Business & Finance: Philip Morris Plan

Selling cheap and advertising dear is the standard formula for making big money out of cigarets. The big Three—Camel, Chesterfield, Lucky Strike—wholesale for $6.10 per 1,000, of which $3 is Federal tax. Because they cannot afford to lose their mass markets they must pour many more millions into advertising than less popular brands. And because each of them sells upwards of 30 billion cigarets a year, they can afford to.

Less popular brands are constantly trying to find chinks in the iron-clad hold which the Big Three have on the mass market. During Depression the 10¢-brands found a chink, pushed through to a market that last year amounted to some 13 billion cigarets sold. Last week Philip Morris thought it had discovered another opening.

Because the anti-trust laws prevent manufacturers from fixing the retail price of their product, competition has forced the retail margin of profit down to a hairline on the popular brands of cigarets. At two-for-a-quarter the Big Three retail for $6.25 a 1,000. Retailer’s profit, allowing discount, is less than i^ per package. Philip Morris, which sold 3,800 million cigarets last year, has generally been able to maintain a retail price of 15¢ straight, or $7.50 per 1,000. Wholesaling at $6.85 per 1,000, Philip Morrises make the retailer well over 1¢ per package. On this advantage Philip Morris prospered until it hit a snag. Several States put into effect their own cigaret taxes. Retailers absorbed part of the State tax, reduced their margin of profit on Philip Morris.

To restore retailers’ lost profit margin Philip Morris last year tried an experiment in four States—Connecticut, Pennsylvania, Ohio, Georgia—each of which has its own cigaret tax. With every carton of 200 Philip Morrises the retailer was given an extra package of 20 free. The same result might have been accomplished by reducing the wholesale price from $6.85 to $6.23 a 1,000. but the psychological effect was different. Retailers loved the free package —15^ clear profit when sold—and they pushed Philip Morris sales.

Last week Philip Morris announced that in all 48 States retailers would now get an extra package with every carton. Reason: Philip Morris sales had tripled or quadrupled in States where the free package had been supplied retailers. Cost of the 20 extra cigarets required to fill standard orders was charged to advertising— the valuable word-of-mouth advertising which retailers do across the counter. Neat point about the Philip Morris plan was that if any retailer starts to spoil it by selling for less than 15¢ a package, Philip Morris can presumably stop him by simply withdrawing its gift package.