Fortune in tobacco and tobacco products

Philip Morris Acquires Kraft: An Overview
(1)When Philip Morris, Inc. moved to acquire Kraft, Inc., it did so for several reasons: first and foremost, PM has made a lion’s share (80%) of its fortune in tobacco and tobacco products. Putting aside for the moment the obvious (and numerous) health problems that such products are known to cause, and seemingly despite them, PM continues to manufacture the leading brand of cigarettes, Marlboro-and continues to sell its products internationally at a greater rate than ever before. But its management was not totally naive about the future, either: in America, tobacco has fallen at least somewhat out of favor, and may in fact someday be completely illegal. Therefore, much like R.J. Reynolds and other major tobacco companies have done and continue to do, PM leadership looked around for an even “surer thing” than tobacco and found it-in food. It’s an obvious choice. As Hamish Maxwell puts it, “People may ultimately stop drinking or smoking, though I don’t believe it, but you can bet your life they will keep on eating.” So, the PM choice was to buy a food business while their profits from tobacco were still big enough to do it right.(2) Since Philip Morris’s acquisition of Kraft made it the largest consumer product firm in the world, it would increase Kraft’s sales and earnings in several ways. Many of Kraft’s primary brands are foods now labeled high-cholesterol (cheese, ice cream, milk)-ironically enough, also a health risk much like tobacco-and therefore were beginning to feel a real pinch from negative sales pressure. Kraft’s growth pattern has been slow and steady, led by a CEO whose area of expertise, and interest, is primary balance sheets and the bottom line. By contrast, Murphy and Maxwell of PM have established themselves as “marketing guerrillas.” Murphy, as president of Miller Brewing, was responsible for creating a Lite beer brand and market; he did much the same thing for Seven-Up’s “no caffeine” marketing plan (which is now mimicked by other soft drink makers). Between them, Murphy and Maxwell are known for building brands and increasing market share, something Kraft needed to do; ironically enough, the balance sheet takes care of itself once market shares increase and stock price and values go up-evidence being that Kraft stock shot up from a $60 per share price to $106 per share after the acquisition.(3) Because PM followed in the successful footsteps of RJR’s acquisition of General Foods with its own acquisition of Kraft, its leadership could benefit a healthy marketing precedent-the fact that different food companies don’t directly compete with different products, but their distribution systems are identical. Both General Foods and Kraft achieved healthy balance sheets due to well-placed advertising and promotion, keeping an eye on costs, up-to-date research and development, and improved sales performance. Because Philip Morris’ “war chest” for advertising, research, and sales training-among other things-was three times Kraft’s, it would stand to reason that the infusion of capital into Kraft would enable it to widen its distribution channels and increase its market share substantially. In point of fact, the frequency with which the Kraft name is advertised now, as “one of the Philip Morris companies,” is beyond what it could effectively manage on its own, and therefore, its product orders and distribution should rise accordingly.(4) On one hand, being “one of the Philip Morris companies” seems to do Kraft a world of immediate good in the marketplace. Its shareholders benefit from a sharp rise in stock prices; its market share increases; Wall Street blesses the acquisition in glowing terms. Unanswered concerns and questions can still linger in observers’ minds, however, especially those who are justifiably wary of corporate strength and muscle for its own sake. The terms “hostile takeover” and “leveraged buyout” may or may not apply in this case; the supporting materials assert otherwise, but the supporting materials for this paper are hardly balanced in their approach. Notably absent, for instance, are any data or reflections from Kraft and/or Morris stockholders, much less any perspective from the staff affected by the change (to name just two omissions). Just as the public should not be fooled by “press labels,” neither should they be fooled into swallowing whole the notion that a bigger company automatically means more jobs and opportunities for all. Not only is that assertion premature, but in today’s economic climate, its opposite is more often the case. It’s my opinion that the “jury’s still out.” PM/Kraft may be an unmitigated good for all concerned . . . or it may be another case of the “rich getting richer” short-term, only to short-change both companies if belt-tightening is needed in the near future.