Philip Morris U.S.A.: The 2003 Wholesale Price Promotion

Abstract

In January 2003, Philip Morris USA announced a wholesale price promotion of $0.65 per pack on Marlboro cigarettes. As a result, the company's first-quarter U.S. cigarette shipments fell 16.1% relative to the first quarter of 2002. Relative to the fourth quarter of 2002, however, Philip Morris's share of industry shipments rose from 48.3% to 49.7%. Several important decisions must be made. Should the promotion be extended? Should the promotion be replaced with a permanent cut in wholesale prices? Should the prices of the company's discount brands be altered in any way?

Excerpt

UVA-M-0709

PHILIP MORRIS U.S.A.:

THE 2003 WHOLESALE PRICE PROMOTION

In April of 2003, Craig Johnson sat in his office and thought about the first-quarter results for Philip Morris USA (PMUSA), where Johnson was executive vice president for sales and distribution. Three months earlier PMUSA had announced a 65-cent-per-pack promotion on Marlboro cigarettes, the number-one-selling cigarette in the United States and the world. First-quarter data revealed that, compared to the first quarter in 2002, the company's U.S. cigarette shipments had fallen by 16.1 percent to 2.2 billion packs, while industry shipments decreased 12.9 percent to 4.4 billion packs. However, relative to the fourth quarter of 2002, Philip Morris's share of industry shipments had risen from 48.3 percent to 49.7 percent. Johnson now faced several important decisions. Should the promotion be extended? Should the promotion be replaced with a permanent cut in wholesale prices? And should the prices of the company's discount brands be altered in any way?

The U.S. Cigarette Industry

According to government statistics, in 2000, 46.5 million Americans smoked cigarettes (24.7 million men and 21.8 million women). In 2002 industry shipments totaled 19.5 billion packs, of which 14.5 billion were premium cigarettes. Exhibit 1 contains additional information about cigarette shipments within the United States, while Exhibit 2 reports domestic tobacco profits and revenues for the industry's two leading companies, Philip Morris USA (PMUSA) and RJR Tobacco (RJRT). Table A below summarizes the evolution of RJRT's per-pack manufacturing costs from 1992 to 2000.

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Keywords: Pricing strategy promotion price competition consumer marketing brand strategy channel strategy