Tobacco Industry


Tobacco Industry Essay, Research Paper

products such as cigars, snuff, and chew are considered close substitutes to cigarettes. Cigar smoke is just taken into the mouth, but not inhaled like cigarettes. Snuff and chew do not even contain smoke, but are put on the skin for nicotine absorption

Companies such as Imperial Tobacco, which produce a wide array of chew and snuff products, would be considered a company that provides substitutes to cigarettes. They would not fall in the cigarette industry itself. Situation Analysis Industry Structura

Analysis Threat of Entry The tobacco industry has a very low threat of entry. A few powerful firms, such as Philip Morris, RJ Reynolds, Lorillard, and Brown and Williamson, control most of the industry (Pollack, Advertising Age, August 30, 1999). Any ne

entrants would be sure to receive heavy retaliation from the other companies fighting to keep their share of the lucrative industry. For example, Philip Morris is by far the industry leader with estimated tobacco sales of $46.7 billion is 1999 (Business

eek 179, November 29, 1999). They have a huge base of resources with which to attack other competitor entrants. They could easily start promotions such as “buy one, get one free” or offer coupons at certain times during the year to discourage entrants t

the industry. Many small companies will not be able to compete with the capital requirements in the tobacco industry. The barriers to entering the tobacco industry are numerous. First, the high volume of cigarette sales gives existing firms economies of

cale, which would be a disadvantage for newcomers to the market. The products currently on the market are differentiated somewhat in their design, but mostly through the large advertising budgets that are used to promote them. Tobacco companies now pour

4 billion a year into promotions and advertising- nine times what they spent in 1971 (Elliot, New York Times, September 22, 1999). These firms have finely tuned distribution channels, which include legions of sales representatives that vie for shelf spa

. One of the biggest obstacles to a new entrant would be finding a decent place of the shelf with such heavy-handed competition already occupying that space. Store managers may be reticent to give away prime slots for fear of losing discounts or other o

ers from major players. Government policy is another possible deterrent to enter the market. Large settlements against the tobacco companies have been the norm in the past several years. Although gigantic companies like Philip Morris are able to handle

e charges because of their extensive monetary resources, it is difficult to imagine how a small startup company would be able to burden the expense. Switching costs are very high in the tobacco industry. Many smokers are still smoking the same brand the

first started smoking (Focus group). Even if the price of their brand is raised, they would not consider switching to another brand (Focus group). Many companies who would want to come into the industry would not easily take away market share, due to hi

brand loyalty. Competitive Rivalry The tobacco industry is a very competitive market. As mentioned above, about four very large corporations control the entire market. Philip Morris is the biggest company in the industry, but others such as Lorillard a

growing in brand name (Pollack, Advertising Age, August 30, 1999). All companies battle for market share through heavy advertising budgets and slotting deals. The cigarette market is well into the maturity stage of the PLC, and some might even argue th

given the recent anti-smoking campaigns and lawsuits the industry is nearing the decline phase. However, sales show that decline has not yet been reached. As mentioned before, Philip Morris has estimated tobacco sales of $46.7 billion (Business Week 17

November 29, 1999). Apparently, brand loyalty still exists. Buyers Retailers. The stores that sell tobacco products have a moderate influence on the market. Retailers have some power over manufacturers who need prime slotting to ensure strong sales. Ho

ver, manufacturers have leveraged quite a bit of power by offering retailers special incentives for giving their products good placement or for installing certain numbers of brand advertisements around the store. To some stores, such as gas stations, lo

ng a major cigarette brand would mean large loss of revenues from customers who would rather go to another gas station to locate their favorite brand. Also, companies are trying to develop closer relationships with bars and coffeehouses. Tobacco compani

offer ashtrays, napkins, and matches, saving each buyer thousands of dollars in supply costs (Heuslein, Forbes, January 11, 1999). Retailers now are marketing the brand on coasters and napkins for the company. Consumers. The end-users in the industry a

o have moderate power. Brand loyalty is very high, and it has been shown that smokers generally chose a brand in their teen year and continue to smoke that brand the rest of their lives (Focus group). However, in the face of a dramatic price hike, consu

rs have been quick to notice that brands are interchangeable and then go for the lowest price. But the dearth of substitutes for tobacco products makes it difficult for the industry to lose customers all together. Suppliers The suppliers in the tobacco

dustry have a low level of influence, even though there is no close substitutes that the industry can use in place of tobacco. Tobacco is purchased from farmers, who essentially have to take the market-determined price for their crops. Tobacco is a comm

ity, so it makes no difference from which supplier a firm buys its materials. The large number of individual farms that supply the industry makes it almost impossible for anyone to raise the price. There is not a threat of forward integration from suppl

rs because they have none of the tools necessary to manufacture or market tobacco products. The farmers have only the land and equipment necessary to grow the leaf. If they were to try to produce cigarettes, they would probably not be able to compete wi

the many large companies that have economies of scale (from

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