The Tobacco Industry
From the beginning of time, the Tobacco plant has had a prominent impact on the lives of those involved, those involved being absolutely everyone, for smoking and chewing tobacco affects both the users and those surrounding them. While years ago, tobacco was not so much of an industry, but actually just randomly used as gifts or a simple pleasure for oneself, it certainly has become one today. This industry has greatly evolved over the years to be now one of the most prominent industries in the United States. From its history to an in depth look at its economic side, much can be learned about the tobacco industry in general.
The history of tobacco in the United States can be traced right back up until the discovery of the continent by Christopher Columbus. Within a week of his landfall, Columbus had noticed the natives’ fondness for chewing the aromatic dried leaves or inhaling their smoke through a pipe. His sailors inevitably began taking part in this custom that the Indians had become so accustomed to. Even though Columbus scolded his men for sinking to the level of the savages, for he foreshadowed both the delight and danger that may have come from the plant, tobacco spread throughout the globe, and was eventually recognized as being one of the treasures of the New World, along with coffee, chocolate, and cane sugar. In the 1850s, Philip Morris, a London tobacconist, catered to English smokers who picked up smoking after trying French and Turkish cigarettes during the Crimean War. Once the 1900s rolled around, American Tobacco Co. founder Buck Duke managed a small group of lawyers, lobbyists, and others who appealed to the pocketbooks of legislators being asked to crack down on cigarettes. Also during this time period, three members of the key Senate Finance Committee were found to have owned tobacco stock, including its chairman, Nelson W. Aldrich of Rhode Island, who holds stock worth more than one million dollars. Four years later, when Congress passed the Pure Food and Drug Act, Senator Aldrich and other federal lawmakers did Buck Duke’s bidding. Although no other ingested product is subject to heavier processing, more additives, or as many known or suspected toxins, tobacco was egregiously excluded from regulation. The industry has since argued that tobacco is neither a food nor a drug, and was thus properly exempted.
In 1902, after succeeding McKinley as president, Theodore Roosevelt initiated more than forty anti-trust actions directed at, among others, Standard Oil, DuPont, Union Pacific, and the American Tobacco Co. Buck Duke testified in federal court, saying that every deal he ever made was intended not to destroy competition but only to round out his own company and to get out fair share of the trade. However, in 1911, the Supreme Court ruled against American Tobacco. American Tobacco thus broke up and the other components reassembled in smaller units. R.J. Reynolds emerged as the strongest competitor of these resulting companies. Duke, who became very morose and had begun drinking heavily, earned the high regard of posterity by turning to philanthropy. He endowed Trinity College with the money to become a university of nation rank when the school agreed to exchange its original name for his. In 1913, Camel introduced the first blended cigarette in the United States. Highly flavorful, the cigarette became an instant success. Later in 1916, American Tobacco followed with Lucky Strike, and the advertising battle began. For the next thirty years after that, tobacco companies lured customers with wildly false claims of health as well as social benefits from smoking.
In the 1950s, three epidemiological studies demonstrated the exponential health risks associated with smoking, which ultimately led to the introduction of cigarette filters. In 1957, John Blatnick, a five term liberal representative from Minnesota, and a devoted smoker, led the subcommittee on government operations through hearings on the Federal Trade Commission’s oversight of cigarette advertising. Blatnick become annoyed when the testimony revealed that the new filtered brands use stronger tobaccos, and so produce about as much tar and nicotine as the old unfiltered brands, a fact that had never before been noted in the industry’s advertising. In the aftermath of these hearings, Blatnick introduced a bill in the House to limit the amount of tar and nicotine that cigarettes produces and grant the FTC injunctive powers against deceptive tobacco advertising. So powerful was the tobacco industry, however, that the House not only denied the Blatnick bill a hearing, but stripped its sponsor of his subcommittee chairmanship and dissolved the subcommittee itself. In the year 1959, Surgeon General Leroy E. Burney wrote in the Journal of the American Medical Association, “The weight of the evidence at present implicates smoking as the principal etiological factor” in the increased incidence of lung cancer. Two weeks after the surgeon general’s statement appeared in the journal, the AMA shocked Burney by publishing an editorial that insists there are not yet enough facts to “warrant the assumption of an all-or-none authoritative position” on what a cause could be. Observers believed that the AMA downplayed the smoking issue because it needs allies to fight the implementation of Medicare.
On January 11, 1964, about two hundred members of the press were handed a one hundred and fifty word report by Surgeon General Luther Terry’s blue-ribbon advisory committee on smoking. The report concluded that “many kinds of damage to body functions and organs, cells and tissues occur more frequently and severely in smokers” than in nonsmokers. The New York Times called the findings ” a severe blow to the rear-guard action fought in recent years by the tobacco industry. It dismisses, one by one, the arguments raised to question the validity of earlier studies.” Philip Morris’ research director, Helmut Wakeham, wrote that the industry must find a way to prove that its products are not harmful, and should do this with respect to the newest medical research. At the annual shareholders’ meeting in April 1964, Philip Morris President Joseph Cullman said that his company scientists and outside experts felt the surgeon general’s prime conclusion linking lung cancer to smoking is unjustified, and not at all what Wakeham’s memo stated. Years later, Wakeham’s subpoenaed memo would provide compelling evidence in a critical liability lawsuit against the company. Also in 1964, the phrase “Marlboro Country” was lodged in the collective consciousness of the Leo Burnett ad agency team as it struggled to break Marlboro out of its deadbeat sales. One day, a member of the Burnett team brought in a recording of the score for the 1960 Western, The Magnificent Seven. Video footage was rolled as the narrator spoke over the rousing movie music. The net effect was electrifying: A cigarette as a larger-than-life hero, its virtues made clear by thundering hoofbeats and soaring brass horns. Thirty years later, even though restricted by law to print media only, “Marlboro Country” has survived as one of the most successful advertising campaigns ever devised. In 1969, the Senate moved to ban cigarette advertising on TV and place health warnings in other ads. Philip Morris President Joseph Cullman saw the greatness in the bad news that the industry was facing. He saw that voluntarily agreeing to remove tobacco TV advertising would effectively end competition from new companies because, without TV, the introduction of new brands would prove prohibitively expensive. In the bargain that Cullman made with Congress, specific references to cancer or other diseases were removed from warning label language, and industry lawyers quietly inserted a “pre-emption” section in the law, which essentially prevented states from awarding any damages in tobacco liability lawsuits. This section, along with package warning labels, became the companies’ main defense against liability lawsuits brought by smokers over the next twenty years.
Over the next years, the proportion of cigarette ads in magazines had doubled because of the ban on broadcast advertising of cigarettes. In magazines that accepted cigarette advertising, people were unable to find a single article, in seven years of publication, which could have given readers any clear notion of the nature and extent of the medical and social havoc that the cigarette smoking habit was causing. The ’80s brought a new type of advertising called subliminal advertising. In 1980, Philip Morris purchased twenty-two exposures of the Marlboro logo for $42,000 in the movie Superman II, which was aimed largely at the youth market. Philip Morris also found a loophole to the previous TV broadcasting ban. Their colorful ads at sporting events gave them access to millions of potential customers.
In 1982, Congress doubled the excise tax on cigarettes to sixteen cents a pack. The tobacco companies entered a protest, claiming that the tax raise discriminated against smokers, who were poorer on average than nonsmokers. They then used this cover to boost the price of cigarettes at a rate never before contemplated. Their profit margin soared to over twenty percent, twice the average return on equity in corporate America. In 1984, Henry Waxman engineered a bill that forced tobacco companies to list their ingredients and toughen the warning labels on cigarettes. This bill marked a turning point in the industry’s hold on the federal legislative machinery, but did nothing to restrict the manufacture or marketing of cigarettes.
An estimated 3.9 billion dollars was spent in 1990 by the tobacco industry on conventional marketing, including advertising, promotions, and free-product distribution. Cartoon images of the Camel “smooth character” gazed from billboards and the Marlboro man rode the pages of youth-oriented magazines. Tobacco sponsorships circumvented the television ad ban with clever billboard placement in major league sports arenas. The tobacco industry had virtually taken over some sports, such as women’s tennis, drag and stock car racing, and CART and Formula 1 racing, whose events promoted tobacco products on television during sports telecasts. (8, 4)
The same trials and events that have occurred in the past hundred years continue to occur today in our country, and around the world. Because of all of these reasons, cigarette smoking has become completely commonplace in our society.
The Tobacco Industry is in the Standard Industrial Classification (SIC) manual. The industry’s specified four digit SIC is 2131, which is in Division D: Manufacturing and in Major Group 21: Tobacco Products. The industry group that I have analyzed is Group 213: Chewing And Smoking Tobacco And Snuff. This analyzes establishments primarily engaged in manufacturing chewing and smoking tobacco and snuff. The manufacturing division includes establishments engaged in the mechanical or chemical transformation of materials or substances into new products. These establishments are usually described as plants, factories, or mills and characteristically use power driven machines and materials handling equipment. The materials processed by manufacturing establishments include products of agriculture, forestry, fishing, mining, and quarrying as well as products of other manufacturing establishments. The type of manufacturing that the Tobacco Industry is in is Wholesale and Retail Trade. (7) While there are many different brands of cigarettes and other tobacco related products on the market, there are not an excessive amount of competitors. The four top firms in the industry are: Philip Morris, R.J. Reynolds, Brown & Williamson, and the Lorillard Tobacco Company. There are other competitors, but none other have as much as a hold on the economic profits available as these do. In 1999, Philip Morris accounted for 49.64% of the Tobacco Industry’s share of the U.S. market, R.J. Reynolds for 23.0%, Brown & Williamson for 13.37%, Lorillard for 10.40%, and other firms for 3.59%. (5)
Because of the level of competition between the four main firms, it is a necessity for them to differentiate between each other. They do this through advertising, although advertising over the years has been greatly restricted. The consumer’s purchase decision is based on the answer to the question “which brand is a better deal?” (3) In order for the firms to impact the consumer’s decision, advertisement is a must. They need to get their points across to the buyers, whatever they may be. In 1994, the tobacco industry spent 4.83 billion dollars on advertising and promotion alone. The Tobacco Industry spends nearly seven billion dollars per year, over eighteen million per day, marketing its products in the U.S. alone. At this rate, the companies have spent about $6,371,310,255 already this year. (5) Because of past TV broadcasting bans, companies have been prohibited from advertising on television. Thus, their only means of advertisement was through publishing them in magazines, newspapers, billboards, etc. Advertisers try to make it seem like their brand of cigarettes is superior, that if you smoke one type of tobacco you would be “cool” or “accepted”. They gear a lot of it towards women, trying to make it seem like the more a woman smokes, the more beautiful, successful, and slender she becomes.
But while advertisers do get away with advertising a lot of information that is not necessary true, many restrictions have been placed on advertising over the years by the government. For example, the MSA bars manufacturers from targeting youths (persons under 18 years of age) in their advertising, and also from using cartoons, including those such as Camel, in advertising, promoting, packaging, or labeling tobacco products. All models used in cigarette brand advertising must be 25 years of age or older – and must look at least that age. Some companies have agreed that their cigarette brand advertising will not suggest that cigarette smoking is essential to social prominence, distinction, success or sexual attraction, or suggest that attractiveness or good health is due to cigarette smoking. Cigarette brand advertising is not to appear in publications directed primarily to those less than 21 years of age, including college media. (5) In addition to these, the U.S. Food and Drug Administration has become increasingly involved in restricting the Tobacco Industry in general. The FDA rule has many provisions, including a nationwide minimum age and photo identification requirement and a restriction on tobacco company marketing to children. (2) Each of the tobacco companies have agreements made with the government and various associations to abide by many different laws and regulations to ensure that their advertising is not getting out to the wrong people, and to ensure that the public is perfectly aware of what exactly cigarette smoking does to your body.
Firms in the Tobacco Industry do not have much of an opportunity to attempt to differentiate between one another by way of their pricing. The private final consumption expenditure figures from the OECD provide a direct measure of changes in the actual price paid per gram of tobacco. By dividing these figures by the GDP price index in each country, we get a measure of “real” price changes. Most of the annual change in tobacco price is due to changes in taxes of one form or another, and therefore reflects political decisions. In some countries, taxes have been kept more or less in line with inflation, and so there are only small changes in real price. In several countries with government monopolies, actual prices have remained unchanged for as long as eleven years. This will result in a gradual reduction in real tobacco price as general prices rise. This may well then be followed by a large rise. In other countries, such as the United States, for example, governments may sharply increase taxes, simply for the purpose of reducing consumption on health grounds. In 1983, taxes went up 16 per cent in the U.S. (3) Thus, as one can see, the government has the greatest influence over the pricing of cigarettes and other tobacco related products. All major consumer packaged goods companies subscribe to at least one of the Universal Product Code (UPC) scanner data services. These scanner data services provide weekly market share figures for all the brands in a product category. Other available marketing measures include retail price, newspaper feature advertising, and in-store merchandise displays. These scanner data do not form a complete picture of the brand. Brand management should be able to identify what other factors should be considered and request the appropriate sources for information. The consumer promotion department can provide coupon redemption figures. The brand’s advertising agency can provide records of the brand’s Gross Rating Points and other media spending. Other causes of price inflation or deflation may be on packaging, new techniques on manufacturing and producing, or other innovations. These prices have resulted in a great amount of economic profits each year. The Tobacco Industry in 1997, for instance, pulled in 18.4 billion dollars. (3)
Because of the research I have performed on the Tobacco Industry, I have formed a few opinions about the industry’s future and the industry in general. I have learned a great deal, not only about the economic side of the industry, but about the effects that cigarettes have on the body, about its contents, and about its effects on people’s lives. There are a great deal of people and organizations in the United States who are unbelievably intolerant towards cigarette smoking. Simply looking at the “Truth” ads that we see all over magazines, broadcasting, and billboards, one can see how this country’s tolerance for cigarette smoking is increasingly lowering every day. By trying to scare people into stopping smoking by throwing body bags over beaches and in front of corporate buildings, they are making a huge attempt to get their point across – that smoking kills. But in my opinion, because people have been smoking for so long already, they have already formed addictions. From viewing people around me alone, I can testify that most people I know do not want to quit, for they make comments such as, ” I am married to cigarettes,” and “I love cigarettes, they are my life.” I feel that the Tobacco Industry holds a significant amount of space in our country’s economy, and I do not see it going anywhere soon, at least not in the next twenty years. While organizations and groups can and will continue to make attempts at protecting children’s lungs and getting the youth of America to not engage in “trying out” cigarettes, I do not think that they will help so much. The more that children and teens see commercials and ads telling them how bad cigarettes are for them, the more curious they will become about the product, resulting in more smokers in our country. Because of these smokers that continue to surface, and because of all the smokers that already exist, packages of cigarettes and other tobacco related substances will have to be bought to fulfill their addictions. And because of this fact, I see the Tobacco Industry going nowhere but becoming more prominent in years to come.
There are four different types of industries that the Tobacco Industry could fall under. These are Perfect Competition, Monopolistic Competition, Oligopoly, and Monopoly. A Perfect Competition arises when there are many firms, each selling an identical product, many buyers, and no restrictions on the entry of new firms into the industry. A Monopolistic competition is a market structure in which a large number of firms compete by making similar but slightly different products. Oligopoly is a market structure in which a small number of firms compete and produce almost identical products. A Monopoly is an industry that produces a good or service for which no close substitute exists and in which there is one supplier that is protected from competition by a barrier preventing the entry of new firms. (1)
After analyzing the Tobacco Industry, my conclusion is that it is an Oligopoly. There are many reasons behind my suspicion. First of all, the definition of an oligopoly states that only a small number of firms compete. From my research, I have found that there are only four main firms in the Tobacco Industry, those being Philip Morris, R.J. Reynolds, Brown & Williamson, and the Lorillard Tobacco Company. These four firms compete between themselves over the same type of products, those dealing with tobacco, namely cigarettes. These products are nearly identical, and the only means of differentiating between each is through advertising. This proves the second main necessity of being called an oligopoly, that of producing products that are practically the same, with very small differentiation.