RJ Reynolds, Lorillard and Philip Morris have reached a $100 million settlement of 400 Engle cases in Florida. I thought they might do this. I’ve been writing for months that, every way I cut it, it was in their interest to do this.
The Engle (named after Howard Engle, a smoker who died several years ago) cases came from a Florida Supreme Court decision throwing out a $145 billion class-action judgement against Big Tobacco for its years of lies and cover-ups over the dangers of smoking. However, while throwing those cases out, the state Supreme Court opened the way for individual plaintiffs to file separate lawsuits against Big Tobacco.
Since then, literally thousands of lawsuits have been filed in Florida and Big Tobacco has been losing about two-thirds of these cases, with hundreds of millions of judgements awarded in favour of over a hundred plaintiffs. Most of those judgements have been upheld on appeal.
Rather than go through at least another decade of losing these cases (not to mention all the legal fees), I figured sooner or later, Big Tobacco was simply going to settle.
This settlement involves 400 cases filed in federal court. That’s $250,000 per plaintiff. I’m guessing there’s going to be more settlements, because I believe there’s several thousand more lawsuits ongoing, and that a lot of them are in state courts. So this settlement may have solely been to deal with the federal cases. And in fact, the NBC story is careful to say “it’s the first settlement by Big Tobacco to settle a chunk of Engle cases.”
Under the agreement, Lorillard will pay $15 million, while RJR and Philip Morris will each pay $42.5 million. This settlement won’t affect cases that have already been settled.
Great news for these families devastated by smoking! I’ll be keeping an eye out for future Engle settlements in Florida.
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.
The No. 2 tobacco company in America — R.J. Reynolds — is in talks to buy the No. 3 tobacco company in America — Lorillard (which I have misspelled Lollilard more times than I can count.). Imperial Tobacco is also involved in the deal.
This deal would create a $56 billion company and would create a monster rival to the dominant No. 1 tobacco company in America — Altria, otherwise known as Philip Morris (its dominant brand is Marlboro, of course).
Reynolds and Lorillard would combine for 42 percent of the cigarette market, joining Reynolds’ big product — Camel — what Lorillard’s — Newport. Other Lorillard brands are Kent and Old Gold, while other Reynolds’ other brands are Pall Mall, Winston, Salem and Kool. But, Camel and Newport are the dominant brands.
The new joint company then would sell off several of their smaller brands to Imperial Tobacco, a British-owned company that would then become the No. 3 company in America.
According to the New York Times, declining cigarette sales are driving this move, as both companies work to restore their past profits. E-cigs are also a factor in this deal, as the e-cig industry is booming (got mixed feelings about that), and Lorillard owns the No. 1 e-cig brand, Blu E-Cigarettes.
According to the New York Times:
Still, a takeover of Lorillard by Reynolds would represent the industry’s boldest response yet to a declining, if still profitable, market. A general drop in smoking rates and aggressive public health campaigns aimed at curbing smoking have cut into sales in the United States.
About 42 million people in the United States, or nearly 18 percent of the adult population, smoke cigarettes, according to the Centers for Disease Control and Prevention. That compares with about 21 percent of the adult population nearly a decade ago and 43 percent of the adult population in 1965, according to the C.D.C.
What remains of the traditional cigarette industry is dominated by Altria, whose Philip Morris arm sells one out of every two cigarettes in the United States.
Opportunity has beckoned in the new business of e-cigarettes. A deal by Reynolds to buy the leading purveyor of e-cigarettes could spur other mergers within the industry as manufacturers jockey for position.
“This transaction in our view will be very positive for the global tobacco industry and could be just the beginning of future transactions with e-cigs/vapor being the underlying catalyst,” Wells Fargo analysts wrote in a note.
Anyway, interesting story as the industry adjusts to a rapidly changing and evolving market. This deal is not cast in stone, as it must be approved by federal regulators and could face scrutiny over
Blu e-cigs (owned by Lorillard tobacco) is pulling out all the stops lately using the same ad techniques cigarette companies used.
I try to stay on the fence on e-cigs, because they might help some people quit smoking, but when I see ads like this, I feel less and less inclined to defend them. They’re stealing the 1960s tobacco industry playbook. One of the biggest problems I have with e-cigs, and one of the reasons I don’t fully trust them or their manufacturers, is they keep relying on advertising trying to make their product look sexy and dangerous.
This ad appeared in the Sports Illustrated swimsuit edition. It’s not even remotely subtle, fairly blatantly using sex to try and sell their products. I would find it funny, but teenaged use of Blu e-cigarettes has more than doubled, according to the CDC. Hey, get kids those kids addicted to nicotine early. You want to get into a girl’s panties? Look sexy by using e-cigs.
Bad move, Blu. Too blatant. Too … creepy. It’s this kind of advertising that is going to help get e-cigs regulated.
I can type “e-cig” into Google or into the Tobacco.org database and I will literally get hundreds of hits. You can find hundreds upon hundreds of articles about e-cigs all over the Internet. It reminds me of Googling “smoking ban” five years ago.
I see them on sale now at every mini-mart I walk into. Two years ago, you never saw them for sale anywhere. E-cigs became a billion dollar industry in 2013, and the tobacco companies are jumping on board to get a piece of the pie (until now, mostly smaller companies made this things.) Blu, the biggest e-cig company out there was bought by Lorillard last year (Lorillard makes Newport cigarettes which are heavily marketed to African-Americans.)
But, what does it mean? And what are e-cigs, exactly?
E-cigs are not fully understood by a lot of people, but more people are learning. I related a story the other day about when Montana’s smoking ban went into effect, the state issued a ruling saying e-cigs were banned, too. After the state was given more information about what e-cigs were, the state quickly lifted that ban. It was obvious that state officials weren’t even sure what they were.
Here’s the deal, e-cigs are not literally an electronic cigarette. A better definition is that they are a battery-powered nicotine delivery system. Essentially the user gets a little jolt of nicotine-laced steam. They don’t have any smell, they don’t irritate the eyes. I’ve tried them. There is no flavour. You just get a jolt, like a cup of coffee.
Is this a bad thing? A good thing? I’m honestly on the fence here.
Honestly, on some levels, I don’t see a difference between e-cigs and nicotine patches. The person is getting a jolt of nicotine, but not the 1,000 other carcinogens and toxins contained in real cigarettes. There isn’t the benzene, formaldehyde, Polonium-210, toluene, acetone, cyanide and arsenic as found in tobacco.
[EDIT: Someone pointed out to me after reading this that some studies have shown there ARE some of these carcinogens found in e-cig vapour such as formaldehyde and toluene, etc., and that the vapour is not “pure” nicotine. I was not aware of these studies. The amount of these carcinogens is vastly lower than what is found in cigarettes. One study showed 9-450 times lower.]
But, what there is is nicotine. Nicotine itself is not well understood, either. It’s actually not the ingredient in cigarettes that gives people lung cancer (a lot of people believe it is.). Nicotine all by itself isn’t that bad for you, other than it’s not good for your blood pressure.
It isn’t that bad for you except for one devilish trait. It is incredibly addictive, possibly ounce for ounce the most physically addictive substance on the planet. Like heroin and cocaine, it’s an alkaloid that triggers an incredibly powerful addiction response. That’s the evil of nicotine. It physically addicts people to a product that is incredibly toxic and poisonous.
So, when a smoker puffs on an e-cig, they’re satisfying that nicotine addiction, similar to a nicotine patch, without all the other poisons. Is this a good thing? I don’t know. I don’t have a problem with nicotine patches. I would prefer people use patches or e-cigs than Chantix as a way to quit tobacco because of Chantix’s side effects of causing depression and suicide.
But one of the way nicotine patches work is through a regimen of lowering the dose of nicotine until the person can go “cold turkey.” The down side of e-cigs is sure, there’s not the same level of toluene and benzene, but you’re still feeding that addiction. And ultimately, if you want to break away from cigarettes, you have to break away from the nicotine.
In talking to people who use e-cigs, I’ve gotten mixed feedback. A lot of people use them so they can get their little jolts of nicotine when they go out because they’re no longer allowed to smoke anywhere. Some people have told me they helped them quit smoking, but most people told they don’t really help. Because they’re tasteless, they don’t satisfy the urge to smoke.
So, I remain on the fence. I simply cannot develop a strong opinion pro or con — though I detest the “sexy” advertising Blu is using to sell its product — using the same ad techniques that the tobacco industry has used for years to make their products look sexy and sophisticated. They might help some people quit smoking, but it appears, at least anecdotally, they aren’t that effective as a quitting tool. They aren’t as toxic as cigarettes, but they keep the nicotine addict addicted to nicotine. I know this, they aren’t going away, not anytime soon.