Authors: Richard Kluger
The basic strategy was to push up the soda maker’s share of a market in which lemon-and-lime drinks commanded only 10 percent of sales and then to try for major-league status by bringing out a new cola to compete seriously with Coke and Pepsi. It was a tall order. And to achieve it, ironically, Seven-Up would cast itself as the purveyor of the healthiest soft drinks on the market—the sort of claim that its new parent could never make for its cigarette brands.
To run Seven-Up, John Murphy’s vice president for sales at Miller—Edward Frantel—was dispatched to the soda company’s headquarters in St. Louis. Frantel was struck by the old “Uncola” advertising campaign that Seven-Up had used, without notable success. The idea of making a virtue of the brand’s differentness was advanced by a spread in
Consumer Reports
noting that Seven-Up was the only true caffeine-free soda on the market. Though the article said that there was considerable disagreement about whether caffeine might be implicated in breast or pancreatic cancer and that moderate use of the chemical stimulant would not likely harm any healthy youngster, there was no debating that it also had certain nicotine-like effects, such as speeding up heart rate and constricting blood vessels. Frantel thought he had the peg he needed. He spent heavily on ads pitching Seven-Up as caffeine-free (“Never had it, never will”); it was not much to crow about, but it was a unique selling proposition.
Seven-Up’s much bigger rivals recognized the challenge and hit back with their own caffeine-free entries and, more to the point, began pushing sugar-reduced Diet Coke and Diet Pepsi to weight-conscious quaffers. Seven-Up actually lost market share, though its revenues were climbing on the strength of the big ad backing. Frantel also looked to economize, but this, too, backfired. The company began substituting cheaper, crystal-clear fructose for slightly yellowish sucrose as the sweetener in Seven-Up, and although the drinker derived a satisfactory taste sensation from fructose at the front of the mouth, the punch faded fast, while sucrose held its sweetness longer—you could almost chew it before each swallow. The bottlers who mixed the syrup’s ingredients, furthermore, did not all follow instructions uniformly, causing the product to have an inconsistent color as well as taste.
Whether out of impatience for progress, anger at Coca-Cola for pushing Sprite (its own lemon-lime entry) all the harder now, or overconfidence, Frantel and his team did not wait for Seven-Up to gain ground before launching their own cola in 1982—Like—which the company hoped would do for it what Lite had done in the ’Seventies for Miller Brewing. Again Frantel chose the health pitch: “You don’t need caffeine. And neither does your cola.” It was
an approach that denigrated the rest of the soda world. Furthermore, the half of Seven-Up’s bottlers who sold Coke or Pepsi could not also handle Like, even if they had wanted to. Philip Morris had to put up capital to buy eleven independent bottlers to market Like, and some of Miller’s distributors were conscripted to get the new cola onto retailers’ shelves. But those shelves were more crowded than ever now, and decent placement came at a premium price as the two cola kings began a market share war ruinous to second-tier brands like Seven-Up and Like. The combined market share for those two brands, which had edged up in 1982, took a pummeling the next year, falling to 5.3 percent, lower than it had been when Philip Morris bought the company, despite a cumulative outlay by then of nearly a billion dollars.
In retrospect, Weissman would concede that Philip Morris, or at least he and his predecessor, Joe Cullman, had been dazzled by “the challenge of it—a great trademark and reputation as a product. [But] we weren’t up to it. Coke and Pepsi were not about to let us do what we had done in the cigarette and beer business.” In the end, Seven-Up proved “a little bit of a disaster” for Philip Morris, as Weissman put it, and his successor would jettison it at the earliest seemly moment.
The problems at Miller were of a different magnitude. Having driven up its market share from 4 percent in 1970 to 22 percent by 1981 and spent $1.2 billion on six new breweries to keep pace with surging demand, the company suddenly hit a stone wall. Under pressure from corporate headquarters in New York to improve bottom-line performance—Miller was earning between 5 and 7 percent on sales—Murphy took the industry pricing lead even though his company was still a decided No. 2 behind Anheuser-Busch. Largely because Lite was a very hot brand, Miller made a pair of price rises stick as the industry reluctantly followed, and margins improved. But by 1981, Gussie Busch in St. Louis was counterattacking in earnest. Not only did the market leader decline to follow Miller’s next price rise, forcing it to rescind the move and lose face, but the company also began to push hard with promotional discounts and other pricing weapons. Anheuser finally adopted advertising, too, that was as zesty as its growing challenger’s “Miller Time” campaign, even if an obvious echo. Anheuser’s pitch was more pointed and flattering: “For all you do, this Bud’s for you.” And they spent heavily on it. Miller Lite’s barrelage, feeling the effects of the big Budweiser drive and of the price hikes that hurt with blue-collar customers, tailed off 40 percent between 1980 and 1984. In the premium market Miller’s Lowenbrau was sniped at as an ersatz German beer and made little headway against Anheuser’s Michelob. And when Bud Light finally debuted in mid-1982, it came on with bells, whistles, and flashing pyrotechnics that at once undercut Miller Lite’s runaway domination in its low-calorie niche. The biggest Miller brewery yet, a $412 million leviathan slated to open in Trenton, Ohio, in 1983, was now superfluous. That year Miller produced a
full 30 percent of Philip Morris’s corporate volume but only 11 percent of its net, confirming it, even if then the second largest U.S. brewer, as a relative drag on the company’s spectacular tobacco earnings.
Criticism was now heard that instead of sinking a billion dollars into Seven-Up and 2 billion into Miller during its thirteen-year diversification drive, Philip Morris would have earned more just investing the money in U.S. Treasury bills or buying back its stock to bolster investors’ per-share equity. “We are operating people,” Weissman answered, “we are not bankers,” and urged shareholders to review the company’s twenty-year record in determining if management had acted prudently to protect their long-term interests. For the company to have sat on its cash flow, he reflected half a dozen years later in his retirement office, would have been wrong: “You’re not going to be a success doing nothing, you’ve got to keep moving—so you build one brewery too many— eventually we’ll use that plant No one gets shot here [at Philip Morris] for making a mistake so long as it’s an honest one and part of an overall strategy.”
IX
TOBACCO
remained the heart and soul of Philip Morris as it surged to the top of the industry in the early ’Eighties. Two of the key contributors to that rise, marketers Ross Millhiser and Jack Landry, had been moved to the sidelines, somewhat embittered by their failure to attain the apex of organizational power. The tobacco program passed now into the hands of technicians and theoreticians. Foremost on Weissman’s team was Clifford Goldsmith, the perfectionist operations man who circled the globe tirelessly, inspecting and improving the company’s proliferating production facilities. At home he took the lead in urging the company to expand its cigarette-making capacity at a time when the rest of the industry was slowing down. The new plant, less of a showplace than PM’s huge Richmond manufacturing center, then operating at capacity, was put up in Cabarrus County, North Carolina, near Charlotte, the state’s largest city, with its abundant labor supply.
At Goldsmith’s side was Philip Morris USA President Shepard Pollack, a short man with a sizable brain, an indisputable talent for numbers, and an outgoing personality that he took on the road regularly to conventions and industry shows, to the amusement of wholesalers and others in the trade. One veteran Philip Morris sales director said of Pollack, “He was extremely funny—for an accountant.” But Pollack did not delude himself, as Goldsmith did on occasion, that he was aces at moving the merchandise. The keeper of the flame in that department so critical to Philip Morris’s rise was James Morgan, the talkative, chain-smoking golden boy of the organization, with his tousled hair and unstinting devotion to the Gospel According to St. Jack (Landry):
Get a great campaign with the right image and stick with it forever. Morgan was the clear heir apparent to Pollack to run PM-USA and, after that, the whole company—if he could just hold his horses. Some around New York headquarters, though, found that in contrast with Landry, his mentor, who would sit through a meeting and hear out everyone else in the room before ruling, Morgan as marketing vice president was inclined to gather his troops and peremptorily tell them how it was going to be. His chief subordinate was a very different character—glib, funny, charming Robert Cremin, whom Landry had brought in from the Leo Burnett ad agency to serve as head of brand management, with the idea that he might even succeed him in the marketing post. But Landry soon concluded that Cremin had a short attention span and an erratic work ethic, so the marketing job went to Morgan while Cremin, given his personable nature and fondness for high jinks, was put in charge of the sales force. Unfortunately, he failed to disguise what appeared to be a certain disdain for his social and intellectual inferiors, at times alluding to his sales force as “grunts” and “shit-kickers”.
Propelled more by momentum now than inspiration, PM cigarette sales were monitored on a day-to-day basis by Cremin’s obedient subordinate, sales director Jack Gillis, a veteran rep who stuck by the somewhat mechanical drill handed down by the New York marketing people and, in the view of a number of field men, poorly geared to the varying regional pull of the brands. Morale suffered from the perception that advancement was awarded to those who least questioned the centralized directives and most loudly kissed their overseers’ rings. There was a perceptible loss of confidence and conviction, too, over the launching of new brands and line extensions. The Cambridge debacle, traceable possibly to uneasy consciences over the health issue, and surely to the company’s reluctance to formulate an ultra-low-tar brand for people who didn’t really want to smoke anymore, proved a costly misstep. And despite the growth of menthol brands, Philip Morris never sustained a freestanding entry in that sector, picking up the scraps instead in the form of line extensions of its main brands. It tried again now with North wind, a mint-flavored variant, and had no better luck.
But its core business remained strong, and as Philip Morris’s top brand sailed along at a smarter clip than anyone else’s, a wariness set in against tinkering with the machinery. This was especially true when Liggett’s discounted “generics” began selling well enough to command the industry’s nervous attention. A few at PM urged an early and forceful entry into the lowered-price sector on the joint premise that multiple-tier pricing was common abroad and had to come to America sooner or later and that, with a higher U.S. cigarette tax imminent, pricing pressure was sure to grow. But most company executives did not relish the prospect of reduced margins from discount brands, perhaps a suitable expedient for survival by the likes of Liggett. A further factor
militated against the notion: Philip Morris was not psychologically disposed to put out such an imageless product. One younger executive who went against the grain in pushing for an early Philip Morris move into generics was merchandiser Edwin J. McQuigg, who recalled, “They were not mentally prepared for it—to make a product visibly poorer, detectably inferior to their regular brands.” The very notion violated Chairman Weissman’s credo on smokers’ love affairs with their brands: Cigarettes were “a personal statement about you … an expression of who [people] are or what they perceive themselves to be … .” So Philip Morris would not truck with faceless, colorless cheapies; Weissman doubted that generics would grab more than half of 1 percent of the cigarette market.
Instead, Philip Morris moved in the opposite direction. Goldsmith requested “the ultimate in a luxury look” for an extension of the upscale Benson & Hedges line, to be called DeLuxe Ultra Lights. Within a year of its 1982 debut, the brand, in designer Walter Landor’s chic metallic silver box with a gold-foil laminate overlay, had captured 1 percent of the market—a rousing success and a nose-thumbing rebuke to the discount concept.
Encouraged, Philip Morris marketers decided to launch a full-price, freestanding brand, a perilous course in the age of TV-less cigarette advertising. Landry favored a kind of playful mentholated brand, to be called Raffles, after the famous hotel in Singapore and the British diplomat of the same name. Ever the imagist, Landry thought that the filmy allusions to travel, intrigue, and the exotic Orient might lend a light, even racy tone to the product. But Goldsmith and Morgan overruled him, believing there was a larger potential market for an American version of a big British hit that had also done well on the continent—John Player Special, dressed up in a suave black-and-gold package that reeked of elegance. Black, though, had been a taboo color for U.S. cigarette makers, sensitized to the health charges against their product, so in fashioning a gorgeous black box with the brand name in gold script, the marketing team pitched the new Player’s brand at fun-loving yuppies with ads showing chic smokers at glitzy parties and swank cafes. But Player’s ritzy black box absorbed a great deal of ink, and the moisture from it had a detectable effect on the brand’s taste. Much time and money were spent correcting the problem, which slowed selling momentum. Beyond the smart package itself, moreover, the brand had no reason for existing, even as Cambridge had nothing going for it but its low yield. Player’s got up to 0.7 percent of the market before tailing off into oblivion.
What the Philip Morris cigarette team proved best at in this period was aggressive pricing, which had the steroid-like effect of handsomely bulking up profits for much of the 1980s but would eventually serve to encourage the one thing the company wanted to avoid—price-cutting by hungry competitors. The 1983 U.S. cigarette tax rise had fueled steady upward pricing by providing
ideal cover against consumer resentment of the moves as well as a price-driven profit opportunity for wholesalers, who welcomed the twice-a-year increases in order to trade-load,
i.e.
, buy cheap and sell high soon afterward. As Vincent Buccellato, Cremin’s successor as sales vice president, later noted, “Outrageously ambitious profit margins could be sustained by equally aggressive pricing policies” without fear because of how the cigarette trade had traditionally operated at retail: “All prices gravitated to the highest level,” in Buccellato’s words, meaning that any boost made by one of the market leaders would automatically be adopted by retailers for all brands. Thus, so long as the economy boomed through the mid-’Eighties, Philip Morris and those who followed its lead were not viewed as price-gougers.