With Cigarette Sales Down, Philip Morris Developed a Strong Craving for Food
With their market for tobacco products shrinking but with gobs of cash on hand and years of experience in mass marketing, the giant tobacco companies are casting a hungry eye on the big food makers.
The most dramatic evidence of that trend so far surfaced Monday as Philip Morris, the maker of Marlboro cigarettes that already swallowed up General Foods Corp., offered $11.8 billion cash to acquire Kraft, maker of dozens of well-known products from Velveeta to Miracle Whip, in what would be the second largest merger in U.S. history.
“There is some real synergy in selling food and selling cigarettes,” said Robert Tamilia, associate professor of marketing at USC. “They are both mass-produced consumer items.”
The move by tobacco companies to diversify is not new but seems to be intensifying. Growth of tobacco sales in the United States has slowed considerably in recent years. Today, only about 30% of Americans over 18 smoke, compared to about 50% in the mid-1950s. What’s more, Americans’ per capita annual consumption of cigarettes fell to just over 3,000 per person last year, after peaking at more than 4,300 per person in 1963, according to industry estimates.
While the companies have been pressing to expand tobacco sales abroad, they have apparently decided that diversification is the best way to remain profitable in the United States.
“Each one seems to follow the other,” said John Bierbusse, analyst with the St. Louis-based investment firm, A. G. Edwards & Sons. Indeed, less than six months after R. J. Reynolds became RJR Nabisco by purchasing food giant Nabisco for $4.9 billion in 1985, Philip Morris purchased rival General Foods for $5.6 billion.
Batus, the U.S. arm of British tobacco giant BAT Industries, owns U.S. retailers Saks Fifth Avenue and Marshall Field, and it is spending $5.2 billion to buy Farmers Group, a Los Angeles insurance holding company.
Although Philip Morris, which makes Virginia Slims and other brands in addition to the best-selling Marlboros, remains the nation’s largest cigarette maker, it can hardly be called just a tobacco company any longer.
If Philip Morris succeeds in buying Kraft, tobacco products would drop from 53% of its sales to 37%, figures for the two companies show.
(Separately on Monday, Philip Morris reported that third-quarter net income increased 27% from a year ago to $639 million. The company attributed the gains to improved market share in its Marlboro cigarette operations; higher volumes and operating revenue for its General Foods USA unit; volume growth for its Oscar Mayer Foods unit, and increased operating revenue for Miller Brewing Co.)
Value of Known Names
Analysts say it is much cheaper for cigarette makers to purchase recognized food makers such as Kraft or General Foods than to set up their own from scratch. What’s more, there is the added value that comes from purchasing established brand names.
“Brand names have a premium value,” said Bierbusse, “and that is being illustrated right here.” Indeed, besides the numerous brands of Kraft cheeses and cheese products, Kraft also owns several familiar brand name foods including Budget Gourmet microwave dinners, and such top-selling ice cream brands as Sealtest and Breyer’s.
But some critics already are sounding warnings about the advertising and marketing wallop that the diversified tobacco companies may attain through big mergers. “This is a very bad sign,” said Joe Tye, chief operating officer of Bay State Medical Center in Long Meadow, Mass., and president of the anti-smoking organization, Stop Teen-age Addiction Now. “The tobacco industry is gaining significant control over the food industry, and that of course means more control over advertising.”
For instance, says Tye, some publications that might now reject tobacco ads could reverse their policy rather than risk the loss of food-related advertising by the same company. “I see it as a real threat when one industry metastasizes its dominance into another.”
But the head of one Los Angeles advertising agency says he has no such concerns. “Philip Morris is simply continuing to hedge its bets outside the tobacco business,” said James D. Helin, managing director of the Los Angeles office of the ad agency D’Arcy, Masius, Benton & Bowles.
“When you’re an advertiser the size of a Philip Morris or Kraft, you already have all the leverage you need.”
TOBACCO’S SHRINKING ROLE IN A MERGED PHILIP MORRIS AND KRAFT (Percent of sales) BEFORE: Tobacco: 53% Food and brewing: 47% AFTER: Tobacco: 37% Food and brewing: 63% Between them, Kraft and Philip Morris sell dozens of brand-name products that are virtual household names across the nation. Among them: PHILIP MORRIS Cigarettes: Parliament Marlboro Merit Virginia Slims Benson & Hedges Beer: Genuine Draft Lowenbrau Meister Brau Miller High Life Miller Lite General Foods products: Alpha Bits Bird’s Eye Brim Cool Whip Country Time Crystal Light D-Zerta Entenmann’s Gevalia Good Seasons Grape-Nuts International Coffees Jell-O Kool-Aid Log Cabin Syrup Louis Rich meats Maxwell House Minute Rice Oscar Mayer Raisin Bran Ronzoni Sanka Shake n’ Bake Stove Top Tang Yuban KRAFT Breyers Budget Gourmet Cheez Whiz Cracker Barrel Frusen Gladje Handi-Snax Lender’s Bagels Light n’ Lively Miracle Whip Parkay Philadelphia Velveeta CORPORATE FACTS Philip Morris Cos. Headquarters: New York Employees: 113,000 Revenues: $27.69 billion in calendar 1987. Profits: $1.84 billion in 1987, $7.75 a share. Largest U.S. cigarette maker. Wholly owns General Foods Corp., with more than 60 brands, and Miller Brewing Co., world’s second-largest brewer. Also owns Philip Morris Credit Corp., which performs investment and financial services, and Mission Viejo Realty Group Inc., based in Costa Mesa. Tobacco accounted for 53% of 1987 operating revenues, and 80% of operating profit. Food accounted for 35.9% of 1987 operating revenues and 14.9% of profits. Kraft Inc. Headquarters: Glenview, Ill. Employees: 46,500 Revenues: $9.9 billion from continuing operations for year ended Dec. 26, 1987. Profits: $435 million, $3.20 a share. Full line of dairy, grocery, packaged products under own and other brand names. Board authorized 10-million share buyback on Oct. 1, 1987, and 6 million were repurchased as of March 3, 1988. On May 5, 1988, board gave authority for 12-million share buyback. Sold Duracell battery unit to Kohlberg, Kravis Roberts for $1.8 billion in June, 1988. Sale made Kraft “all food” for first time in 30 years. Source: Reuters
