On April 2, 1993, the US tobacco giant Philip Morris cut the price of its branded cigarettes – including Marlboro – by 25 percent. A day earlier, people might have thought the company was joking, but this was deadly serious. Just over a year later, on June 19, 1994, Michael Miles, the man who made the decision, resigned as chairman and chief executive of Philip Morris. The story behind what has become
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known as Marlboro Friday resounds with many of the vital questions that lie at the heart of branding and brand management in the mod- ern business.
Marlboro and others in the Philip Morris range had suffered from long-term loss of market share to generic (unbranded) ciga- rettes. (It is worth remembering that Philip Morris also produces the cheaper cigarettes that were undermining Marlboro – but that the profit margins are understandably smaller.) Before Marlboro Friday the unbranded cigarettes had claimed almost 40 percent of the US market. Selling at half the price of Marlboro, the cheaper competi- tors, along with RJR Nabisco’s Camel brand, had sliced Marlboro’s US market share from nearly 30 percent to just over 22 percent.
Michael Miles decided that something needed to be done.
Miles had been described as “aloof and uncommunicative.” For- tune had labelled him “a business junkie . . . pragmatic, ruthless, fo- cused . . . cold blooded.”1 He was also a non-smoker and his experi- ence was in the food side of Philip Morris’s massive business empire in which 1993 sales totaled $61 billion. His food-based background, legend would have it, meant that Miles lacked real enthusiasm for the brand and understanding as to the business and what Marlboro stands for. With market share falling, the normal solution would have been an advertising blitz or a small price cut, perhaps both. They might have prodded Marlboro’s market share in the right direction.
Miles’s solution was more dramatic and unexpected: a massive price cut. Cutting the price of the world’s leading cigarette by a fifth to increase flagging market share was a very high-risk gamble indeed.
To many commentators, observers and analysts it was a strategy driven by panic rather than by long-term considerations.
As well as making cigarettes cheaper, Marlboro Friday had other wider-ranging implications. In one fell swoop it brought to an end the romantic veneration of brands that had evolved during the 1980s.
Instead of secure money-making machines, brands were suddenly unclothed as fallible, potential victims no matter what their size. There was an outbreak of realism – during the 1980s brands had grown, largely in many cases due to premium pricing, fuelled by annual price increases, often up to 15 percent. The succession of price increases
had, in many markets, driven customers into the hands of competi- tors – hence the growth in own-label goods.
Marlboro Friday marked a new – and none too welcoming – dawn. The stock markets responded with disbelief, as they often do when caught totally unprepared. Philip Morris’ shares plummeted 23 percent in one day. (In a final insult to Michael Miles, they rose immediately after his departure.)
Miles’ strategy was basically straightforward. He recognized that the company could not continue to charge a high premium price for the Marlboro brand – one which was clearly regarded by many con- sumers as being excessive. Perhaps with an eye to what Compaq had done in PCs, he sought to reduce prices and utilize the immense strength of the brand to drive up market share.
In fact, Miles’ strategy worked. In the initial period after Marlboro Friday, Philip Morris shares largely recovered and the company grew its total share of the US tobacco market from 42 percent to 46 per- cent, with Marlboro alone growing from 22 percent to 27 percent. In July 1994 Philip Morris was able to report a 17.6 percent surge in after-tax profits to $1.23 billion in its second quarter alone – more significant was the fact that this was the first increase in profits re- corded since Marlboro Friday. Sales were up by nearly 22 percent in the USA, giving Morris 46.6 percent market share (up five percent) while Marlboro reached a record 28.5 percent – up 6.5 percent.
What eventually finished Miles’ career with Philip Morris was his plan to separate the company’s two core businesses – tobacco and food and drinks (including Maxwell House, Kraft and Miller beer). This met with opposition from former chairman, Hamish Maxwell, who had masterminded the company’s diversification in the 1980s through eye-catching buys such as General Foods, Kraft and Jacobs Suchard.
Again Miles’ logic was clear. Maxwell had built up the food side of the company’s business in the 1980s when it seemed that tobacco was likely to be a declining and potentially troublesome business to be in. The strategy worked to the extent that the food side of Philip Morris accounted for almost half of its turnover by 1993 – though it was far from being as profitable as tobacco. Miles had actually be-
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come part of Morris when it took over Kraft where he was chairman and chief executive. Experienced in the foods business, he was keen to divide the two empires – he was also reacting to the intense anti- smoking lobby in the US and the threat of litigation.
After a six hour board meeting, Miles’ plan was rejected. His position made untenable, he left weeks later, to be replaced by two smokers from the tobacco side of Philip Morris’ business. In Marlboro country, the smokers still rule the corporate roost.
Note
1 Fortune, October 23, 1989.
M ars
hen Roald Dahl wrote the childrens’ classic Charlie and the Chocolate Factory and created the character of the confec- tionery entrepreneur Willy Wonka, he might have had Forrest Mars, the now retired patriarch of Mars Inc., in mind. Both built their chocolate empires on a passion for quality and secrecy. (For the record, Dahl’s book is said to be based on the Cadbury and Rowntree factories in England where spying was rife).
To this day, Forrest Mars, the man who built a $10 billion a year confectionery empire, remains one of the most mysterious fig- ures in the history of corporate America. The brilliant, if guarded, architect of the Mars brand is one of the most private and successful entrepreneurs in the world.
A recent book examines the rivalry between Mars and its choco- late nemesis Hershey.1 It paints a picture of the American confec- tionery giants that is as bizarre as anything Dahl could have imag- ined; a world where industry spies trade in secret recipes and inside information; where paranoid executives are locked in mortal struggle for market share.
Forrest Mars is described as “an autocrat, with brilliant – if some- times unconventional – management strategies”. To an outsider, the secrecy over chocolate recipes, may seem excessive. But the ferocity of competition for confectionery shelf space is real enough.
Today, Mars products are sold in more than 150 countries around the world. The company is run jointly by CEO John Mars and his older brother Forrest Jr., from its headquarters in Virginia at 6885 Elm Street, McLean.
Publicity-shy it may be, but for more than 80 years Mars has been a market leader around the world. In that time the company has created one of the most powerful brands on the planet.
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