American cigarette price war hits quarterly earnings of Philip Morris: Tobacco giant warns that fourth-quarter profits will suffer

THE cigarette price war in the US took its toll on third-quarter earnings at Philip Morris, which warned that profits in the next quarter would also suffer.

Net earnings at the US food and tobacco giant fell 24.8 per cent to dollars 971m following the sharp cut in the price of its Marlboro brand. Revenues increased slightly to dollars 15.21bn.

The figures were below expectations, though one analyst said they were hardly surprising given that the company cut its premium cigarette prices in April.

The news hit shares of BAT Industries, which closed down 10p to 479p. At Philip Morris, the US domestic tobacco business, operating profits fell 53 per cent to pounds 615m on a 16.3 per cent drop in operating revenues. The operation's share of the cigarette market grew 1.7 per cent.

The company said that trading in the group's non-tobacco consumer businesses remained difficult.

Philip Morris's earnings were equivalent to dollars 1.11 per share after a dollars 0.04 per-share charge.

The decline also reflected the impact of new tax legislation and lower results from its international food and drink operations.

Michael Miles, chairman, said he was generally pleased with the results, though he gave a grim warning about the fourth quarter.

'Our overall results indicate that our business strategies are proving effective in very difficult economic and competitive circumstances,' he said. 'None the less, our US cigarette pricing and continued volatile and difficult market conditions will make our fourth-quarter comparisons unfavourable.'

After Marlboro's market share hit a low of 21.5 per cent in March, Philip Morris cut the price. Rupert Murdoch, a non-executive of Philip Morris, was said to have been one of the key figures pushing for the price cut, a move he replicated recently at his UK newspapers.

In the subsequent tobacco price war BAT's American division discounted a number of premium brand cigarettes by about 40 cents a packet.

Although BAT is cushioned against the effects of the price war by its dominance of the Brazilian and Canadian cigarette markets, as well as a 20 per cent stake in western Germany, Sir Patrick Sheehy, chairman, warned in July that its US operations were being hurt. What is more, he said that its effects would continue to be felt well into 1994.

After the price cuts the average cost of a packet of discounted Philip Morris cigarettes was about dollars 1.31, some 45 cents lower than a pack of Marlboro, now selling at around dollars 1.75. Before the cut a pack of Marlboro cost dollars 2.20.

Marlboro has been the premier brand in the dollars 46bn US cigarette market.

But the price cut sent waves through other consumer products sectors as it underlined the vulnerability of quality brands to cheaper own-label alternatives.

The Marlboro price cut, said at first to be a temporary measure, has been made permanent.

Philip Morris's other brands, Virginia Slims and Benson & Hedges, were also cut. The discount cigarette sector has grown rapidly in recent years at the expense of premium brands, and cheaper, generic brands now account for about 40 per cent of the market. Philip Morris's share of the international tobacco business continues to grow, with operating income at dollars 600m in the third quarter.