A New Fourth

(See front cover)

In the spring of 1912 an English-born stripling named Alfred E. Lyon took a train from Canada to Manhattan to look for a job. Getting off at Grand Central Station with no knowledge of the city, no specific job in mind, he turned right on 42nd Street, presently reached Sixth Avenue. There he saw a handsome store with a large display of Melachrino cigarets in the window. He asked the clerk inside about Melachrino. "Sure," said the clerk, "that's a swell company. It's run by Mac McKitterick and Rube Ellis.'' A. E. Lyon went to see McKitterick, asked for a job as a Melachrino salesman.

"I'm sorry,'' said McKitterick, "but we have no opening for a salesman just now."

"Oh," retorted Alfred Lyon, "so you're selling all the Melachrino cigarets you want to?"

"No, by God, we're not," grinned McKitterick. "You've got a job."

Alfred Lyon thereupon became a "missionary" at $15 a week, began to learn cigaret selling in the Ellis-McKitterick manner. Through the years and many a complicated corporate change the three stuck together. In 1931 Ellis and McKitterick emerged with working control of an inconspicuous 12-year-old firm named Philip Morris & Co., Ltd., Inc., with annual sales of about $3,000,000. Last week Rube and Mac were not alive to see it, but Philip Morris was the No. 1 success story of a depression year. It had increased its sales 45%, its profits from $3,573,000 in fiscal 1937 to $5,663,000 in fiscal 1938 (ending March 31). Nor was this all. Last week Alfred Lyon, spearhead of P.M.'s sales drive since President McKitterick died in 1936, announced that Philip Morris has finally ousted Old Gold from its ten-year berth in the "Big Four."*

Salesman Lyon is Philip Morris' field commander. Its generalissimo is a man as different from him as Turkish tobacco from burley--a lanky, shy Virginian, Otway Hebron Chalkley. Vice President Lyon is breezy and backslapping, President Chalkley taciturn, reserved, at ease with finance and factory but not with strangers.

Soda Water to Shanghai. Otway Hebron Chalkley, born in Richmond some 50 years ago (he is even bashful about his exact age), was the only child of a prosperous, respected leather merchant. In Richmond he is remembered now as an expert player of bandy (a form of hockey), a proficient swimmer in the local holes--which go by such picturesque names as Soda Water, Cherry, Heaven, Hell--and a sober student. From school he went to work as an office boy for American Tobacco Co. at $3 a week, began a standard up-through-the-ranks career--factory manager in Newport News, clerk in Manhattan, a two year stint in Bulgaria buying Turkish leaf tobacco. Thence he returned to Manhattan to work again for American Tobacco, later for Tobacco Products Corp., one of whose possessions was Melachrino. There he met Rube and Mac. In 1920 with his bride, a Boston girl named Rachel Riley, lanky Mr. Chalkley shipped for China to be second in command of a Tobacco Products Export Corp. factory in Shanghai. Twice during that period Rube Ellis journeyed to Shanghai and the two men became firm friends. In 1924 Rube took Chalkley back to Manhattan to be treasurer of Philip Morris.

Second Try. The U. S. business of this then minute English concern had been taken over by Tobacco Products Corp. in 1919. In 1923 Rube Ellis was put in charge of its three brands--English Ovals, Oxford Blues and Cambridge--the first a blend and the others Turkish. Mr. Ellis promptly launched Marlboro, a 20-c- cigaret which, with the benefit of an ivory tip, has sold a solid 500,000,000 a year since. Then he lured McKitterick back from a seven-year vacation in Europe and the two quietly began buying Philip Morris stock. In 1931 they had control, got into the 10-c- field with a cigaret called Paul Jones. But they found themselves making little from Marlboro because a 20-c- cigaret has only a limited sale, making less from Paul Jones because it had too small a profit margin for big earnings despite its sales of some 2,000,000,000 in 1932. Rube eyed the 15-c- field dominated by Camels, Lucky Strikes, Chesterfields, Old Golds. He had already tried, with dismal failure, to crack this field with a 15-center named Unis. His second try was Philip Morris English Blend. Launched in January 1933, it was an immediate hit.

Rube Ellis dropped dead that same year and Mac became president. By 1936 when he, too, dropped dead, Philip Morris English Blend had enjoyed gross sales of $21,000,000 -- about 3,800,000,000 cigarets. This was a puny total compared with some 35,000,000,000 each sold by Camels, Luckies, Chesterfields. But it was more than half the 5,300,000,000 of Old Gold. Presumably Lorillard Co. executives, who in 1926 had spent $15,000,000 to launch Old Gold, breathed easier with Mac's death. Much of the tobacco industry laid Philip Morris' tremendous success primarily to the personalities of Rube and Mac. That Philip Morris had other assets was presently demonstrated. New President Chalkley and First Vice President Lyon increased Philip Morris sales and profits by a full 100%.

Rum & Flavor. In the Philip Morris factory in Richmond, where long lines of colored girls chant improvised songs all day long in the humid redolence of tobacco, Philip Morris cigarets are manufactured by virtually the standard process used by all the big popular brands--Turkish and U. S. tobaccos are mixed, sprayed with a special flavoring formula which gives each brand its own particular taste. Since taste is a big selling point, each brand's flavoring mixture is a trade secret, but the basis for all flavoring is rum. Only other ingredient cigaret companies reveal is a hygroscopic agent mixed with the tobacco to attract moisture. In most cigarets the hygroscopic agent is glycerin; Philip Morris uses diethylene glycol. The result, it claims, with substantiation from many a doctor, is less irritation to the membranes of the throat.*

Dwarf & Advertising. The diethylene glycol angle has been pushed hard by Philip Morris in advertisements in medical journals and in general promotion among doctors. In its general advertising Philip Morris merely uses round phrases such as "Doctors have agreed that Philip Morris is less irritating to the throat." This sort of talk would presumably have made little impression in a world full of cigaret claims had not Philip Morris' smart advertising agent Milton Biow had a brain wave. He remembered an old Philip Morris slogan, "Call for Philip Morris," and hired a shrill-voiced dwarf named John Roventini to chant it on the radio.

Johnnie Morris, as he is now called, is on the company's payroll for life at about $20,000 a year, including the cost of an automobile and other perquisites furnished him. And with an advertising expenditure vastly smaller than its competitors Philip Morris has for five years had the fastest growth of them all. This, Milton Biow lays to the fact that Philip Morris has stuck to one theme and one slogan without switching from one idea to another every few months as do many others. At any rate Philip Morris spent only $908,497 for advertising (exclusive of radio talent) in 1937 as compared with $8,500,000 for Camel, $8,900,000 for Chesterfield, $5,600,000 for Luckies, and $4,000,000 for Old Gold. And Philip Morris sold 8,200 cigarets per dollar of advertising against 6,800 for Luckies, 4,500 for Camels, 3,400 for Chesterfields, 2,200 for Old Golds.

Price & Dealers. The crux of Philip Morris' selling is its 15-c- price. Its rivals allow price cutting (such as two packs for a quarter). Philip Morris never does and swears it never will. In some States price-maintenance laws insure this policy; in others Philip Morris relies on its good dealer relations to maintain the 15-c- price. This price stability assures dealers their approximate 2-c- per pack profit margin with Philip Morris and they tend to push it harder, give it better displays, etc. Conversely, with its prices rigid at a high level, Philip Morris has more money per cigaret to spend on tobacco and manufacture. Even so, it probably could not have gone over but for two circumstances at its birth. After years of pushing Melachrinos, Rube and Mac had first-name friendships in most of the nation's tobacco stores. Dealers were told that the new cigaret was Rube and Mac's baby and if they valued the friendship they would help. Dealers were delighted to help because at the moment they were nursing a grudge against the "Big Four," whose prices (and dealer profit margins) in 1933 were at new lows in a bitter price battle with the ten-cent brands.

Since Rube and Mac's personal touch was so vital in Philip Morris' start, there were understandable qualms when the team of Chalkley and Lyon succeeded them. But affable Salesman Lyon soon rivaled his predecessors in cajoling dealers and salesmen ("My name is Lyon but I'm no wild animal. . . ."), and President Chalkley spurred the whole company to fresh endeavor by encouraging initiative rather than following able Mac McKitterick's policy of being a one-man arbiter of everything. He extended the bonus system to the whole company. As the only major executive in the country with leaf-buying, manufacturing and selling experience he was a logical choice as McKitterick's successor. And as the cool, careful, level-headed type he was well fitted to guide Philip Morris from a small unit with big ideas to actual bigness.

Tobacco inventories are bought three years in advance so they can age properly and thus they require a sizable investment. Philip Morris at first got such working capital by borrowing, not by floating securities. But inevitably, as its inventories swelled to a $20,000,000 figure, bank loans became too cumbersome, particularly on top of the $700,000 expense of building a slick new factory, opened last month. So last week with its 519,151 shares of common selling at $95 (on earnings of $10.91 last year, current dividends so far for this year of $5.25)--with its English Blend sales this year setting new records each month and expected to approximate 11,000,000,000 by year's end--Philip Morris finally offered for sale an issue of 77,873 shares of 5% preferred stock convertible into common share for share. Only 748 reached the general public. The rest was gobbled by eager Philip Morris common stockholders at $100 a share.

In Wall Street this easy sale, in a period when stock flotation had never been so difficult, produced two reactions. Financial World dubbed Philip Morris "a coming blue chip." Cynical tobacco stock specialists, however, were still unconvinced. Noting that more than two-thirds of Philip Morris sales are urban, they wondered whether, with its sophisticated slant, it would ever have truly national appeal. And they shook gloomy heads over the action of New York City (where Philip Morris sells one-fifth of its smokes) in imposing a 1-c- a package cigaret tax two months ago. Other cigaret companies could pass this on to the consumer. Philip Morris to maintain its fixed price policy must either absorb the tax or reduce its famed dealer profit margin. So far the dealer has either absorbed it or charged 16-c-. Philip Morris may therefore be forced to use a stunt it tried before--giving dealers one pack free with every carton they buy, thus compensating the reduced profit margin.

Though ranked among the Big Four, Old Gold was always a peewee in comparison. Whether the new member of the Big Four can do better, can overtake the 38-45,000,000,000 sales of each of the big three, the tobacco industry waits to see. With June sales totting up to the biggest total of any month in his company's history, President Chalkley went home last week to his one-acre place at Port Washington, Long Island, to enjoy a weekend's sailing in his 23-foot sloop, still trusting in partly the rum, partly the dwarf but mostly the price--the formula which so far has proved all that Philip Morris could desire.

*PhiIip Morris' sales for 1937 were 7,500,000,000; Old Gold's, 7,900,000,000. No figures for this year are yet available but Barron's, the National Financial Weekly, has already concurred with Mr. Lyon's claim that P. M. now leads Old Gold.

*Philip Morris was perturbed last year when at least 41 persons died from taking as medicine sulfanilamide that had been mixed with diethylene glycol as a solvent (TIME, Nov. 1). Medical research, accepted by the American Medical Association, indicates however that there is nothing poisonous about diethylene glycol when it is burned as it is in cigarets.

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