Path: bloom-picayune.mit.edu!snorkelwacker.mit.edu!americast.com!americast.com!usa-post Newsgroups: usa-today.bonus,americast.usa-today.bonus From: usa-post@AmeriCast.Com Organization: American Cybercasting Approved: usa-post@AmeriCast.com Subject: bonus Fri, Oct 30 1992 Date: Fri, 30 Oct 92 09:37:04 EST Message-ID: 10-30 0000 BONUS: Discount brands lighting up USA TODAY Update Oct. 30-Nov. 1, 1992 Source: USA TODAY:Gannett National Information Network Donna Fitzhugh used to light up Virginia Slims. Eighteen months ago, the 15-year smoker switched to Misty. "They're a lot cheaper - $9.45 a carton compared with the $15.50 I was paying for Virginia Slims," says Fitzhugh, a 31-year-old General Electric analyst from Fredericksburg, Va. "Misty tastes the same, and I really don't care about image. So I'll stick with them and save the money." IS THIS A COMMON TREND? Fitzhugh is among millions of smokers who have put the Marlboro man, Camel and other premium-priced cigarettes out to pasture, switching to discount smokes that sell for as little as $6 a carton. Rising cigarette prices and higher federal and state excise taxes (ranging from 22 1:2 cents to 67 cents a pack) have pushed per-pack prices to $2.60 or more, and the weekly tab for each of the nation's 51 million smokers to an average $17. Given the lousy economy, it's no wonder discount brands have become the hottest segment of the U.S. cigarette industry, which enjoys $45 billion in annual revenue. WHAT DO THE DISCOUNT BRANDS HAVE? Discount smokes come in three main categories: generics such as Cost-Cutter; private labels, typically sold by supermarket companies; and value-priced, name brands such as Misty, Doral and Cambridge. Manufacturers keep costs down with cheaper tobacco blends, no-frills packaging or lower marketing costs. This year, discount smokes will account for about 30% of the U.S. cigarette market, nearly double their 1989 share. They're especially popular at supermarkets and convenience stores, where most cigarette sales take place. Such cheap smokes are increasingly being stocked as so-called loss leaders to boost store traffic. HOW IS THE MARKET FARING? "This part of the market has been growing like mad, and it could go up to 40% over the next few years," says industry tracker Jack Maxwell of Wheat First Securities. That's bad news to Philip Morris and RJR Nabisco, the biggest marketers of premium cigarettes. Ironically, the tobacco giants' success with their own discount smokes has hurt the market share of their premium brands. Among Philip Morris' brands, U.S. sales of Marlboro fell 3% last year and another 4% during the third quarter of this year. Among RJR brands, Winston fell 17%, Salem 13% and Camel 11% in 1991. IS SMOKING IN GENERAL FALLING? Overall U.S. tobacco consumption is falling about 2% a year. As discount brands take a bigger piece of a shrinking market, tobacco companies' profits will suffer because profit margins on discount brands are 30%-50% lower than premium brands. Meanwhile, to prop up faltering premium brands, tobacco companies are spending more on marketing, promotions and coupons. WHAT IS THE TREND'S EFFECT? The explosive growth of discount cigarettes is making Wall Street anxious. For years, Philip Morris and other tobacco companies have been considered recession-proof - investors figured smokers would give up a lot before they gave up their cigarettes. Indeed, during the past five years Philip Morris shares have risen nearly 260%. WHAT IS HAPPENING NOW? But now the glow on tobacco stocks is fading. When Philip Morris recently reported a lower-than-expected 8.5% rise in third-quarter earnings for its U.S. tobacco business, analysts predicted the shift to discount cigarettes would hurt fourth-quarter earnings as well. Philip Morris stock plummeted from $80 to $72 5:8 over the next three days. The tobacco, food and beer giant lost about $6.6 billion of its market value before the stock recouped a bit. Thursday it closed at $77 3:8. WHEN DID THE DISCOUNT BRANDS START UP? Discount brands didn't even exist until 1980. Liggett & Myers, whose L&M, Chesterfield and Lark brands were stumbling, figured the tobacco industry could tap into growing demand for generic household products. Liggett began offering cut-rate brands with names like Cost-Cutter as well as no-frills, no-name smokes known as black and whites for their stark packaging. By 1982, discount smokes controlled 3% of the U.S. market. As they continued to siphon market share from premium smokes, brand-name marketers began unveiling their own discounts. HOW DID NAME BRANDS REACT? Philip Morris transformed Alpine and Cambridge into discount brands and launched Bristol and Bucks. RJR turned Doral into a discount brand and repositioned Magna and Sterling. American Brands brought out Montclair, Misty, Bull Durham and Malibu. Brown & Williamson turned premium Viceroy into a discount brand, doubling market share from 0.7% to 1.9% within two years. Pursuing both discount and premium markets may seem a strange strategy, but it's one Philip Morris and RJR are continuing. Philip Morris' newest discount brand is Basic; RJR's is Monarch. Discount smokes now account for 30% of the two companies' U.S. cigarette volume. HOW HAVE COMPANIES BOLSTERED PREMIUM BRANDS? "Our strategy is to continue to grow our share of the premium category, to stress the value of our brands," says Philip Morris spokesman John Nelson. "But the discount segment of the market is here to stay, and we have to compete in all segments." Philip Morris has introduced two cigarettes under the Marlboro name - Marlboro Mediums and Medium 100s - as well as an upscale version of Benson & Hedges. WHAT IS THE MARLBORO ADVENTURE TEAM? Next month, it will begin an ambitious media blitz - estimated at $200 million - to target young male Marlboro smokers. The focus is the "Marlboro Adventure Team," a promotional contest in which 10 participants will compete in macho outdoor events. The effort also includes merchandise offers and themed events in bars. WHAT IS RJR DOING? RJR is testing an ad campaign, "Escape to the Fresh Side," to make its Salem menthols more attractive to young smokers. Earlier RJR switched to a better grade tobacco in Winston, as well as new packaging to keep cigarettes fresher. And it continues to tinker with its five-year effort to revamp Camel. Although critics claim its Joe Camel character promotes smoking among youngsters, RJR is promoting its Joe with a "Camel Cash" program giving smokers coupons for promotional items such as clothing and jewelry. HOW WILL A GOOD ECONOMY BE AN EFFECT? Once the recession ends, marketing experts say, premium brands should regain their luster. Discount-smoke pioneer Liggett is preparing for the switch with plans to launch premium-priced Chesterfield Filters. "The intense pressure of a deep, lingering recession may force people to switch, but cigarettes are very image-driven," says John Loden, author of MegaBrands. "People chose to smoke them for self-image." Bonus Editor: Kate Coughlin. (1-919-855-3491) Making copies of USA TODAY Update (Copyright, 1992) for further distribution violates federal law. This article is copyright 1992 Gannett News Service. Redistribution to other sites is not permitted except by arrangement with American Cybercasting Corporation. 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