CASE STUDY: Forget your opinion of cigarettes and cigarette smoking. You may feel uncomfortable…

CASE STUDY: Forget your opinion of cigarettes and cigarette smoking. You may feel uncomfortable about marketing a product that, if your efforts are successful, canaddict its buyers and ultimately seriously harm their health. For this case, you are not being asked to condone the marketing of cigarettes. Instead, try to view theplight of Marlboro as a marketing problem to see what you can learn. Philip Morris Companies Inc. makes Marlboro cigarettes, the world’s most successful brand (with 21percent of the U.S. market). The company also markets a host of other consumer products in the United States, including Kraft cheeses, Sealtest ice cream, Post RaisinBran, Sanka, Lender’s bagels, and Parkay margarine. Internationally, it offers such food products as Gevalia coffee and Toblerone chocolate. In addition, Philip Morrisowns the Miller Brewing Company and interests in Molson Breweries and Oscar Mayer. With so many products under its roof, Philip Morris commands attention from themarketing world—and Wall Street. So when the company announced a temporary price cut on Marlboros in April 1993, investors dumped Philip Morris stock, causing itsprice to plunge. In fact, many investors were worried that the price cut signified a nosedive for brand loyalty toward a variety of products, so they also sold offtheir stock in such companies as RJR Nabisco, Procter &Gamble, H.J. Heinz, Quaker Oats, Coca-Cola, and PepsiCo. Just what happened to Philip Morris that causedsuch a stir? Shipments of Marlboro cigarettes to resellers had dropped a substantial 8 percent in the first quarter of 1992, signaling that the resellers weren’tmoving the cigarettes off their shelves fast enough. To stimulate greater demand, the company slashed the price of Marlboros by 40 cents a pack (from $2.15 to $1.75).Roger Enrico, chief of PepsiCo’s Frito-Lay subsidiary, noted, “In the annals of business history, Philip Morris’s action is bigger than New Coke. MBAs will study thisdecision for the next century.” The price cut was significant for several reasons: 1. The Marlboro cigarette brand alone inhales more U.S. revenues than such companiesas Campbell Soup, Kellogg, and Gillette. 2. The change was responding to a dramatic shift in consumer buying habits: more consumers are buying according to pricerather than brand preference. Although Marlboro has long been the leader in full-price cigarettes (ahead of RJR’s Camel and Winston), discount brands have taken a firmhold in the market. Discount cigarettes made up 36 percent of the market in 1993 and are expected to capture an estimated 50 percent by the century’s end. Oneconfirmed smoker who switched from Camels to a cheaper discount brand remarked, ‘A cigarette is a cigarette.” 3. The price cut took effect just when the federalgovernment was considering raising the excise tax on cigarettes, ‘Obviously, this move makes it easier to raise cigarette taxes because it won’t have as great animpact on the consumer,” explained one Clinton administration official. 4. The cut triggered a price war, a situation feared by marketers in any industry. Even when aprice war is short lived, it can seriously damage competition and an industry as a whole. As one tobacco industry executive said, “Thanks a lot. Now (Philip Morris)has established a floor People don’t understand why they did it,” Defending the company’s action, Michael A. Miles, chairman and CEO, explained, “We announced asignificant change in pricing strategy designed to make our premium products more affordable, and thus encourage consumers to make purchase decisions based on brandpreference rather than price.” Philip Morris’s rationale, according to William I. Campbell, head of Philip Morris USA, is, “When we make Marlboro more affordable, itwill grow.” Many marketers, investors, and financial analysts aren’t buying that explanation. Instead, they believe Philip Morris is trying to correct past mistakes.In the view of the critics, Marlboro had been raising its prices too fast. Demand for tobacco products has historically been inelastic; once you start smoking it’shard to stop, even if the price goes up. And an extraordinarily successful marketing effort has positioned Marlboro as the cigarette of the rugged Americanindividualist. With these points in its favor, Philip Morris raised prices sometimes as often as twice a year without improving the product), confident that smokerswould stand by their brand. Evidently, some of them didn’t. At the time Marlboro announced the price change, Philip Morris called the lower price temporary, sayingthat it would promote the change only in store displays, not in advertising. However, a few months later, the company ran an ad for its premium brands under theheadline “Premium Quality. New Low Price.” It also sent a letter to smokers on its mailing lists, advising them about reduced prices. Critics observed that the ad didnothing to distinguish the company’s brands. QUESTIONS: 1. Do you think cutting the price of Marlboro cigarettes was a good marketing decision? Why or why not? 2. Ifyou were the marketer responsible for rival “Camel cigarettes”, how would you handle the pricing of your product in light of Marlboro’s price?