A sobering story from Business Cheat Sheet, but one I was aware of.
In John Oliver’s recent epic rant about the tobacco industry, he touched on this issue (more on that in a subsequent post).
Yes, the tobacco industry has taken some big hits in the past 30 years. A sharply declining smoking rate, from over 50 percent in the 1960s to approximately 18 percent today; the massive $280 billion Master Settlement Agreement in 1998; the Engle judgements out of Florida; and higher taxes in most states over the past 15 years.
However, from the Business Cheat Sheet story.
Then came the good news. According to a Credit Suisse research report released last week, tobacco is America’s most successful industry. The report states that the average returns from a company listed on the stock exchange was about 10% per year from the period between 1900 and 2010. Tobacco stocks, however, produced annualized returns of 14.6% during the same period. In terms of hard cash, this means that a single dollar invested in tobacco stocks was worth $6.3 million by 2010, while a dollar invested in a stock market index would only be worth $38,255.
However, as Business Cheat Sheet points out, the tobacco industry has simply rolled with the changes. There’s a reason the average cost of cigarettes has gone from $1.50 a pack in 1990 to $5.50 a pack in 2015. All those added costs — taxes and settlements — have simply been passed on to cigarette consumers.
According to this article, the $280 billion MSA and other litigation raised the cost of cigarettes by 10.9 cents a pack in the late 1990s. However, the price of cigarettes increased by an average of 14 cents a pack. The industry simply kept the change. When your customers are addicted to nicotine, there’s nowhere else to go.
Business Cheat Sheet also points out that the tobacco industry is an oligopoly — a large industry basically controlled by a very small number of companies. In the U.S., there’s really only four major tobacco companies — Philip Morris, RJ Reynolds, Lorillard and British-American Tobacco. And when the merger of RJ Reynolds and Lorillard is complete, that number will be down to three (BAT, which is big internationally, has a tiny share of the market in the U.S.). In fact, get this, there has not been a new major tobacco company formed in 56 years.
Worldwide, a mere five major companies — Philip Morris, BAT, Japan Tobacco International, Reemsta and Altadis — control 45 percent of the market. A huge percentage of the rest of the world market is in state-controlled in China.
To quote from the article:
As a result, competition within the industry is rare and the incentive to innovate on products and prices is low.
To add to that, cigarettes have an inelastic demand curve. This means that demand stays constant, even in times of recession. Thus, the tobacco industry manages to make profits because product margins improve, even if the overall product volume sold decreases.
The third reason the industry continues to thrive — burgeoning markets in the Asia and Africa.
The smoking rate has not only declined dramatically in the U.S., but through most of the Western World. This was historically where the tobacco industry made the bulk of its revenues. But, as John Oliver pointed out last week, the developing world is completely different, where there is not as much education about the dangers of smoking and frankly for a lot of people, living conditions are so poor, there’s a level of apathy toward the dangers of smoking even when they are known. U.S. tobacco companies simply drool over these huge markets in Brazil, Africa, India, Indonesia the Philippines. (They’d be going after China, too, but China won’t allow it).
It can seem a daunting task fighting an industry that continues to thrive despite losing so many regulatory, legal and PR battles. Killing the industry won’t happen tomorrow and won’t happen next year or in the next decade. It’s definitely a process of chipping away at it.