Business: IOC V. I5C

IOC V. 15C

On the New York Stock Exchange last week tobacco stocks took a deep dive. At the end of the week Liggett & Myers Tobacco Co. was 53, ten points below its Monday high. American Tobacco Co. was down eight points to 61. R. J. Reynolds Tobacco Co. dropped from 31 to 28⅞. P. Lorillard Co., low already, held fairly steady, closing five-eighths of a point off at 13. Wall Street buzzed with rumors of impending price cuts on the four leading U. S. cigaret brands&—American’s Lucky Strike, Reynolds’ Camel, Liggett & Myers’ Chesterfield, Lorillard’s Old Gold—whose price is, and has been for years, 15¢ for a package of 20.

Reason for these rumors and the attendant stock decline was not widely knownoutside Wall Street. September cigaret consumption was 3.9% below that of September 1931, but fewer cigarets have been smoked this year than everymonth last year except August, and September’s showing was better than the nine-month average, which was 10.12% below 1931’s. Careful readers of financial pages could find an occasional paragraph tucked away in a corner reporting the price rumors and citing the popularity of cigarets as the cause, but newspapers were not inclined to go deeply into the subject—not so much through fear of hurting important advertisers’ feelings as because of a traditional journalistic policy that those who do not advertise, and have no intention of advertising, are no fit subjects for publicity. There was nevertheless, a story in10¢ cigarets—a year ago practically unheard of, today burning up at the rate of about 60 million a day. One out of every five cigarets smoked in the U. S. now is a 20-for-10¢ brand.

Rise. Fourteen months ago 90% of the cigarets sold in the U. S. retailed for 15¢ a package. Tobacco was cheap, cigaret smoking was at its peak. The future looked fine and smoky to Tycoons George Washington (Lucky Strike) Hill, Samuel Clay (Camel) Williams, Clinton W. (Chesterfield) Toms and Benjamin L. (Old Gold) Belt. Acting in concert (though legally disassociated since American Tobacco Co.’s trust was dissolved) they had just upped the wholesale price of their cigarets from $6.40 to $6.85 per thousand (presumably on the strength of the new Cellophane wrapping). Then, all unknown to Messrs. Hill, Williams, Toms & Belt, an old tobacco man named William T. Reed had an idea.

One day a little more than a year ago there issued from the Richmond, Va. factory of Larus & Brother Co. (William T. Reed, president) a small shipment of cigarets modestly named White Rolls. Their cheap package was without Cellophane, they were unheralded by advertising—but their price was 10¢ per package of 20. The selling organization which had made Edgeworth a widely-used pipe tobacco began pushing White Rolls and soon the orders were rolling in. News of this reached President Reuben M. Ellis of Philip Morris & Co. Ltd. and its Richmond subsidiary, Continental Tobacco Co. Continental had been having trouble distributing a cigaret called Paul Jones (price, 10¢) in New England. President Ellis arranged with the United and Schulte cigar stores and Liggett and Whelan drug stores to display Paul Jones (TIME, Aug. 31, 1931). Then he inserted in New York, Philadelphia and Boston newspapers a single advertisement: “20 for 10¢. America. . . . Here’s your cigarette!” Manhattan sales jumped. By February White Rolls and Paul Jones were producing some 350,000,000 cigarets per month, 4% of the national total.

In March President George Cooper of Brown & Williamson Tobacco Corp. of Louisville, Ky., reduced the price of a 15¢ cigaret called Wings to 10¢. Production of Wings doubled in a month. Although White Rolls and Paul Jones had fallen off a little. Wings’ sales boosted the ten-centers’ average to 5% or 6% of the national total. By May Wings had slowed the decline in national cigaret production which had been going on all year. Wings did not advertise in newspapers, but blurbs on the cheap brown paper package told smokers that they could not smoke Cellophane. In June arrived the fourth national 10¢ cigaret— Twenty Grand, also from Louisville. Its sales soon passed those of White Rolls and Paul Jones, ran the ten-centers percentage up to 15. Last week that percentage was 20. Axton-Fisher Tobacco Co. was making 18 million Twenty Grands a day, with unfilled orders piled high. Wings were rolling out of the machines at the rate of 50 million per day. White Rolls and Paul Jones were still selling well. These four brands had taken advantage of cheap tobacco, the advertising done by the “standard brands,” and the opportunity to make money with a small margin of profit ($0.2315 per 1,000, against $1.226 per 1,000 for the 15-centers) to cater directly to Depression-hit smokers. Tycoons Hill, Williams, Toms & Belt, whose advertising had increased U. S. cigaret consumption from eight billion to 119 billion in 20 years, were vexed.

Remedies? The November issue of FORTUNE, out this week, estimates that Lucky Strikes, Camels, Chesterfields and Old Golds will sell to the extent of about 84½ billion cigarets in 1932, some 18 billion less than last year. Practically all of this loss will go to the10¢ cigaret. What can Messrs. Hill, Williams, Toms & Belt do about it? FORTUNE suggests five possible ways of eliminating 10¢ competition: 1) Raising the price of tobacco just enough to wipe out the ten-centers’ profit margin. This can be done by heavy buying, but surplus stocks over a long period would hurt the 15-centers. 2) Ceasing their opposition to governmental increase of cigaret taxes from $3 to $3.50 per 1,000, an expensive remedy. 3) Cutting prices. 4) Putting out special “fighting brands” of 10¢ cigarets. 5) Training their advertising guns directly at the enemy, which might do the ten-center more good than harm. A FORTUNE suggestion to President George Washington Hill: “STALE FISH STINK. … So do cheap cigarets.”

The makers of the four leading 10¢ cigarets (there are a dozen others, with local sales) worried little last week. If suspicion were cast on the quality of their brands they could point to their sales as proof that the public likes them. They are all oldtime tobacconists, sure they can keep costs down low enough to profit on a small margin. They point out that tobacco has averaged 19¢ per Ib. for the past 20 years, is not likely to rise far above that. As for the fairness of taking advantage of advertising-increased cigaret consumption while not advertising themselves, they only shrug their shoulders.

Revenge. Most colorful of the 10¢-cigaret men are President Reed of Larus & Brother (White Rolls) and Woodford Fitch Axton, burly president of Axton-Fisher Tobacco Co. (Twenty Grand). Both grew up fighting the old tobacco trust, both, until recently, were heads of small independent companies producing chiefly pipe and chewing tobaccos. In the early days of the century when American Tobacco Co. was gobbling up independents in the South, William T. Reed was one of its bitterest foes. He used to hide in grocery store cracker barrels to get evidence against the Trust’s agents. He won his fight, remained independent, was making a neat profit out of Edgeworth when his 10¢idea put him into the cigaret business in earnest.

Woodford Axton was selling groceries around eastern Kentucky when, in 1899, a debtor paid him in tobacco-preparing machinery. The debt was $60. Salesman Axton decided to sell tobacco instead of food, began peddling his product from town to town. Soon the trust was after him, too, giving away tobacco to his customers when he refused to sell out. Big and hearty, “Wood”‘ Axton had enough friends to stay in business. He formed Axton-Fisher Tobacco Co. with a partner, George H. Fisher, now dead. They moved from Owensboro to Louisville and began selling smoking and chewing tobaccos throughout the Ohio Valley, prospering in a comparatively small way.

In 1926 Mr. Axton bought the formula for Menthol-Cooled Spuds from its inventor, Lloyd F. (“Spud”) Hughes. Hughes and his associates got $90,000, but Spuds brought much more to ”Wood” Axton. He launched an advertising campaign, which has grown with Spud sales. Last year Axton-Fisher spent $550,000 advertising Spuds, made a net profit of $605,000. This year the profit has jumped month by month was $56,000 in July, $123,000 in August, $238,000 in September. Last week Axton-Fisher stock rose 8¼ points to 56¼ while other tobacco stocks were falling.

On the strength of his admiration for Theodore Roosevelt “Wood” Axton ran for Mayor of Louisville in 1913 as a Bull Moose. Friends still maintain he won the election. He has put his money in farm lands where he raises thoroughbred cattle and horses. It was his love of horses that made him buy the name Twenty Grand several years ago.