Michael A. Miles, the chairman and ceo of Philip Morris Companies Inc., is nothing if not a survivor. This was demonstrated most poignantly six years ago, when he was on a white-water" data-categories = "" data-popup = "" data-ads = "Yes" data-company = "[]" data-outstream = "yes" data-auth = "" >

Up in smoke By Richard Morga

Michael A. Miles, the chairman and ceo of Philip Morris Companies Inc., is nothing if not a survivor. This was demonstrated most poignantly six years ago, when he was on a white-water

Seven weeks ago, as Miles stood before Philip Morris’ assembled shareholders, that same steely resolve was on display. Hundreds of visitors had piled into the tobacco division’s Richmond, Va., manufacturing center, where the overflow from the facility’s 300-seat auditorium filled an auxiliary auditorium of equal size. A giant screen, installed to transmit images from one auditorium to the other, gave the proceedings added import. Smoke hung in the air, as did expectations of a rout. It was as if the crowd, though orderly and well-dressed, had come to see some bad-boy pop star.
Most had remained loyal, although there was the usual health-concerned contingent, which acted out its usual health-concerned dismay: “A moment of silence” was requested and granted as a tribute to a former Marlboro man who in real life died from cancer; a man whose larynx had been removed made a mesmerizing plea in an electronic-aided, R2D2-like voice. But there were others in the audience who likely felt betrayed beyond predictable behavior patterns. They certainly had reason: Marlboro Friday–when Miles announced drastic price cuts on the bellwether brand–had cost Philip Morris shareholders 14-3/4 points a share, or some $13 billion in market value. So, dammir, some answers had better be ready.
Like any good performer, Miles knew the audience better than it knew itself. He knew not to make it wait for its reprisal. Taking the stage, looking a bit like Clark Kent in need of a hair weave, he even opened with an admission. “Before the presentation of proposals for voting, I would like to speak to what are undoubtedly the primary issues on the minds of most of you . . . I’m sure that you are not happy about the recent performance of the stock, and especially the share drop at the beginning of this month. I can assure you management is not happy either.”
Miles went on to explain the reasoning behind what’s known internally as the Marlboro Leadership Program. Short-term promotions and the like had promised, but then failed, to beat back the encroaching discount segment in cigarettes. “Given the choice between whether to let volume and share for our global brand continue to decline,” Miles said, “or to invest in the defense of Marlboro and our other key trademarks, we took action.”
It was just what the audience needed to hear–even its dissidents. Philip Morris, the corporate embodiment of action, wasn’t rolling over to “the continuing threat from deepdiscount competition.” It was, rather, taking that threat head on. And it was doing so not only for shareholders but for consumers. “On April 2nd,” Miles continued, referring to the press release and analysts’ briefing that triggered Marlboro Friday, “we announced a significant change in pricing strategy designed to make our premium products more affordable, and thus encourage consumers to make purchase decisions based on brand preference rather than price.” It was artfully couched corporate-speak for: We’re mad as hell, and we’re not taking it anymore ! Two hours later, as Miles left the podium unscathed and the crowd spilled into the glare of noon, there were far more believers than there had been going in. The Marlboro man would soon be riding tall in the saddle again. That, anyway, is what everyone took away from Miles’ commanding performance. And hardly a one of them–a handful of analysts notwithstanding-thought to consider if what they had witnessed was the performance of a survivor or a leader.
The tobacco business may not be as dangerous as the Chilco River, but it’s certainly as treacherous. Private-label brands have come out of nowhere–or so it seems–to command 39% of the market. Even tiberbrand Marlboro has gotten burned, losing five full percentage points off its 26% peak share in four years. (Each share point represents $450 million at retail.) To outsiders, it looks as though the industry’s high end is locked in a fight-to-the-death struggle with the industry’s low end. Never mind that the industry’s high end is also its low end. That, to insiders, merely heightens the drama.
Philip Morris in a fight-to-the-death struggle with itself?. To an almost incomprehensible degree, yes. More of Marlboro’s lost share is going to Basic, a low-end brand marketed by Philip Morris, than to anyone else. Competitor RJ Reynolds’ revenue growth is being slowed by the same consumer downshift, as are, to even greater degrees, the industry’s four also-rans. The irony of an industry locked in a death embrace isn’t making tobacco’s great civil war any easier–just messier.
Miles, who is in his second year as a bona fide tobacco executive, is a man who likes to worry. He’s admitted as much in an interview: “I worry instead of exercising.” It’s a good thing because, in addition to the spectacle of a self-induced and self-afflicting private-label war, there’s plenty to keep the 53-year-old exercised. It costs only 2 cents more to make a pack of premium cigarettes than it does a cheap brand. Is it any surprise, then, that even discriminating smokers are having trouble distinguishing between the two? Not when the price differential at retail has widened, at times, to more than a buck a pack. Not when the average smoker earns only $18,000 a year-some $11,458,000 less than Miles earned last year–and smokes a pack a day. And not when tobacco’s immense profits, which have accounted for two-thirds of Philip Morris’ earnings, are due to fall drastically.
The chairman of the world’s largest tobacco company can count on being even more fit next year when an increase in the federal excise tax takes hold. A dollar-a-pack increase, which remains the best guess, promises to increase the attrition rate of smokers an extra six percentage points a year. That’s in addition to the 3% who quit every year anyway.
But all that is business as usual. What’s not so usual is that, for the first time in Miles’ three-decade career, there are those who wonder if he’s up to the task. If he can lead Philip Morris out of one of the roughest patches in its century-and-a-half history. It’s not just Miles’ reputation that’s on the line. It’s the reputation of all the big-brand boys–the hotshot marketers who cut their teeth in the ’70s at packaged-goods companies and leading food concerns.
Knowing the ins and outs of a specific business was never as important to this style of executive as managing a portfolio of brands. The food business, especially, has been given to what one of its veterans calls “a Chinese menu approach” to growth and investment. Managers could pick and choose among various food lines to build brands (and their own reputations) and not have to worry so much about flops or overall strategy. This approach, in addition to going unchallenged during years of fat profits, had the advantage of convenience. It has allowed the big-brand boys to flit from one big-brand company to another. And it seems to have seduced many into thinking that marketing would remain a highend game for an educated elite. Private-label brands were slow to figure into this world view, and when they registered at all, it was as the province of guerrilla marketers barely off the street.
In no two industries is the difference more pronounced than food and tobacco. “One is process-driven, the other is product-driven,” says the head of an agency with clients in both. When you talk to the tobacco guys about marketing, you talk about marketing. When you talk to the food guys, you talk about how you can take more money out of packaging, out of distribution, out of advertising.”
“It was an overreaction of historic proportions. Philip Morris destroyed pricing flexibility for the entire industry.”
–Gary Black, Philip Morris analyst, Sanford C. Bernstein “To have done nothing would have been the most brilliant way imaginable to destroy one of the world’s greatest brands. It would have been straight from the Dr. Kevorkian school of marketing.”
–Gary Stibel, principal, New England Consulting Group “A brand that has cut its price is a brand that has lost its perception of value to the consumer.”
–Michael Perry, chairman of Unilever PLC
Such are the varied responses to Philip Morris’ new pricing strategy–a strategy many see as a de facto price reduction of 40 cents a pack that’s disguised, all too thinly, as a promotion. According to the company, the full strategy consists of four parts: 1. the immediate rollback of prices on Marlbore, backed by heavy promotions over eight weeks; 2. the expansion of the Marlboro Adventure Team, a promotional campaign that has millions of Marlboro smokers signed up for giveaways of merchandise in exchange for continued loyalty; 3. an intensified push by Philip Morns to gain market share in all segments of the industry, including discount cigarettes; and 4. the promise not to raise prices on Marlbore and other premium brands “for the foreseeable future.”
How one takes to the program depends on one’s marketing sensibilities. There are many views. Even within Philip Morris there are many, despite assurances from Ellen Merlo, vp of corporate affairs, that “every board member supports” the strategy actually taken. To put it simply, the heart of the conflict within Philip Morris goes back to the distinction between product-driven and process-driven. It’s built in. The tobacco giant, having annexed a food conglomerate, purposely positioned itself as a company in transition. An undesirable side effect, contend longstanding fans of the Fortune 500’s most macho member, is that it’s also a culture in confusion.
Often cited as tobacco’s best marketer–and by extension the ultimate product driver–is Miles’ predecessor, Hamish Maxwell. An urbane Scot whose father was a London tobacco dealer, Maxwell grew up learning about the product. On joining Philip Morris in New York, where he worked a few years in advertising and brand management, he learned about marketing. His next stop was Australia, where as the head of Philip Morris’ Asia-Pacific division for nine years he learned about running the business. The result of all that learning was that when he took charge of the entire company in 1984, Maxwell knew the tobacco business as no other.
He knew it and loved it. A pack-a-day smoker who would quit now and then just to show that he could, Maxwell was seldom photographed without some Philip Morris blend in his hand. The other hand would likely be fidgeting with a keepsake pencil that bore the monogram “GWH.” The initials stood for George Washington Hill, the legendary chairman of American Tobacco Company (and inspiration for the ogre of a client served by Clark Gable in The Hucksters). Hill, who rode the radio waves to the top of the tobacco industry in the ’40s, had presented the pencil to Maxwell’s father.
Publicly, the parallels between Maxwell and Miles have been vigorously cultivated. Fartune magazine determined, two years before his ascent, that “the cold-blooded Miles fits right in at Philip Morris, whose corporate culture a new employee sums up as ‘Screw it; get it done.'” In private, however, Philip Morris veterans have never been sure. Maxweirs style inspired openness as well as loyalty. “Managers knew they had to deliver,” says a close observer, “but they also felt they could go to (Maxwell) and say, ‘What do you need most–share or profits?’ Nobody held back, and nobody played the game better. Maxwell could pull a little from here, put a little back over there. He knew how to work it, how to keep everybody happy. The short term was never a problem under Maxwell. Under Miles, it’s all short term.”
Comparisons of corporate reigns are invariably unfair. Earlier ones benefit from simpler times. But in the case of Philip Morris, the comparison is at least illuminating. If Maxwell represented the best of his generation, then Miles represents the best of his. Miles, to many, is far and away the best of the big-brand boys. He’s a process driver without peer, despite his having started out in advertising. Yet even that makes sense in that his agency was Leo Burnett, where, as a promising graduate of Northwestern’s Medill School of Journalism, Miles was broken in, but not broken down, by his proximity to Procter & Gamble’s militaristic regimen.
Miles worked as an account executive for a decade before being wooed to Heublein Inc., a Burnett client whose taste for talent was as delectable as its Kentucky Fried Chicken. There, as a thirtysomething division chairman, he achieved fame for turning around an already troubled KFC–a challenge that inspired him to coin “QSCVFOOFAMP” (pronounced qui-SIV-o-famp). The clunker of an acronym stood for “quality, service, cleanliness, values, facilities, other operating factors, advertising, merchandising and promotion.” It wasn’t as crisp as McDonald’s “QSVP,” but that was the point. KFC, with so much more on its plate than the industry’s runaway leader, had to draw more arrows from its marketing quiver. And Miles not only drew them but aimed them with enough precision to end his career’s second decade as one of marketing’s all-around marksmen.
What few gaps remained were paved over in decade No. 3. The man who would later run Philip Morris jumped to Kraft Inc. after RJ Reynolds acquired KFC in 1982. Although meaningless at the time, the move revealed an unfortunate preference for working in food instead of tobacco. As a magazine profile reported in 1988: “He figured that if he had to start over with a new owner (R JR), he would rather move to a big food company.” The timing is interesting in that within six months of the profile’s appearance, the same food company that inspired Miles to seek refuge from tobacco ownership was itself acquired by a tobacco company.
It scarcely mattered in those forgiving times, which were especially forgiving in food. While improvements in agriculture and packaging kept a lid on food costs, aggressive pricing permitted revenues to soar. Food companies, propelled by the twin engines of cost cuts and price hikes, reached unimaginable heights. Success was often attributed to shelf space, which inspired the industry’s process-driven management to capture as many aisles as possible. In-store promotions, slotting allowances and extensions of already extended lines became favorite ploys. What these mostly tactical measures cost scarcely mattered: They could be funded by a price hike or carved out of an ad budget. The immediate gains were so thrilling nobody noticed the curtain going up on the private-label drama that has taken center stage today. The result was an “explosion in performance,” says Mark Stevens, who spent the decade running Sunkist soft drinks and then Haagen-Dazs ice cream, “and Wall Street said wow.”
Philip Morris said wow as well, having been similarly blessed in its own business. In 1985, after snagging an unwilling General Foods for $5.7 billion of its tobacco bounty, Maxwell all but committed himself to another food acquisition or two. “That was always the strategy,” says a longtime watcher of the company. “Get two big ones and meld them together.” The strategy did have appeal. Significant economies could be obtained just by collapsing such functions as sales, distribution, production, even management. “But you could get an accountant to do that,” the source continues. “What Philip Morris really wanted was someone to take the lead in food–a visionary who could take one and one and make three.”
It was obvious from the get-go that the desired visionary did not reside in General Foods. The difference in cultures was just too great. GF was almost as fat as its product line. Even its headquarters–a Rye, N.Y., temple to corporate opulence known as the Taj Mahal–promised untold riches when raided. As for management, it was dismissed as being the corporate equivalent of landed gentry in the nearby area. It had a great future behind it.
Philip Morris, by comparison, was the baddest wolf ever to don sheep’s clothing. Not even its arts patronage could conceal its love of a rumble. “If blood wasn’t on the streets,” says a former competitor, “then Philip Morris hadn’t shown up yet.” Even when outgunned, the company took no survivors. Just ask the cola giants, whose relief was audible when Philip Morris unloaded its 7-Up subsidiary. “It was too small to make strategic sense,” Maxwell would later admit. “So we sold it.” But not before putting a gun to America’s revered colas with a swan song of a 7-Up ad campaign: “Never had it. Never will.” Might this campaign, by accentuating the sodium, caffeine and generally undesirable or unnecessary ingredients in all soda pop, jeopardize the world’s most funloving industry? Only if it worked. Did Philip Morris care? Not if it worked.
With GF, however, Philip Morris held back. That it would never shake its unwanted suitor status was obvious to the point of pettiness. As reported in these pages, GF not only “forgot” to provide ashtrays on newowner visitation days but threw up a few “Thank You For Not Smoking Signs” for good measure. The slights had no effect. Philip Morris didn’t need to be liked. And it certainly could afford to wait.
Meanwhile, the numbers coming out of the Glenview, Ill., headquarters of Kraft continued to be impressive–impressive enough, anyway, to put the leadership duo that was delivering them on red alert. Miles, the lesser half of that duo, had joined Kraft in 1982 as president and coo. His relationship with chairman and ceo John Richman, a shrewd lawyer some 12 years Miles’ senior, was enviable long before Philip Morris came knocking in 1988. Kraft even had an anti-takeover plan in place, which it planned to activate instead of making anything less than a magnanimous match.
Despite Kraft’s artfully contrived “hostile” protestations, which worked to extract better terms from its buyer, Philip Morris was that match. Besides disbursing $12.9 billion among Kraft shareholders, it turned over leadership of Philip Morris food operations to its newest and biggest acquisition. The deal reduced General Foods to a second-class citizen (untouchable in its own Taj Mahal), but the combined operation gained enough heft to be taken seriously.
The jammed-together subsidiary, introduced to the world as Kraft General Foods in early 1989, was charged with a mission even its swashbuckling parent could respect: to secure for all of Philip Morris a future in food no less glorious than its smoke-filled past.
Richman and Miles, ensconced as KGF’s No. 1 and No. 2, stacked the ranks (only two GF executives wound up in the top 15) and then made everyone deliver as if lucky to be a survivor. KGF truly outdid itself its maiden year, posting twice the normal earnings increase for Kraft and five times the normal increase for General Foods. The objective was to help their new bosses pay down a fair amount of the debt assumed for the expensive takeover. The end didn’t justify the means so much as imbue it with irony: KGF’s wildly impressive results were achieved by implementing draconian measures from the very anti-takeover plan designed to keep unworthy suitors at bay. At the end of 1989, Richman handed the entire food subsidiary over to Miles and then set about selling his protege from his perch on Philip Morris’ board. In the meantime, the ultimate process driver began reporting to the ultimate product driver.
Richman hadn’t clinched the sale when it came time to consider Maxwell’s successor, but he was close enough for Miles to be a contender. Even that was a surprise in some circles, in that the polished Midwesterner had neither tobacco experience nor a tobacco habit. (Once, when asked by The New York Times about his nonsmoking ways, Miles replied: “I used to smoke, and for some reason I can’t even remember how I lost my taste for it.” Ex-smokers give the statement credibility only if the same person can’t remember where he was when JFK was shot.)
But maybe the job would have gone to Miles for the simple reason Philip Morris saw food as its future and equated tobacco with its past. As Maxwell himself kept telling the press, “We want to be a consumer products company.” Maybe it was irrelevant that, as some contend, Richman boosted his candidate’s stock by hinting that Miles, the best food marketer in the company, might leave if overlooked for the top spot. “Well,” Richman supposedly would say, “there’s no telling what Miles might do.” It was all consistent with the way the big-brand game got played. It was always “play me or trade me.”
Whatever the reasons, Miles got to play. He bettered his rivals on the tobacco side and, in September 1991, became Philip Morris’ first nonsmoking and non-tobacco leader. America’s most product-driven culture began taking orders from America’s most process-driven chairman, and it showed. “People never used to worry about their jobs,” an observer complains, “only about killing the competition. Now they’re worried about being ‘fragged.’ They’re as worried about being shot by the guys behind them in the trenches as they are about the enemy in the woods.”
Such fears aren’t unique to Philip Morris, especially in this period of corporate downsizing. Horns are being pulled in everywhere; C-Y-A memos are proliferating in businesses previously spared. More telling than all the general upheaval, however, is the specific response of a Philip Morris executive when asked how business is: “Meetings are up, profits are down.”
Not every transition has to be easy. Not every marketing problem has to have a tidy solution. Philip Morris’ current woes may be complicated by the fact the tobacco business looks deceptively simple. There are only six players, the flavors are colorcoated, the media outlets limited. Innovation seems to happen at glacial speed. Indeed, the last major development in the business was The Liggett Group’s inability to get out of it. This was in the early ’80s, and K.V. Dey, who at the time ran Liggett & Meyers (the smallest of the six), had just seen another sale fall through. It frustrated him so much that he fired all administrative people, including 100 or so in marketing, and set about shutting his factory. Only he learned he couldn’t fire the factory’s workers because they were protected by union contract.
Dey’s decision to have his factory produce something, anything, instead of staying idle gave birth to black-and-white brands, which in turn spawned the discount segment wreaking such havoc today. This segment has been aided by two recessions–blue collar in the ’80s, white collar in the ’90s–and by a series of pricing missteps that business historians will be poring over for years. But the tobacco business is hardly alone. As a message from consumers, there’s nothing comparable to Marlboro Friday. The forces unleashed by Philip Morris’ mea culpa admission went on to trounce every publicly-traded consumer company. The one-day damage to other leading consumer stocks amounted to many times the $13 billion lost by Philip Morris.
Wall Street, for all its prowess as a leading indicator, lagged Main Street on this one. What manifested itself as a revolt was really a contagion. Consumers had been hinting at the illness for years. Sure, certain parts of our consumer economy were sicker than others, and a few were scarcely affected. There was even talk of preventive medicine, about how brands must rid themselves of ’80s-style excesses in a decade of value and disinflation. Philip Morris itself was clamoring aboard the preventive bandwagon when its own sickness surfaced. Last year, it folded the glossy Philip Morris magazine, which was sent free to 13 million smokers, and it cut back sharply on corporate overhead and perks.
It was too much, too late. Marlboro Friday wasn’t a wake-up call so much as the final diagnosis. The cancer of private-label had struck a vital organ. That’s not to say everyone faults Philip Morris for going public. But even admirers question the timing, especially in the face of a tax hike. President Clinton “knows he can at least pocket the same 40 cents they took off each pack,” complains marketing consultant Stibel, “and the consumer won’t even notice. That’s because his takeaway price will stay exactly the same.” Philip Morris, by tipping its hand, has almost certainly missed a chance to champion the little guy. Had the company’s brands not already given so much of their margins back, premium cigarettes like Marlboro might have been able to absorb the tax hike–the brunt of it, anyway–for God, country and smokers of Philip Morris’ top brands.
Philip Morris declines to defend its action, saying it said all it has to say in its April 2 announcement. That would leave its defense to rest on the market test that Philip Morris trumpeted as “effective in encouraging consumers to make brand selections based on brand preference rather than price.” The actual market was Portland, Ore., and the test spanned eight weeks over the 1992 holiday season. According to sources, the test showed that, when offered the same 40-cents-a-pack promotion now being offered nationwide, participants boosted Marlboro’s share by 3.8 points. (Granted, some of that increase had less to do with the promotion than it did with Christmas. Holiday gift-giving always favors high-end brands.) The test also showed that half of Marlboro’s gain came from other premium brands.
What disturbs analysts is that, in the eight weeks after the test, Marlboro’s share dropped to a level slightly lower than it was before the test began. Also disturbing was what the test didn’t show. It didn’t show competitive responses, which means the results are telling only if Marlboro’s cutthroat competition permits nationwide switching without a fight. “That’s looking at the landscape awfully naively,” says analyst Black, who estimates the responses of competitors would have cut Marlboro’s test gains by nearly half. Says another test-market follower: “The Portland test doesn’t tell you a thing except if I cut my price and nobody else cuts theirs, then I gain share. The problem is the real world isn’t as nice as Portland.”
Even if it were, is eight weeks enough on which to make a bet-the-company decision? Is the immediate sacrifice of 40%, or $2 billion, of U.S. tobacco earnings worth what may or may not translate into a couple of permanent share points on the premium end? The prospects already have Philip Morris’ stable of agencies nervous. Miles is known to trim ad budgets to compensate for pricing miscalculations, especially his own. This happened at the end of his Kraft tenure, whose legacy was a dangerously wide gulf between such premium-priced Kraft cheeses as Cracker Barrel and private-label alternatives. In a gesture likely to be repeated, Miles brought prices back in line and then slashed budgets to try to regain lost market share. This time, the pain is likely to be spread around: One executive at a KGF agency expects ad spending cuts of 10% or more to begin next quarter.
Longtime Philip Morris observers find such behavior not only uncharacteristic but disturbing, whereas supporters of Miles contend there’s no better leader today, if only because he already has confronted private-label threats in food. The official word from Philip Morris is that it’s “cautiously optimistic.” It concedes, nonetheless, that a couple of weeks are still needed to call its price-cutting strategy a success–or, though it would go unstated, a failure.
The ultimate wisdom resides with shareholders, of course, and they’re hanging back. Philip Morris continues to hover around Marlboro Friday lows. The recent promotion to executive vp of worldwide tobacco of Geoffrey C. Bible, who earlier succeeded Miles as head of Kraft, suggests there’s already activity in the bullpen. “Bible’s a part of Maxwell’s old Australian mafia,” an insider explains. “He’s about as big as a small jockey and, like Maxwell, smart as a whip.”
Whether Bible gets the nod or not will most likely be up to Maxwell, who as chairman of the executive committee again finds himself arbitrating between cultures driven by product and by process. Until he makes that call, the smart money has him smoking more than the usual pack a day as he sorts out whether his successor is truly a leader or just a survivor.
Copyright Adweek L.P. (1993)