Marlboro Case

1. Problems faced by PM and Marlboro, and why they exist

1. Cigarette brands could be divided into 2 categories – (1) Premium brands (which is the category that Marlboro fell into) and (2) Discount brands. During the early 1990s, [Exhibit 9 from case] the market share of discount brands had risen past 30% of all cigarette volume and was growing by ½ of a share point per month. The rapid growth in discount brands was fueled by the widening price differential between discount and premium brands which was approximately $0.97 in January 1993, compared to $0.49 in January 1992 [source: Table C from the case].
   Further, the share of discount brands had received a boost in the summer of 1992 when RJR (which led the Discount segment of the cigarette market) ran a number of temporary price promotions on its discount cigarettes, which encouraged many retailers to also cut margins, using discount cigarettes to build store traffic. At these times, PM was increasing its prices.
2. Threats to the industry – these are NOT SPECIFIC TO THE BRAND

1. Tax increases
2. Restrictions on smoking
3. Restrictions on marketing
4. Product liability lawsuits

1. Trade-loading practices – encouraging wholesalers to “forward-buy” extra quantities just prior to a price increase.
   

1. Unique strategic resources (factors that differentiate a firm from its competitors. These do no need to be attributes of the product but rather features of the industry or aspects of the firm in question) of Marlboro

1. Higher margins of premium brands (such as Marlboro). [Exhibit 2] revenues and margins led overall industry. It is essentially this strategic resource that provides the firm with financial flexibility to offer promotions, discounts and even long-term price reductions such as the 20% discount it decided to offer on Marlboro. Compare this to RJR (PM’s closest competitor) which was in a somewhat weakened position as it was heavily in debt from a $25 billion leveraged buyout in November 1988.
2. Higher market share [exhibit 6]
3. Multiple product lines and new product introductions [Exhibit 5].
4. Part of the PM brand which had other well-reputed brands under its belt
5. Long-term history – it was around since 1924. It was the biggest selling brand in multiple countries around the world, and was named as the world’s most valuable brand by Financial World.
   

1. EVC = Differentiation Value + Reference Value

1. Reference value = Cheapest discount cigarette
2. Differentiation Value = Brand Value (Marlboro) + Taste/Quality (Premium vs. Discount)
   

1. Possible ways for Marlboro to influence EVC

1. General strategies

1. Offering discounts / promotions

1. Premium cigarettes
2. Discount cigarettes
3. Both

1. Reducing ad spend
2. Increase prices further to distinguish brand
3. Do a combination of the above
   

1. Pros / Cons of general strategies

1. Offering discounts / Promotions

1. Margin decline
2. Market share increase

1. Reduce ad spend

1. Overall margin improvement
2. Potential loss of market share

1. Increase prices

1. Margin improvement
2. Loss of market share

1. PM did a combination of the above which makes sense given

1. Discounted brands were gaining market share

1. Recession..? and recent trends

1. Tax increases would make it more unaffordable for consumers to afford the premium branded Marlboro
2. Restrictions on marketing could make it more difficult to distinguish the Marlboro brand from others
3. RJR, the closest competitor, could find it difficult to compete with Marlboro as it was highly levered

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