Tobacco Documents Online

M.w 1fo'{i: 2'12-3Q9-1400 Chicago: 31 Q-541-20,20 DMnoife 3 1 3-3 4411 1 77 t-- - - . ~ ~ . l Los Ang.i.s: 213-466-6124 VWoshington, D.C.: 301-6'56-4068 saaMa: 617-536•2232 , . ,4 . .4 Philedilphie: '2i'S-567-'71900 TRAM9CRIPT San Fwncisces 213-466-6'124 Miami: 305358J3358 FOR :HILiP MORR:Z STAnoNW,ASC-TV L PROGRAM 'JIGHTLINE tITY NY DATE ~4,/'05I 93 -- - ~ -DM AUDIENCE SUBJECT ::~rT!T ~_ 'ytJRRI- ~~WIEcIS PRICES ?TJLL TEXT :::R'IS WA.LLACE : TWbacco, kills more Americans each year than .:omicide, car accidlents, and AIDS' alll c'ut :,me_ :"a 's mJs.:z popular brand just cut its price 40 =ent_ . .._ti:: s::other generation? Tonight, Cigarette =r:cz wars. 7his :s ru3,C ::ews Nightline. Substituting for Ted' K:oppP : and _.eccrt _ ng --f_ cm +;ashington, Chr'is Wallace.. Nhen _::e :at _....' sc.Qgest tobacco company, Philip Morris, sias: _s :~::e -r,_A ~ :s -ost popular cigarette, Marlboro, it is oi:a -. _ws. So c,g :::at _ t contributed' to a 68' cilol lar drop on :n t^e 2ow .:cnes :ndustrial average. So bigithat public :ea_:- =xper~:s warn, =::at _^eaper cigarettes will cause alserious :.ncrease in smoking, ?speclally among teenagers~. So big that -:e_t::er ?hiiic: Mor_ _s ::or :_s chief competitor RJR Nabisco or' even :^e :ndustry"s :"abacco :nstitute would participate in this broadcast. :',n one _evei t::e dec.sion to cut the price of Marlboro by 40 cezts a pack is ;ust business, an effort to hold on to: market share, against the onslaught of discount brand!s, but whenever you talk about cigarettes, it's not just business. The price cut comes just aa the Clinton administration is considering a monster tax on cigarettes to pay "or health care reform, and just as the ra'te 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 GRE'EI+JWOO'D, iREPORTER'.) : Smokers have made tobacco one of the most profitable industries in the entire world, with a'nnuall sales of almost $45 billion in the United States alone. Marlboro brings~ in 22'% of that amount. Talk about king size . Americans~ puff six billion packs of Marlboro's ea~ch year, as many as the nextt foiur brands combined. V'Vhil. Rodio TV Rbpocts .ndwwrs,b oswn d» oocurocy of motsnol wppli.d by it, it cannct b.wsQonsibl. (ur misbkn or omissions. Mamrial ~suppli.d by Rodao TV, Rsoorts may be used (w Hk ond reier.nc. cairposes ooly. 0 may nmt br rspredua.dl,sold or pubiicly dsmooserabd or .uchibit.d.

- 2 - ALLAN KAPLAN (MERRILL LYrJCH) : The tobacco is one of the sing,ie 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 _oyaity. 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 -zirtual free fall? Philip Morris not only refused to discuss the reasons for its decision, but tried to deny Nightline access to this corporate videotape i.n which officials said Marlboro had been simpiy :verpriced. WILI,IAM CAMPBELL (PR'ES & CEO PHILIP MORRIS') : Our pricing s.trategy during recessionary times did exceed our consumer's income ?ro:.at_^. With this initiative, we are correcting that situation. CL:? TARRYTON COMMERCIAL: MAN: Us Tarryton smokers would rather -'ic:a =:,an switch. ) ]REENWOOD; ~ne problem for Marlboro is the fact that toddy's zigarette smokers do switch brands. Ani3'mostly 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 52.15 cack of Marlboros. But it'si the premium, brands like Marlboro: :i::at zrc. uce higner profits per pack. LARRY ADELMAN ( DEAh1 W ITTER R'EYNOLDS ): They make a prof it somewnere in the range of 60 cents to 65 cents, at the ultra crem,•~,.::n, non-discounted level. And probably at the! low end, they probaDiy only make an estimated profit per pack of let''s say rouar:ly a dime to 15 cents. GREENWOOD: With Philip Mbrris the undisputed industry leader, cutting the price and profit of its best seller, other tobacco companies a~re certain to follow suit with a price war. And that prospect is alarming public health officials and smoking opposr.ents. RICHARD--DAYNARtB (T?OBACC4 PROD LIABILITY PItOJ)' : I think this is a public health crisis, a; public health emergency of'the.first order. It"s very ra-x-€ that something happens that endangers N hundreds of thousands of Americans at one time. We're going to ~ have a tremendoua increase in the number of kids smoking in the ~ United States, number of kida getting hooked on nicotine, and 20, 4~jj 30, 40 years down the line, number of people coming down and dying Q. of tobacco~ caused disieases. PON GREG' CONNOLLY (MASS DEPT' OF PUBLIC HEALTH~) :_--K:eisp-im-mind,, 6,8% of adblescents smoke Marlboro,. It's the leading brand art~g W youth. Philip Morris' long term decision is to go after that youth W market by dropping are the price on Marlboro. \-Z4- X_. d

GREENWOO'D!: 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 3,0010 youngsters too light their first cigarettes each and every day. And lower prices. make the habit more affordable for the youngsters.. That''s one ofl the reasons President Clinton is considering a$'2.00 increase ini the federal tax on cigarettes. New Jersey Senator;~l. Bradley has, already moved to hike the tax to one! dollar. . ` ---1 SENATOR BILL BRADLEY (NEWi JERSEY) : The purpose of this tax ~I 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 thousandLs of Americans who get sick every year because they smoke. GREENWOOD: Braciley 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 stratem,.attracts enough new smokers, iit wouldbe~ a short-term loss for a long term financial gain. This is Bill Greenwood in Washington for Nightline. WALLACE': When we come back, we'll be joined by a law professor who, encourages the filing, of lawsuits against tobaccoo companies, al public health official who specia~lizes in the: impact of smo)cing, and a, securitie,s analyst who says the Marlboro price cut will affect the entire industry. t * * 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. Gregi 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 Gbldman is a securities analyst for Paine Webber specializing in the tobacco and beverage industriesi, and he is in our San Francisco bureaul. Mr. Goldman,, strictly as a business decision, does it make sense for Philip Morris to cut prices so drastically? MANNY GOLDM;AN ( PAIh7E WEBBEPt) : 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 I.1 is 40 cents a pack too much, to accomplish what they want to. W They've dbne some market research that indicates that that's the opi - _~..

- 4 - rig,ht 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 increa!se the discount levei of Mariboro, but it'a really the marketplace that"s going to say whether or not 40 cents is the right amount. On the surface, at least, :t sounds like it might be a little high. WALLACE : Let me ask you, db you expect other companies to follow suit and'we'il see a full fledged price war?' 3OLDMAN': Well T-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 ~ncu.:,be,ra unon other companies to respond. They can't just let their cwn market share erode. So I think what's being set up here: is the basis for what amountsto a price war. WALLACE': Mr. Jaynard, as I understand it, you think that. Phil:w MorrisandMarliboro are lessconcerned'withmarket share and figMt:r.g these discount brands~, than with attracting young smokers. Explain that. RICHAF~D IDAYNARD (TOBACCO PROD LIABILITY PR+OJ) : Well, the major cigarette smoked by kids are Marlboros and Camels, and what's happened is that M(ariboros, 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 experimentingi. 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 termiview. WALLACE: And what do you, think...what practical impact do\ you think a 40 cent cut on a pack of Marlboros will have cao young - smokers? DiAYNARD : . _ WA - 7 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 kidL smoking. So that a 20V drop in the price of Marlboros, and that''s what they're talking about, ought to: producee about a 20V to 251 increase in the number of kids smoking. And-I 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 Y C11

that' s not the purpose. II think that has to be at least al big part of the explanation. WALLACE': Mr. C.onnolly, do you, agree: with Mr. Daynard? GREG CONNOLLY (MASS DEPT OF PUBLIC HEALTH): I' do. The tobacco industry during the 198!0's had a choice either profits or smokers. What they chose is profits. They doubled the price:o.f'f cigarettes. from 1980 to 19901. 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 19'9&' s~, and what the -,ndustryischoosing is no longer profits but smokers. They need smokers to keep the industry allive after the year 2000, and unfortunaltely what they' re doing is they''re takingi this brand here, and! they're discounting, prices to go after the young smoker, to make sure that they'11 have an adequate number of'f people in the year 2005, 20101. WALLAC'E: Let me g,et Mr. Goldman in this. Do you agree wit'h, that, ihat :.he companies are making a decision to cut their profits, in the short term to! attract these.young smokers down the road? MANNY GOLDMAti3 ( PAINE WESBER) : No, I think the companies are interested in smokers of all ages above the legal smoking age.. They're interesteci :n a lot more than young smokers. I think they're interested in middle aged smokers, old smokers, not so: old' smnkers. It's a big country. About 26% of the population of smokes, and if thley''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 thee smokers, that they're just interested in a small segment, thatt they're going to run their company that way? CONNOLLY : Philip Morris announcedi 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 Reynolda three years.ago took a brand popular with old menl, the only people that srnoked!the Camels were old men, and used a cartoon character to, reintroduce this~, andigo after teens. What we found is after x~ marketing campaign, Camel smoking rows from 2% to 30!% among.teens~in our country. Philip Morris lost' a small three! to four perrc-en of market share of Marlboro becau!se o,f'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, disksi, I'm sorry, five CD disks, I''m sorry. In the United States today,

- 6 - a youngster can buy f ive packs of Marlboro for one CD Disk. If you go to! Canada, you can buy two packs of Marlborol 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. Cbnnolly we have to break in here. But we'1l 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. Andi we'1!1 be back in a moment. WALLACE': we' re back now with Richard Daynard, Greg Connolly, and Manny Goldman. Mr. GoSdman, tobacco stocks have been big winners in recent years. How much trouble is the industry in now? ~3OLDMAN: Well, I think you have what could be a watershed event _z the industry, and thia kind of discount with Marlboro. And :-night point out that it's not likely to be limited to~ Marlboro, but it' s l ikely to spread over the company" s other brands~ as we11. I think what Philip Morris is looking for is to gett p~eople whoare: discount brand consumers backupto Marlboro llevels. 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 tol 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. WALLARCE : 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 clottiing,, taking trips on raft adventures in the N west to get young people to smoke Marlboros because they know RJ' Reynolds has been so effective! with the cartoon character So 0 . . N that's not true. __ _----- DAY'NARD : Greg has to be: right. It' s simply impossible: that a ~ the two biggest sellers by 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 are really pitching to kids.. They're extremely effective at it.

That's the reason there's been so much excitement around these two brands... WALLACE:~ Mr. Daynard...(OiVER-fALK)... 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 shou!ld be doing, and should be proposing is alS2.40 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 isi 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 80,0100 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

- 8 - exports that may have come back in, it looks like the rate of decline ofl smoking...(OVERTTALK)!... was not effected in Canadal. WALLACE': Gentlemen...(OVERTALKJ.... we have to break in onee 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. * * * WALLACEI: 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, anrli 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. Cbnnolly 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 developedi countries. We have the lowest taxes of all developing countries.. It's 30 cents... 3'0% 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 ass being,healthy, macho,, and whatever. Alsol with the price increase companies like RJ Reynolds, that have 12 billion dollars in debt today, if they are forced to lower the price on Camels~ and Win:stons, could conceivably file chapter 11 and go out of busineas. ~ ~-----~- O WiALLACE : And. . . ~. CONNOLLY: That's something that I think would be a good' O' thinqfor the nation as a whole. ~ WALLACE: Mr. Goldman we have about 45 seconds left. You're W thoughts for five years down the road. ~.

- 9 - GOLDMAN: Well I think in the: U5' 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 off 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. Goldlrnan, Mr. Connolly, Mr. Daynard thank you all for joining us tonight. ALL : Thank you,. WALLI,ICE :~ 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]