Philip Morris U.S.A. And Marlboro Friday (a)

Abstract

In July 1993, Philip Morris executives met to consider second-quarter data on U.S. tobacco sales. Three months earlier, the company had announced a 40-cent-per-pack promotion for Marlboro cigarettes, the number-one-selling cigarette in the world. On the day of the announcement, April 4, Philip Morris stock fell $14.75, to $49.375, while the Dow Jones Industrial Average fell 68.63 points. On June 4, the company announced an extension of the promotion through August 8. Second-quarter data revealed that the company's U.S. cigarette volume had fallen by one-fifth, while operating income from domestic tobacco sales had fallen by more than one-half. After eight months of consecutive share declines, however, Marlboro's share had rebounded by three points. Philip Morris executives now faced several important decisions: Should the Marlboro promotion be extended beyond August 8? Should the promotion be replaced with a permanent cut in wholesale prices? Should the prices of other Philip Morris premium brands be lowered? Finally, should the prices of the company's discount brands be altered in any way? See also the B case (UVA-M-0473).

Excerpt

UVA-M-0468

PHILIP MORRIS USA AND MARLBORO FRIDAY (A)

In July of 1993, Philip Morris executives met to consider second-quarter data on U.S. tobacco sales. Three months earlier, the company announced a 40-cent per pack promotion on Marlboro cigarettes, the number-one selling cigarette in the United States and the world. The day of the announcement, April 2, Philip Morris stock fell $ 14.75 to $ 49.375, while the Dow Jones industrial average fell 68.63 points. On June 4, the company announced an extension of the program through August 8. Second-quarter data revealed that the company's U.S. cigarette volume had fallen by one-fifth, while operating income from domestic tobacco sales fell by more than one-half. However, after eight months of consecutive share declines, Marlboro's share had rebounded by three share points. Philip Morris executives now faced several important decisions. Should the Marlboro promotion be extended beyond August 8? Should the promotion be replaced with a permanent cut in wholesale prices? Should the prices of other Philip Morris premium brands be lowered? Finally, should the prices of the company's discount brands be altered in any way?

The U.S. Cigarette Industry

According to Simmons Market Research Bureau, of the 186 million adults in the United States in 1993, 53 million smoked cigarettes (27 million men and 26 million women) and 9.7 million (5.7 million men and four million women) smoked 30 or more cigarettes per day. Exhibit 1 reports domestic unit sales for the six U.S. manufacturers by price category. Supermarkets sold 39% of U.S. cigarettes, followed by convenience stores (17%), gas and service stations (13%), drug stores (8%), mass merchandisers (7%), and warehouse club stores (2%). In 1992 supermarket tobacco margins averaged 21.8%, down from 23.1% in 1991.

. . .

Keywords: brand management, pricing