Authors: Richard Kluger
The federal courts, though, did not agree with this line of reasoning. In the 1971 ruling of
Capital Broadcasting Company
v.
U.S.
, the District of Columbia federal circuit tribunal said Congress was within its rights to impose the cigarette ad ban selectively since the Fifth Amendment did not compel legislatures to “prohibit all like evils, or none. A legislature may hit at an abuse which it has found, even though it has failed to strike at another.” In an eloquent dissent, however, Judge J. Skelly Wright, an eminent civil libertarian, registered free-speech concerns that would continue to echo several decades later, when Congress began to weigh seriously a ban on all cigarette advertising. Wright wrote that he had no doubt that the girl in the Salem ads was “in fact a seductive merchant of death and that the real ‘Marlboro Country’ is the graveyard. But the First Amendment does not protect only speech that is healthy or harmless.”
As a final reward to the tobacco manufacturers for yielding to the inevitable, Congress pushed back the date when the TV ban would take effect to midnight of January 1, 1971, thereby allowing the industry one final fling in the form of heavy cigarette advertising during the college football bowl games. No company bought more airtime that day than Philip Morris. “It was going to be a whole new world now,” recalled the company’s acknowledged ad wizard, Jack Landry. As his farewell gesture to the medium he had used so effectively, Landry scheduled a ninety-second Marlboro commercial, to begin at 11:58.30 and end precisely at the stroke of midnight. He sat home alone by his television set, watched four of his beloved cowboys gallop off into the sunset for the last time, and wept. “A lot of the excitement went out of the business then,” George Weissman recalled.
IX
PERHAPS
the truest measure of Philip Morris’s advance toward the leadership of its industry in the ’Sixties was how it positioned itself in overseas markets as no other American company had. But the dream of establishing Marlboro and several other Philip Morris brands as the world standard in cigarettes,
rather like Swiss watches or Italian leather goods, was burdened by the daunting reality that there was no such thing as a single global market for tobacco products, but a myriad of them, each distinguishable by national, cultural, political, and economic considerations.
Most obvious of the problems was the need to achieve a massive transformation in the taste preferences of non-American smokers. Just as those in British Commonwealth lands had a decided affinity for “Virginia flue-cured leaf,” unflavored and more natural than the U.S. staple blended with sweetened Burley, so did most smokers on the European continent and in Latin America favor “black” air-cured tobacco blended with “Oriental” (in fact, Levantine) leaf for its strong aroma and a smoking quality that seemed rather harsh to American and British tastes. Nor did most smokers elsewhere yet share the American vogue for filter-tip brands, viewed abroad as interfering with true tobacco taste. Even though American brands had been widely sampled overseas as a result of the two world wars when production of domestic brands had been curtailed in many countries, U.S. smokes remained largely a high-priced novelty or tourist item abroad.
A huge portion of the potential world market, of course, was beyond Philip Morris’s reach, locked away under Communist regimes that held sway from East Germany across the Eurasian landmass to the China Sea. But even many countries outside of the Communist sphere operated state tobacco monopolies to bolster domestic industry and employment and reap tax revenues often difficult to collect through income levies. France, Italy, Spain, Japan, and most Pacific Rim countries gave their state-owned cigarette brands nearly invulnerable advantages in the marketplace, slapping steep tariffs and excises on imported U.S. or other foreign brands that, after adding in generally much higher labor, leaf, and shipping costs, could be sold only at premium prices beyond most consumers’ range, even if they liked the American blends. Even when manufactured by the state monopolies under a licensing arrangement, American brands were invariably penalized by being taxed at a higher rate than domestic brands were, and were usually locked into their premium price category, unable to adjust to changing economic conditions.
Other nations also burdened U.S. cigarette makers invading their shores with a variety of discriminatory devices, born out of self-protective impulses or simple xenophobia—or both. These impediments ranged from the required use of domestically grown tobacco (100 percent in most Latin American countries and at least half in Australia) to a limit of one-half or less of the ownership in a domestic tobacco company by foreign nationals (as in India and Nigeria) to more narrow prohibitions like Austria’s ban on the advertising of foreign (but not domestic) cigarette brands. Withal, most free-world governments welcomed efforts by U.S. tobacco companies to operate within their
borders if only because taxes from cigarette sales of any kind fattened their treasuries.
Although no other U.S. company was nearly so active in exploring this thorny international thicket, London-based British-American Tobacco, the world’s largest private maker of cigarettes, loomed as Philip Morris’s most formidable global competitor. BAT was barred by the terms of its turn-of-the-century charter from selling in Great Britain or the U.S., but it held worldwide rights outside those two countries to all American Tobacco and Imperial Tobacco brands and, catering to national and regional tastes with the domestic brands it produced, accounted for more than half the cigarette market in the fifty or so countries in which its subsidiaries were operating in the 1960s. Even in developing or pre-industrial nations, where the average smoker could afford only a package or less a week, BAT thrived by using cheap local labor and leaf and antiquated but serviceable machinery in manufacturing its brands, so that even a modest rise in the standard of living in such places could yield great profits. Except when faced with disasters like the shutdown of its operations by Red China—a nation where BAT had been the dominant cigarette purveyor before Japan occupied it in the 1930s—or the temporary seizure of its plants by Indonesia’s Sukarno in 1964, BAT had learned to cope. In a poor, small nation like Malawi, it tailored its product to reality, offering an eight-stick cigarette pack called Tom Tom that sold for three and a half cents. On the Asian subcontinent, its India Tobacco Company held half the cigarette market, much of it in the form of one-stick sales by street wallahs who bought a pack at a time and resold the contents in competition with
bidi;
the crudely made, all-tobacco product that outsold cigarettes about eight to one despite their poor burning quality, which required them to be puffed twice a minute and accounted in large part for the nation’s astronomical rate of oral cancer. Perhaps the best example of BAT’s ability to extract some 35 percent of its net profits from developing nations was its performance in Brazil, a vast land with a volatile economy and unstable government but whose people loved to smoke. Thanks in part to a complex pricing system that penalized imported brands, limiting their appeal to the nation’s rich, BAT’s locally made brands grabbed a heavy majority of the market where cigarettes had to be distributed on a door-to-door basis for cash only. So extensive was BAT’s delivery network that it could reach every urban
favela
with beat-up trucks paid for long ago and remote settlements off Amazon tributaries by canoe.
When not struggling against entrenched BAT or subsidized state monopolies, Philip Morris had to worry about smaller local competitors who could obtain supplies and labor at lower cost and had cheaper access to the marketplace. In the global market, George Weissman was guided by a single strategy: Try to sell as many units as possible, with market share and not
profitability the first goal. The game was to stay at it patiently, enlist skilled local talent, learn native marketing techniques, soft-soap the authorities—short of bribing them, a never-ending form of blackmail—and in time the profits would materialize. But even if profits accumulated, it was at times difficult to repatriate them from foreign countries reluctant to be drained of wealth by America. Often the best U.S.-owned foreign operations could manage was to negotiate with finance ministries and central banks to recoup a percentage of their investment base, reinvesting the rest of their profits while gaining a nice credit on their parent company’s consolidated earnings statement for taxes paid abroad.
Forced to run what amounted to a bootstrap operation, since Philip Morris was putting most of its money into building domestic brands, Weissman turned to licensing foreign manufacturers as the most economical and least aggravating way to gain a toehold in overseas markets. For a royalty in the neighborhood of forty cents per thousand units sold—less than a penny per pack after recovering costs—Philip Morris supplied the foreign licensee with blended U.S. tobacco (formula withheld), filters, flavorings, and troubleshooters from its Richmond manufacturing center to help achieve uniformity of quality and a taste indistinguishable from that of the American version.
One of Weissman’s first moves, accordingly, had been to sign a ten-year deal with the house of Martin Brinkmann, third biggest cigarette maker in West Germany, the most promising and sizable market in Europe for U.S. brands, where younger people were taking avidly to such other American imports as jazz, blue jeans, and Coca-Cola. Brinkmann, well behind German market leader Reemtsma, once favored by the Nazi regime, and BAT, whose brands accounted for one out of four German cigarette sales, found Marlboro a useful addition to its line. But it insisted that it knew better than Philip Morris marketers how to sell to Germans: more Oriental leaf had to be added to the Richmond blend to appeal to the Teutonic taste, and instead of Western cowboys, Marlboro ads in Germany featured cozy family settings that Brinkmann claimed were the ultimate aspiration of its bourgeois customers. And they were right, up to a point. “They were very successful in selling the cigarette—they just restricted its sale to the exact minimum needed to satisfy the royalty arrangement—1 percent of the market—and they kept it there,” Weissman recounted. “I mean, they really screwed us for ten years.”
Soon Weissman willingly got himself entrapped in a licensing arrangement with a government-owned tobacco monopoly. In 1962, he found himself lunching with the head of the Italian state-owned manufacturer of M.S., the cheap, poorly made domestic brand that was by far the nation’s top seller and a major source of the government’s tax revenues. Increasingly, though, imports were cutting into his sales, the Italian executive complained, especially German brands that were being advertised heavily in Milan and other cities in the
north. Why not make Marlboros for us, Weissman proposed. “We’ll teach you how to make them—it’s the best cigarette in the world.” The deal was struck, but the Italian monopoly had a love-hate relationship with foreign brands, craving the higher revenues and tax receipts but resenting M.S.’s loss of market share, particularly as Marlboro soon proved highly popular as a status smoke, to the point where the costlier American brand became a weekend favorite, its flip-top box saved and filled with the cheaper domestic brand the rest of the week. Ostensibly to blunt the sale of German brands, the Italian government banned all cigarette advertising, a move that slowed Marlboro’s progress. Nor would the state monopoly produce enough Marlboros to meet the demand. As a result, a black market began to grow in smuggled foreign brands, sold without the heavy domestic tax. Philip Morris, frustrated by shortsighted and emotional Italian government policies, averted its eyes from the increasing Italian traffic in unlicensed Marlboros.
At the mercy of overseas distributors who were also its prime competitors, Philip Morris gradually concluded that licensing was a penny-wise and pound-foolish expedient, and it would be better to conduct its own manufacturing operations abroad, preferably with a local partner in the early years while learning the cultural differences in doing business abroad and training a staff of competent nationals to run the operation. But Philip Morris’s early experiences in overseas production had not been encouraging.
In Australia, for example, the company thought it saw a small, relatively wealthy, and stable market, where cigarettes were said to be in short supply and Yank tastes and a national tradition of rugged independence were thought to be well regarded. And it would theoretically be a good place to establish a manufacturing base for penetrating huge Asian markets, where U.S. brands were barely visible. But there were problems. For one thing, Philip Morris had no famous brand of all-Virginia leaf, the British smoking legacy to its old prison colony, to compete with Australian and English makes. And Marlboro’s cowboy pitch was off-key in a society not long removed from its own frontier days. Nor was it easy to simulate the Richmond recipe with tobacco that by law had to be half Australian-grown, and labor costs were unduly high because of permissive “manning” rules, effectively killing chances of using Australia as a base for competing in Asian markets with their far lower production costs. “A dismal failure,” Joe Cullman later termed the early Australian effort.
In oil-rich Venezuela, with a slightly larger middle class than most Latin American societies, the Philip Morris effort was handicapped by BAT’s long headstart but abetted by the hands-on presence of Weissman’s top legal expert, John A. Murphy, a hulking native of New York City. Murphy, who combined a sharp legal mind honed at Columbia, a head for numbers, the raffish appeal of an outsized leprechaun, and as much bully and bluster as the occasion required, put together a pair of local Venezuelan manufacturers under Philip
Morris control after earlier efforts had made scant headway. With the help of company technicians from Richmond like Joseph Lloyd, manager of manufacturing services who began to roam the globe solving production problems at facilities far less sophisticated than at home, the expanded operation opened in a rural community close by tobacco fields sixty-five miles from Caracas, Venezuela’s capital. The plant grew by bits and pieces over two decades, as sales rode a roller coaster, first cresting in a period when the company enjoyed the blessing of a friendly dictator, then receding, partly by design, in the face of threats of nationalization by a less benign government, and partly due to a resurgence by BAT. The success of the enterprise depended, as Lloyd recalled, on “a bunch of poorly educated guys, busting their asses in quonset huts,” struggling to overcome lax work habits, inadequate training, and the language barrier. Progress could be measured visibly at the work site, where in the early days laborers arrived on the job on foot, then by bike as the company’s domestic brands began making sizable gains in market share, and finally by cars that required carving a parking lot out of the adjacent jungle. Profits were slow in coming and irregular at best.