingly.

As described in the case there have been a number of unfriendly takeovers by Philip Morris including Kraft and General Foods. This may have an adverse affect on morale and lead to problems where the acquired organization has a distinctive corporate culture. Many of the planned for synergies of acquisitions have not been realized because the organizations could not merge due to cultural dissimilarities. The result is two organizations functioning under the same corporate tent but essentially as two separate companies. There is no merging or synergy. In fact the acquired organization may be resentful to the point that it subverts the raider. Philip Morris has experienced some of these problems with Kraft General Foods as have a number of highly publicized corporate mergers including General Motors’s acquisition of EDS, USAir’s acquisition of Piedmont, and Sears with Dean Witter and Coldwell Banker.

The advantages of an external acquisition as opposed to internal growth strategy include speediness, managerial talent, and cost. An acquisition of a company in a highly attractive industry provides an instant presence with experienced executives at the helm. This is much less time consuming than establishing a subsidiary in an industry and trying to gain market share from existing competitors. Philip Morris has traditionally acquired companies with an established presence—usually a top three market share position—and invested heavily to gain market share.

Finally, acquiring an established company is less costly than a new start-up. Capital and equipment costs would be much higher in an internal development scenario—not to mention the additional costs of recruiting and training employees.

The most threatening trends are in the political/regulatory and sociological factors. Litigation pending against cigarette manufacturers seeking compensatory and punitive damages for victims of respiratory system diseases linked to smoking present a potential threat to the industry. Although no tobacco company has lost a case to date, a ruling by the Supreme Court that manufacturers are not shielded due to the presence of warning labels could open the door to a torrent of legal claims.

Legislative/regulatory proposals to prohibit or restrict advertising and marketing of alcohol on radio and television (Project SMART—Stop Marketing Alcohol on Radio and Television) threatens the brewing industry. Attracting new consumers is heavily dependent on marketing and Philip Morris has traditionally considered its marketing expertise as its distinctive competence. Thus Philip Morris stands to lose more than its competitors if this scenario comes to fruition.

Governmental studies have found that environmental tobacco smoke (ETS) is harmful to non-smokers. This has led to the banning of smoking in many public places such as supermarkets, shopping malls, restaurants and increasingly, sections of motels and restaurants are set aside for nonsmokers. Findings linking the presence of ETS to increased risk of cancer among non-smokers increasingly cast smokers as irresponsible villains. The smoker in today’s society is faced with increasingly militant non-smokers. Smokers have in many ways become pariahs.

During harsh economic times states increase excise taxes on beer and cigarettes to help cover budget shortfalls and fund needed public projects. These so-called “sin-taxes” are more acceptable to most taxpayers because they are in essence voluntary or discretionary. During the recession of 1990–1991 many states doubled their excise taxes on beer and cigarettes.

A sociological trend with ominous implications for Philip Morris is increased awareness of and concern for physical fitness. People have long been aware of the dangers associated with smoking and drinking but until recently food and nutrition was not considered overly important. Brewing industry sales have stagnated as consumers substitute fruit juices and bottled water. The number of smokers and unit sales continue to decline. However, the food side of Philip Morris is beginning to show signs of consumer awareness as the products with notoriously high cholesterol and saturated fat content exhibit slowed growth. The prepared foods of KGF such as dairy products and meat products fall into the high fat, high sodium, high cholesterol categories that leading health agencies such as the American Heart Association, the American Cancer Society, and the American Medical Association are warning against. Often the recommendations call for increased consumption of unprocessed fruit and vegetables to the exclusion of prepared foods which are the staple of Philip Morris.

The primary trend that represents an opportunity for Philip Morris is the opening of previously restricted markets for trade with western firms. As described in the case, China and the former Soviet Union represent tremendous growth opportunities for PM. The EEC to be consummated in 1992 also represents an opportunity for Philip Morris because it standardizes alcoholic beverage and tobacco regulations.

This is a very difficult issue. Tobacco farming represents a major money crop for the beleaguered agricultural industry. Cigarette manufacturers employ tens of thousands of Americans. Taxes on tobacco products subsidize our education systems, highways, health care, and many other social services. Tobacco exports help to offset our existing trade imbalance with many countries but most especially with Japan.

On the other hand, the evidence concerning the detrimental health effects of smoking is irrefutable. The costs to the country in terms of health care resources directly resulting from smoking induced maladies run into the billions of dollars. The Surgeon General and Director of Health and Human Services openly campaign against the industry and decry their ads focused on youths and ethnic groups. If new studies support the claim that nonsmokers’ health is seriously jeopardized by smokers’ second hand smoke, public sentiment could pressure congress and health agencies to introduce legislation to ban the sale of cigarettes.

5. Should cigarette companies be shielded from liability lawsuits because of the federally mandated warning labels that have appeared on packages of cigarettes since 1966?

The company’s position is stated in the case. The plaintiffs argue that by the time the warning labels were in place they were already hopelessly addicted to smoking. The plaintiffs also cite the powerful tobacco lobby (the American Tobacco Institute) as continuing to deceive the public by proclaiming that there exists no proof that smoking leads to diseases such as cancer and emphysema.

Philip Morris is the largest tobacco company in the U.S. with 41.9 percent market share. The brand recognition and brand loyalty are significantly ahead of the competition. Marlboro is the leading selling cigarette in the world.

PM is ranked as one of the very best employers in the U.S. in terms of salary, benefits, and opportunity for advancement. Its employees and managers exhibit a high degree of company loyalty and consequently PM experiences low turnover and absenteeism.

The company is cash rich. It produces more excess cash than any other company except Exxon. During the next five years the company is expected to throw off free cash (this figure is the money left over after capital expenditures, dividends, and taxes) of more than $21 billion.

The company has a global perspective that is promoted by its diverse top management team.

Weaknesses:

Many of Philip Morris’s past acquisitions have not been friendly. Some of the employees from these companies harbor resentment and hostile feelings.

The company’s profits are disproportionately attributable to tobacco. With tobacco’s endangered future, PM’s past strategy of acquisitions funded by tobacco profits may be drawing to a close. The company’s food businesses with few exceptions are positioned in areas not associated with “eating smart—a buzzword for the 1990s.

External Environmental Analysis

Industry Environment:

The two most important forces driving competition in the cigarette industry are competitive rivalry and pressure from substitute products.

The U.S. tobacco market has been declining at about 2.5 percent per year. One of the major contributing factors to intense rivalry is slow growth. In this situation one competitor’s growth must result in other competitors’ decline. There are over 250 domestic brands of cigarettes in the U.S. These brands are supported through advertising and pricing tactics. The tobacco companies continually target niches or small segments of smokers that are drawn to a particular type of cigarette. The smokers are actually drawn to a brand because of their perception of its attributes as studies have borne out that smokers generally cannot distinguish among brands of cigarettes within the same category (regular, menthol, filter, non-filter, premium, discount, low tar, ultra low tar). Thus PM and RJR Nabisco typically rank among the top 5 in terms of total advertising expenditures. Other marketing ploys used by tobacco companies include larger packs, longer cigarettes, thinner cigarettes, gender specific brands, and ethnically targeted cigarettes.

There are many substitutes for cigarette smoking. As people become more concerned with the health risks of smoking they turn to alternative forms of oral gratification including nicotine gum, smokeless tobacco or snuff, and chewing tobacco.

A recent innovation which is in essence a substitute for smoking is the nicotine patch which is applied to the shoulder. Nicotine is slowly absorbed into the bloodstream through the skin which allows the smoker to wean himself from tobacco.

The Remote External Environment:

The major forces in the remote external environment include political and regulatory restrictions on smoking and tobacco advertising, litigation against tobacco companies by individuals claiming to have been harmed by smoking, and increased health and fitness awareness. Each of these are discussed in detail in discussion questions 2 and 3 in the second section of this instructor’s guide.

On June 24 1992 the Supreme Court ruled that victims of smoking-related ailments may sue cigarette companies in state court on charges of intentionally deceiving the public about the dangers of smoking. The justices concluded by a 7-2 margin that federal laws requiring warning labels on cigarette packages do not shield the companies from all suits based on state personal injury laws.

The ruling was in response to a case filed by the family of Rose Cipolbne who died after smoking for 42 years. Analysts disagree over the implications of the ruling for tobacco companies. Kathleen Scheg, counsel to Action on Smoking and Health (ASH), says it represents a major victory for the families of smokers and will open the door to millions of lawsuits. But according to the tobacco industry, whose stocks dropped sharply when the ruling was announced, said the ruling will have little noticeable effect.

According to Steve Parrish, vice president and general counsel of Philip Morris USA, predictions of increased litigation as a result of the ruling are off-base. “Those people who say the floodgates will open and the industry will be brought to its knees don’t have a very good track record,” he said.

The tobacco industry had maintained that the Federal Cigarette Labeling and Advertising Act exempted cigarette manufacturers from damage claims made by persons who smoked after 1965. The ruling invalidates this claim and substantiated a lower courts ruling that Mrs. Cippolbne was entitled to damages. The substance of her claim was that cigarette manufacturers had failed to warn her of health risks caused by smoking before the federal act took effect. She also charged the industry with purposely undermining the impact of the health warning through a campaign to persuade the public that there was no proof of the link between smoking and cancer.

Epilogue Information

WSJ 9302110036

Headline: SMOKE AND MIRRORS: HOW CIGARETTE MAKERS KEEP HEALTH QUESTION ‘OPEN’ YEAR AFTER YEAR; COUNCIL FOR TOBACCO RESEARCH IS BILLED AS INDEPENDENT BUT GUIDED BY LAWYERS AND INDUSTRY INSURANCE POLICY

By-line: Alix M. Freedman and Laurie P. Cohen, Staff Reporters of The Wall Street Journal

Source: Wall Street Journal

Date: Thursday Feb 11, 1993 Sec: A p: 1

Length: Long 5259 words Type: News Illus: Table

Abstract: For almost four decades, rival cigarette makers have joined together to back the Council for Tobacco Research in one of the most aggressive and persistent cases ever of industry using research to counter safety claims. The CTR has been able to present the appearance of controversy on the issue of a link between smoking and cancer and other diseases even though most scientists consider the evidence overwhelming against tobacco.

Subjects: Council for Tobacco Research; Tobacco; Medical research; Lobbying

Copyright 1993 Dow Jones & Company, Inc. All Rights Reserved.

Article Text:

This is the story of the longest-running misinformation campaign in U.S. business history, and how it may ultimately backfire on its corporate sponsors.

The tale opens in 1954. Cigarette smoking, like tail fins and the new music called rock-and-roll, was fun and glamorous. But a warning had just been sounded that smoking might not be good for you. A scientist at Memorial Sloan-Kettering Cancer Center had painted tobacco tars on the backs of mice and produced tumors. The tobacco industry met this sudden threat head-on.

In full-page newspaper ads headlined “A Frank Statement to Cigarette Smokers,” tobacco companies announced that a new research group, funded by the industry but independent, would examine “all phases of tobacco use and health.” Its solemn pledge: ‘We accept an interest in people’s health as a bask responsibility, paramount to every other consideration in our business.”

The tobacco industry’s main vehicle for damage control was up and running.

For almost four decades, the Council for Tobacco Research in New York City has been the hub of a massive effort to cast doubt on the links between smoking and disease. Sponsored by U.S. tobacco companies and long run behind the scenes by tobacco-industry lawyers, the ostensibly independent council has spent millions of dollars advancing sympathetic science. At the same time, it has sometimes disregarded, or even cut off, studies of its own that implicated smoking as a health hazard.

“When CTR researchers found out that cigarettes were bad and it was better not to smoke, we didn’t publicize that” in press releases, says Dorothea Cohen, who for 24 years until her retirement in 1989 wrote summaries of grantee research for the Council’s annual report. “The CTR is just a lobbying thing. We were lobbying for cigarettes.”

Many companies under attack for their products have underwritten research to buttress safety claims. What sets the tobacco industry apart are the scope, aggressiveness and persistence of its undertaking. For decades rival tobacco companies have acted in concert to combat the growing body of evidence linking their products to cancer, heart disease and emphysema.

The U.S. Centers for Disease Control today links 434,000 deaths a year to smoking. The surgeon general has declared smoking “the single largest preventable cause of death and disability,” citing “overwhelming” evidence from no less than 50,000 studies. Yet the wisp of uncertainty supplied by the Council has always been enough to protect the $50 billion industry in Congress and especially in court, and tobacco companies have never paid a dime in product liability claims.

Addison Yeaman, a former Brown & Williamson Co. lawyer and ex-chairman of the Council, says the passage of time hasn’t altered his faith in this view expressed at a Council meeting in 1975: The “CTR is the best and cheapest insurance the tobacco industry can buy, and without it, the industry would have to invent CTR or would be dead.”

Michael Pertschuk, a former chairman of the Federal Trade Commission, finds the industry’s defense extraordinary. “There never has been a health hazard so perfectly proven as smoking, and it is a measure of the Council’s success that it is able to create the illusion of controversy in what is so elegantly a closed scientific case.”

But now the device the industry has so long used to deflect attack has become its biggest vulnerability. That is because the Supreme Court last year said smokers can sue, accusing the industry of deliberately hiding or distorting smoking’s dangers. And the U.S. attorney’s office in Brooklyn, NY, is conducting a criminal investigation into whether the industry used the Council to defraud the public.

Whether anything will come of the criminal inquiry—and whether plaintiffs can convince juries that the industry did in fact misrepresent health hazards—are very much open questions; just last month, one jury rejected allegations of a conspiracy. But if plaintiffs should begin to succeed, perhaps by gaining access to now-secret Council documents, they could turn on its head what up to now has been an almost totally winning industry strategy.

The Council for Tobacco Research declined to respond to questions about its activities, as did all of the Big Six tobacco companies—Philip Morris Cos., RJR Nabisco Holdings Corp., American Brands Inc., B.A.T Industries PLC (parent of Brown & Williamson), Loews Corp. (parent of Lorillard) and Brooke Group Ltd. (parent of Liggett Group).

At the outset, many in the industry thought the late-1953 crisis posed by the Sloan-Kettering mouse research was entirely manageable. With the Council, “the industry was told that in the best of worlds, we’d do a great service to mankind,” says James Bowling, a former Philip Morris director. “Our product either would be exonerated or, if involved in causing cancer, they’d identify the ingredients and we’d take them out. We thought this is marvelous.”

So apparently did some scientists. The Council snagged a noted figure, Clarence Cook Little, as its scientific director. Thanks to his renown as a former University of Michigan president and director of a prestigious laboratory, the Council was able to attract an illustrious scientific advisory board, which culled through proposals from a who’s who of American scientists who sought its research grants. Over the years, it has doled out more than $200 million.

But the Council’s role was never just research. It was largely a creature of Hill & Knowlton, the public-relations firm, which cigarette merchants retained when the mouse research came out. Hill & Knowlton installed the Council in the Empire State Building in New York one floor beneath its own offices, with one of the PR firm’s staffers as the supposedly independent research council’s executive director. Hill & Knowlton also began publishing a newsletter that reported such news items as “Lung Cancer Found in Non-Smoking Nuns,” and it helped authors generate books with titles like “Smoke Without Fear” and “Go Ahead and Smoke.”

Some people, including many in the news media, were skeptical of the Council. “To reporters, the Council was never independent,” says Earl Ubell, a veteran science reporter at WCBS-TV in New York. “It was a wholly owned subsidiary of the tobacco industry.” But in the interest of balance, journalists writing on smoking and health routinely included the Council’s views.

And many smokers lacked the professional skepticism of reporters. “You would have to have lived in that era to understand—they kept providing false reassurances, so I had no idea that smoking was so very dangerous,” says Janet Sackman, who once appeared in ads as Miss Lucky Strike and who now has throat cancer.

As early as 1958, however, the Council had strong intimations from studies it financed that smoking could be dangerous. “Cigarette smoke condensate is a weak mouse skin carcinogen,” said a Council-financed study completed in that year.

Ensuing Council-financed research found more links to disease. In 1961, a study of 140 autopsies at a Veterans hospital in Iowa City, Iowa, said “a history of cigarette smoking is significantly related to the incidence of carcinoma.” In 1963, researchers at Philadelphia General Hospital and the University of Pennsylvania linked chronic smoking to earlier coronary artery disease and a higher incidence of coronary occlusion.

The Council summarized such results in its annual reports, but it often chose other research to stress to the public. Ms. Cohen, who wrote the summaries, cites a 1965 study that said pregnant women who smoked had smaller babies and were more likely to give birth prematurely. But the industry in 1982 submitted to Congress a study the Council hadn’t financed, saying that smokers had no greater risk of premature babies and that low birth weight wasn’t a problem.

“In the ‘60s,” says Ms. Cohen, “there was so much bad news about smoking that there really wasn’t much the CTR could put out, but anything they could find they would use.”

By 1964, keeping the case open was no longer just shrewd public relations; it had become a legal imperative. As more Americans came to believe smoking could kill, the number of tobacco liability suits jumped to 17 from seven the year before. And in that year, the Surgeon General labeled smoking a health hazard.

It “was a serious, stunning shock,” says Mr. Bowling, the former Philip Morris director. “That’s the stage at which the lawyers became a lot more involved.”

Needing a defense from science as never before, yet dreading the legal exposure that adverse research would bring, the industry created within the Council a Special Projects division—with lawyers, not scientists, at the helm. Much of what it did was shrouded in mystery. “Everything was cloak-and-dagger,” recalls John Kreisher, a former associate scientific director of the Council. “We weren’t allowed on their floor.”

The core of the lawyers’ operation was a vast database, storing the world’s literature on tobacco and health, data on foes and strategy documents. The lawyers began shuttling the globe, looking for research and expert witnesses. They sought out studies supporting causation of lung cancer by factors other than smoking and research suggesting the complex origin of all diseases linked to tobacco.

Overtures to scientists usually were handled by outside law firms, especially Jacob, Medinger, Finnegan & Hart in New York. It also served as counsel to the Council, and its Edwin Jacob took the lead role at the Special Projects unit. This arrangement offered crucial advantages. Notes Roy Morse, a former research chief at R.J. Reynolds: “As soon as Mr. Jacob funded” a scientific study, “it was a privileged relationship and it couldn’t come into court” because of legal rules protecting attorney-client communications. “So they could do projects that they could bury if they chose.”

How often they may have done that is unclear, because 1,500 Council documents are under seal in a federal suit in New Jersey, withheld under the attorney-client privilege. In any case, the industry had other options, such as halting funding after an initial phase. Mr. Jacob and the firm of Jacob Medinger declined to comment.

In 1972, the Special Projects unit gave Hugh Fudenberg, an immunologist, funding to determine whether some people are genetically predisposed to emphysema. Early results indicated up to 10% might be. Dr. Fudenberg planned “to warn high-risk people not to smoke,” he says, but before he could his funding was discontinued without explanation. “They may have cut me off because it would have been negative for them,” he speculates.

A researcher named Geoffrey Ashton reamed the limits of the Council’s independence in 1976. He was invited by Mr. Jacob to study whether there might be some genetic factor underlying both smoking and certain diseases. But the study never got funded. Dr. Ashton says the lawyer told him “the presidents of the tobacco companies had turned down the proposal because they didn’t think the outcome would be useful to them.”

This case, like several others, points up the sometimes-perplexing relationship between scientists and the tobacco Council. Dr. Ashton says he was “very apprehensive about casting his lot with the industry. What finally won him over? “Not to shock you, but scientists are always looking for money to further their research,” Dr. Ashton says.

Likewise, a pharmacologist, Charles Puglia, did a special project for the Council’s lawyers from 1979 to 1981, although he believed smoking to be dangerous. He explains: “It was early on in my career and it got me started with a laboratory.

While these scientists hesitated to accept tobacco funding but finally said yes, others, such as Theodore Finley, hesitated and finally said no. Dr. Finley, encouraged by Jacob Medinger lawyers to apply for cigarette research funding, decided to examine whether emphysema can result from a reduction that smokers face in a protective lining of the lung. He soon backed out. “If my theory was correct, it would have discredited cigarettes,” he says. “But it would be hard to talk about the evils of tobacco while being supported by them at the same time. This was dirty money—I felt like a prostitute.”

The researchers the Council cultivated most assiduously were those of a different breed: contrarians whose work disputed the perils of tobacco. For instance, James F. Smith did two controversial studies in the 1960s and 1970s saying smokeless tobacco did not cause cancer. (The surgeon general in 1986 said it raised the risk of oral cancer.)

Although Dr. Smith all but repudiated his own conclusions on CBS’s “60 Minutes” in 1985—urging the public to avoid smokeless tobacco—a short time later he acknowledges he accepted an offer of several thousand dollars from Jacob Medinger lawyers to review scientific literature in preparation for a tobacco liability suit. The plaintiff was the mother of an Oklahoma youth who had died of oral cancer after using smokeless tobacco for seven years.

The Jacob Medinger firm and other defense lawyers won the suit, invoking Dr. Smith’s studies as independent research. But there are indications he had longstanding ties to the Council; one court document shows his first study was earmarked a “priority” for funding by Council lawyers 20 years earlier. Dr. Smith says the Council paid for equipment at his department’s lab at the University of Tennessee when he was doing his smokeless-tobacco studies, though it didn’t finance the studies.

Two other favorite scientists of the Council were Carl Seltzer and Theodor Sterling. Dr. Seltzer, a biological anthropologist, believes smoking has no role in heart disease and has alleged in print that data in the huge 45-year, 10,000-person Framingham Heart Study—which found otherwise—have been distorted by anti-tobacco researchers. Framingham Director William Castelli scoffs at Dr. Seltzer’s critique but says it “has had some impact in keeping the debate alive.”

Dr. Sterling, a statistician, disputes the validity of population studies linking smoking to illness, arguing that their narrow focus on smoking obscures the more likely disease cause—occupational exposure to toxic fumes.

For both men, defying conventional wisdom has been rewarding. Dr. Seltzer says he has received “well over $1 million” from the Council for research. Dr. Sterling got $1.1 million for his Special Projects work in 1977-82, court records show.

In relying on such research, the tobacco industry is “exploiting the margins of science,” contends Anthony Colucci, a former top researcher and later director of scientific litigation support at R.J. Reynolds. He offers an analogy: “There’s a forest full of data that says tobacco kills people, and sitting on one tree is a lizard with a different biochemical and physiological makeup. The industry focuses on that lizard—that tiny bit of marginal evidence.”

R.J. Reynolds is suing Dr. Colucci, an outspoken critic, to keep him from testifying in a trial or talking to the media about tobacco liability, and accuses him of demanding a big consulting contract to keep quiet. Dr. Colucci says Reynolds “manipulated the negotiations” so it can now portray them as an extortion attempt. He adds: “This is a clear demonstration of the extent to which a tobacco company will go to silence someone who is telling the truth.”

The Special Projects unit worked in a variety of ways to protect tobacco companies. Lobbying in Congress against advertising curbs, the industry in 1982 submitted to Congress a researcher’s statement that peer pressure, not advertising, induced young people to smoke. Congress wasn’t told that the research had been funded by Council attorneys. This was no accident. At a meeting of tobacco-company lawyers the year before, Mr. Jacob explained that the reason for funding that particular research as a Special Project was to conceal the researcher’s ties to the industry. “We did not want it out in the open,” Mr. Jacob said, according to the meeting transcript as cited in a Newark, N.J., federal judge’s opinion.

The Council’s lawyers weren’t content for long to confine their activities to the Special Projects division. By the late 1960s, they had begun to encroach on the smoking research emanating from the putatively independent Council itself. Often, the Council and its lawyers shared or swapped projects and scientists.

By 1968, the Council had begun putting researchers under contract for many studies. This gave it the right to control both a study’s design and publication of the results. However, as a contractor, the Council could be held responsible for withholding negative findings. So its operatives would do their utmost to ensure that ugly surprises didn’t arise.

This contributed to a parting of the ways with Hill & Knowlton. “The lawyers had this thing under control,” recalls Loet Velmans, a former chief executive of the PR firm. It quit the account in the late 1960s, he says, out of frustration that the industry “for legal reasons felt it couldn’t admit to anything on tobacco and health because then it would be sued out of existence.”

Says Robert Kersey, a former head of tobacco research at Liggett: “Almost everything that transpired had to be done under the advice of counsel so that nothing…would incur a potential liability.”

In 1968, the Council contracted with Mason Research Institute in Worcester, Mass., to evaluate “smoking machines” for animal inhalation studies and do toxicity tests on rodents. As the study drew to a close in 1972, Mason researcher Miasnig Hagopian was astonished when scientists from the Council and from R.J. Reynolds began turning up weekly at his lab, where he says they sat for hours taking notes. They made sure that only the most genetically vigorous (that is, cancer-resistant) rodents were going to be used, he says, and dictated which cigarettes and how many puffs were administered to them.

“It got to the point where they were directing the course of the study,” says Dr. Hagopian. “It was nowhere near as objective as if it had been funded by” the government.

Although he did complain to Mason’s president, Dr. Hagopian concedes he and other researchers mainly “looked the other way.” They wanted to make sure the contract was renewed so they could do the critical experiments on whether smoke affects rodents’ lung tissues. However, the Council canceled funding before Mason began the animal study.

The Council pulled out the big guns after another study, at Bio-Research Institute in Cambridge, Mass. When Syrian hamsters were exposed to smoke twice a day for 59 to 80 weeks, 40% of those of a cancer-susceptible strain and 4% of a resistant strain developed malignant tumors. Before publishing the study in 1974, the institute’s founder, Freddy Homberger, sent a manuscript to Robert Hockett, then scientific director of the Council. Dr. Homberger says he had to do so because halfway through his study, the Council had changed it from a grant to a contract “So they could control publication—they were quite open about that.”

Soon thereafter, Dr. Hockett and Mr. Jacob, the lawyer, hastened to Dr. Homberger’s summer home in Maine. Their mission? “They didn’t want us to call anything cancer,” Dr. Homberger testified years later at the Rose Cipollone tobacco liability trial in federal court in Newark N. J. “They wanted it to be pseudo-epitheliomatous hyperplasia, and that is a euphemism for lesions preceding cancer. And we said no, this isn’t right. It is a cancer.” Today, Dr. Homberger adds that Mr. Jacob told him he would “never get a penny more” if the paper was published without making the changes.

He compromised. At the last minute, he changed the final proofs to read “microinvasive” cancer, meaning a microscopic malignancy. Despite this, his lab was never funded by the Council again.

Dr. Homberger would come to regret his concession. And the Council would find a use for it—on the same occasion on which it eventually would use research from another lab, Microbiological Associates of Bethesda, Md.

The Council contracted with that lab to do the world’s largest inhalation study, involving more than 10,000 mice. To do it, the Council spent hundreds of thousands of dollars in a quest for the perfect smoking machine, one that prevented mice from either holding their breath or overdosing on carbon monoxide. The lab initially had considerable freedom, says Carol Henry, who was its director of inhalation toxicology. But after nine years of work and $12 million, the team was told in 1982 that it could no longer meet with Council staffers unless a lawyer was present.

“We had never done science through lawyers before, and we told them it was unacceptable,” says Dr. Henry. She says a Jacob Medinger lawyer told her, “That’s the way it is.”

The scientists knuckled under. If the Council had canceled before all phases of the first experiment were done, 40 staffers might lose their jobs and nine years’ worth of data would never come to light.

In the first experiment, in which mice inhaled the equivalent of five cigarettes a day, five days a week, for 110 weeks, 19 out of 978 mice got cancer—versus seven out of 651 controls. However, the tumors weren’t squamous-cell carcinomas, the kind usually seen in human lung cancer. And there was a 10% possibility the results were due to chance, whereas scientists prefer no more than 5%. Even so, Dr. Henry says the study built a “very strong case” that cigarettes can induce cancers in animals. This was to be the first of several experiments.

But lawyers from Jacob Medinger told Microbiological the project would go no further. “When a contract is canceled given these kinds of results,” Dr. Henry says, “reasonable scientists might conclude the liability issue must have suddenly become apparent to this group.” In fact, says Dr. Kreisher, the Council’s former associate scientific director, Council lawyers “worried like hell about it.”

Microbiological and the Council parted ways, but the tobacco Industry got plenty of mileage out of the Microbiological mice. In 1984, the Council issued a news release noting the absence of squamous-cell lung cancer in the lab’s study. The timing wasn’t coincidental: That year, lawyers from Liggett, Philip Morris and Lorillard began taking depositions in the landmark case of Mrs. Cipollone, a New Jersey woman whose family claimed she had died of smoking-related squamous-cell lung cancer. And at the federal trial four years later, a witness for the defense said the fact that the smoking mice didn’t get squamous-cell carcinoma (although some did get cancer) showed that “cigarette smoke has not been shown to be a cause of lung cancer.”

The witness also put Dr. Homberger’s Syrian hamsters to good use. Smoking hadn’t produced any more than “microinvasive” tumors in the hamsters, noted the witness, toxicologist Arthur Furst.

Dr. Homberger, regretting he had agreed under pressure to use this milder wording, calls this use of his report “baloney,” adding: “It was cancer beyond any question, not only in our opinion but in the view of the experts who looked at the slides.” Dr. Furst declined to comment.

The tobacco companies succeeded in planting doubt in some jurors. “I didn’t think it was proven scientifically that smoking caused her lung cancer,” says juror Barbara Reilly. She says that under pressure from other jurors, she and two other holdouts went along with a finding in favor of the Cipollones, but managed to hold the damages to $400,000 instead of the $20 million some wanted to give. The award was based on false safety assurances by cigarette companies in their pre-1966 advertising.

An appeals court overturned the verdict, saying the plaintiffs had to prove Mrs. Cipollone had relied on the ad claims. In December, the Cipollones withdrew the suit rather than retry it, citing the cost.

The advent of this suit had coincided with the end of the Council’s contract and Special Projects research, as well as the waning influence of Jacob Medinger, which departed under pressure in 1984. Tobacco industry lawyers say privately that executives and attorneys grew fearful that the Council, though designed to deflect liability, would wind up incurring just that, because it could be portrayed as having breached a public pledge to do independent research.

In fact, by the mid-1980s, the industry had begun to face the very suits against the Council that it feared. In one, the Cipollone family’s lawyer, Marc Edell, sued the Council in 1984 on behalf of Susan Haines, the daughter of a lung-cancer victim.

To prove his claims of fraud and conspiracy, Mr. Edell has been trying to get access to the 1,500 Council documents the industry has kept secret by invoking attorney-client privilege. Such privilege can be abrogated in case of fraud, and last year a federal judge in Newark, citing possible evidence of fraud, set in motion the process of making documents available to Mr. Edell. The judge, H. Lee Sarokin, who had been hearing tobacco lawsuits for a decade, wrote a scathing opinion saying that the tobacco industry may be “the king of concealment and disinformation.”

A federal appeals court removed him from the case last September for failing to maintain the appearance of impartiality. A new judge will decide the critical issue of whether the industry must divulge any of the 1,500 Council documents.

In the meantime, plaintiffs’ attorneys are pinning their hopes on the Supreme Court’s ruling last June. The ruling, which grew out of the Cipollone case, said that although cigarette warning labels prevent smokers from bringing “failure to warn” cases, plaintiffs may file suits alleging that cigarette makers intentionally hid or misrepresented tobacco’s health hazards. This has led some to view the Council for Tobacco Research as the key to recovering damages from the industry.

But doing so may not be easy. At the end of January, a state court jury in Belleville, Ill., rejected the allegation that companies had conspired to play down tobacco’s dangers. Some say winning such a case may depend on getting access to sealed Council documents.

Also facing an uphill battle is the criminal investigation by the U.S. Attorney in Brooklyn, N. Y. Prosecutors are facing statute-of-limitations problems because the Special Projects unit was disbanded more than five years ago.

But what may prove the best protection for the tobacco industry is the readiness of certain scientists to read the evidence differently from the majority. Says Dr. Colucci, the ex-Reynolds employee: “The scientists can come from Mars, but no matter how obscure or how misbegotten, as long as they are willing to tell the scientific lie that ‘it’s not proven,’ the tobacco industry is off the hook.”

Milestones in the Struggle Over Smoking

—1953: Sloan-Kettering researcher Ernest Wyder paints tobacco tars on mice and produces cancer.

—1954: Industry forms Council for Tobacco Research.

—1954: Industry faces first tobacco liability suit, Pritchard vs. Liggett & Myers (dropped by plaintiff 12 years later).

—1964: Surgeon General calls cigarette smoking a “health hazard.”

—1965: Council sets up secretive, lawyer-directed Special Projects division.

—1965: Congress requires cigarette label warnings (later toughened).

—1971: Congress bans TV and radio cigarette ads.

—1982: Surgeon General calls cigarette smoking major single cause of cancer mortality in U.S.

—1983: Rose Cipollone of New Jersey sues three companies saying their cigarettes gave her lung cancer.

—1984: Surgeon General calls smoking the “chief, single, avoidable cause of death in our society.”

—1986: Surgeon General says passive smoking can cause lung cancer and smokeless tobacco can raise oral-cancer risk.

—1986: In Oklahoma City, U.S. Tobacco wins only smokeless-tobacco liability case ever tried.

—1988: In only damage award against industry, federal jury in Newark orders Liggett to pay Cipollone heirs $400,000; award is later overturned and suit is dropped in 1992.

—1992: Federal judge in Newark, seeing possible tobacco-industry fraud, moves to let a plaintiff see Council documents protected by lawyer-client privilege; later, judge is removed and order is voided.

—1992: U.S. Attorney in Brooklyn, N. Y., begins criminal probe of industry.

—1992: Supreme Court says smokers can file suits accusing tobacco companies of deceiving public about smoking dangers despite warning-label law.

—1993: In first trial after high court ruling, state jury in Belleville, Ill., finds no conspiracy to hide tobacco dangers.

WSJ 9301180048

Headline: MARKETING & MEDIA COURT UPHOLDS CANADIAN BAN ON TOBACCO ADS

By-line: Rosanna Tamburri and Christopher J. Chipello, Staff Reporters of The Wall Street Journal

Source: Wall Street Journal

Date: Monday Jan 18,1993 p: No page citation

Length: Medium 506 words

Copyright 1993 Dow Jones & Company, Inc. All Rights Reserved.

Article Text:

MONTREAL—The Quebec Court of Appeal upheld a Canadian ban on tobacco advertising, forcing tobacco companies to remove display advertising from stores across Canada.

The judgment also opens the way for tough new anti-smoking regulations that have been held in abeyance pending the outcome of the court case. The new regulations include bigger health warnings on cigarette packages and package inserts detailing the hazards of smoking.

The tobacco companies involved in the case said they intend to appeal the ruling to the Supreme Court. “The government shouldn’t be allowed to take away our right to freely communicate with our customers,” said Edward J. Lang, chairman of RJR-Macdonald Inc., a subsidiary of RJR Nabisco Holdings Corp.

The Canadian cigarette market is more than 95% controlled by RJR-Macdonald, Imperial Tobacco Ltd., a unit of Imasco Ltd., and Rothmans, Benson & Hedges Inc., which is jointly owned by Philip Morris Cos. and Rothmans Inc., a unit of Rothmans International PLC. Only RJR-Macdonald and Imperial were involved in the case.

Canada already has some of the world’s toughest anti-smoking regulations. Canada was among the first countries to ban smoking in many public places and in airplanes. Canadian Health Minister Benoit Bouchard said Canada has made a lot of progress in combating smoking, but he said it still has much work to do, particularly convincing 400,000 teenagers to quit the habit.

In a majority ruling the Quebec Court of Appeal overturned a lower court judgment that held that the ad ban violated tobacco companies’ right to free speech. The ban prohibits tobacco advertising in newspapers and magazines and phases out advertising on billboards. The law also bans display advertising in stores where cigarettes are sold.

The tobacco industry had stopped advertising in newspapers, magazines and billboards, but pending the outcome of the Quebec court’s ruling, it had continued to put up displays in about 47,000 retail stores. The tobacco companies said Friday they have instructed their sales representatives to dismantle the displays.

The tobacco industry voluntarily stopped television and radio advertising in 1972. The only other tobacco advertising that still continues is the sponsorship of sports and cultural events. The Canadian government has banned the use of cigarette brands in the sponsorships and allows only the use of corporate names. But some tobacco concerns have set up special companies named after their cigarette brands to sponsor events.

Anti-smoking groups have urged the government to tighten it; advertising restrictions further to prevent the use of cigarette brands in sponsorships.

Some provinces also are imposing anti-smoking legislation. The Ontario government is expected to introduce today legislation restricting sales of tobacco in drug stores and requiring licensing of tobacco retailers.

WSJ 9301060109

Headline: HEALTH: EPA DECLARES ‘PASSIVE’ SMOKE A HUMAN CARCINOGEN

By-line: Timothy Noah, Staff Reporter of The Wall Street Journal

Source: Wall Street Journal

Date: Wednesday Jan 6,1993 Sec: B p: 1

Length: Long 1148 words

Copyright 1993 Dow Jones & Company, Inc. All Rights Reserved.

Article Text:

WASHINGTON—The Environmental Protection Agency has concluded that “passive” tobacco smoke is a human lung carcinogen, a decision that is likely to generate demands for drastic new curbs on smoking in workplaces and public places.

The EPA also found that for young children, exposure to passive smoke increases risk of bronchitis and pneumonia, asthma, and disturbances in the middle ear and lungs.

The report caps two years of wrangling between the EPA and tobacco companies over the dangers of passive smoking and may prod the federal Occupational Safety and Health Administration to craft tighter regulations on smoking in the workplace. But its ultimate impact will depend on the eagerness of the incoming Clinton administration to tackle the issue and the ability of lawyers to exploit a potentially lucrative new area of liability for companies that allow smoking on their premises.

The findings are in a final report to be issued by the EPA tomorrow. The report, which follows a series of drafts on the health effects of tobacco smoke on nonsmokers, “will have profound reverberations in the country,” according to departing EPA administrator William Reilly. In an interview last month, Mr. Reilly predicted that the report would represent “one of the biggest decisions I ever will make.”

In the interview, Mr. Reilly said that an EPA decision to declare passive smoke an environmental health risk could substantially increase the legal liability of businesses. “If you were running a bar or an airline or a body shop or whatever,” he said, “and you saw your people smoking, or you allowed customers to smoke, you’d be opening yourself up 10 years, 15 years later to lawsuits. And people would be able to say you knew you were exposing us to cancer. There wasn’t any doubt about the issue. The government has spoken on the question.”

But Steve Parrish, senior vice president for external affairs at Philip Morris Cos.’ Philip Morris USA, disputes Mr. Reilly’s conclusion, declaring, “there is no statistically significant increased risk of lung cancer from exposure to passive smoke or environmental tobacco smoke in social settings.” He predicts legal challenges would fail because “one of the important things that somebody is going to have to show to win a lawsuit is causation.”

Since the initial draft of the report was released in 1990, tobacco interests and supporters in Congress such as Democratic Rep. Thomas Bliley Jr. of Virginia have quarreled relentlessly with its conclusions. “There is a mind-set that we want to discourage people from smoking,” Mr. Parrish says. “If one of the things that supports that is to make claims about the health effects” of passive smoking, he says, then the EPA is willing to “make those claims and adjust the science to fit the policy.”

But an EPA official says that the report eliminated a previously planned section on passive smoking and heart disease because agency scientists found the link didn’t appear to be as great as that between passive smoking and lung cancer. Previous studies have shown that individuals who smoke cigarettes have a greater risk of heart disease.

According to the report, passive smoke is responsible for about 3,000 lung cancer deaths each year in the U.S. In addition, the report estimates that nonsmokers’ exposure to smoke translates into between 150,000 and 300,000 cases of bronchitis and pneumonia every year in young children aged up to 18 months. Between 7,500 and 15,000 of these cases result in hospitalization, the EPA report says.

The report says that passive smoke worsens asthma symptoms for 200,000 to one million children yearly and increases the chances that children who don’t have asthma will get it. It also states that exposure to tobacco smoke can increase fluid in the middle ear, leading to infection.

The findings regarding children will likely have the greatest immediate impact, says Cliff Douglas, tobacco policy director for the Advocacy Institute, a nonprofit group focusing on consumer, health and safety issues. “In the long run, I think this will lead to elimination of smoking in public places and in the workplace,” he says, but “in the short run, it should certainly lead to elimination of smoking in all locations where children face exposure.”

Antismoking activists likely will use the report to press state legislatures to ban smoking at day care centers, preschools and schools. “Many states have no requirements whatsoever,” says Fran DuMelle, deputy managing director of the American Lung Association. Ms. DuMelle also foresees “more and more public places that restrict smoking, worksites in particular.” She says the report’s impact will likely be greater on schools and workplaces than on such public places as bars and restaurants because the greatest risk from passive smoking comes with repeated daily exposure. Currently, 44 states have some form of restriction on smoking at worksites.

The report also is expected to put additional pressure on OSHA to ban smoking in the workplace. OSHA has issued a “request for information” calling for public comment on whether it should issue a rule governing indoor air quality, including the impact of passive smoke. But it has been slow to move on the matter; the request for information was published in the Federal Register more than a year ago, and OSHA hasn’t yet fixed a deadline by which it will decide whether it will issue a regulation.

“Certainly the information in the EPA report will be helpful in that process,” says OSHA spokesman Douglas Fuller, but “we’ll have to wait to see what the report says.” He adds that the fate of any rule will be determined by the incoming Clinton administration.

In the interview last month, Mr. Reilly said EPA had put together an “office policy guide” on how to create a smoke-free office environment, but he had decided not to release it because it would “look like we’re trying to torque the science, and I think the science will be compelling enough.” He said the guide could be issued later, by his successor, Carol Browner. He also said that “I don’t think you’ll even need OSHA” to follow through on the EPA report for it to have an impact. “I think really the liability question will drive it.”

WSJ 9212040016

Headline: BUSINESS BRIEF: PHILIP MORRIS PLANS TO BUY 7.9% INTEREST IN MEXICAN COMPANY

Source: Wall Street Journal

Date: Friday Dec 4,1992 Sec: B p: 4

Length: Medium 306 words

Copyright 1992 Dow Jones & Company, Inc. All Rights Reserved.

Article Text:

NEW YORK—Philip Morris Cos. said it will buy a 7.9% interest in Fomento Economico Mexicano SA, a large Mexican brewery, bonier and convenience store company.

Based on current Mexican stock market prices, the stake would be valued at about $160 million. Philip Morris didn’t give a figure for the purchase.

Fomento Economico, which makes Dos Equis, Tecate and other beer brands, has a 49% share of the Mexican beer market. It had 1991 sales of $1.7 billion. The company is the biggest Coca-Cola bottler in Mexico and the owner of the largest convenience store chain in the country.

Philip Morris already sells cigarettes, beer and food products in Mexico. It plans to acquire the stake in Fomento Economico from Citicorp International Holdings Inc., an investment arm of Citicorp, which said the sale will “have a positive effect on Citicorp’s capital position.”

“We are very optimistic about the growth potential of the Mexican economy,” said Michael A. Miles, chairman and chief executive of Philip Morris. Warren Dunn, chief executive of Philip Morris’s Miller Brewing Co. unit, called Mexico “one of the most dynamic beer markets in the world.”

A Philip Morris spokesman said the investment should help Miller’s distribution in Mexico. Philip Morris will become one of Fomento Economico’s major shareholders and is seeking representation on its board.

John M. McMillin, a Prudential Securities analyst, said he expects Philip Morris eventually to take a larger stake in the Mexican company. “This is a date they would like to turn into a marriage,” he said. The purchase is subject to antitrust clearance by U.S. regulators.

WSJ 9211170154

Headline: PHILIP MORRIS TO BUY NABISCO CEREAL BUSINESS; PURCHASE FOR $450 MILLION WOULD PROVIDE BOOST TO CONCERN’S POST UNIT

By-line: Suein L. Hwang, Staff Reporter of The Wall Street Journal^*

Source: Wall Street Journal

Date: Tuesday Nov 17,1992 Sec A p: 4

Length.: Long 74.5 words TvDe: News

Abstract: Philip Morris Cos agreed to buy RJR Nabisco Holdings Corp’s cold cereal business for $450 million as part of an increased effort to compete more vigorously in that category. Analysts’ reaction to the move is provided.

Subjects: Acquisitions & mergers; Food processing industry

Companies: Philip Morris Cos Inc; RJR Nabisco Holding Group Inc

Copyright 1992 Dow Jones & Company, Inc. All Rights Reserved.

Article Text:

NEW YORK—Philip Morris Cos. agreed to buy RJR Nabisco Holdings Corp.’s cold cereal business for $450 million as part of an effort to compete more effectively in the profitable category.

The purchase price exactly matches the amount General Mills Inc. agreed to pay for Nabisco’s cereal unit in September. General Mills called off its proposed acquisition earlier this month, faced with the prospect of a lengthy and potentially contentious review by federal regulators. Analysts predicted that the far smaller Philip Morris-Nabisco combination will pose no antitrust problems.

If approved, the Philip Morris acquisition would strengthen the position of the company’s Post unit as the nation’s No. 3 cereal marketer, boosting its share of the cereal category to 14.5% from 11.7%. Although that would put Post way ahead of Quaker Oats Co.—which holds a paltry 6.8% of the market—it would still lag far behind powerhouses Kellogg Co. and General Mills, which hold 37.8% and 24.8% of the market respectively, according to Nielsen Marketing Co.

“The ready-to-eat cereal market shows tremendous potential for growth,” said a Philip Morris spokesman. “We think we’re in a much better position to leverage the business than Nabisco was.” Last year, Philip Morris overall earned $3 billion, or $3.25 a share, on sales of $56.4 billion.

Although analysts question whether Post will be able to turn around the dormant Shredded Wheat franchise, they said Philip Morris was lucky to snare the business at a relatively affordable price. Philip Morris didn’t bid on the Nabisco business initially because Nabisco struck a private deal with General Mills.

“If they (Nabisco) had auctioned off the business the first time, Philip Morris would have paid more than $450 million,” said John McMillin, analyst at Prudential Securities Inc. Philip Morris is “just a poor No. 3 in this industry, and they really need to add muscle to the business,” he said. In the $8 billion U.S. cold cereal market, a single share point represents about $80 million in sales.

Analysts said Philip Morris’s proposed purchase of the Nabisco cereal business comes at a time when it needs a new growth recipe at its struggling Kraft General Foods unit. Many of Kraft’s key products, such as cheese and frozen entrees, have been buffeted by discounting and private-label competition.

By contrast, the cereal category has been growing steadily while preserving hefty profit margins. Furthermore, Nabisco’s Shredded Wheat brands would dovetail with Post’s lineup of such adult-oriented, “good-for-you” brands as Grape Nuts and Raisin Bran.

After making a series of marketing missteps in the ‘80s, Post seems to have arrested its free fall. In 1983, the company’s market share peaked at 16.5% but fell to 10.7% in 1989. Under the aegis of Sy Hinkes, who is known within Philip Morris as a turnaround specialist, Post’s market share has stabilized at 11.5%.

However, some analysts who predicted a turnaround of the Shredded Wheat franchise under General Mills, are less optimistic about the brand’s future at Philip Morris. In an industry driven by new products, Post hasn’t had a hit since its 1989 introduction of Honey Bunches of Oats. “They haven’t had that much success in new products,” says Roy Burry, an analyst at Kidder Peabody.

Moreover, Post’s difficulties with its own aging lineup lead some to question whether the company has the savvy to revitalize Shredded Wheat. While market share of its top three brands grew last year, insiders say sales of Post’s best-selling Grape Nuts have been flat in recent months and that Philip Morris’s top brass have been disappointed with its progress. And No. 2 ranked Raisin Bran hasn’t managed to break out of the shadow of rival Kellogg’s similar product.

Says Mr. McMillin: “This allows them to compete more easily, but they’re not guaranteed to be on an upward track.” Philip Morris shares closed at $79.375, down 12.5 cents in New York Stock Exchange composite trading yesterday.

WSJ 9211170017

Headline: PHILIP MORRIS’S LOWEST-PRICED CIGARETTES ARE RAISED FOR SECOND TIME IN A MONTH

By-line: Gerri Willia, Special to The Wall Street Journal

Source: Wall Street Journal

Date: Tuesday Nov 17,1992 p: No page citation

Length: Medium 396 words

Copyright 1992 Dow Jones & Company, Inc. All Rights Reserved.

Article Text:

NEW YORK—Philip Morris Coal told wholesalers last week it will raise the prices of its cheapest cigarettes for the second time in a month, in an apparent effort to narrow the gap between private label and brand-name cigarette pricing.

The price increase moves private-label cigarette costs up $2 per 1,000, on top of an identical gain a month ago, say analysts who follow the industry.

Philip Morris makes three kinds of cigarettes: private label, the least expensive; value-priced, the mid-range category; and branded, the most expensive.

Philip Morris officials couldn’t be reached for comment.

The price increase Philip Morris announced to wholesalers last week could improve the company’s profit margins, analysts say, but they add that some of the gain may get eaten up in promotions.

According to analysts, prices for the company’s cheapest lines were set to jump 14% on an annualized basis, while the most expensive lines would rise 8.4%. Medium-priced brands were set to cost 11.8% more.

Competitors were already responding to Philip Morris’s move. First Boston analyst Rebecca Barfield says B.A.T Industries PLC’s Brown & Williamson unit has said it will match the price increase. Brown & Williamson, based in Louisville, Ky., makes Kool brand cigarettes.

Investors, who have tended to see the mushrooming discount brand category as just another item pressuring domestic product margins, are expected to applaud the move as well.

Private-label cigarettes claim a whopping 13% of industry volume so far this year, according to Leigh Ferst, Prudential Securities Inc. tobacco analyst.

While she sees plenty of room for price increases at the low end, she says the company may have difficulty getting price increases on brand-name cigarettes to stick. Last year, prices in the branded-name category rose 12%, while this year they jumped 16%, she says.

Generally, analysts expressed surprise at the size of the price increases. Kidder, Peabody & Co. analyst Roy Burry, for example, was expecting an annualized increase across the categories of 8%. Ms. Ferst said the company may have to spend more on promotions to bolster consumer spending.

WSJ 9210120127

Headline: PHILIP MORRIS UNIT TO BUY FIRM

Source: Wall Street Journal

Date: Monday Oct 12,1992 Sec: C p: 12

Length: Short 125 words Type: News

Abstract: Freia Marabou A/S approved changes in its bylaws on Oct 9, 1992, enabling a Philip Morris Cos unit to acquire the Norwegian confectionery group. The deal valued Freia at 8.8 billion kroner ($1.6 billion).

Subjects: Acquisitions & mergers; Candy Companies: Philip Morris Cos Inc; Freia Marabou AS

Copyright 1992 Dow Jones & Company, Inc. All Rights Reserved.

Article Text:

OSLO—Shareholders in Freia Marabou A/S approved changes in its bylaws Friday, enabling the Norwegian confectionery group to be acquired by a unit of Philip Morris Cos. The deal valued Freia at 8.8 billion kroner ($1.6 billion).

Jacobs Suchard AG of Switzerland, a subsidiary of Kraft General Foods International, itself a unit of Philip Morris, offered 450 kroner ($81) a share for all Freia shares outstanding on Sept. 28.

The bid was subject to a number of conditions, including changes in company bylaws to remove citizenship requirements on ownership of certain share classes. Shareholders representing about 75% of Freia’s total voting rights approved the proposed changes.

WSJ 9203130070

Headline: STUDY SAYS TEEN-AGERS’ SMOKING HABITS SEEM TO BE LINKED TO HEAVY ADVERTISING

By-line: Glenn Ruffenach, Staff Reporter of The Wall Street Journal

Source: Wall Street Journal

Date: Friday Mar 13,1992 Sec: B p: 8

Length: Medium 566 words Type: News

Abstract: The CDC issued a report indicating that the smoking habits of teenagers appear to be connected to those brands with the most aggressive advertising. The report followed a demand by US Surgeon General Antonia Novello that RJR Nabisco voluntarily cease its “Old Joe” campaign for its Camel cigarettes.

Subjects: Centers for Disease Control—CDC; Tobacco; Advertising; Children & youth Names: Novello, Antonia C Companies: RJR Nabisco Holding Group Inc

Copyright 1992 Dow Jones & Company, Inc. All Rights Reserved.

Article Text:

ATLANTA—The Centers for Disease Control, in a study that may put added pressure on the tobacco industry to curtail certain types of advertising, said teenagers’ smoking habits appear to be linked to those brands that promote themselves most aggressively.

The report showed that, among smokers aged 12 to 18, the vast majority prefer three brands:—Marlboro, Newport and Camel. Those same brands, according to federal health officials, were among the most heavily advertised cigarettes in the U.S. in 1990. By contrast, preferences among adult smokers weren’t nearly as concentrated.

While researchers have long maintained—and the tobacco industry has long denied—that some advertising promotes smoking among children, few statistics have been available to bolster either argument. In recent months, however, studies in the Journal of the American Medical Association, and now the CDC report, indicated that some marketing efforts are highly successful in winning adolescent loyalties.

The CDC’s study “dispels the notion that kids aren’t influenced by this advertising,” said Donald Shopland, coordinator for the National Cancer Institute’s smoking and tobacco control program. “You have the industry saying: ‘Kids don’t pay attention to this stuff; it’s only directed at adults.’ But the brands that children are buying do show that they pay attention.”

The report comes on the heels of a demand made earlier this week by the U.S. surgeon general, Antonia Novello, that RJR Nabisco voluntarily halt its “Old Joe” campaign for its Camel cigarettes. The food and tobacco company, based in New York, and its tobacco subsidiary, based in Winston-Salem, N. C., have indicated they have no plans to change the ads, which feature cartoon characters.

A spokeswoman for R.J. Reynolds Tobacco Co. dismissed the CDC’s findings. “No matter what country you look at,” said Maura Payne, the spokeswoman, “advertising doesn’t play a significant role in decisions to begin smoking. It’s always the influence of friends and family that matters most.” Officials at Philip Morris Cos. in New York, maker of Marlboro, and Lorillard Inc., a unit of Loews Corp. in New York and maker of Newport, couldn’t be reached for comment.

The CDC’s survey of 1,396 teen-agers found that 69% preferred Marlboro, 8.2% preferred Newport, and 8.1% preferred Camel. That tight grouping, according to the report, which contains three of the most heavily promoted cigarettes in the country, “suggests that tobacco advertising may influence teen-agers in their choice of brands.”

With regard to Marlboro cigarettes in particular, the report said teen-age smokers “may be attracted to the brand’s image of strength and independence promoted in the long-running ‘Marlboro man’ advertising campaign.”

Among black adolescents, mentholated brands were the cigarette of choice. 61% said they preferred Newport, 11% bought Kool and 10% Salem.

The contrast with adult smokers was striking. Among individuals aged 25 to 64, Marlboro was again the most-preferred cigarette—but only among 24% of those surveyed. Next was Winston with 11%, followed by Salem, 8.8%. Camel and Newport had 6.1% and 5.6%, respectively.

WSJ 9201300106

Headline: PHILIP MORRIS POSTS DECLINE OF 13% IN 4TH-PERIOD NET

By-line: Kathleen Deveny, Staff Reporter of The Wall Street Journal

Source: Wall Street Journal

Date: Thursday Jan 30,1992 Sec: B p: 4

Length: Medium 461 words

Copyright 1992 Dow Jones & Company, Inc. All Rights Reserved.

Article Text:

NEW YORK—Philip Morris Cos. said fourth-quarter net income fell 13%, largely as a result of a one-time charge associated with restructuring its Kraft General Foods unit.

However, excluding the restructuring charge and another charge related to adopting a new accounting rule for post-retirement health-care benefits, Philip Morris’s net income would have increased 21% to $1.07 billion, or $1.16 a share.

The giant food and tobacco concern said net was $767 million, or 83 cents a share, compared with $880 million, or 95 cents a share, in the year-earlier period.

Revenue for the quarter dropped 3.7% to $13.7 billion, from $14.22 billion a year earlier. The company blamed the decline on lower revenue from North American food operations and an accounting change caused by the 1990 acquisition of Jacobs Suchard AG, a European coffee and confectionery company.

The results before the charges matched the expectations of Wall Street analysts, who had been predicting quarterly earnings of $1.18. “If you strip away all the one-time items, it was very much in line with my expectations of a very good quarter,” said Marc Cohen, a tobacco analyst with Sanford C. Bernstein & Co.

Philip Morris shares were quoted at $75.75, down 50 cents in late trading on the New York Stock Exchange.

The restructuring at Philip Morris’s food business, announced in November, resulted in a fourth-quarter charge of $455 million. That reduced quarterly earnings after taxes by $275 million, or 30 cents a share. The accounting change resulted in a further charge of $23 million, or three cents a share, for the quarter.

So far, the company has declined to disclose details of the restructuring at Kraft General Foods, saying only that it is consolidating manufacturing and distribution facilities and getting out of several unprofitable businesses.

The retrenchment at Kraft General Foods signals Philip Morris’s intensifying concern about slowing growth at the nation’s largest food company. Apart from the accounting change, quarterly revenue and operating income from North American food operations declined 3.2% and 6% respectively, as price competition intensified and recession-weary consumers traded down to lower-priced products.

For the year, Philip Morris’s net declined 15% to $3 billion, or $3.25 a share, from $3.5 billion, or $3.83 a share. Annual revenue increased 10.3% to $56.5 billion from $51.2 billion in 1990. The accounting change resulted in a charge to annual earnings of $1 billion, or $1.09 cents a share.