Authors: Richard Kluger
To impress more firmly on retailers the virtues of this dream product, Reynolds now systematically upgraded its field force. Beyond better wages and travel allowances, its salesmen began to be regarded as professionals. Closer and more instructive communication with the home office became routine, better-educated salesmen were enlisted, given more sensitive training, and, when promoted, had more authority over their territory, which they might hold for many years, thereby gaining an intimacy with dealers well beyond any their transient competitors could achieve.
A classic example of the benefits of this more highly motivated and enterprising Reynolds sales force took the form of a simple discovery by one of the company’s Seattle area representatives in 1948, a time when carton sales were growing in popularity amid postwar prosperity. Heavily loaded with the usual sales paraphernalia, the RJR rep happened to rest a small Camel display rack on an upended orange crate as he began pitching the store manager on the advantages of self-service cigarette displays. Noting how nicely the Camel display fit, the salesman proposed that the raw sides of the crate be covered with Camel posters to form an eye-catching base to support the display stand. But on reflection, and because he was supposed to help the store sell cigarettes in general, not just Camel, he suggested that the crate itself be turned into an all-brands carton dispenser, with Camels stacked above the central crate divider and competing brands below it. The store manager agreed to give it a try in view of Camels’ rising market share, and the device worked like a dream. Soon RJR designed sturdier, more attractive racks and began giving them to retailers in exchange for the preferred display position and more generous space allocation than any other brand.
Eventually the Reynolds hardwood racks, prominently featuring the Camel and later RJR brand placards, became permanent store fixtures holding several hundred cartons and giving the company an enormous selling advantage that its salesmen worked hard to defend. “They saw the opportunity, they had the product and the capital to do the fixturing, and they cleaned up while the rest of us looked on,” one rival salesman recalled. By 1950, Camel was again the best-selling brand, and Reynolds stood on the verge of its second golden age.
IV
WORLD
War II treated no cigarette maker more kindly than Philip Morris. Sales were up by a third in 1941, by just under a quarter in 1942, and by more than a quarter in 1943—the biggest proportionate gains in the industry—and if profit margins were thinned, the company’s market share hovered in the 10 to 11 percent range for a solid No. 4 position, well behind the majors but on top of the second flight.
By 1944, as demand continued strong, Philip Morris elected to drop the cellophane wrapping on its packs rather than curtail production due to supply shortages, figuring as some other companies also did that the brisk sales pace would prevent the product from turning stale on dealers’ shelves. When the inevitable shortage of tobacco leaf itself hit, PM’s executive vice president and supersalesman Alfred Lyon could not bear the thought of his company’s loss of sales momentum. Lyon lived for sales; no other numbers mattered to him but sales figures, on the premise that if you could sell enough units, the profits would materialize sooner or later. Behind his desk hung a sign bearing the inveterate salesman’s creed: “There are a hundred thousand reasons for failure but not a single excuse.” It was not surprising, then, that when an opportunity appeared in 1944 to pick up a huge cache of aged tobacco leaf, Lyon urged Philip Morris’s President Otway Chalkley to seize it, even if the tobacco came only with a whole manufacturing company attached to it.
Besides the 26 million pounds of tobacco in its warehouse and a serviceable plant in Louisville, the Axton-Fisher Company sold a pair of brands that Lyon rationalized might be far better marketed by Philip Morris. One was a king called Fleetwood, launched in 1942, that seemed a more promising entry than the deluxe Dunhill king that Philip Morris had offered in 1940 but attracted few takers. Axton-Fisher’s other exploitable brand was Spud, the modestly successful, pioneer menthol that had been far outstripped by Brown & Williamson’s Kool. Still, Al Lyon thought he saw potential in this pseudo-medicated kind of smoke that would eventually capture more than one-quarter of the entire market.
The cautious Chalkley thought that the $20 million asking price for Axton-Fisher was prohibitive, but Lyon, with Philip Morris on a roll, argued long and hard for the company to take the plunge. He finally prevailed. There was simply no other way to get the leaf—at any price—to keep Philip Morris’s wartime sales growing. The newly acquired leaf allowed Philip Morris sales to hit a record 32 billion units—5 million packs a day as its creaking factories were pushed to the limit of their two-shift-a-day operations—by the close of the company’s fiscal year in March of 1945. Its market share had reached 11.5
percent, its stock was at a record high, and on the next day—April Fool’s Day—Lyon was installed as Philip Morris’s $100,000-a-year president upon Chalkley’s designation as board chairman.
Lyon did not have a good first year at the helm. In fact, he nearly ruined the company.
Because Philip Morris sales had advanced practically nonstop through some very hard times since the introduction of the “English Blend” brown pack a dozen years earlier, Lyon the happy warrior saw even brighter days ahead now. Explosive growth could be expected in the civilian market, long restrained by wartime priorities and shortages, and with victory in Europe at hand and the end in sight in the Pacific as well, distributors began placing heavy orders, partly in anticipation of an imminent lifting of price controls by the government; inventories assembled when the retail price was under wraps would of course yield considerably higher profits if the over-the-counter price was to climb by the time smokers bought them. Military purchase orders were sure to drop with the coming of peace and a reduction of the armed forces, but Lyon reasoned that the higher orders for the rejuvenated civilian market would naturally compensate. Thus, by mid-1945 he ordered jobbers’ allocations increased by 50 percent and the flood of new orders to be expedited, even if Philip Morris cigarettes had to be shipped in their wartime packaging
(i.e.
, without cellophane or foil). The pragmatic overseers of the company’s manufacturing operations at Richmond warned Lyon that the new orders were unrealistically high and brought with them a decided risk that the new shipments would go stale if demand fell off. Other companies were moving more cautiously, it was noted, holding allocations in line longer or easing them only modestly in the hope that supply shortages would lift with the end of hostilities and new cigarette shipments could thus be packaged to assure sustained freshness, should postwar demand turn soft. Lyon was unpersuaded. Philip Morris could steal a march on its timid rivals by not slowing down output to repackage as the war ended. He ordered Richmond to roll ahead full speed.
All of the company’s unbroken progress, which Lyon had come perhaps subconsciously to view as divinely ordained, came at a price. Leaf inventories had to be steadily enlarged, production equipment purchased, and the big acquisition of Axton-Fisher paid off. Philip Morris was highly solvent, to be sure, but its short-term debt had risen to $40 million by 1945. Its Wall Street banking house, Lehman Brothers, proposed a $30 million trip to the financial markets, consisting of a $15 million new issue of preferred stock and another $15 million in twenty-year 2⅝ percent debentures, both of which, considering the company’s stellar record, Lehman felt would be quickly and fully subscribed.
But within weeks of the Japanese surrender in August 1945, cigarettes went
from a state of black-market scarcity to one of sudden abundance. Hoarders stopped hoarding, smokers returned to their prewar favorite brands, wholesalers’ shelves were loaded (especially with Philip Morris), and to compound the situation, the U.S. military, which had stockpiled cigarettes as a necessity of war, now stopped ordering altogether and would not reenter the market until the year’s end. Other brands, in shiny postwar wrapping, were now readily available and selling nicely while Philip Morris, in its dull brown war dress, piled up. Customers complained that the product seemed stale, and switched to fresher brands. Telegrams went out from Philip Morris headquarters, reluctantly inviting wholesalers to return any stock they felt might have turned stale. All that autumn, the boxcars pulled up in Richmond and disgorged the oversupply—by the billions. For weeks the factory was getting back more cigarettes than the fresh ones—in cellophane wrap again, finally—it was shipping. Lyon made matters worse by ordering some of the stale returns to be wrapped in cellophane and reshipped as if new merchandise. When word of that gambit was leaked to the trade, the reaction was so furious that the practice was instantly halted and leaf inventories were invaded beyond normal to rush out replacement stock, accompanied by point-of-sale signs proclaiming, “Just arrived—
FRESH
!—Philip Morris cigarettes.” But the damage had been done. In November of 1945, Philip Morris operations ran $57,000 in the red; December, usually a high-profit month, showed a net of just $12,000, and the prospect for 1946 was highly uncertain, considering the brand’s tarnished reputation.
Lyon now made his final mistake in a string of miscalculations. While registering its planned $30 million financing with the Securities and Exchange Commission in mid-January of 1946, the company failed to mention the sudden downturn in Philip Morris’s fortunes; the financial data in the disclosure statement covered only the first half of the current fiscal year, which had ended with the figures for October, before sales collapsed. Lyon would later lamely explain that the November-December numbers were not included for investors’ consideration because management thought them a temporary aberration, due entirely to the economy’s shift of gears from wartime and unlikely to persist into the new year. Word of the trouble at Philip Morris soon reached Wall Street, the stock price plunged, and the SEC ordered the company to tell all to the subscribers of its new issues and offer them their money back. Most of the investors accepted the offer, and the financing was humiliatingly withdrawn. Stale cigarettes were bad enough, but dishonest dealing with the investment community threatened quick ruination.
Lyon, true to his salesman’s creed, offered no excuses. He conceded that he had been “a damn fool in trying to do everything, including many tasks I didn’t know anything about. … I realized for the first time Philip Morris was no longer a baby, that we had grown up and not been aware of it.” Lyon, the
exemplary “street man,” the drummer who could sell ice to Eskimos, was a victim of his own limitations, and his ambition had threatened to take the company down.
The basic soundness of the business and its primary product soon reasserted itself, and the crisis eased. Lyon was able to unload 5 billion stale units in cigarette-starved Europe, the volume loss for fiscal 1946 was limited to 8 percent below the record performance of the previous year, and Lehman Brothers was able to place the company’s entire new financing package, now at $32 million and more needed than ever, in a private deal with Equitable Life Assurance. But it was clear to all concerned, including the beleaguered company president himself, that Lyon needed serious help, especially on the financial side, and fast.
Oliver Parker McComas had ancestors who once grew tobacco near the Maryland tidewater of Chesapeake Bay, but offered few other credentials to serve as rescuer of a troubled cigarette manufacturer. A big man with easy, polished manners, McComas had graduated from Princeton, won the Silver Star for gallantry during World War I, gone to work on Wall Street as a foreign-exchange trader, and in time nicely advanced himself at Bankers Trust, heading the Paris office for a while and then, back in New York, serving as the bank’s chief commercial lending officer. Among his clients was Philip Morris, and Lehman Brothers, knowing of McComas’s reputation for square dealing and tough-mindedness, urged Lyon to bring the banker on board, even if he had to be paid three-quarters as much as Lyon himself. Never an operations man, McComas relished the challenge of stabilizing Philip Morris’s wobbly position; he came over late in 1946, and during the next eleven years would do much to set in motion the company’s eventual rise to predominance in its industry.
The first two years were devoted to repair work, as sales remained in a trough and Philip Morris stock tailed off to 27, little more than a third of what it had been before the 1945 fiasco. McComas began by imposing far stricter budgetary and inventory controls and ordering full financial disclosure in company reports to Wall Street lest its reputation be further tainted. The headquarters staff was chopped by one-third in an economy move that allowed the company to correct the disastrous 200 percent annual turnover in its salesmen’s ranks; better pay and benefits were offered to attract more skilled field men. A major planning and communications gap between sales and manufacturing was addressed by McComas in bringing to New York the chief of Philip Morris’s production, Clark Ames, a bluff, profane, and very direct man who had run the Richmond operation, one semi-admirer would recall, “as if in charge of a cockfight.” Younger and vitally needed new talent, also from the manufacturing side, advanced soon after Ames’s arrival, including a pair of native Richmonders who caught on fast in New York. Robert P. Roper was the
epitome of the courtly, witty, and sweet-tempered Southern gentleman, well connected in Virginia social circles and to the gentrified crowd that ran Universal Leaf, the big Richmond brokers who bought, financed, and partially processed Philip Morris’s tobacco. Roper displayed a good deal more ambition and energy than the stereotypical progeny of the faded Dixie aristocracy as he reshaped the personnel and operations departments in New York. His close friend Ross P. Millhiser belonged to a family that owned a large box-making plant in Richmond and had sent him to Yale—a pair of distinctions he shied away from proclaiming upon joining Philip Morris as a factory hand before the war. Blessed with a questing mind and a love of words that had quickly made him useful to factory superintendent Ames, Millhiser reluctantly accompanied his boss to New York, where, after a checkered apprenticeship, he began to show a decided knack for marketing. McComas also now brought more professionalism to the company’s public relations, hiring the firm of Benjamin Sonnenberg, a flamboyant, social-climbing, and highly gifted publicist. Sonnenberg assigned to the Philip Morris account a wry, smooth young native New Yorker, George Weissman, whose craggy good looks and resonant voice made him welcome at the company office, where McComas soon put him to work writing more forceful speeches and adroit press releases. Among them, Roper, Millhiser, and Weissman would form the operational core of the far larger enterprise Philip Morris was about to become; only their catalytic agent was yet to appear on the scene.