LEADING NATIONAL ADVERTISERS;TOUGH RULES BESIEGE RICH SMOKE SEGMENT PRICE-CUTTING FILLS COFFERS; LONG BATTLE SEEN FOR CONTROL OF ADVERTISING

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The tobacco industry has faced a market of extremes the past two years.

The long quarter-by-quarter slide in cigarette sales came to an end in 1995.

Shipments were down 1.7% overall for the year, but up 0.9% in the fourth quarter and they will be flat to slightly up this year, according to Jack Maxwell, Wheat First Butcher Singer analyst.

Philip Morris' move (initiated in 1993) to bring smokers back to premium brands by dramatically slashing prices on premiums has proven to be wildly successful. By yearend '95, discount brands held 30% of market, down from 32.5% in 1994 and a high of 36.8% in 1993.

CIGARS CATCH FIRE

And that was just cigarette sales. Cigar sales were going through the roof with a 10% growth in units last year, and the imported premium category is on pace this year to double 1993's total unit volume, according to Cigar Insider, a publication that tracks that category.

Tobacco marketers proved less than popular on regulatory and judicial fronts. The government this year proposed to regulate the industry's marketing and advertising in the interest of decreasing underage smoking. Several states filed lawsuits seeking repayment of tobacco-related medical costs. By late summer, marketers suggested settlements Food & Drug Administration rules unveiled last month that would ban current advertising and marketing programs.

Under the rules, which are facing a court challenge, outdoor boards would either be banned or could only be b&w text, magazine advertising in a number of titles could only be b&w text, and giveaways, event and team sponsorships and POP displays would all face sharp restrictions.

MORE WOES AHEAD

That was only some of the turmoil. Brooke Group, owner of Liggett, early this year sought to take over R.J. Reynolds Holdings Corp. and convince investors to spin off the tobacco company and offer a settlement to lure investors to its cause.

"The rest of the industry ganged up on Liggett," says Gary Black, analyst with Sanford C. Bernstein & Co., showing fury for a proposed lawsuit settlement offer.

Against that kind of backdrop, the marketing fight seemed almost small potatoes. Philip Morris' Marlboro, the nation's No. 1 brand, grew to 30.1% of market (up from 28.1%) in 1995, and Philip Morris' share of all brands grew 1.3 points to 46.1%.

Rival R.J. Reynolds Tobacco Co., witnessing further erosion in its share, down 1 point to 25.7%, replaced almost all its top staff and started a series of initiatives to staunch the flow of market share fading from two of its top four brands, Winston and Salem. A smokeless cigarette called Eclipse is being tested in Chattanooga, Tenn. RJR is reconsidering Salem advertising, turning from agency, Trone Advertising, Greensboro, N.C.

`WOMAN THING'

Philip Morris changed the longtime Viriginia Slims advertising slogan "You've come a long way, baby," to "It's a woman thing."

Brown & Williamson sold off Montclair, Malibu, Riviera, and Bull Durham to a new company called Commonwealth Brands.

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