Philip Morris to Slash 14,000 Jobs, Operations : Business: Cigarette price war proves costly to conglomerate. Forty plants worldwide will be affected.
Stung by declining U.S. cigarette consumption and Americans’ growing price consciousness, Philip Morris Cos. on Wednesday said it will cut 14,000 jobs--8% of its work force--and slash operations at 40 plants worldwide over the next three years.
The moves by the nation’s largest consumer products maker--whose top-selling brands include Marlboro cigarettes, Miller beer, Kraft foods and Oscar Mayer meats--are part of an effort to cut costs and make its products relatively less expensive so that they can better compete with cheaper no-name labels, particularly in cigarettes.
The moves also underscore a central and recurring theme of difficult economic times: hard-pressed consumers are less willing to pay premium prices for heavily promoted name brands that aren’t perceived to offer better quality. To compete, companies such as Philip Morris must become “leaner and meaner,” analysts said.
“This is the value-conscious ‘90s,” said Barry Ziegler, an analyst at A. G. Edwards, a St. Louis securities firm. “Consumer preferences are changing and these companies are realizing that the prices for premium brand products” can’t be increased forever.
New York-based Philip Morris, which employs about 168,000 workers worldwide, said it had not yet determined which of its operations would be affected or how many jobs in Southern California might be cut. The company has about 10,000 employees in California, including operations in Buena Park, Fullerton, Garden Grove, San Diego, Anaheim, Ontario, Irvine and the City of Industry.
The Mission Viejo Co., a land development company in south Orange County, is a Philip Morris subsidiary and could also be affected by the cutbacks, the company said.
Although many of the job cuts will be made through attrition and early retirement incentives, the company acknowledged that there will be an as-yet undetermined number of dismissals. The reductions, which are expected to generate savings of $600 million a year by 1997, will force the company to take a write-off of $457 million against its fourth-quarter profits.
Wall Street investors initially approved of the moves, sending Philip Morris stock up 62.5 cents a share to close Wednesday at $44.50 on the New York Stock Exchange.
The cuts, Philip Morris’ third in the last four years but by far its largest, follow on the heels of similar job cut moves by many huge American corporations, including International Business Machines, General Motors, Bank of America and Apple Computer. These companies are seeking to cut their work forces and costs to become more competitive. In the consumer products sector, Procter & Gamble, the nation’s No. 2 consumer products maker, recently said it would eliminate 13,000 jobs and close 30 plants over the next four years.
Wednesday’s announcement came just months after the onset of an unprecedented price war in the United States between generic and brand-name cigarettes that severely reduced the largest single source of Philip Morris’ profits. The price wars come as U.S. tobacco consumption has declined between 2% and 3% per year for at least the last five years.
The company’s international tobacco sales were not affected by the price cuts and have been growing at a strong pace.
Philip Morris started the price war on April 2 when it cut the price of the world’s most popular brand by 40 cents a pack, to an average of about $1.85, to preserve its market position against fast-growing and cheaper no-name competitors that are still generally cheaper by between 50 cents and 60 cents a pack. Three months later, Philip Morris extended the new pricing to its other premium brands, Benson & Hedges, Merit and Virginia Slims.
While the strategy proved successful at maintaining the brands’ market shares, the price cuts came at a severe cost for Philip Morris. Company-wide profits for the first nine months of the year dropped 25% to $971 million and are expected to be off at least 15% for the full year. Last year, the company’s worldwide tobacco operations generated 43% of its $50.1 billion in sales. About two-thirds of its operating profits last year were generated by tobacco sales.
Earlier this month, cigarette prices inched back up by about four cents a pack in a move led by R. J. Reynolds Tobacco Co., but pricing pressures against cheaper generic brands still remain, analysts said.
“Although 1993 has been a challenging year, our current domestic tobacco strategies are achieving our objectives, and all of our other businesses are performing well and have good momentum,” said Michael A. Miles, Philip Morris chairman and chief executive. “The actions being announced today reflect our determination to be the lowest-cost competitor in all of our core operations.”
The company said that despite its problems in the U.S. tobacco market, its other operating units are profitable and show strong prospects for 1994.
However, some analysts suggested that the company is using the cigarette price war as a cover for making long overdue cuts in other operations.
“If the business for branded consumer products were good right now, we wouldn’t be having these cuts,” said Sandy Bing, a tobacco-industry analyst at the Wall Street securities firm of Donaldson, Lufkin & Jenrette. “Bad economic times highlight problems.”
In recent years, economically strapped consumers have abandoned their status-conscious shopping habits of the 1980s, flocking instead to discount retail chains and no-frill warehouse clubs in search of bargain prices. The result, say some market researchers, may be some permanent changes for manufacturers of premium-priced, brand-name products.
“Consumers are gradually becoming more sophisticated,” said Arnold Fishman, chairman of Lieberman Research West, a market research firm in West Los Angeles. “They are more likely to make up their own minds about products and less apt to defer to institutional images created by manufacturers and the media.”
