If you thought the 1998 Master Settlement Agreement succeeded in putting Big Tobacco in its place, think again. As part of the settlement, tobacco giants Philip Morris, R.J. Reynolds, Brown & Williamson, Liggett Group and Lorillard Tobacco agreed to pay $246 billion to 46 states suing the industry to recoup Medicaid costs. The cigarette companies also promised to adhere to a ban on outdoor advertising and curb youth-oriented marketing programs involving product placement, branded merchandise and multiple sponsor-ships.While heralded as a huge victory by anti-smoking groups, the MSA has not stopped the tobacco industry from getting its message through to consumers. A recent report by the Federal Trade Commission indicated the Big Five tobacco giants spent a record $8.24 billion on advertising in 1999, $1.5 billion more than in 1998. Print advertising, the only remaining mass-media outlet for cigarettes, soared 37.8% to $428.3 million. Still, that was a mere 5% of the total spending in the category.

All naturalPositioned as an all-natural, premium brand priced at 25 cents to 85 cents higher than standard packs, Natural American Spirit contains a blend of tobacco with no stems or artificial flavorings. For the menthol items, a chamber containing natural menthol is infused into the center of the filter to release a vapor into the smoke as it is inhaled--no menthol is added to the tobacco. Medium and light filter cigarettes have increasingly dense filters and porous papers to dilute the smoke with more air."The real benefit of carrying them is the trade margin," Tully said, with an average profit per pack of $1.02.Regionally popular in New Mexico, California, Oregon, Michigan, New York and Chicago, Tully reported the brand''s compound annual growth rate over the past eight years as 17 percent. This month the company will introduce a tobacco-free herbal cigarette and, by next January, will offer all varieties in hard packs. When the Master Settlement Agreement imposed marketing restrictions, Philip Morris and R.J. Reynolds back with tough tactics to squeeze their competitiors off shelves.

The Big Two typically negotiate for 55% shelf placement. While the actual percentage varies per contract, Philip Morris requires participants in its Retail Leaders incentive program to give its products top-rack positioning. Similarly, RJR asks for No. 1 or No. 2 shelf position for its Retail Partners and, for certain levels of participation, no less than than 12 linear feet of display space for its core Winston, Camel and Doral brands. Window decals, signs over permanent displays and a dedicated area for flagging promotions are extras in both programs, earning retailers more bonus cash and benefits like coupon mailings to drive traffic to specific stores.One Tennessee operator of tobacco outlets and c-stores, who dropped the Philip Morris contract two years ago because of "unreasonable" demands for compliance and signage, was gently coaxed back into the program by a recalcitrant PM. This year, he''s allocating 35% to PM, 40% to RJR and 10% to B&W. But adding Philip Morris, he said, will force him to shrink his offerings of Lorillard and drop his contract with discounter Commonwealth.

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