Authors: Richard Kluger
The results were dramatic. Between 1981 and 1985, the average price for a pack of cigarettes in the U.S. rose from 67 cents to $1.03; of this 36-cent increment, 11 cents went to pay higher federal and state excise taxes, 8 cents went to distributors to fatten their narrow margins, and the remaining 17 cents went to the manufacturer. The per-pack operations income thus soared from 8.2 cents in 1980 to 19.2 cents in 1985; by 1983, PM’s operating revenues had soared 70 percent over three years earlier on a growth in unit sales of only 7.5 percent.
At the beginning of 1983, both RJR and Philip Morris played down the race for top market share in the tobacco business. Goldsmith said his company was “allergic to being the biggest. It’s puffery. It means nothing.” To charges that success was making the organization soft, he replied, “We’re the opposite of complacent—we’re nervous … .” By year’s end, Reynolds had sold almost 14 billion fewer cigarettes nationwide than the year earlier, the severest hit suffered by its badly listing flagship brand, Winston, while Philip Morris steered through a stormy year for the industry to capture first place and end the North Carolina company’s twenty-five-year reign as market leader. Shep Pollack, who loved a good party, refrained on this occasion, recalling, “There were no celebrations, no raises or awards.” The company had triumphed by running scared; gloating was not in its nature.
Despite its long-sought triumph, however, the mood at Philip Morris had soured a bit. The breach within the executive ranks over the Seven-Up takeover never closed, and the old collegiality that had allowed sharply diverse personalities to reconcile their differences never returned. Among the company’s tobacco people the sense grew that Weissman favored his beverage crowd, giving them excessive leeway while taking for granted those responsible for the core business—and its lush profits. Vice Chairman Millhiser, never close to Weissman, did not notably mellow toward him while lingering in corporate limbo. More overt tensions remained between Landry, at best semifunctional now, and Goldsmith, who was perhaps overfunctional. Goldsmith, as the company’s de facto No. 2 officer, took on imperial trappings as he
toured Philip Morris’s global outposts. “They pulled the carpet out for him,” recalled one high-ranking colleague, “and he’d come back to New York with new affirmations that he walked on water.” Goldsmith would sometimes seem obsessively attentive to production glitches in, say, Sweden or Uruguay but indifferent to U.S. problems, and when a few like Pollack called him on it, they risked falling out of favor. Indeed, Goldsmith began to tell Pollack he was in the wrong job, and others, taking the cue, said they sensed a bit of slackening in Pollack’s attention to every last detail and that he had become too flip. Then there was the Cremin problem. When his superiors came to the inescapable conclusion that he played more and better than he worked, they tearfully let the sales chief go. A more able younger executive, Wallace McDowell, who was strong in domestic operations and finance, quit in a clash with Goldsmith, reportedly over authority and prospects for advancement.
Most demoralizing of all was the sudden departure of the company’s great future hope, James Morgan, pirated away by Warner Communications’ Steve Ross to run his badly troubled video game subsidiary, Atari. The sweetener was said to be a seven-year contract worth $10 million and the chance to strut his managerial stuff. “I physically flinched when I heard about it,” recalled Ellen Merlo, a Morgan colleague in marketing. Beyond regretting the loss of a personable and spirited co-worker, those who most admired Morgan noted that he had never really run anything and feared that he was not yet ready to be a CEO. Within eight months, before the forty-one-year-old Morgan could introduce any merchandising concepts or cut costs, Atari was sold out from under him, and Morgan found himself one of the best-paid unemployed young executives in America.
These stresses effectively left Philip Morris without adequately talented personnel to run the domestic tobacco business after Shep Pollack. The company’s international tobacco people, in fact, were about to seize the reins of the nation’s biggest cigarette maker.
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o boost business in France, where Philip Morris had only a few percentage points of the market—compared with 30 percent in Italy, Switzerland, and Australia and a swiftly growing share in Germany—George Weissman went to Paris with a full corporate entourage in the fall of 1980. It had been twenty years since Joe Cullman put him in charge of the company’s embryonic overseas sales, and his arrival now, in a London Fog raincoat, as he paused to light a Marlboro on the tarmac before heading to his suite at the Ritz, was noted by the French press and financial community. They knew he had come to try to sway the government to ease up on foreign competitors of the highly
protected French national tobacco monopoly, yet it was hard not to take a liking to the low-key Philip Morris chairman. When a reporter at his press conference asked the world-class tobacco purveyor about his own choice in dissipations, Weissman replied, “Forty cigarettes a day, one or two beers”—then, remembering his audience, added without skipping a beat, “I also drink some wine.”
Unobtrusively at Weissman’s side throughout his Paris showing was the president of Philip Morris’s international operations (PMI)—Hamish Maxwell, whose reserved manner was taken by some for introversion, by others for natural shyness. Almost everyone in the company thought he was smart because he listened intently, questioned incisively, said little more than he had to and no louder, and seemed to forget nothing he ever heard. In the view of Shep Pollack, who became president of PM-USA at the same time Maxwell took over PMI, the latter was “bright, driven, catholic in his knowledge, interests, and curiosity … and he held his cards very close indeed.” While coming from a tobacco family and being competent in the financial and marketing aspects of the business without demonstrating a special flair for either, Maxwell had the crucial skill of winnowing wisdom from others’ chaff. Subtle and politic, a precise user of both the spoken and written word, he worked most effectively in one-on-one exchanges rather than by force of command around a conference table. So quietly efficient an inside operator was he that one ranking company man said of Maxwell, “He could cut off your balls and have them in a jar before you knew you’d lost them.”
His talents did not go unnoticed at corporate headquarters in New York, where a bit of a chill set in between the domestic and international tobacco people. The former felt that PMI’s volume growth, building on relatively small bases, was unspectacular and that its profits were skimpy alongside the U.S. figures—that, in general, there was more sheen than substance to the overseas showing so far. For their part, PMI executives groused that PM-USA had been spoiled by the far easier conditions of doing business than prevailed overseas. PMI was forever operating at a huge pricing disadvantage, for example, when Marlboro had to be sold for one-third more than Gauloises, the French favorite, and 250 percent more than the leading Polish brand. Without benefit of the measured media that U.S. marketers used to gauge consumer pull and the American economies of scale, the international executives saw themselves, justifiably, as more versatile problem-solvers, having to confront more volatile economies and currencies, unstable if not corrupt governments, high cigarette taxes, rebel chiefs who threatened to burn their factory to the ground if tribute money was not forthcoming, and unskilled labor and sales forces, as in Indonesia, where it was hard to find field men who could both drive a motorcycle and read. Thus, the battle-scarred PMI corps was not eager to take orders from U.S.
executives, who they thought were too little exposed to the realities of doing global business.
Aware of the need to convert promise into achievement as he took over international operations, Hamish Maxwell believed that the key to the game was “to be tenacious and patient—but not passively patient,” to keep his eyes open for opportunities like buying out Liggett’s overseas business and buying into Rothmans, to press steadily against pricing inequities and for marketing access, to take calculated risks—and to own up when they didn’t work out. “I was the one who urged us to get into Indonesia and Chile—and then to get out of them,” he recounted.
The people under him whom Maxwell valued most were inventive, as ambitious for the company as for themselves, and, above all, dogged. In the case of Aleardo Buzzi, who would later succeed him as PMI president, years of working with auto-racing promoters helped break down barriers against U.S. brands, especially in Italy, where Merit as well as Marlboro became a top seller. Much of the time, Buzzi operated beyond the surveillance of the company’s New York executives, from whom, as one admiring junior associate put it, “he was wonderfully protected by his poor command of English.” In France, the company contended with tough advertising restrictions by distributing cigarette lighters embossed with the Marlboro name, and to overcome suffocating price controls, PMI executive Walter Thoma recalled how, on more than one occasion, “I had to knock on the French finance minister’s door, get down on my knees, and tell him how poor a company Philip Morris was and how badly it needed a price increase.” In Germany, where door-to-door deliveries from tobacco factory to retail outlets were routine—and more costly than the U.S. system of using wholesalers—PMI economized by hiring a delivery service that doubled as order-takers.
No PMI executive struggled longer or harder for a breakthrough than German-born Andreas Gembler, operating out of the company’s European headquarters in Lausanne and roaming Eastern Europe from 1969 on in an effort to obtain licensing agreements with Communist governments to make and sell Marlboros through “courtesy shops” to tourists and a scattering of nationals. “You had to work at all levels,” recalled Gembler, who dealt with everyone from Communist Party chairmen to workers on the factory floor after he finally succeeded in striking a deal. Every step—the tobacco leaf, the cigarette paper, the filters, the machinery—involved different offices, commissars, and endless skeins of red tape, and the very concept of a sales “royalty” by that name was resisted, especially in the Soviet Union, where it smacked of czarist exploitation; Gembler had to speak instead of “licensing fees.” Throughout the years he had to avoid succumbing to the suspicion he was being toyed with by people with nothing better to do. And he had to be willing to settle for crumbs
when offered, as in the mid-’seventies, when it was proposed that in honor of the planned joint U.S.-Soviet
Apollo-Soyuz
space flight, Philip Morris market 10 billion commemorative cigarettes in each of the two nations as a good-will gesture. Since the brand would disappear from the market once the special run had been exhausted, the effort seemed unpromising to Philip Morris, which also explained how difficult it would be to guarantee the sale of what amounted to 2 percent of the fiercely competitive U.S. market without a large, costly advertising outlay. The Soviets, who did not have to truck with the decadent capitalist practice of advertising, settled for the company’s promise to give the commemorative brand decent exposure in the U.S. Gembler, without a lot of other options to penetrate the Soviet market, got President Brezhnev to hold up the package on television and sold the Russians a billion units.
That small opening led to marathon negotiations for a contract to license Marlboro. Gembler would show up in the morning and endure a cadre of naysaying Soviet bureaucrats until the three-hour lunch break, when food and vodka were plentiful; afterward, the Red ranks thinned, spirits mellowed, and progress was made inch by inch, culminating in a 1978 contract. Once production actually began, Gembler and Philip Morris technicians stood by to teach and check up on factory hands used to being gauged by the quantity and not the quality of what they produced. “You couldn’t leave them alone to make the Marlboro,” Gembler remembered.
Half a world away, William L. Campbell faced an equally grinding challenge as head of Philip Morris’s operations in Asia, where progress came sooner and in larger doses but only after costly mistakes. These were impressed upon Campbell in a five-page letter he received, on taking over the post, from one of his predecessors, Hamish Maxwell. PMI would do much better henceforth, Maxwell advised, by not trying, as it had earlier, to extract blood from stones—investing heavily in sales to teeming but desperately poor populations, like those in India and Indonesia—and concentrating instead on much smaller but more prosperous markets, like Taiwan, South Korea, Hong Kong, and Singapore.
The fate of PMI’s Indonesia operation dramatized the point to Campbell. After complex negotiations to manufacture there, PMI confronted the realities of doing business in a culture where bribery was a routine cost; cigarettes could not be sold unless they bore excise tax stamps, and these could not be purchased without a payoff to tax officials. Such surcharges helped make the U.S. brands hopelessly expensive for the Indonesian masses, and PMI decided over time to close up shop. But to remove its machinery from the country, a punitive charge of $750,000 was levied—PMI had not stayed there long enough to suit the Indonesian authorities. When Campbell went to deliver the payment in person, the government officer assigned to collect it would not do
so unless a sizable side gift was also given to him. The company declined, and six more months of haggling ensued.
Campbell made more headway in Hong Kong, where Marlboro had been handled by a British distributor who was lucky to gain a 1 percent share of the market; opportunities were missed for export sales from that bustling free-port bazaar. Campbell switched to an Asian distributor, the House of Ho, out of Shanghai, and things began to change. The Leo Burnett agency was then assigned to give the Marlboro Man a cultural makeover, since cowboys were perceived in Asia as little better than coolies and their brand preferences as necessarily a low-status smoke. The Marlboro wrangler got cleaned up, shown as more of a boss than a hand, and modernized: TV ads depicted him as driving a Jeep before he boarded a train for his trip to the Asian market. When Marlboro became the best-selling U.S. brand in 1976, the purchasable front pages of Hong Kong newspapers bannered the news, and so the cowboy became a symbol not of freedom and democracy but of Yankee-style commercial success and thus highly attractive among enterprising Asians. Marlboro was finally off and running seriously in East Asia, and exports from its Hong Kong licensee, many smuggled duty-free into any port where vendors were willing to risk it, grew substantially. The whole process was largely replicated in booming Singapore.