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The company announced yesterday that it will begin phasing out production at its Louisville plant before July, laying off about 1,400 union and non-union workers by December 2000.
``Obviously we don't want to just keep making cigarettes if we don't have the demand for it,'' said spokeswoman Terry Hanson. ``At some point you have to make a business decision.''
Reduced production will be absorbed by revamped, larger plants in Richmond, Va., and Cabarrus, N.C.
The tobacco industry, plagued by litigation and higher taxes, has to consolidate costs where it can, stock analysts said.
``They've got a much harsher environment,'' said Steve Marascia of Virginia-based Branch, Cabell. ``All tobacco companies are looking for ways to cut costs and improve profitability. Profits have been lower across the board for the last two quarters, driven primarily by those two factors.''
Smoking has dropped about 5 percent in the last year, most analysts said, and it's predicted to decrease as much as 15 percent over the next few years, primarily because of the higher prices.
The four major U.S. cigarette companies -- Philip Morris, R.J. Reynolds, Lorillard and Louisville-based Brown & Williamson -- announced a $206 billion settlement of states' lawsuits in November. To pay for that and $40 billion in settlements reached earlier with four other states, the companies raised prices by 45 cents a pack.
And the environment keeps getting harsher. Recently, in California, cigarette-makers were hit with a double whammy -- taxes were increased by 50 cents a pack in January, and a jury in a smoker's lawsuit awarded a $51.5 million judgment against Philip Morris.
The company's stock plunged on the news.
``There are currently something like 400 lawsuits pending against Philip Morris and all it takes is one person to win,'' said analyst Brian Eisenbarth of Collins & Co. of California. ``That's what the market's really afraid of.''
Eisenbarth pointed out that all jury victories against cigarette-makers have been overturned on appeal, but the fight is still costly.
``They're bleeding money forever in the courts,'' said Lars Bergan of Argus Research. ``They're getting sued by everybody -- asbestos companies, unions. They're fighting organizations as big and strong as themselves now.''
``It looks as though Bill Clinton is making progress in his continuing assault on Kentucky's No. 1 cash crop,'' McConnell said. ``Since Bill Clinton took office six years ago we have lost over 15,000 tobacco farms and thousands of jobs in Kentucky's tobacco industry.
``Today's announcement ... is an inevitable result of the president's war on tobacco.''
But the latest casualty in that war came as a shock to state officials.
Gov. Paul Patton said he learned of Philip Morris' plan only a short time before the company announced it publicly.
``I was surprised and disappointed by the news,'' Patton said. ``I had no inkling that this was coming.''
The governor said, however, that state officials had known for some time that if Philip Morris had to cut back its manufacturing capacity, Louisville would be the target.
Patton would be given a chance to meet with Philip Morris officials to see whether the state can do anything to prevent or lessen the layoffs, said Mark Pfeiffer, spokesman for the governor.
The company began notifying workers yesterday morning. Joe Phelps, financial secretary of Local 16 of the Bakery, Confectionery and Tobacco Workers' union, said the union knew a year ago that the plant would be phased out, but it expected that would happen in three to five years.
``This was quite a shock,'' Phelps said.
The company last year offered early-retirement packages to eligible workers in Louisville, Richmond, Va., and Cabarrus, N.C.
Another older plant, also in Richmond, Va., was closed six months ago. Additional Philip Morris employees, including 140 in Louisville, were laid off Feb. 1.
Although 50 to 60 of those Louisville employees transferred to the North Carolina plant, more transfers are unlikely in the current industrywide slump. R.J. Reynolds, for example, cut 1,300 U.S. jobs late last year. That indicates the 1,100 union workers left at the Louisville plant will have to find a different line of work to replace their $21-an-hour jobs.
Salaried employees will receive an enhanced retirement package. ``Something will be worked out with people close to retirement age,'' spokeswoman Hanson said.
Severance details have yet to be worked out with union workers, who have been working without a contract since the beginning of the month. Talks continue Monday.
The Louisville plant manufactured many cigarette labels, including Benson & Hedges and Virginia Slims, along with Merit, Basic and dozens of other discount brands, according to Hanson. But its highest-profile tobacco product was Marlboro, the top-selling cigarette in the world, with a brand recognition second only to Coca-Cola.
Philip Morris bought the plant in 1944 from Axton-Fisher Tobacco Co., and at one time it was a major factory for Philip Morris. But since the Cabarrus plant was built 15 years ago, production in Louisville has been steadily reduced, Hanson said. The plant, which in 1992 had nearly 3,000 workers who made 300 million cigarettes a day, has been operating at only 50 percent of its capacity.
Louisville Mayor Dave Armstrong, who was in Washington, D.C., yesterday, said he will ask the company to give the city the land the plant stands on.
``To be frank, this announcement means a loss of jobs that will really hurt, but Philip Morris also is a significant supporter of many community activities and causes. I don't want to see that commitment fade away,'' Armstrong said.
Philip Morris Inc., the company's domestic tobacco subsidiary, will take a $200 million pretax charge in the first half of 1999, mostly to pay for severance costs.
Philip Morris' only other properties in Kentucky are stem and paper-processing plants and leaf warehouses, which employ about 200 in Louisville. Those jobs will be unaffected.
Herald-Leader staff writers Bill Estep and Jack Brammer contributed to this report.
Philip Morris will close Ky. plant
1,400 at cigarette factory in Louisville will lose jobs
McConnell blames Clinton
Severance benefits
On A8 Ohio union health funds are suing tobacco firms for billions.
Copyright © 1999 by the Lexington Herald-Leader. No portion may be retransmitted, republished or reused in any form without written permission from the Lexington Herald-Leader and Kentucky Connect.