Marlboro's Contract Cap

Industry upset by Altria's latest program, "recommended maximum price"

Published in CSP Daily News

By
Mitch Morrison, Vice President & Group Editor

OAK BROOK, Ill. -- A controversial new tobacco contract that would impose price ceilings on what operators could charge is leaving a foul taste for retailers. Numerous retailers, from independents to some of the country's largest convenience-store chains, are criticizing Altria's Marlboro Leadership Price (MLP) Option.

"We feel philosophically when a supplier tries to dictate how much you can sell a product for, it's inherently not a good policy," said Steve Loehr, vice president of operations support at Kwik Trip, operator of more than 400 stores in Wisconsin, Minnesota [image-nocss] and Iowa.

"It's not acceptable to us. We're not going to go with the program," Loehr told CSP Daily News.

The MLP program comes with a certain irony, said Loehr. "My take is they're pushing people to sell their (Philip Morris) cigarettes at the lowest price at retail. At the same time, they don't seem to have a problem raising their manufacturer costs on us, which then forces us to raise our prices."

Loehr is among roughly a dozen retailers reached by CSP Daily News critical of the contract unveiled by Altria Sales & Distribution.

Altria officials said they understand retailers' complaints, but add they were driven by another consideration--the country's economic slump. Aiming to address concerns from pocket-pinched consumers, Altria hopes that by capping prices, the MLP option will deliver the impression that the manufacturer is in touch with its smoker base.

As for widespread retailer skepticism, Altria officials expressed hope that incentives contained in the program would remedy potential margin losses incurred through the price ceiling.

The objective, Miguel Martin, general manager of Altria Sales & Distribution, told CSP Daily News is to "reward retailers who offer a competitive Marlboro single-price pack to adult smokers."

The MLP, he said, is an option only available to retailers at levels three, four and five of the company's retail-leaders program.

To further clarify how the program works, Altria spokesman Greg Mathe said, "The higher the level, the more we ask them to do, but also the more incentives they can receive from us." Incentives include off-invoice pricing, merchandising, off-invoice allowances, special price promotions and product promotions, among others.

And if a retailer opts not to go with the MLP option? "That's up to them," Martin said. "If they don't choose it, they don't have the opportunity to earn the incremental promotional funds that come in as a result of that choice, but there are no ramifications to their merchandising payments, to their fixture availability or to other promotional allowances that we provide. It's really a separate choice or component of the promotional part of the program."

Real Impact
The MLP, according to documentation obtained by CSP Daily News is a "recommended maximum price designated, from time to time, by PM USA for the retail sale of Marlboro single packs by stores that participate in the MLP Option."

How MLP plays out will vary by market. In Purcell, Okla., for instance, where Stephen Ballard runs two Guzzlers stores, that MLP is $5.14.

Ballard said that equates to an 11.3% margin, a figure he's heard applies across the program nationwide. (Altria did not confirm that percentage.) That's a dramatic drop from the 25% margin he's generated per pack over the past 31 years.

"They're telling me I have to increase my volume by 50% to make it work, " Ballard said. "I live in a town of 6,000 people, and there's seven convenience stores. So I don't know where I'm going to get the 50% increase from."

With that, Ballard said he's not going to sign the contract, echoing that of other retailers interviewed for this story.

For MLP to secure broad support, Altria officials will have to sell retailers on the program's merits and possibly modify the contract, several observers said.

Martin declined to elaborate on the monetary incentives--the program's strongest hook to win support--but he did address some of the discussions around "price fixing." While he said he doesn't want to "debate the definition" of the term, he added, "There are two points I would make: First, it is one component of our promotional funding, which I think is really a critical piece of it. And the second point is it is [optional]."

Retailers can choose to opt in or opt out of the program, which runs from April 3 to Oct. 1, on a monthly basis. As for what happens after October, Martin said, "We'll see. We don't announce past that point, and so I think that's to be determined."

By Mitch Morrison, Vice President & Group Editor
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