It was April 2, 1993, when Philip Morris stunned the tobacco world. In a move pundits said was marked by desperation, the tobacco giant announced it was cutting Marlboro prices by a seismic 20% in an effort to strike back against generic challengers who were eating into PM’s market share. The nation was emerging from a harsh recession, and many major brands were suffering from budget-conscious consumers siding with value over prominence.
Philip Morris’ stock immediately plunged 26%, and the S&P 500 Index fell nearly 2% that day. The action, many thought, was a prelude to the death of Marlboro. They were wrong. The move was the ultimate game changer, and Marlboro would become the cigarette industry’s most powerful brand.
I’ve been thinking a lot about Marlboro Friday in light of another bold—if not controversial—move. Philip Morris USA recently rolled out Marlboro Leadership Price (MLP) Option, in a six-month trial program.
To be clear, PM USA is in a far superior position than it was 18 years ago. While under modest attack today, it pales in comparison to the barrage it eventually withstood from discount brands through the actions known as Marlboro Friday.
What today’s story does share with its predecessor is the sense of boldness and urgency to deliver a jolt to the category. MLP installs retail price caps that ask operators to forgo part of their typical markup in exchange for incentives.
Some operators don’t like it. But after initial rebuffs, the scorecard appears split. Some retailers, including several large regional players, are embracing MLP to differentiate their pricing and capture more market share. Others are signing up as a defensive move to maintain share. A third tier is adopting a wait-and-see attitude, and a fourth group has resolved never to sign up.
While reaction to the MLP plan spans the full spectrum, more than three dozen retail executives I spoke to agree on the following: MLP, and domino plans by Reynolds and Lorillard, will permanently change how retailers market and merchandise cigarettes. The future, most agree, means tighter margins but potentially more sales of premium for a category in slow decline due to taxation, legislation and cultural shifts.
And here’s the big question: Could MLP, which has stoked strong reaction from retailers, be a course changer and restore Marlboro’s luster? Here’s what I believe will happen. Some aggressive retailers who already price at the legal state minimum or just above will adopt the program and pocket the upfront manufacturer incentives. Others will sign up in fear of losing their cigarette business.
It’s the next step that will be the most interesting and telling as to whether MLP moves from trial to tenured. Some of our industry’s largest chains will buck the program. They might even revisit all their contracts to reassess the best direction for their entire cigarette category.
At first glance, this could be a blow to Philip Morris. But it won’t be. In many markets, independents and small chains will sign on with MLP. And a number of prominent players will adopt it, putting pressure on competitors holding out. This is what PM is hoping for and what I believe will happen in more markets than not.
What will be MLP’s lasting imprint? Retailers will get accustomed to cigarette margins in the range of 10% to 15% for premium brands (including Reynolds and Lorillard). Reduced street prices will further narrow the gap between premium and discount brands, forcing retailers to recalculate product assortment.
What remains an open question is MLP’s long-term effect on total tobacco sales. Will stable, more competitive cigarette prices slow consumer migration to OTP? Will retailers dependent on high cigarette margins lose in this pricing chess match?
Most likely, the answer to both questions is yes. My prediction is that Marlboro Leadership Price will live and retailers will learn to live with it, and some might even prosper from it.
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