Bacon Bytes

James A. Bacon



 

Yessss!

Who Loves Ya, Baby?

 

Hey, Bloomberg, tax this! Kudos to the Warner administration for bringing Philip Morris USA to Richmond.


 

Between a budget crisis and an uncooperative General Assembly, Gov. Mark R. Warner hasn’t had much to cheer about the last few months. But he was all smiles March 4 when he announced some very good news: the decision of Philip Morris USA to relocate its corporate headquarters to Richmond.

 

Warner had known Philip Morris CEO Szymanczyk back when the two had served together on the board of the Virginia Foundation for Independent Colleges. Last year, the governor spotted an opportunity to approach Szymanczyk when New York Mayor Michael Bloomberg jacked up cigarette taxes in the Big Apple and began pushing for draconian restrictions on smoking in public places. Warner inquired whether the Philip Morris executive would consider moving the division to Virginia.

 

Virginia has been courting Philip Morris USA for years: Economic developers have long pitched Philip Morris on the idea of moving the headquarters to the same city as its major manufacturing operations. But New York was home to the parent company, Altria, as well as the advertising gurus in Madison Ave. As owner of some of the most valuable consumer brands in the United States, Philip Morris had good reason to stay close to the world’s largest pool of marketing/branding talent.

 

This time around, Philip Morris was receptive to the Virginia sales pitch. Philip Morris has studiously avoided blaming Bloomberg for the decision to leave New York – perhaps for fear of inspiring and even harsher crackdown – but it’s hard to imagine that Szymanczyk felt welcome in a city that, for all intents and purposes, was trying put him out of business.

 

Once Warner succeeded in opening up talks, Virginia’s economic development team followed up aggressively. Michael Schewel, secretary of commerce and trade, the Virginia Economic Development Partnership, the Greater Richmond Partnership, the Greater Richmond Chamber of Commerce and the University of Richmond all played key roles in persuading Philip Morris to make the switch.

 

In the end, Philip Morris calculated it could cut its costs by $60 million a year in lower rents, lower salaries, lower taxes and efficiencies gained by locating in the same city as its main operating unit. The move is expected to bring 682 positions and $83 million in payroll to the Richmond area – an average salary of $122,000, or more than twice the region’s average household income. State income taxes alone should amount to $4.5 million annually. The company also announced a $300 million investment in its cigarette manufacturing facility, which should yield more than $8 million annually in property taxes and machine-and-tool taxes for the city of Richmond.

 

Some $28 million in state incentives helped offset the expected $120 million in relocation costs. Warner approved a $3 million grant from the Governor’s Opportunity Fund to assist the Richmond region with the project. Philip Morris also qualifies for a $25 million performance-based grant from the Virginia Investment Partnership program. That grant, payable over five years, begins in the sixth year after the investment is completed and promised jobs are delivered. Philip Morris property in the city of Richmond and Henrico County also will qualify for enterprise-zone tax credits against state income taxes. The net present value of the cash incentives is $19.4 million; the 20-year net present value of revenue to the Commonwealth is $54.6 million.

 

There could be more positive ripples to come from the Philip Morris USA move. The company spends vast sums on advertising and marketing. Indeed, the parent company, which also owns Miller Beer and Kraft Foods, was the nation’s second largest advertiser, spending $2.6 billion on advertising nationally in 2000, according to Ad Age magazine. With cigarette marketing functions moving to Richmond, there may be an opportunity to bring some of those ad dollars to Richmond, either by persuading New York agencies to set up satellite offices here or by shifting some of the business to the Martin Agency, Richmond’s largest ad shop.

 

On the downside, the Philip Morris news generated negative reaction among Richmond-area smoking foes. The move could reinforce the city’s identity as Tobacco Town: still fighting the civil war, and still smoking cigarettes.

 

One way to combat that image, as I argued two weeks ago (see Safer Cigarettes, March 3, 2003)  would be to launch a “safe cigarette” initiative. Virginia could seek to become a center of R&D probing the relationship between cigarette smoking and cancer with the goal of developing new technologies and processes to mitigate the risks of smoking – in effect, to help develop “safer” (or less dangerous) cigarettes. Research  innovations potentially would reduce health hazards for 1.2 billion cigarette smokers around the world, most of whom smoke harsh lung-busters manufactured by foreign cigarette companies. As a bonus, researching the connections between cigarette smoke, immunology, human genetics and cancer could provide a big boost to the Richmond region’s aspiring biotech sector.

 

It’s not often that Virginia attracts the headquarters of a $24.8 billion (2001 revenues) business into the state. Gov. Warner, the state economic development team, and local economic developers all should be congratulated on their coup. But economic development is a game with no time outs, no end, and no final score. We’ve got the “big mo.” Now let’s build on it.

 

-- March 17, 2003

 

 

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You can berate Bacon at jabacon@

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