Weekly Tobacco Notes: Philip Morris Changes Purchase Process, Runs Into Trouble With WHO

by Trefis Team
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Philip Morris International
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In our tobacco weekly notes this week, we will discuss Philip Morris’ recent announcement of its decision to stop purchasing tobacco from farmers directly and instead from two large suppliers. These suppliers are North Carolina based, Alliance One International and Virginia based, Universal Corporation. [1]

On a separate note we will briefly touch upon the World Health Organization (WHO)’s decision to come out against Philip Morris in a lawsuit that the company has been involved in with the Uruguayan Government. [2]

See Our Complete Analysis For Philip Morris International

A Move Aimed At Supply Chain Efficiencies

The outsourcing of the procurement of raw materials to the two companies identified above will come into effect in April 2015. PM’s professed aim of this change in operations strategy is to gain supply chain efficiency. This move will enable the company to cut  35 jobs associated with in-house procurement of tobacco. [3]  In addition, a 65 year old federal price support program that forced tobacco companies to pay higher prices to U.S. farmers than the market price ended this year. This price floor had kept U.S. domestic tobacco noncompetitive vis-a-vis imported tobacco. [4]  However, with the market mechanisms in place, Philip Morris possibly felt a need to have a more a sophisticated price discovery process to optimize purchase costs. This becomes more important when we consider the fact that the import price of tobacco has grown year on year  at a rate on 3.3% over the past four years to cross $5000 per metric ton in 2014. [5]

Distancing From Bad Employment Practices Of Tobacco Farmers

Another reason for Philip Morris to avoid dealing directly with farmers could be their controversial employment practices. The company has taken flak globally for indirectly encouraging employment of child workers in hazardous jobs. For instance, in Kazakhstan, Human Rights Watch reported that children were being made to work 11 to 13 hours  a day in farms that grow tobacco procured by Philip Morris. This was under dangerous conditions with exposure to high levels of nicotine and pesticides. As a consequence of this, many of these children started having nausea, headaches, dizziness and muscle weakness. Philip Morris had issued a statement opposing these practices and promising action in that regard. [6]

One of Philip Morris U.S. farmer tobacco suppliers, Marty Coley Farms, had been the target of a lawsuit by immigrant workers this year. These illegal migrant workers  were paid $6 an hour, less than the minimum wage. When one of them was injured, with three fingers lost, while working on the farm, he was given $100 and asked to leave. [4] The desire to avoid a re-run of Kazakhstan closer home might have prompted the move from Philip Morris to procure tobacco from intermediaries. This is so because Philip Morris is a company that is sensitive to its public image, and believes that its profits can be hurt by bad publicity. [7]

A New Twist In Philip Morris Uruguay Lawsuit

We have written earlier on how Philip Morris took the Uruguayan Government to court over mandatory health warnings on cigarette packs. (See An Uruguayan Lawsuit For Philip Morris) The World Health Organization (WHO)  has now come out in support of the Uruguayan Government. It said that the country’s efforts at curbing the harm due to smoking and second hand smoke showed that Uruguay would not be intimidated by the tobacco industry. Uruguay had mandated that 80% of the surface of cigarette packs be covered by health warnings and that the words light, mild etc. not be used on cigarette packs. Smoking was also banned on several public places. [2]

The measures taken by the Uruguayan Government between 2005 and 2011 are credited with having reduced smoking by 23%. For a company like Philip Morris which according to our model can expect decline in market sizes in all geographies except Asia, resisting such regulations becomes a life and death issue.

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Notes:
  1. Philip Morris Deal With Tobacco Suppliers []
  2. WHO Supports Uruguay [] []
  3. New U.S. Tobacco Deal []
  4. Tennessee Tobacco Farms [] []
  5. Tobacco Import Price []
  6. Philip Morris Using Child Labor []
  7. Philip Morris’ Identity Crisis []
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