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Kraft agencies await possible budget cuts: chain reaction following Marlboro price slashing has Kraft food agencies worried By Jim Kir

CHICAGO–Philip Morris’ dramatic price cut on Marlboro is expected to have a n

“We’re waiting for the next shoe to drop,” said one Kraft agency source. “We’re surprised that it hasn’t happened already. But we’re expecting budget cuts.”
Although no official word has been handed down to agencies yet, agencies could begin seeing cuts in the third and fourth quarters of this year. One source said budgets could be cut from 5-10% or possibly more.
KGF would not comment on spending plans.
Philip Morris announced last month that it would cut prices and increase promotional spending on Marlboro, from which discount brands have stolen substantial share. The price cuts combined with the increase in promotional spending could cost Philip Morris more than $550 million.
KGF has seen its budgets remain flat in the past couple of years, specifically on the Kraft side, where price cuts on cheese and other products have bit into marketing budgets already.
KGF agencies that could be affected are Grey Advertising; Ogilvy & Mather; Young & Rubicam; and D’Arcy Masius Benton & Bowles, all N.Y.; and Leo Burnett; J. Walter Thompson; and Foote, Cone & Belding in Chicago.
The president of one KGF agency said, “I’m real nervous. Certainly what’s happening (with Marlboro) is going to tighten things up. We haven’t heard anything yet” but said he expected KGF will have to “give up a few bucks” from the budget for products his agency handles.
Most of the cuts will be based on a brand-by-brand basis, and will depend on profitability, according to one Kraft insider. He said that brands, such as General Foods’ Kool-Aid may not see a cut until after the summer selling season, but no brand is likely to be spared. “It looks like the cuts will be substantial,” said the insider. “(PM chairman) Mike Miles has to make his numbers, it’s as simple as that.”
Insiders say that Miles, who led KGF before taking over Philip Morris in 1991, is mainly dedicated to shoring up the troubled tobacco division. “He doesn’t want the demise of the tobacco unit to be on his head,” said one insider.
Separately, Bill Landgraf, director of media and planning at KGF, is retiring. His employees will report directly to Dave Braun, vp/media services at KGF. At press time Friday it was unclear whether Landgrafts position will be immediately filled.
Copyright Adweek L.P. (1993)