Tobacco Documents Online

N.w Ye.ks 212-309-1100 Chiosym 312-5Y1.2020 D.I.oih 313-34t-1177 1 J i Los Ang.i.ss213•d66-612A Washington, D.C.: 301!656-4068 B eo..u 617-536 2232 . _ Pfiiledeiphias 2i5.567-7600 TRANSCRIPT Sdn Franeiseet 213-466b124 ~ Miami:3053583358 FOR : HILIP N:ORR_.. STATION ;nJABC-TV ! PROGRAM DATE VIGHTLINE s ~4/05L73 -._-- -~='M; CITY AUDIENCE NY SUBJECT =H I L:: MORR'I S _.:.WERS =RICES ?TJLL TEXT :::RIS :'cbacco kills more Americans each year than ~. .cca: ne, .:omicide, car accidents, and'-AIDS all :st '_z=et!:er. Amer__3"s -.ost popular brand just cut its price 40 _e^:~c. Wi:: at ..2__ c.inother generation? Tonight, Cigarette Wars. This _s ;,BC ::ews Nightline. Substituting for Ted K:opce: and _eport:n.; _f_om Washington, Chris Wallace. When _i:e r.at_::::' s c_Qgest tobacco company, Philip Morris, s1asr._s :::e er._e _. ::s -:ost popular cigarette, Marlboro, it is oia -._ws. So b-g _::at _t contributed to a 68 dollar- drop on :n :.^e 2ow .;cnes : ndustrial average. So big that public ::ea«:: t_--xperts warn, =::.at :^eaper cigarettes will cause a serious -ncrease in smoking, especially among teenagers. So big that -:eit::er Philip Morr_s nor :ts chief competitor RJR Nabisco or even =he :nciustry's Tobacco :nstitute would participate in this broadcast. ;n one '_evei t^e riecision to cut the price of Marlboro by 40 z:ents a pack is ;ust business, an effort to hold on to market stiare, against the onslaught of discount brands, but whenever you talk about cigarettes, --t's not just business. The price cut comes just as the Clinton administration is considering a monster tax on cigarettes to pay '-for health care reform, and just as the rate of smoking has bumped up after a 25 year decline. As ABC's Bill Greenwood reports the stakes on all this can't be higher. BILL GREEh1WOOD (REPORTER): Smokers have made tobacco one of the most profitable industries in the entire world, with annual sales of almost $45 billion in the United States alone. Marlboro brings in 221 of that amount. Talk about king size. Americans puff six billion packs of Marlboro's each year, as many as the next four brands combined. ' . ~~lz~~~. Z~~3 Whil. Radio TV R.pons .r%d.own b oswe. th. aoeuraey oF',mcsa.rwi suppli.d by it, it eannof 6e r.sponsiWs for misfalc.s or omissions. Me1..w6 suppli.d by Rbdoo TY Reoons may bs ussd'Gor Pils and roh..nc+e purposss only. M may not lie npoduo.d. sold or publicly dbmonshaMSd a.ahibiUd.

- 2 - ALLAN KAPLAN (MERRILL LYNCH): The tobacco is one of the single most profitable businesses in all of America. I- think part of the reason for that is in the past it has had very high brand ~oyalty. GREENWOOD: So why would the best selling cigarette maker cut prices by 40 cents a pack, and send the value of its stock into a virtual free fall? Philip Morris not only refused to discuss the reasons for its decision, but tried to deny Nightline access to this corporate videotape in which officials said Marlboro had been simpiy overpriced. WILLIAM CAMPBELL (PRES & CEO PHILIP MORRIS): Our pricing strstegy during recessionary times did exceed our consumer's income growt::. With this initiative, we are correcting that situation. CL: P"':,RRYTON COMMERCIAL : MAN: Us Tarryton smokers would rather =iar.t _^an switch.) 3REENWOOD: One problem for Marlboro is the fact that today's ziaarette smokers do switch brands. ASd"m`ostly to low cost generic brands, which did not exist 12 years ago. Today the generic brands account for 36% of* all sales, and cost half as much as the average $2.,5 cack of Marlboros. But it's the premium brands like Marlboro :.".at zrcduce higher profits per pack. LARRY ADELMAN (DEAN WITTER REYNOLDS): They make a profit somewnere in the range of 60 cents to 65 cents, at the ultra cremium, non-discounted level. And probably at the low end, they probaDiy only make an estimated profit per pack of let's say roughly a dime to 15 cents. GREENWOOD: With Philip Morris the undisputed industry leader, cutting the price and profit of its best seller, other tobacco companies are certain to follow suit with a price war. And that prospect is alarming public health officials and smoking opponents. RICHARD--DAYiJARH -(TOBACCO PROD LIABILITY PROJ) : I think this is a public health crisis, a public health emergency of the first order. It's very-rare that something happens that endangers hundreds of thousands of Americans at one time. We're going to have a tremendous increase in the number of kids smoking in the UnitedStates, number of kids getting hooked on nicotine, and 20, 30, 40 years down the line, number of people coming down and dying of tobacco caused diseases. GREG CONNOLLY (MASS DEPT OF PUBLIC HEALTH) :___Keeg"'ixr.mind, 68% of adolescents smoke Marlboro. It's the leading brand a`~g youth. Philip Morris' long term decision is to go atter that youth market by dropping are the price on Marlboro. ~ ` ..~.•~"~~ . . . 2423913'754

- 3 - GREENWOOD: The Centers for Disease Control says the tobacco industry needs to attract more than one million new smokers each year to replace those who died or kicked the habit. The surgeon general claims slick ads that feature the likes of Joe Camel and the Marlboro man target teenagers and encourage 3,000 youngsters to light their first cigarettes each and every day. And lower prices make the habit more affordable for the youngsters. That's one of the reasons President Clinton is considering a $2.00 increase in _ the federal tax on cigarettes. New Jersey SenatorT1 fl Bradley has ~, already moved to hike the tax to one dollar. - ~ ---y SENATOR BILL BRADLEY (NEW JERSEY): The purpose of this tax is to turn the grim reaper into the health keeper. The purpose is to assure that there's adequate money to try to take care of those thousands of Americans who get sick every year because they smoke. GREENWOOD: Bradley claims the cost of medical care for smoking related illnesses now runs 50 billion a year. Philip Morris expects to lose more than 2 billion because of its price cut. But if that strategy attracts enough new smokers, it would be a short-term loss for a long term financial gain. This is Bill Greenwood in Washington 4for Nightline. WALLACE: when we come back, we'll be joined by a law professor who encourages the filing of lawsuits against tobacco companies, a public health official who specializes in the impact of smoking, and a securities analyst who says the Marlboro price cut will affect the entire industry. * * * WALLACE: Richard Daynard is the chairman of the Tobacco Products Liability Project, a public health advocacy group that encourages lawsuits against tobacco companies, and he joins us from our Boston bureau. Greg Connolly is the director of the Massachusetts Tobacco Control Program. Massachusetts recently imposed the highest excise tax on cigarettes in the nation, and he also joins us from Boston. Manny Goldman is a securities analyst for Paine Webber specializing in the tobacco and beverage industries, and he is in our San Francisco bureau. Mr. Goldman, strictly as a business decision, does it make sense for Philip Morris to cut prices so drastically? MANNY GOLDMAN (PAINE WEBBER): Well what Philip Morris is most concerned about is the possible deterioration of the Marlboro franchise which theoretically at least is one of the strongest in the nation, if not in the world. And the step that they're taking is a rather drastic one to put on promotion Marlboro at 40 cents'a pack, as they're indicating, is a very large step take. The fact they're putting on a promotion could be understood, 'the question is is 40 cents a pack too much to accomplish what they want to. They've done some market research that indicates that that's the 2023913755

right level of discount. So it's really a matter of how it all plays out. The company thinks that that is the right amount, but that's really to be seen. _ WALLACE : I was going to say, it sounds like you' re giving me a big maybe. As a securities analyst, do you think it was a good decision or not? GOLDMAN: well, I think it was a good decision to increase the discount level of Marlboro, but it's really the marketplace that's going to say whether or not 40 cents is the right amount. On the surface, at _'east, it sounds like it might be a little high. WALLACE: Let me ask you, do you expect other companies to follow suit and we''_l see a full fledged price war? JOLDMAN: Well I think other companies almost have to follow suit, whether it's Winston with RJR, or any other number of brands in t::e market place. Life is not a vacuum, and it's really incus.bent upon other companies to respond. They can' t just let their own market share erode. So I think what's being set up here is the basis for what amounts to a price war. WALLACE: Mr. Daynard, as I understand it, you think that Philip Morris and Marlboro are less concerned with market share and fightiag these discount brands, than with attracting young smokers. Explain that. RICHARD DAYNARD (TOBACCO PROD LIABILITY PROJ): Well, the major cigarette smoked by kids are Marlboros and Camels, and what's happened is that Mariboros, which, as Greg Connolly said, was two thirds of the market when last seen, has been costing two dollars, ten, twenty, thirty cents a pack, and that's more than kids have to spend on a pack, particularly when they're first experimenting. So I think the only way you can make sense of what Philip Morris has done, because as Mr. Goldman said, I think all the analysts, the people who are following the industry, were really astounded by this, the only way to make sense of this is that they' re really taking a'very long term view. WALLACE: And~ what do you think...what practical impact d you think a 40 cent cut on a pack of Marlboros will have cag young ' smokers? DAYNARD: The best estimates are that for every 10% that the price of cigarettes rises or falls, there's a 12% drop or increase in the number of kids smoking. So that a 20% drop in the price of Marlboros, and that's what they're talking about, ought to produce about a 20% to 25% increase in the number of kids smoking. Aad-l think that's the real underlying purpose of this, and I think it's very interesting that Philip Morris won't come on here to say that ..,._. -~- 202391375.~-~

.~:~~. . . - 5 - that's not the purpose. I think that has to be at least a big part of the explanation. WALLACE: Mr. Connolly, do you agree with Mr. Daynard? GREG CONNOLLY (MASS DEPT OF PUBLIC HEALTH): I do. The tobacco industry during the 1980's had' a choice either profits or smokers. What they chose is profits. They doubled the price of cigarettes from 1980, to 1990. They tripled the amount of money they put in advertising. If you look at it, they only gave the tobacco farmer a small bit of that. Now we're coming into the 1990's, and! what t.e indUstry is choosing is no longer profits but smokers. They need smokers to keep the industry alive after the year 2000, and unfortunately what they're doing is they're taking this brand here, and they're discounting prices to go after the young smoker, to make sure that they'll have an adequate number of people in the year 2005, 2010. WALLACE: Let me get Mr. Goldman in this. Do you agree with that, :ihat the companies are making a decision to cut their profits in the short term to attract these young smokers down the road? - MANNY GOLDMAN (PAINE WEBBER): No, I think the companies are interested in smokers of all ages above the legal smoking age. They're interested in a lot more than young smokers. I think they're interested in midd!le aged smokers, old smokers, not so old smokers. It's a big country. About 26% of the population of smokes, and if they're going to make a decent living , they have to be interested in all of them. CONNOLLY: I disagree. I disagree. GOLDMAN: You don't think they're interested in all of the smokers, that they're just interested in a small segment, that they're going to run their company that way? CONNOLLY: Philip Morris announced on Friday that they're holding the line on Benson & Hedges, Merit, brands not popular with kids. They're going,to hold the line and not increase the price. Where they cut the price was Marlboro. Of which 68% of teens smoke Marlboro in this country. Philip Morris was forced to do this because RJ Reynolds three years ago took a brand popular with old men, the only people that smoked the Camels were old men, and used a cartoon character to reintroduce this, and go after teens. What we found is after ir.~ marketing campaign, Camel smoking rows from 2% to 30% among.teens,,in our country. Philip Morris lost a small three to four pex,eent of market share of Marlboro because of teens taking up this product. And Philip Morris widely came back and they cut price here. In the United States today, a youngster'can buy two CD disks, I'm sorry, five CD disks, I'm sorry. In the United States today, 2023913'75'7 V,; :

- 6 - a youngster can buy five packs of Marlboro for one CD Disk. If you go to Canada, you can buy two packs of Marlboro for one CD disk. In Canada kids are choosing the CD disks not the- Marlboros. This is the leading cause of cancer in our country. What are we doing we're discounting it to make it more attractive to kids. WALLACE: Mr. Connolly we have to break in here. But we'll continue our discussion. When we do, I want to ask all of you just how much trouble the tobacco industry is it in right now. And we'll be back in a moment. * ..,~.•x..:~:.. WALLACE: we're back now with Richard Daynard, Greg Connolly, and Manny Goldman. Mr. Goldman, tobacco stocks have been big winners in recent years. How much trouble is the industry in now? ~]OLDMAN: Well, I think you have what could be a watershed event -n the industry, and this kind of discount with Marlboro. And : rnight point out that it's not likely to be limited to Maribcro, but it's likely to spread over the company's other brands as well. I think what Philip Morris is looking for is to get people who are discount brand consumers back up to Marlboro levels. And I might point out one thing here that Marlboro, Merit, name _t what you want, it's not the companies that get people to smoke. It's really what I call the three p's. As a securities analyst, one of my jobs is to forecast what's going to happen to the industry, and it' s really not levels of advertising or anything like that. It's parents, peers, and pals. That's what gets people to smoke. And really what the companies are looking for is to see if there's some way to get those who do smoke back to the higher price, higher image brands. WALLACE: Mr. Connolly go ahead. CONNOLLY: Over a quarter of a billion dollars was spent last year advertising Marlboros in this country, 17 cents per pack. That's three times the-amount of money that was paid to the to the tobacco farmer in a pack of Marlboro. The farmer got six cents. Philip Morris is announcing this mega campaign of western gear, free giveaways for clothing, taking trips on raft adventures in the west to get young people to smoke Marlboros because they know RJ Reynolds has been so effective with the cartoon character. So that's not true. DAYNARD: Greg has to be right. It's simply impossible that the two biggest sellersiby far among kids are the- brand that advertises with a cowboy, and the brand that advertises with a cartoon camel. That just can't be a coincidence.- These companies arereally pitching to kids-. They're extremely effective at it. 2023913758

That's the reason there's been so much excitement around these two brands... WALLACE: Mr. Daynard... (OVERTALK) ... Let me break in here. (OVERTALK): ... Let me break in for just a second, because I want to change subject just slightly here. Mr. Daynard you talk about smokers especially teenagers being very sensitive to price, what happens in a few months or perhaps next year when, by all accounts the Clinton Administration is going to put an excise tax of a dollar or two dollars extra on cigarettes? What impact will that have? DAYNARD: Oh I think it will have a very dramatic impact. I think that the prediction was that, before Friday's price drop, was that a two dollar a pack price increase would produce a 23% drop in overall smoking. I think the drop among smoking, among kids was probably more like 40% to 50%. Now that Philip Morris has dropped the price of the starter cigarettes, Marlboros, the kid cigarettes, by 40 cents, I think what the administration should be doing, and should be proposing is a $2.40 price increase. The 40 cents just to get us back to the starting point, and then the two dollars to get that 23%... ( OVERTALK ) , GOLDMAN: If I might chime in here. I think this is important. I have no axe to grind with anybody about any of this, but remember my job is to forecast what going to happen, and one of the things that I think is the case is that the total amount of smoking that goes on is minimally sensitive to price. What happens is people will go for a cheaper cigarette. In Canada for example, in Canada what appeared to be a huge drop in smoking, if you see what happened with exports you conclude maybe there's simply increased smuggling. (OVERTALK) That's what happens. CONNOLLY: Chris ... (OVERTALK) ... let me point out Massachusetts... (OVERTALK) ... GOLDMAN: In Massachusetts they probably went across the border to New Hampshire. CONNOLLY: No. We have studied data for the past three months. Our rates are down ten percent. Ten percent from the same time as last year. Across board of sales is one point five percent. We're working. We project 80,000 fewer smokers this year. Yet if Philip Morris dropped the price we're going to lose all that price effect. Since Canada raised their prices, their rate of decline among kids is twice that among kids in the United States. (OVERTALK) GOLDMAN: Excuse me. If you look at the total consumption... of cigarettes in Canada, and you adjust for what happened with 2023913759

- 8 - exports that may have come back in, it looks like the rate of decline of smoking... (OVERTALK) ... was not effected in Canada. WALLACE: Gentlemen... (OVERTALK) .... we have to break in one more time, and when we return I'm going to ask all of you where you see the battle of smoking five years down the line, and we'll be back in a moment. # * * WALLACE: Continuing our conversation now with Richard Daynard, Greg Connolly, and Manny Goldman. Mr. Daynard where do you see the tobacco industry five years from now? The strength of the companies, and the battle of smoking. DAYNARD: Well I'm really very optimistic. I think the Clinton Administration will come down squarely on the side of the public health, and come out with a proposal for a big.tax increase. I think Congress will go along with it. I think that will produce a big drop in the smoking rates. I think in terms of smoking in public places, the Americans With Disabilities Act, and private suits under that act, and the occupational safety and health administration I think will probably issue rules. I think we're going to see really a phase out of smoking in public places. I think we'll begin to see the tobacco liability suits winning, and that's going to produce a tremendous amount of more information about the real conspiracy, and fraudulent behavior of the tobacco companies... WALLACE: Let me get, if I can, Mr. Connolly into this. What are your... What's your prospect? CONNOLLY: Well number one the United States has the weakest policies curbing cigarette advertising of all the developed countries. We have the lowest taxes_of all developing countries. It's 30 cents... 30% of price verses 65% in Europe. I think the Clinton Administration will aggressively raise price through taxes, and also curtail this nonsense advertising that sells cigarettes as being healthy, macho, and whatever. Also with the price increase companies like RJ Reynolds, that have 12 billion d'ollars in debt today, if they are forced to lower the price on Camels and Winstons, could conceivably file chapter 11 and go out of buszness. WALLACE: And... CONNOLLY: That's something that I think would be a good thing for the nation as a whole. . . WALLACE: Mr. Goldman we have about 45 seconds left. You're thoughts for five years down the road. zoz3s07so

- 9 - GOLDMAN: Well I think in the US you're going to see three price points, somewhat as you have today. I think you'll see the companies, not just focusing in the US but also focusing overseas. The industry will look similar in that regard. Excise taxes probably will continue to move up. I don't think they will be raised exorbitantly. I think any large increases, whether it's a dollar a pack, or whatever, will probably be spread out over some number of years, cause remember the key thing here is that all of the revenue raising measures have to go through Congress... WALLACE: Mr. Goldman? GOLDMAN: So you have the natural pull and tug of the Congressional process. WALLACE: Mr. Goldman, Mr. Connolly, Mr. Daynard thank you all for joining us tonight. ALL: Thank you. WALLACE: Later tonight World News Now will rebroadcast some of the original testimony from the first Rodney King Trial. Testimony that dealt with the use of excessive force. That's later tonight on this ABC station. And that's our report for tonight. I'm Chris Wallace in Washington. For all of us here at ABC News. Good night. [end]