A:

On April 2, 1993, Phillip Morris announced that it was cutting the price of its cigarettes to compete with the growing number of generic brands selling for much less. The announcement had an almost immediate effect on the company; its stock plunged 26% in a single day and its market cap shrunk by $10 billion.

Generic cigarettes had been eating away at the Marlboro market share for years, so the move by Phillip Morris was based on sound reasoning. Phillip Morris was betting that its brand recognition, a big part of its formerly impenetrable economic moat, was strong enough to sway consumers who were given the choice of two similarly priced products. Simply put, Phillip Morris assumed most people would choose Marlboro over a similarly priced generic brand.

Despite the sharp drop in its stock price, Philip Morris proved to be right in its pricing strategy. Its quintessential air pocket stock recovered value over the next two years. The strategy behind Marlboro Friday was mimicked by many other established brands during the "generic versus brand" price wars of the 1990s. In almost every case, the brand carried the day. For contrarian investors who recognized the strength of the Philip Morris brand and bought in after the drop, Marlboro Friday was one of the nicest pieces of news of the 1990s.

(For more on this topic, read Economic Moats Keep Competitors at Bay and Competitive Advantage Counts.)

This question was answered by Andrew Beattie.

RELATED FAQS
  1. What are the differences between brand name drugs and generic drugs?

    Discover the process by which brand name drugs lose their patent, allowing generics to be manufactured, as well as the differences ... Read Answer >>
  2. Why is brand equity considered an intangible asset?

    Brand equity is an intangible asset because the value of the brand is not a physical asset and is instead determined by consumer ... Read Answer >>
  3. What impact does brand equity have on profit margins?

    Learn how both positive and negative brand equity affects profit margins by influencing profit per customer, sales volume ... Read Answer >>
  4. How does the profit margin compare for a generic drug versus a brand name drug?

    Learn how the profit margins compare for generic drugs and brand-name drugs. Brand-name drugs cost three to four times more ... Read Answer >>
Related Articles
  1. Small Business

    What Happened on Marlboro Friday?

    On Friday, April 2, 1993, cigarette-giant Philip Morris announced it was cutting the price of its Marlboro brand by 20%.
  2. Insights

    Philip Morris: 4 Secrets You Didn't Know (PM)

    Here are five secrets about Philip Morris International, maker of the iconic Marlboro brand cigarettes, that you probably didn't know.
  3. Investing

    5 Things Philip Morris Wants You to Know (PM)

    With the power of the well-known Marlboro brand behind it, Philip Morris International (NYSE: PM) has become a player in the worldwide tobacco market. For a time, that gave Philip Morris an ...
  4. Financial Advisor

    Philip Morris International's Profit Machine

    Even in an abstemious U.S., 18.1% of adults smoke. But that's nothing compared to the rest of the world, served by Philip Morris International.
  5. Investing

    3 Reasons to Buy Philip Morris International Stock (PM, AAPL)

    Among international tobacco companies, Philip Morris International (NYSE: PM) is the best known in the U.S., with competitors like British American Tobacco (NYSEMKT: BTI) taking a back seat ...
  6. Investing

    Philip Morris Stock Trades Ex-Dividend Tuesday

    Philip Morris will send its dividend payment on April 11 to shareholders of record as of March 23.
  7. Investing

    Is India Kicking Out Philip Morris International?

    Tobacco giant Philip Morris International (NYSE: PM) may be completely blocked from India's cigarette market if the government's proposals to end foreign investment in the industry are approved. ...
  8. Investing

    Philip Morris Investing Big on Heated Tobacco (PM)

    Philip Morris is making big moves in anticipation of a growing trend.
  9. Investing

    Why Philip Morris is Up 24% in 2017

    Shares of the tobacco leader are up on Thursday after management indicates lower currency headwinds.
  10. Trading

    5 Generic Products That Are Just As Good

    While some generic products are second-rate, others are just as good as the real thing. Here are six generics that take the cake.
RELATED TERMS
  1. Marlboro Friday

    A reference to Friday, April 2, 1993, when Philip Morris, the ...
  2. Morris Plan Bank

    A type of bank first established in 1910 to lend money to individuals ...
  3. Generic Brand

    A type of consumer product that lacks a widely recognized name ...
  4. Phillips

    A New York-based auction house specializing in the sale of art ...
  5. Brand Management

    A function of marketing that uses techniques to increase the ...
  6. Brand Equity

    The value premium that a company realizes from a product with ...
Hot Definitions
  1. Debt Security

    Any debt instrument that can be bought or sold between two parties and has basic terms defined, such as notional amount (amount ...
  2. Taxable Income

    Taxable income is described as gross income or adjusted gross income minus any deductions, exemptions or other adjustments ...
  3. Chartered Financial Analyst - CFA

    A professional designation given by the CFA Institute (formerly AIMR) that measures the competence and integrity of financial ...
  4. Initial Coin Offering (ICO)

    An Initial Coin Offering (ICO) is an unregulated means by which funds are raised for a new cryptocurrency venture.
  5. The Bernie Madoff Story

    Bernie Madoff ran a multibillion-dollar Ponzi scheme that is considered the largest financial fraud of all time.
  6. Pyramid Scheme

    An illegal investment scam based on a hierarchical setup. New recruits make up the base of the pyramid and provide the funding, ...
Trading Center