THE VIRGINIAN-PILOT
Copyright (c) 1994, Landmark Communications, Inc.
DATE: Sunday, August 7, 1994 TAG: 9408090588
SECTION: BUSINESS PAGE: D1 EDITION: FINAL
SERIES: A CULTURE IN RETREAT
[Tobacco series]
SOURCE: BY DAVE MAYFIELD, STAFF WRITER
LENGTH: Long : 334 lines
A firestorm of challenges is engulfing the nation's cigarette makers. Lawsuits. Smoking bans. Whopping tax proposals. Regulation - just maybe - of their products as drugs. Tobacco stock prices are down. Shareholders are angry. And fewer Americans smoke each year.
But don't count tobacco out. Through lawsuits, a lobbying blitz and an intensifying public-relations campaign, the industry is fighting back. And business keeps getting better overseas. In more and more countries, Joe Camel and the Marlboro Man are kings of Tobacco Road.
On an April morning, on turf as friendly as it will find anywhere, Philip Morris Cos. showed just how isolated and threatened the U.S. tobacco industry feels these days.
The event was the Philip Morris annual shareholders' meeting, held at the company's Richmond Manufacturing Center.
A half-billion Marlboros, Merits and other cigarettes are packed into cartons each day at the sprawling complex. Eight thousand people work for the company in and around Richmond, making Phillip Morris the capital city's largest private employer.
In this city steeped in history and pride, tobacco's economic and political influence remains so strong that Richmond's congressman, Thomas Bliley, has been derided by anti-smoking activists as a ``water boy'' for the industry.
Yet on this day in its own backyard, Philip Morris made its shareholders pass through metal detectors to get into their meeting. Pinkerton guards with walkie-talkies patrolled outside.
In their secured gathering place, company executives who'd jetted down from Philip Morris' Park Avenue headquarters in New York spent much of their presentation defending cigarette price cuts. The cuts had ravaged the company's profits and stock price.
In the audience, a few anti-smoking activists who own shares criticized the company.
No assassins were found.
It's easy, however, to imagine why cigarette makers behave as if they're being gunned at these days. Just one week before its annual meeting, Philip Morris U.S.A. President William I. Campbell and executives of six other tobacco companies were vilified in a nationally televised congressional hearing.
Accused of knowingly selling a deadly and addictive product and distorting the truth about it, they were made to sit in line at a table next to a large placard that read: ``One American dies every 80 seconds from tobacco use.''
It's starting to look like ``a death struggle over the future of cigarettes,'' a New York Times reporter wrote.
Tobacco has been there before. Since the first anti-smoking pamphleteering, in the early 1600s by Britain's King James I (who described the habit acquired from the Virginia colony as ``loathsome to the eye, hatefull to the Nose, harmful to the braine, daungerous to the Lungs''), the industry has been assailed.
Whipped into a prohibitionist fever by religious zealots, anti-tobacco leagues won bans on the sale of cigarettes in more than a dozen states in the 1890s and first decade of the 1900s. But those bans were largely ignored and quickly repealed.
The challenges to tobacco this time don't include prohibition - though the industry is trying to frighten people with that specter. Today's swirl of controversies is much more complex. And how the issues are decided will likely have longer-lasting and costlier consequences for cigarette makers.
In Congress, in courts, in the public arena, tobacco is on the run.
And even more crucial to the cigarette manufacturers, the golden leaf is increasingly irrelevant in Americans' lives.
Thirty years ago, the average American adult puffed 4,300 cigarettes a year. Today: 2,600.
When will the downward trend turn? ``Probably never,'' says industry analyst John C. Maxwell Jr. of Wheat First Butcher Singer in Richmond.
Fewer smokers mean fewer people to stop anti-smoking initiatives. And of those, there are many.
Bans on indoor smoking are increasingly common. California and Maryland in the last month joined a growing list of states with tough rules against workplace smoking. Now, federal regulators are proposing strict new nationwide limits. The Defense Department, which provided free cigarettes to troops from World War I through Vietnam, earlier this year banned smoking in practically all of its buildings worldwide.
Even in the heart of Philip Morris country, smokers are ever more outcast. Despite a threatened boycott by tobacco workers, the Richmond area's Regency Square mall in April barred smoking inside. Traffic inside the mall has since increased, says manager Mike Sullivan.
``There is a perception out there that smoking is not good,'' Sullivan says, ``and I responded to that.''
Out on the tax front, other anti-smoking guns are drawn. Congress is considering a cigarette tax increase of between 24 cents and $1.25 per pack to help pay for health-care reform. Health advocates say a higher tax can't help but accelerate smoking's decline.
Bans and potential tax increases may be mere nuisances compared to some other threats to tobacco.
A barrage of class action lawsuits is hitting cigarette manufacturers.
Florida, Massachusetts and Mississippi are leading a pack of states suing to be reimbursed for the Medicaid costs of treating cancer and other diseases linked to smoking.
Flight attendants in another Florida suit claim harm by secondhand smoke in airplanes. Smokers themselves, in a Louisiana class action, charge that cigarette makers kept them addicted by manipulating nicotine levels.
The industry has a 40-year record of winning suits related to health claims. But those were mostly brought by individual smokers, whose credibility or commitment to the case were often eroded by lengthy pre-trial procedures.
With class actions relying on statistical evidence covering a large number of people, ``you have much more of a level playing field,'' contends Edward L. Sweda Jr., an attorney for the Boston-based Tobacco Products Liability Project. The group supports suits against tobacco companies.
These new lawsuits will be costly for the industry to defend - on the order of $600 million a year by century's end, according to the Washington-based Advocacy Institute, an anti-smoking group.
Credit the ``Hillary-Billary administration'' for many of the broadsides, says analyst Maxwell. Hillary Clinton banned smoking at the White House immediately upon becoming First Lady. Since then, he says, ``every time you turn around another shoe drops on the industry's head.''
Brennan Dawson, vice president of public affairs for The Tobacco Institute, says the Clinton administration's ``activist'' style has energized regulators and elected officials who don't like the industry.
``Holding an anti-tobacco press conference or an anti-tobacco hearing puts your face on the news,'' she says. ``It gets you good exposure. It's politically correct. I don't know how else to put it.''
Clinton's food and drugs commissioner, Dr. David A. Kessler, has been a particularly energetic opponent. He argues that there's strong evidence that cigarette makers have for decades manipulated nicotine levels. Among the things Kessler cites as support is a statement by a Philip Morris researcher at a 1972 industry conference.
``Think of the cigarette pack as a storage container for a day's supply of nicotine,'' the researcher was quoted as saying. ``A dispenser for a dose unit of nicotine.''
Kessler asked Congress in March to consider giving the Food and Drug Administration authority to regulate cigarettes as drugs. Last week, a scientific advisory panel to the FDA advanced the argument. It concluded that nicotine in cigarettes addicts users in much the same way as heroin or cocaine.
If the FDA gets control of the industry, tobacco companies could be forced to reduce or even eliminate nicotine from their products. Cigarettes could be turned into over-the-counter items. And cigarette ads - already banned on TV and radio - would likely be controlled even more tightly, making it harder to recruit new smokers.
That is if ads are allowed at all. Surgeon General Joycelyn Elders, disturbed by children's fascination with R.J. Reynolds Tobacco Co.'s Joe Camel character, is proposing a total ban on cigarette ads.
Does all of this add up to goodbye for Joe Camel and the Marlboro Man?
Hard to say.
Even the nation's two best-known investment minds don't agree. Warren E. Buffett, the famed ``value investor,'' told shareholders of his Berkshire Hathaway Inc. in April that he didn't see much of a future for tobacco. Yet Peter Lynch, former manager of the high-flying Fidelity Magellan mutual fund, predicts growth for the industry.
The cigarette makers themselves aren't about to lie down and be run over. They're thrusting their formidable public relations, lobbying and legal machinery into highest gear.
The counterblast that signaled this new aggressiveness came in June 1993, when the industry sued the U.S. Environmental Protection Agency over the EPA's report linking 3,000 lung-cancer deaths a year to secondhand tobacco smoke. Tobacco companies claim the EPA relied on junk science. They want the report declared null and void.
In March, Philip Morris hit ABC-TV with a $10 billion suit after that network's ``Day One'' program accused it and other cigarette makers of spiking their products with nicotine. Philip Morris says the TV show's allegations were untrue.
The industry has long been munificent to its political friends. Tobacco interests contributed nearly $6 million to presidential and congressional campaigns in 1992 - making it one of America's leading industry donors.
But gone are the days when giving guaranteed receiving. So to turn up the political heat, the industry has recently added a populist spin to its lobbying effort as well. In March, it organized an anti-tax protest march on Washington by 16,000 tobacco workers. It has helped launch ``smokers' rights'' groups and, in recent months, sprung for full-page ads in big-city newspapers to flay various anti-tobacco initiatives.
``Some politicians want to ban cigarettes,'' one Reynolds ad read. ``Will alcohol be next? Will caffeine be next? Will high-fat foods be next? . . . Let's understand exactly what they're trying to do. They're pursuing a new era of prohibition, and in the process are ignoring the individual rights of not just the 45 million Americans who smoke, but all other Americans as well.''
There's still no evidence that cigarettes cause cancer or any other disease, tobacco executives say.
Addictive? Balderdash, says Reynolds executive Charles Blixt. ``Cigarette smoking is a habit, not an addiction,'' he says. People are no more hooked to cigarettes, he argues, than they are to a morning cup of coffee.
The real problem, tobacco executives say, is that Americans are developing a victim's mind-set when it comes to personal and social problems. That's liberalizing the definition of addiction, they say.
Philip Morris, which some people in the industry had regarded as a half-committed participant in this public-relations campaign, has in recent months become especially aggressive - even more so since the ouster in June of its nonsmoking chairman and chief executive, Michael A. Miles. Miles, who came up through Philip Morris's food-products side, was replaced by two tobacco veterans. Both smoke.
``If you had to sum up what we think the key issue is, it's fairness,'' said Philip Morris U.S.A. spokeswoman Karen Daragan. ``Adults . . . make informed decisions and they have the right to enjoy our products, just like we have the right to manufacture and market our products.''
Separate the rhetoric and look at the numbers, and it's clear that cigarette makers aren't even close to being extinguished.
They suffered an earnings slump last year, but only because of price-cutting in the U.S. on some premium brands. Industrywide profits are rebounding this year. Analysts say the six largest U.S. companies will reap nearly $9 billion in pre-tax earnings in 1994.
One trouble indicator is tobacco stock prices. They're depressed - partly a carry-over from the cigarette price cuts, partly because investors are worried about the cost of smoking-related lawsuits and regulatory crackdowns.
Because of such threats, the more diversified companies like Philip Morris have been under shareholder pressure to spin off their nontobacco operations into a separate company - shielding them from potential liabilities. Philip Morris' holdings include Miller Brewing and Kraft General Foods.
The tobacco outfits have resisted so far, but not without some bloodshed. Former CEO Miles' support of such a breakup got him booted off the Philip Morris board.
The salvation - if you're an American tobacco executive or factory worker - is that the cigarette business is booming overseas.
By next year, some analysts say Philip Morris will reap most of its tobacco profits outside the U.S. It's already doing more cigarette sales volume overseas - a projected $17 billion in 1994.
Other cigarette makers like Reynolds, a unit of RJR Nabisco Inc., are shifting overseas just as quickly. Earlier this year, Reynolds opened a new factory in Poland. Poles are among the world's heaviest smokers.
Cigarette consumption overseas has been basically flat the past several years. ``What's happening is that the U.S. companies' market shares are exploding . . . because the governments are lowering their trade barriers and doing away with monopolies,'' says Gary Black, a tobacco analyst for Sanford C. Bernstein & Co. in New York.
``It's kind of like when the Japanese motor cars came in here,'' Black says. U.S. cigarette companies ``make a better product that has better imagery. These people want the American imagery.''
Indeed, Marlboro, the Philip Morris flagship, is No. 1 in dozens of countries besides the United States - from Argentina to Germany, Saudi Arabia to Hong Kong. It's the world's second most valuable brand, worth $33 billion, according to Financial World magazine. Only Coca-Cola is worth more.
Best of all for U.S. cigarette makers, there is plenty of ``upside potential'' overseas. Philip Morris's total share of sales outside the United States is still only about 10 percent, Black says. The U.S. companies combined don't have more than a 15 percent stake.
And there are huge developing demographic markets overseas. Smoking among Japanese adult women, only about 15 percent of whom now light up regularly, is exploding in popularity. Nearly two-thirds of Japanese adult men smoke.
In the United States, Philip Morris executives go to great lengths to claim the company is not trying to entice nonsmokers. Their only aim, they say, is to convert current smokers from other brands. The company is working with Time magazine to place ads only in editions destined for subscribers who have been identified as smokers, for instance.
But that level of discreetness isn't required in most other countries.
Reynolds even supports its sales of cigarettes overseas with Camel boutiques, which sell high-priced clothing and accessories. The company estimates it peddles more than $400 million worth of such items each year outside the United States. Emblazoned with the Camel logo, each item is basically a fashionable walking ad.
The Advocacy Institute's Karen Lewis, a tobacco specialist, figures the U.S. cigarette makers' grand strategy this way: ``hang on in the U.S. long enough to get people addicted to their products overseas.''
And maybe, just maybe, find a way to make smoking fashionable again in America.
Strangely, the very alienation of smokers in society appears to be stirring an interest in cigarettes among some people.
``It's become so out of bounds, so vilified,'' says one industry executive, hopefully, ``that it's attracting some people. . . . It's people saying, `Yes, I know what they tell me about it. But I'm going to do it anyway because I like it.' ''
Trend watcher Faith Popcorn invented the term ``pleasure revenge'' to describe such a phenomenon. It describes what she sees as a general rebellion against neo-puritanical health attitudes.
Scott Ballin is one of those people that tobacco executives have fingered as a neo-puritan. That is if they're not calling him a ``Nazi'' or ``anti'' or ``smoking policeman,'' some of the other slurs that industry people hurl at anti-tobacco activists.
Ballin chairs the Washington-based Coalition on Smoking or Health, perhaps the nation's most powerful anti-smoking group. It's funded by the American Heart Association, the American Cancer Society and the American Lung Association.
He and other activists don't want to prohibit cigarette sales, Ballin says,they just want to make it harder for tobacco companies to sell them and make them pay for the damage their products cause. It's time to treat cigarettes like the drugs and health hazards they are, he says.
He's not ready to pronounce death for the cigarette makers - not by a long shot.
``These people are expert,'' Ballin says. ``Who else could take a product that is a known cause of cancer, heart disease, emphysema, birth defects, et cetera, et cetera, and keep it on the market 30 to 40 years practically unregulated? It's unheard of.''
The industry, he says, ``is fighting more aggressively than they have in a long time . . . The question is: Are we going to fight them tooth and nail and turn the tide once and for all?'' ILLUSTRATION: Color photos
Scott Ballin, chairman of the Coalition on Smoking or Health:
``People are beginning to see the tobacco industry for what it is.
They are in the business of withholding information, deceiving the
public, selling a product that they know causes disease and death
and is addictive in spite of their denying it ... There have to be
some policy changes that are fair and equitable and bring tobacco
in line.''
Brennan Dawson, The Tobacco Institute's vice president-public
affairs:
``I think part of what we have to do is let people know just how
far some of these anti-smoking proposals go because they're simply
not in accord with public opinion. If that portrays our opponents as
zealots or neo-Prohibitionists, so be it. In fact, that's what
they're calling for.
ASSOCIATED PRESS
Heads of the nation's seven largest cigarette companies are sworn in
before an April hearing of the House Energy and Commerce Committee's
health and environment subcommittee. From right: William Campbell,
Philip Morris USA; James Johnston, R.J. Reynolds; Joseph Taddeo,
U.S. Tobacco; Andrews Tisch, Lorillard Tobacco; Edward Harrigan Jr.,
Liggett Group; Thomas Sandefur Jr., Brown and Williamson Tobacco;
and Donald Johnston, Amercian Tobacco. At far left is Robert
Sprinkle III, executive vice president/research for American
Tobacco.
Graphics
PROFITS AND SALES
THE SMOKING WORLD
TOBACCO JOBS
[For complete graphics, please see microfilm]
by CNB