Gridlock On Tobacco Road

Patrick Carrico has plenty of Marlboros, thank you. Carrico's Master Distributors Inc., a South Bend (Ind.) wholesaler, bought so many of the cigarettes at the end of last year that it didn't reorder until late February. Usually, the company restocks every 10 days. At the end of March, Master still had $1 million in excess inventory--enough to last through April.

By now, everyone knows how cheap cigarettes rode into town, took aim at the Marlboro Man, and caught him square between the eyes. Philip Morris Co. shook the consumer-brands universe when it shot back earlier this month, announcing that it would slash prices on its premium brand and boost promotional spending--forfeiting as much as $2 billion in profits. Rival RJR Nabisco Inc. reacted on Apr. 13, eliminating the 32 dividend it had planned to pay on new shares of its tobacco operation.

But there's more to this saga of a fallen cowboy. Some distributors and analysts contend Marlboro relied too heavily on a practice called trade loading to boost short-term revenues. The result: $200 million to $300 million in bloated inventories at many of the nation's cigarette distributors, estimates Gary Black, a tobacco analyst at Sanford C. Bernstein & Co. Some industry insiders say the figure is even higher. The sudden discounting, says Black, certainly represents the company's attempt to regain control of its market. But some observers suspect the cuts also mask the losses Philip Morris would have had to take to correct a big supply miscalculation.

BURNED AGAIN. Philip Morris says there's no big problem. "We think our inventories are just about right," says a spokeswoman. "It's up to the wholesaler to manage their inventories. We would not encourage anybody to overstock."

For years, though, tobacco companies have employed trade loading to push additional inventories into the distribution channel before a price increase. Sometimes, the strategy worked well: Distributors got a price break, and manufacturers booked extra revenues at the end of a quarter. But back in 1989, R.J. Reynolds Tobacco Co. took a $400 million charge when it announced it would stop the practice. And in January, Philip Morris executives admitted they had been burned, because a slowdown in consumer demand left too many cigarettes on warehouse shelves. At that point, William I. Campbell, president of its tobacco subsidiary, promised to kick the trade-loading habit for good.

But distributors say Campbell didn't quit. Of the 44 tobacco wholesalers surveyed recently by analyst Black, 58% said their Marlboro inventories were too high at the end of this year's first quarter. The same was true at the end of 1992. "People are saying they've got a ton of inventory they can't move," says Black.

How bad is the inventory backlog? Philip Morris says trade loading does happen, but the company doesn't know how much it has left in the channel. A lot, say its wholesalers. Valley Wholesalers in Winona, Minn., says it doesn't normally trade load much. But when Marlboro pushed cheap cigarettes this winter, it bought heavily. Multiply behavior like that by 1,000 distributors, and the fallout could hit hard.