Philip Morris Futurists by stariya

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									INDUSTRY SEGMENTS

             Altria Group, Inc. is the parent company of Philip Morris Domestic and

International Tobacco products, food products, beer products, and financial services, and

real estate are the significant industry segments. About 62% of total operating revenue

with Philip Morris U.S.A. came from tobacco products correspondingly in 1994 and

1993, and about 33% and 29% came from Philip Morris International. About 32% of

food products, 45% of beer products and 2% of financial services and real estate

accounted for the Company's total operating profit in 1994 and 1993.


Philip Morris U.S.A
Operating Revenues:         1997                        1998    1999        2000
       Tobacco              25.7%                       13.1%   32.8%       33%
       Food                 22.4%                       27%     21%         21.9%
       Beer                 3.6%                        4.0%    3.5%        4.0%
         &
       Financial Services
Philip Morris International
Operating Revenues:         1997                        1998    1999        2000
       Tobacco              35.7%                       44.4%   33.5%       32.1%
       Food                 10.3%                       9.9%    7.7%        7.4%
       Beer                 2.3%                        1.6%    1.5%        1.6%
         &
       Financial Services

Domestic Tobacco Products
     Philip Morris is the largest tobacco company in the United States. Health

concerns, litigation, governmental regulation, tax increases, smoking restrictions are

issues which have a huge impact on Philip Morris Company.

YEARS ENDED PM INC. DECEMBER 31
                    INDUSTRY* PM U.S.A SHARE
                              INC.      OF INDUSTRY

 (IN BILLIONS OF UNITS)                                         (%)
2000.......................................... 419.8    211.9   50.5
1999........................................... 419.3   208.2   49.6
1998........................................... 460.8   227.6   49.4
1997........................................... 482.9   235.2    48.7
1994........................................... 489.6    219.4   44.8




          The largest six manufacture comparatives in 2000 were Brown & Williamson

Tobacco Corporation, Commonwealth Brands, Inc., Liggett Group, Inc., Lorillard

Tobacco Company, Philip Morris Incorporated and R.J. Reynolds Tobacco Company.

Cigarette Industry Segments
      In addition to Marlboro, the largest selling brand in the United States with

shipments of 152.8 billion units with 36.4% of market share, Philip Morris Inc.'s

manufactures Virginia Slims, Benson & Hedges, Merit and Parliament. Basic and

Cambridge are the discount brands. Philip Morris continues to enhance Marlboro’s brand

equity in 2004 to Marlboro mental 72mm which contributed to share growth. All brands

are marketed to preferences of adult smokers. In 2000 and 1999, the premium and

discount segments accounted for approximately 73.5% and 26.5%, respectively, of

domestic cigarette industry volume. Philip Morris Inc.'s share of the premium segment

was 60.6 in 2000. Shipments of premium cigarettes accounted for 88.2% of Philip Morris

Inc.'s 2000 volume.
International Tobacco

         Philip Morris International Inc. unit of Altria Group faces more competition

than United States. In 2005 Philip Morris International Inc., maker of the top selling

Marlboro cigarette, cuts down its forecast for volume before acquisition due to

impending tax increase in Germany. Philip Morris would bring brand recognition

internationally as in the United States. Philip Morris has made improvement in the

production of tobacco. They have expand into developing countries in fact in 2005 Philip

Morris acquired Indonesian kretek cigarette manufacturer.


Food

       In 2000 Kraft Foods a domestic and International world’s second-largest food

company acquired Nabisco. Kraft Foods markets many of the world's leading food

brands, including Kraft cheese, Maxwell House and Jacobs coffees, Nabisco cookies and

crackers, Philadelphia cream cheese, Oscar Mayer meats, Post cereals and Milka

chocolates, in more than 155 countries. Industry segments are subject to intense

competition, changes in consumer preferences and demand for its products, including diet

trends, the effects of changing prices for its raw materials and local economic and market

conditions.
2000   2003   %
Financials

       Philip Morris is the nation’s largest cigarette company. It is owned by its parent

company Altria Group, Inc., which is based in New York and trades on the New York

Stock Exchange. As of the second quarter of 2005, Philip Morris brands commanded

50% of the cigarette market. Marlboro by itself controlled 40% of the market, followed

by the 4.3% market share of Basic, 2.3% of Virginia Slims, 1.7% of Parliament, and

other Philip Morris brands combining to control 1.7% of the market. (Philipmorrisusa)

Since the end of the case in 1991, Altria has been a steady performer in terms of net sales

and net earnings, generally increasing each from year to year.

       Looking at Philip Morris’ financial figures from 1991, its 2004 fiscal year

earnings show that it has tripled net income from $3 billion to $9.4 billion. (Thomson

Research) Operating income has also steadily improved year by year and is up to $89.6

billion as of 2004, from the $56.4 billion they received in 1991. As of the end of the

2004 fiscal year, Altria Group reported earnings per share increase of 2.0% from 2003 to

$4.57, a significant improvement over the 1991 and 1992 earnings per share figures of

$1.51 and $1.82 respectively. (Value Line) The $9.4 billion Altria earned during 2004 is

a 3.3% increase from 2003 earnings of $9.2 billion. (Altria) Net revenues are found by

summing the total sales of domestic tobacco, international tobacco, North American food,

and international food sales. At year-end 2004 domestic tobacco accounted for 20% of

the $89.6 billion in revenue, international tobacco sales accounting for 44%, North

American food for 25%, and international food 11%. (Altria) These figures show that

Altria’s revenues are 64% tobacco and 36% food.
       Dividends declared per share is another area Philip Morris has made steady

progress in since 1991. In 1991, dividends declared per share amounted to $0.64

compared to the $2.92 Altria Group declared in 2004. (Value Line) Since the fiscal year

of 2000, Altria has shown an 8.7% compound annual growth rate (CAGR) (Altria).

According to Value Line, dividends declared per share are estimated at being $3.02 for

2005 and $3.22 in 2006. (Value Line)

       As of the second quarter results of 2005, Altria is already ahead in some areas

compared to where it was at the end of the second quarter 2004. Net revenues are up

8.3% from $22.9 billion to $24.8 billion. (Altria) Earnings from continuing operations

after taxes are up 11.7% compared to second quarter 2004. Net earnings are up 1.5% and

earnings per share are 11% more than they were at the end of the second quarter 2004.

Also, net revenues are ahead of the pace by $1.9 billion as of the end of the second

quarter 2005 on June 30. (Altria)

       In May 2005, Altria Group made the decision to buy a 98% stake in Sampoerna, a

leading Indonesian tobacco producer, for $4.8 billion. This acquisition would make

Altria the second largest tobacco producer in Indonesia. Also in 2005, Altria purchased

Coltabaco, Colombia’s largest cigarette producer, for $300 million. This international

expansion is due to the declining domestic market for cigarettes. International tobacco

sales now make up 70% of total tobacco revenues and about 50% of Altria’s top line.

(Value Line)

       Share net of the second quarter 2005 is up 10% from the same period last year.

Since Altria raised its price on premium brand cigarettes by $1.00 per carton, they have

seen benefits as a result. Domestic market share is up to 50% from 49.8%, and in the
premium brand area, Altria controls 62% of the market. With the release of new

Marlboro and Parliament brands, earnings for 2005 are expected to be 10-15% more over

earning in 2004. (Value Line)

Philip Morris as an Employer

       As stated in the case Philip Morris believes its employees are what give the

company a competitive advantage. This fact has not changed since the case was written.

This is apparent through the numerous awards the company has received over the last few

years which include ranking 14th in Computerworld’s “100 Best Places to Work in IT

2005” (2005 OverAll). Phillip Morris was also featured in Richmond magazine’s April

2005 issue as one of the best places to work in Richmond (Awards).

       The company continues to find ways to compensate its employees fairly.

Competitive salaries is only the start, the benefit package offered to employees includes

optional levels of medical coverage as well as disability insurance, life insurance,

survivor benefit plans and retirement plans where PM USA actually matches employee

contribution up to 15% of income. One thing that makes Phillip Morris’s benefits unique

among other employers is that it offers coverage to domestic partners, opposite sex as

well as same sex.

       Phillip Morris also continues to employee a very diverse workforce. One third of

the companies employees are women and about 30% are of a minority background

(About). The company also encourages employees to advance at all levels. It offers

tuition reimbursement for business-related courses and up to $1,500 a year for non-job

related courses (Awards). The company clearly values its employees and gives them

every opportunity to excel regardless of career level, race or gender.
       The company also supports many charitable organizations, with a focus on

positive youth development, education, the environment and community development. In

2004 employees volunteered over 25,000 hours to service projects.

       In order to assure every employee has the opportunity for a well balanced life, the

company offers flexible work hours, onsite fitness facilities, more than average number

of paid holidays and family leave options. The time and effort the company has invested

and continues to invest is paying off. The average employee stays with the company for

fifteen years, with a company turnover rate of only 10.3% over the last five years,

including retirements (About).

       To experience this type of loyalty from more than 6,400 employees in central

Virginia alone is remarkable. But to receive recognition nation wide as an Ideal Employer

(MBA) is something everyone at Phillip Morris should take pride in and continue to

reach for the same level of excellence far into the future.

Litigations

       The vast world of cigarette sales is very prone to lawsuits. When this case study

was put out Philip Morris was a defendant in 23 court cases. Of the 23 court cases

pending 2/3 of the cases were dismissed without ever walking into a court room due to

the long working tactic of using preemption of liability based on the Federal Cigarette

Labeling and Advertising Act. Other courts ruled that the cigarette labeling act

completely protects cigarette manufacturers from most liability claims.

       A more up-to-date hit on the Philip Morris Company happened in 1998. It is

finally calming down for Philip Morris after it had to face one of the biggest legal

assaults in corporate history. They were faced with many lawsuits after the entire
tobacco industry faced a $206 billion dollar settlement in 1998 with 46 state governments

trying to recoup the cost of caring for sick smokers. In 1999 things weren’t looking any

better the company was facing 670 suits filed by smokers and other plaintiffs. At this

time Philip Morris’s stock plunged 57 percent. Philip Morris was hit so hard the

contemplated filing for bankruptcy in 2003. Today a new innovated defense strategy is

working for the company because the number of lawsuits has dropped significantly. As

of last year there were only 30 new cases filed against Philip Morris. Of the 30 cases

filed four have already been dismissed. Philip Morris also just recently dodged a huge

bullet when they won a ruling that said they did NOT conceal smoking’s health hazards

and marketed cigarettes to the youth. This ruling meant that Philip Morris did not have to

hand over $280 billion in past profits. Now that Philip Morris has rebounded so well in

2005 they are investing more money in Kraft Foods Inc. The change of fortune for Philip

Morris is partly due to the ever changing strategy. They have recently been challenging

every judgment that is brought against them as well as bringing in more women and

minorities to represent them in the court cases. Although the times have slowed down as

far as court cases for Philip Morris they are still not in the clear. There is still a court

case in the works including the governments continuing civil racketeering suit and the

appeal of a $10.1 billion dollar verdict in a suit brought by smokers because of the

advertising campaigns of “Light” cigarettes. As well as this huge court case Philip

Morris is currently waiting on 20 other class action cases dealing with the marketing that

light cigarettes are safer than regular. Many plaintiff lawyers say that the days of huge

industry killing law suits are over simply because nothing has stuck in with the cigarette

manufacturers. So basically all the pursuing plaintiffs have backed off.
       Although Mr. Ohlemeyer came in as associate general counsel at a time when the

west coast was cracking down on cigarette manufacturers he reorganized his defense

strategy to cut down drastically on cases filled against Philip Morris as well as brought

there stock back up to $69.80 a share.

 Threats to Philip Morris

       Many firms and industries face adversity time and time again; however, the

tobacco industry has always been under fire. The Master Settlement Agreement of

November 1998 did not help the industry. The goal of this agreement was to make

cigarette manufactures reimburse states for the cost of treating smoking related illnesses

and to reduce underage smoking. A few of the key components include $206 billion

dollars to be paid to the states over 25 years, $1.5 billion over 10 years to support anti

smoking measures plus $250 million to fund research into reducing youth smoking,

increased advertising limitations, ban on cartoons in advertising, ban on branded

merchandise, increased sporting event sponsorship limitations, and disbanding of tobacco

trade organizations. Also, $5.15 billion was to be paid to tobacco growers over 12 years

to compensate for potential reductions in their production and sales in response to the

agreement. Because of this agreement, as well as taxes imposed on cigarettes, prices

have increased dramatically. Rising prices have caused cigarette consumption to fall by

over 7 percent since 1998. Prices increased 45 cents per pack on the day the agreement

was signed alone. Obviously, manufactures had to raise prices to cover the costs of this

agreement. The federal excise tax jumped 10 cents from 24 cents per pack in 2000 and

an additional 5 cents in 2002. While the tax is paid by the manufacturer, most of the tax

gets passed along to the consumer. State taxes differ greatly, adding to the cost of
tobacco, from just 2.5 cents per pack here in Virginia to over $1 dollar in New York.

State excise taxes average about 41 cents per pack. The impact of these taxes was

estimated to cost consumers an extra $250 dollars per smoker in 2000. To cut costs,

manufacturers tried to export and re-import cigarettes back into the United States because

it would be cheaper for them. Unfortunately, this practice was banned by legislation in

2000. What was most interesting about this agreement was the fact that it did not require

Congressional approval (Capehart).

       In 1992, analysts predicted more of a trend from purchasing the premium tobacco

products, such as Marlboro, to purchasing the bargain brands. Smaller, discount

manufacturers found a loophole in this agreement and have avoided paying their share of

the total settlement. Because of this loophole, they have been operating with a lower cost

structure and can effectively compete on price, easily undercutting major manufacturers’

competitive advantage in marketing and scale. Smaller manufacturers have seen their

market share increase from 3 percent in 1998 to about 10 percent in 2004. State level

legislation efforts have attempted to eliminate this loophole (Fischer). However,

according to philipmorrisusa.com, Philip Morris led the industry with 50 percent of the

retail share with Marlboro accounting for 40 percent by itself (philipmorrisusa.com).

       Antismoking litigation continues to be a problem for the tobacco industry. There

are an estimated 1500 total product liability cases, 38 class action cases, and over 2700

flight attendance cases pending. In the case of Price v. Philip Morris USA, a judge found

in favor of the plaintiff and awarded over $10 billion dollars in damages against Philip

Morris USA. It was a class action lawsuit and the plaintiff claimed that Philip Morris’

use of Lights\Ultralights constituted as a deceptive and unfair trade practice (Fischer).
Philip Morris appealed the case, unfortunately the ruling was not changed

(philipmorrisusa.com).
References

MBA Students Rank Phillip Morris USA Among Their Idea Employers in USA, 2005.
     Retrieved from www.philipmorrisusa.com/en/about _us/careers/popup_mba.asp

Great Places to Work,Richmond Magazine’s April 2005. Retrieved from
       www.philipmorrisusa.com/en/about_us/careers/popup_richmond_magazine.asp

2005 Overall Ranking of Winners. Retrieved from
      http://www.computerworld.com/careertopics/careers/bestplaces2005

About Us, Philip Morris USA-About Us – Company Information-Diversity. Retrieved
       from www.philipmorrisusa.com/en/about _us/company-inforamation/our_people

Capehart Jr, Thomas C. Trends in the Cigarette Industry After the Master Settlement
      Agreement. October 2001.
      http://www.ers.usda.gov/publications/tbs/oct01/tbs250-01/tbs250-01.pdf

Fischer, Brendon. Tobacco Industry Report. November 2004.
       http://www.mccombs.utexas.edu/AIMCenter/AppInvMan/reports/industry/Fische
       r_Tobacco.pdf

Price v. Philip Morris USA appeal summary.
        http://www.philipmorrisusa.com/en/downloads/about_us/pressroom/litigation/pdf/
        price_appeal_brief_summary_121003.pdf

Financial Information.
       http://www.philipmorrisusa.com/en/about_us/financial_information.asp

Thomson Research.
     http://research.thomsonib.com/gaportal/ga.asp

Altria Investor Overview.
        http://www.altria.com/investors/02_00_investorsOver.asp

Value Line.
       http://www.valueline.com/index.html

								
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