Puffing Hard Just to Keep Up

By John S. DeMott

With consumption down and taxes rising, cigarette makers try bold changes

No matter how fierce or ingenious their attempts to outdo one another, American cigarette makers have historically had one thing in common: 20 smokes to a pack. But last week even that came unwrapped. In smoke shops and supermarkets in 33 states, Century cigarettes from R.J. Reynolds (1982 total sales: $10.9 billion) made their debut with 25 to the pack and 225 cigarettes to the nine-pack carton. Century still costs about the same as other brands. Reynolds ads made that point clear: "New Century--taste that delivers in the moneysaving 25 pack."

Century is such a break with tradition that it is literally changing the way the industry does business. The wider-than-standard pack, for example, will fit in men's shut pockets but, at least for now, not in vending machines, where 8% to 10% of cigarettes are sold. The brand will not even be sold in 17 states for the time being because their taxing systems are geared to increments of ten or 20 cigarettes. This means that the 25-smoke packages would be taxed in some states as if they contained 30 or 40 cigarettes, which would jack up Century's price disproportionately. Reynolds officials are trying to get local laws changed so that Century can be sold in all states.

Reynolds hopes that Century will help the company regain the No. 1 sales position, which it held for 25 years but lost in the first quarter to Philip Morris (total 1982 sales: $9.1 billion). The big two, which together have about 65% of the market, are the Coca-Cola and Pepsi-Cola of cigarettedom, far ahead of third-place Brown & Williamson (Kool, Raleigh, Viceroy), which has 10.9%. Following those three are Lorillard (Kent, Newport, True), American Brands (Carlton, Pall Mall, Lucky Strike) and the Liggett Group (L & M, Eve, Chesterfield).

If Century gets only a small piece of the market, it could mean big profits. With industry sales estimated at $27 billion this year, a niche of just 1% is worth $170 million to the cigarette maker alone. Says American Brands Spokesman Robert Rukeyser: "Gaining only one share point is of enormous interest."

At the end of World War II, six brands controlled about 90% of the market, but today the top six* labels have 56% of sales. There are now more than 200 styles to buy, and Reynolds alone has introduced 20 new ones in the past five years. Marlboro and Winston each come in eight different styles. The largest-selling brand is now Marlboro, with 20.9% of the market. Newcomers like Reynolds' Bright (1982) and Lorillard's Satin (1983) are on shelves next to oldies like Lucky Strike (1916), Camel (1913), Chesterfield (1911) and, oldest of all, Pall Mall (1907).

The cigarette industry faces a special problem. For 30 years it has been under attack by various Government agencies over issues of smoking and health. Since 1966, federal law has mandated ever harsher health warnings on cigarette packs and in ads about smoking (see box). Those admonitions, plus increased federal and state taxes, the recession and America's rising health-consciousness, have taken their toll. Consumption was down half a percent last year, dropping from 627 billion cigarettes in 1981 to 624 billion last year. John Maxwell of Lehman Brothers Kuhn Loeb, Wall Street's leading tobacco-industry analyst, believes that cigarette sales dipped an additional 3% to 6% during this year's first quarter.

Perhaps the most important cause of the recent drop was the doubling, to 16-c- per pack, of the federal cigarette tax on Jan. 1. In addition, many states--14 since 1982--are pushing up their levies on smokes. Says Reynolds Tobacco Chairman Edward A. Horrigan Jr.: "The excise tax, coupled with state tax increases, caused a dramatic drop in sales during the first quarter of the year." Wisconsin has the dubious honor of having the highest state cigarette tax: 25-c- a pack, making total taxes on a pack 41-c-. Those increases helped push up the price of a standard pack by an estimated 28%.

Average prices now range from 72-c- in tobacco-growing North Carolina to $1.06 in Connecticut, but in New York City smokers can shell out $1.25 a pack. Gone are the days when smokes cost 22-c- in machines; a quarter bought a pack plus 3-c- change wrapped in the cellophane.

The price increases have helped spur the biggest new hit in the cigarette industry: generics. Sold in plain black-and-white or black-and-yellow packages, the no-name cigarettes have captured about 2.5% of the market in the past two years. Liggett, looking for a way to reverse its steadily declining share, was the first major company to start selling the generics. Paced by its bestselling Chesterfield, Liggett had about 25% of sales in the 1940s, but that fell to less than 3% by 1981. Says President K.v.R. Dey Jr.: "We were the smallest kid on the block." The company was laying off workers, selling its foreign divisions and closing warehouses, when company executives hit on the idea of selling no-name cigarettes. Test marketing began in June 1980, and national distribution started in late 1981. The generics, costing $1.50 to $2 less a carton than brand cigarettes, were an immediate success. Says James Dowd, Liggett's marketing chief for generics: "We heard that generic cigarettes would just not sell because cigarettes are such an image product. But we've shown the industry something else." Liggett's generics come in six styles, including menthol and low tar.

Industry insiders are split over the future of generics. James W. Johnston, an executive vice president of R.J. Reynolds Tobacco, strongly opposes following Liggett into generics. He and many other cigarette officials believe that the no-names are just a recession phenomenon. Says Johnston: "In my judgment, you've got to have the link between the consumer and an identifiable brand name. I predict that the success of generics will be short-lived." Liggett officials, on the other hand, believe that smokers will stick with their new, lower-cost smokes in better times. Says Dey: "There is still brand loyalty, but price has become a factor."

While Liggett has been going after the cost-conscious consumer with no-brand, other cigarette companies have been trying to win over the status-conscious customers with new brands. Said David Bulleit, who handles the Philip Morris account for New York's Wells, Rich, Greene ad agency: "Quality is selling. Sophistication is a very convenient term for all these trends."

Cigarette companies are introducing new brands aimed specifically at upper-scale consumers interested in quality. But Reynolds' Johnston points out that the new brands are high-stake gambles, since it now costs $80 million to launch a totally new cigarette. Only six new brands have captured .5% of the market in the past decade. Those were More, Now, Merit, Barclay and Golden Lights.

In February, Lorillard introduced Satin, a cigarette with a satin-paper filter tip. Market research indicated that women wanted a product that symbolized luxurious relaxation. Ted van de Kamp, a director with MCA Advertising, says studies showed women in the 1980s are looking for a cigarette that will let them "indulge themselves." Philip Morris put Virginia Slims on the market in 1968 with an image of the striving, independent woman and the slogan "You've come a long way, baby." Its share is 2.7%.

But now it is time for women to relax. Says Van de Kamp: "In all the ads we emphasize that special moment of time that women want for themselves." Read the ads: "Go ahead. You deserve this Satin moment." The brand holds about .8% of the market.

Philip Morris is aiming a revived Players, a name first used by the company six decades ago, at upper-income smokers between ages 25 and 35. Says Company Spokesman Ernest Quimby: "It is a brand designed, formulated and packaged to an upscale mode of life." Concurs Adman Bulleit: "Players is a sociable, fun brand for sophisticated adults who enjoy going places at night." The black, cigarette case-type package is an important part of the promotion.

With its new Lucky Strike filters, American Brands is starting its biggest new-product effort since it successfully launched Carlton low-tar cigarettes in 1964 (current market share: 2.3%). Lucky Strike filters are available in just three-quarters of the U.S. Lucky Strike nonfilters, a favorite of World War II G.I.s, once had 40% of the market, but now have only .8%. The company is aiming the new-style Lucky at the same upscale smokers who have become the industry's favorite target. Spokesman Rukeyser points out that the ad campaign shows "people in successful situations" rather than the familiar outdoor scenes that have worked well for other brands.

Despite recent sluggish sales, tobacco executives and cigarette-industry watchers believe the market will pick up as the recovery gathers strength and consumers become accustomed to the higher taxes. Says Horrigan of Reynolds: "We've bottomed out absolutely. We have a lot of strength." Cigarette-industry officials can only hope that Horrigan is not just blowing smoke.

--By John S. DeMott. Reported by Dorothy Ferenbaugh/New York and Philip Mandelkorn/Richmond

* The six: Marlboro 20.9%, Winston 11%, Salem 7.4%, Kool 6.6%, Benson & Hedges 5.4%, Merit 4.7%.

With reporting by Dorothy Ferenbaugh, Philip Mandelkorn This file is automatically generated by a robot program, so viewer discretion is required.