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Mom and pop shops hurt, too / Tobacco cuts leave small businesses reeling

Sunday, March 22, 1998

BY CHIP JONES
Times-Dispatch Staff Writer

J im Smith doesn't smoke, grow tobacco or work for Philip Morris USA. But he's worried about cutbacks in the tobacco industry.

Call it the Marlboro Connection.

Smith, owner of a small machine shop in Chesterfield County, makes parts for a major equipment supplier for Philip Morris.

Last fall, Philip Morris canceled orders for that supplier to rebuild 15 high-speed cigarette-making machines. That led to the layoff of 20 skilled machinists who worked for the supplier, Molins Richmond Inc.

And since Molins is a major customer, it hurt Smith's business.

"If they're not rebuilding machines, then I don't sell as many parts," said Smith, owner of Falling Creek Metal Products off Hull Street Road. "That hurts our profit."

Smith has managed to keep open his family owned enterprise where he employs three shop workers. He's avoided layoffs, "but I can see that coming if they get too hard on the tobacco business."

His son, Howard, who serves as shop manager, also is worried.

"I know we'd feel it if there were no more tobacco-related parts," he said.

The insecurity of Virginia's tobacco farmers has grabbed the attention of members of Congress trying to write national tobacco legislation. But around Richmond, small business owners say they've been forgotten in the debate.

Many see a gradual decline of business
with Philip Morris and other cigarette makers that's already rippling through the regional economy.

"All I hear are politicians saying we've got to protect the farmers, but a small businessman will have more difficulty finding new business," Smith said.

Local economists say there's no firm estimate on the number of "mom and pop" shops that serve Philip Morris and the rest of the industry. Some industry insiders estimate that about 200 machine shops, equipment makers and other companies make parts and machinery for Philip Morris alone.

But economists do say that tobacco-related jobs have a dramatic "multiplier effect" on the local and state economy. Every cigarette-making job results in the creation of nearly four jobs in the economy -- or more than 30,000 overall in the Richmond area, they say.

In all, Philip Morris and the jobs it generates account for more than 38,000 jobs in the region, according to Christine Chmura, chief economist at Crestar Bank.

But Chmura also points out that tobacco's role in the local and state economy has been diminishing for years.

"Even though the ripple effect for the tobacco industry is high, in terms of the total amount of jobs in Richmond, the impact should be fairly small," Chmura said.

With the addition of high-technology jobs from such companies as Motorola Inc. and Siemens AG, she said, "I'd see the Richmond economy continue to grow at about the U.S. pace next year of 2 percent."

But economic predictions don't soothe the sting for struggling business owners.

"We can hold on for a little while longer," said one equipment maker who asked not to be named.

This specialty parts maker said he's been forced to lay off nine veteran craftsmen during the past year because of tobacco-industry cutbacks. The downturn came after a boom year in 1996 when, confident of his prospects for growth, the small business owner bought a new facility in Chesterfield County.

But in early 1997, he said, "when the tobacco lawsuits hit the fan, we had our orders canceled. Our business came to a screeching halt. We didn't have a new order for a tobacco machine from April until December."

This shop has lost business from major cigarette makers other than Philip Morris as well, including R.J. Reynolds Tobacco Co. and Brown & Williamson Tobacco Co.

"I wasn't given any reason by Philip Morris, but Brown & Williamson told me they were not doing any new projects" until the huge lawsuits were settled, he said.

Brown & Williamson spokesman Mark Smith denied the Louisville, Ky.-based company has a litigation-based purchasing policy.

"I've seen no indications of any cutbacks," he said. "We're looking brightly at the future."

Philip Morris officials estimate that they buy goods and services from 1,000 Virginia businesses, with annual spending of about $1 billion. This doesn't include about $110 million spent each year on Virginia tobacco, spokesman Dan Ison said.

Asked about deepening concern among the company's suppliers, Ison said, "there is nothing that says there will be a dramatic drop in goods and services."

Even before it was hit with hundreds of smoking-related lawsuits, Philip Morris was cutting its base of suppliers. This happened about five years ago, Ison said, when the nation's No. 1 cigarette maker created a new program, known as Omnibus Purchasing, to streamline how it buys good and services.

Many longtime suppliers lost multimillion-dollar contracts overnight.

"We went from having Philip Morris be our single-largest customer to zero, within 45 days," recalled George Sydnor, president and chief executive officer of The McGraw Group Inc.

McGraw, one of Richmond's oldest companies, was paid about $1 million a year to provide a broad range of industrial supplies and equipment to Philip Morris' cigarette-making operation, including cutting tools and power transmissions.

The South Richmond supplier had four employees who worked solely on the Philip Morris account. But the cigarette maker's "sole source" purchasing program, recommended by consultants in New York, changed all that.

"Philip Morris did away with a supply base that it had developed over a period of 75 years," Sydnor said. "There was a lot of blood around Richmond from what they did."

His company has survived, and grown, by finding new customers outside Virginia. Sydnor said he has "no animosity or bitterness" toward Philip Morris but said the experience changed the flavor of the tobacco business forever.

"I think they'll never capture the loyalty of suppliers again," he said. "But again, they're so big, it probably doesn't matter."

Other suppliers agreed that the old, familial feelings about Philip Morris are long gone.

"It was a wake-up call for us," said Ted Lusch, president of Jerry Brothers Industries, a conveyor-belt maker located off Jefferson Davis Highway near the Manufacturing Center.

"When you have your largest customer just 500 yards away . . . and all of the sudden it goes away, it's a tremendous shock," Lusch said.

It took aggressive marketing of his company's conveyor and materials-handling systems, but Lusch said he's managed to double his revenues.

"Now I have no one who's over 10 percent of the business," he said. "We had to look beyond Richmond."

Ernie Whitlock, purchasing manager at Molins, said his British-based company has been forced to lay off workers during the past year, both here and in England.

"The cigarette companies as a whole canceled a lot of potential rebuild jobs," Whitlock said, including last fall's cancellation of 15 machines.

In all, at least 20 members of the machinists union were laid off at Molins in November, Whitlock said.

"When Philip Morris has a runny nose, everyone else has the flu," said Stephen Spain, who represents 500 machinists at the cigarette maker.

"A lot of these mom and pop shops are in a lot of trouble."

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THE RIPPLE EFFECT

Cigarette makers employ 9,700 people throughout the state (this doesn't include tobacco farmers). The majority of production or support employees -- 8,200 -- are in the Richmond area, with the bulk at Philip Morris USA.

Cigarette making creates 3.7 jobs per tobacco job. These run the gamut from packaging companies, equipment makers and industrially based firms to retailers and restaurants that rely on Philip Morris employees.

For Virginia, 35,890 jobs were created by cigarette manufacturing, primarily at Philip Morris USA in Richmond. The local impact is largest, with 30,340 cigarette-dependent jobs.

© 1998, Richmond Newspapers Inc.