Cigarettes

SIC 2111

Companies in this industry

Industry report:

This category covers establishments primarily engaged in manufacturing cigarettes from tobacco or other materials.

Industry Snapshot

According to the U.S. Census Bureau, approximately 23 establishments operated in this category for part or all of 2008 for the cigarette manufacturing industry. Industry-wide employment totaled approximately 10,564 workers receiving a payroll of nearly $774 million. The majority of establishments were in North Carolina with 6,410 employees who earned annual wages of $464.3 million. Other states operating within this industry sector were Virginia, Florida, Puerto Rico, Kentucky, and New Mexico. The Annual Survey of Manufactures reported that the tobacco product manufacturing industry (also including other tobacco product manufacturing) was valued at $31.3 billion in 2009, a decrease from the 2008 total of nearly $37.3 billion. Additionally, a total of 10,502 employees worked in production in 2009 (of 14,264 employees), putting in nearly 21 million hours to earn wages of nearly $561 million.

According to the U.S. Census Bureau, approximately 34 establishments operated in this category for part or all of 2005 for the cigarette manufacturing industry. Industry-wide employment totaled approximately 12,566 workers receiving a payroll of nearly $919 million. Companies in this industry tended to be larger in size with nearly 59 percent employing more than 500 workers. The Annual Survey of Manufactures reported that the tobacco product manufacturing industry (also including other tobacco product manufacturing) was valued at $41.9 billion in 2005, an increase from the 2004 total of nearly $38.0 billion. Additionally, a total of 14,956 employees worked in production in 2005 (of 18,833 employees), putting in nearly 29 million hours to earn wages of nearly $783 million.

Based on data from Hoover's and cited by the Department of Health and Human Services' Centers for Disease Control and Prevention (CDC), 90 percent of the total annual sales in the industry in 2006 were derived from the largest five cigarette companies in the United States. These included: Altria Group Inc. (parent of Philip Morris) with 49.2 percent; Reynolds American Inc. with 27.8 percent; Loews Corporation (parent to Carolina Group and its subsidiary Lorillard) with 9.7 percent; Houchens Industries (of Commonwealth Brands) with 3.7 percent; and Vector Group Ltd. (of Liggett) with 2.4 percent. Altria's Marlboro was the leading brand per a 2007 CDC report with 40.5 percent of the market followed by Newport (8.9 percent), Doral (6.6 percent), Camel (4.4 percent), Basic (3.8 percent), Winston (3.5 percent), and Kool (3.2 percent).

Battered by multibillion-dollar lawsuits and antismoking campaigns, the U.S. tobacco industry confronted a shrinking yet resilient market at home and widening demand abroad. In recent years, cigarette shipments fell as tax-induced price hikes and antismoking sentiment cut into demand. The average price of a pack of cigarettes was about $4.63 in 2006, though this varies widely due to different tax levels among states. Although price increases helped to prop up sales and profits, the increases, along with substantial tax increases on a state level, were affecting the industry's profitability. At this time, continued price increases were helping discount brand cigarettes to gain popularity with cost-conscious consumers.

Despite setbacks due to a string of lawsuits and a more health-conscious consumer base, industry consolidation and substantially increased prices, among other factors, was keeping the few companies in the industry profitable. According to the Economic Research Service (ERS) of the U.S. Department of Agriculture (USDA), Americans smoked about 371 billion cigarettes in 2006 and the CDC reported that during that time about 20.8 percent of American adults were smokers--men accounted for 24 percent while women totaled 18 percent. The overall total was virtually unchanged from 2004 after seven consecutive years of declines. Industry giant Philip Morris, for example, increased production from 87 billion cigarettes in 1970 to 761 billion in 2004 worldwide (including their international division). However, the 2006 shipment volume of 183.4 billion units decreased by 1.1 percent for their United States division from 2005 totals though their operating income increased by 5 percent during that time period.

Organization and Structure

From the industry's nascence in the mid-nineteenth century, when many cigarette manufacturers began as tobacco farmers, to the early 2000s, the number of participants has been limited. Early cigarette producers were located in proximity to the tobacco fields of the southern United States, typically operating in the same region as their competition. Nearly a century and a half later, the cigarette industry still consisted of a small, almost fraternal group of manufacturers, several of whom had been in competition with one another since the nineteenth century.

Cigarette manufacturers are still clustered in just a few southeastern states. Production of cigarettes is confined to the four-state region of North Carolina, Virginia, Georgia, and Kentucky. The bulk of these manufacturing facilities are located in North Carolina. However, Philip Morris decided in 2007 to close its North Carolina plant and transfer those operations to its Richmond, Virginia plant. Also, the Virginia plant was to begin manufacturing only for the domestic market; international market cigarette production was shifted to an overseas site.

Background and Development

The origins of tobacco in the United States date back to before the formation of the nation itself, and the growth and sale of this product represented one of the key agricultural crops that spurred the country's growth in the eighteenth and nineteenth centuries. The use of tobacco to produce cigarettes in any widespread fashion did not occur, however, until the dawn of the twentieth century. Other uses for tobacco precluded the popularity of cigarettes, as Americans in the early nineteenth century enjoyed plug and twist tobacco, then smoking tobacco, and finally cigars, all of which overshadowed cigarette production in terms of volume for most of the century. Even in the mid-1800s, the use of tobacco had its detractors, and cigarette smokers, many of whom were women, suffered from a somewhat ignoble image. As a social commentator in 1854 wrote in reference to New York: "Some of the ladies of this refined and fashion-forming metropolis are aping the silly ways of some pseudo-accomplished foreigners in smoking Tobacco through a weaker and more feminine article which has been most delicately denominated cigarette."

A decade later, however, the production volume of cigarettes had increased enough to become the object of special federal taxation, which, according to the Internal Revenue Law promulgated in June 1864, levied one dollar per one hundred packages not exceeding five dollars in aggregate value. The following year, 19.7 million cigarettes were produced, and manufacturers were buffeted by a series of tax hikes, first to two dollars per thousand and then to five dollars per thousand. This arrested the growth of the industry just as sales were beginning to elevate cigarette manufacturers' importance in the tobacco industry. In 1868 tax rates were cut back to $1.50 per thousand and growth resumed, marking the beginning of twenty-year period that would witness the most rapid percentage growth rate in the production of cigarettes in the history of the industry.

Cigarette production reached 500 million in 1880 and eclipsed the 1 billion mark five years later. By the 1880s, there were five principal manufacturers of cigarettes: Washington Duke Sons & Co., Allen & Ginter, Kinney Tobacco Co., William S. Kimball & Co., and Goodwin & Co. Together these companies produced 2.18 billion cigarettes annually by the end of the decade, 91.7 percent of the national output of 2.41 billion. These companies, referred to as the "Tobacco Trust," essentially controlled the cigarette market, enjoying a virtually unassailable lead over other, smaller manufacturers. This monopolistic trait would characterize the industry throughout much of its existence.

The ability of these companies to secure such a wide advantage over their competition was partly due to significant technological innovations achieved during the 1880s that ended the time-consuming chore of rolling cigarettes by hand. On a good day, a skilled laborer could roll 3,000 cigarettes during a ten-hour workday--a production rate that threatened to place a ceiling on the industry's growth. But beginning in 1872, the age of mechanization in the cigarette industry was initiated. The first cigarette manufacturing machine, patented by Albert H. Hook, earned a modicum of success but did not prove to be commercially viable. By 1881, however, significant improvements had been made in a design patented by James A. Bonsack. This machine could churn out 200 to 220 cigarettes per minute, accomplishing in fifteen minutes what it took an experienced production worker ten hours to complete.

Bolstered by the ability to produce more cigarettes with lower labor costs, the five companies that occupied the industry's leading positions grew quickly by moving into untapped markets and securing their overwhelming lead in the U.S. market. In 1890 the composition of the industry's manufacturers became more homogeneous when the five leading companies, at the urging of James Duke of Washington Duke & Sons Co., merged to form the American Tobacco Co., which initially focused primarily on the production of cigarettes. Over the next twenty years, the American Tobacco Co. acquired an interest in roughly 250 companies. This cigarette giant expanded into other tobacco products, securing commanding leads in every product branch of the tobacco industry with the exception of cigars. In the manufacture of cigarettes, plug, smoking tobacco, fine cut tobacco, snuff, and little cigars, the conglomerate's production output in the first decade of the twentieth century represented no less than 76 percent of the country's total volume, giving smaller manufacturers little hope of wresting market share away from the industry's predominant leader.

If the five leading manufacturers in the 1880s justly earned the moniker "Tobacco Trust" when operating as separate companies, then their union certainly deserved the same label. The U.S. Supreme Court said as much in May 1911, when it found the American Tobacco Co. in violation of the Sherman Act. Six months after the ruling, the court issued a decree stipulating that the enormously powerful tobacco company be divided into 16 independent corporations, none of which could wield monopolistic control over any one product branch within the tobacco industry.

Post-Breakup Growth.
Although certainly a significant chapter in the history of the cigarette industry, the parceling of the American Tobacco Co.'s sundry divisions and subsidiaries did not affect the cigarette industry as greatly as the cigar industry, primarily because cigarettes still did not represent a major branch of the tobacco industry. The cigarette industry was burgeoning, however, and stood on the brink of catapulting past all other branches of the tobacco industry. The first step toward this end came six years after the restructuring of the industry, when the United States entered World War I and cigarettes were issued to soldiers in the U.S. Army and Navy.

Once the habit of smoking cigarettes had extended to women, thereby doubling the potential customer base, sales began to mushroom, and the cigarette branch of the industry at last overtook all other branches. Over the ensuing twenty years, during which time many of the widely popular brands--Chesterfield, Lucky Strike, Old Gold, Camel, Raleigh, and Marlboro--emerged, the consumption of cigarettes grew rapidly. Domestic tobacco leaf consumption increased 42.5 percent between 1910 and 1930, while the production of cigarettes increased from 8.64 billion to 125.20 billion, a 1,339 percent increase. In these first two decades following the dissolution decree, there were approximately fifteen to twenty manufacturers deriving the bulk of their revenue from the production of cigarettes. Only four of these manufacturers, commonly referred to as the "Big Four," held any appreciable share of the market. Indeed, these manufacturers--the restructured American Tobacco Co., R.J. Reynolds Tobacco Co., P. Lorillard Co., and Liggett & Meyers Tobacco Co.--held as firm a grip on the U.S. cigarette market as American Tobacco had before the U.S. Supreme Court's ruling; they controlled more than 95 percent of the market.

The dissolution of American Tobacco had not produced the U.S. Supreme Court's intended effects; a monarchy had merely been replaced with an oligarchy. Smaller, independent cigarette manufacturers were able to record enviable profits during this period, largely because of the bountiful market itself, but none could challenge the Big Four in magnitude. Accordingly, as the cigarette industry continued to grow, these powerful manufacturers became more formidable, further widening the gulf separating the industry's upper echelon and the rest of the competition.

The next two decades of business brought continued success to the industry's four largest manufacturers and witnessed the rise of an additional member to the industry's elite, Philip Morris & Company Ltd. Inc. Philip Morris introduced its mainstay Marlboro brand in 1925, which reached an annual production total of approximately 500 million cigarettes. But the industry's leading brands during these years, Camel and Lucky Strike, each sold 25 billion cigarettes a year, by far outpacing Philip Morris' production volume and providing little room for the future ascension of the smaller, formerly British-based manufacturer. Instead, Philip Morris was able to climb the industry's ranking list due to a strong relationship with cigarette jobbers throughout its distribution network and by virtue of prudent management. By the end of the 1940s, after Philip Morris had already unseated Lorillard to occupy the industry's fourth place position, the "Tobacco Trust" now included five members, generating an aggregate sales total of $357.3 million.

Postwar Unease.
The 1950s heralded a new era for cigarette manufacturers, one in which it became necessary to defend growing criticism of the product being sold. Since the industry's emergence, anti-cigarette and anti-tobacco factions from both the federal and consumer sector had railed against the sale and use of tobacco. Manufacturers had fared fairly well, effectively beating back the rising tide of protest against their business. While industry manufacturers had suffered run-ins with the Federal Trade Commission (FTC) concerning misleading advertising, the federal government had subsidized a large portion of the industry before World War II, which helped to allay the fears of manufacturers.

During the 1950s, however, medical reports linking health problems to smoking began to surface. In 1953 the Sloan-Kettering Cancer Institute's report showed a relation between cancer and tobacco, and manufacturers consequently found themselves fighting an entirely new and much more formidable foe--scientific evidence.

In 1964 the U.S. Surgeon General issued a landmark report linking smoking with lung cancer and heart disease. A year later, the U.S. Congress promulgated the Federal Cigarette Advertising and Labeling Act, which stipulated that health warnings be placed on each cigarette package. In 1971 cigarette advertisements on radio and television were banned. Although these announcements and restrictions did not cause the industry to collapse, the rate of smoking in the United States began to spiral downward.

Cigarette manufacturers had already begun creating different types of cigarettes--filter tips during the 1950s, then low-tar cigarettes during the 1960s and 1970s--and marketed these products not to create more customers but to capture their competitor's customers. By the 1970s, however, Philip Morris and R.J. Reynolds had gained considerable ground on their competition, making the industry essentially a battle between the two behemoths. Philip Morris gained the upper hand in 1976 when its Marlboro brand passed R.J. Reynolds' Winston.

During the 1980s, lower-priced, discount cigarettes began to enter the market with increasing frequency. This enabled smaller cigarette manufacturers to thrive for a short time, until the industry's preeminent leaders dropped their own prices and set about capturing the low-end market. By this time, the reams of medical reports delineating the hazardous effects of smoking had firmly grabbed the attention of the American populace, transforming anti-tobacco factions into a powerful nationwide movement. Cigarette taxation doubled in 1983 and continued to rise, particularly during the late 1980s, increasing the popularity of lower-priced cigarettes. Consequently, cigarette manufacturers diversified their operations with unprecedented fervor, while casting an eye to international business opportunities.

Decade of Legal Skirmishes.
As the U.S. economy recovered from recession in the early 1990s, cigarette makers were saddled with much larger problems. These difficulties had always confronted the industry, but they intensified in the early and mid-1990s.

In June 1992 the Supreme Court reversed an appeals court ruling concerning the product liability of cigarette manufacturers. Earlier, two lower courts had ruled that the family of a woman who had died of lung cancer could not sue cigarette manufacturers on the grounds they had withheld information about potential health dangers. The Court's reversal sent cigarette manufacturers' stock prices cascading downward, as industry participants braced for a rash of lawsuits.

Around the same period, cigarette manufacturers suffered diminishing influence over federal lawmakers. In the past, through the combined efforts of the tobacco lobby and elected representatives from tobacco-growing states, manufacturers had been able to slow the rate of federally imposed cigarette taxes and to mitigate federal legislation aimed at curbing cigarette use. Tobacco companies' diminished clout left them ever more vulnerable to legal attacks.

Restrictions on smoking in public areas grew increasingly common as well. This was in part a result of a 1993 Environmental Protection Agency (EPA) report that classified environmental tobacco smoke as a class-A carcinogen and alleged that 3,000 nonsmokers die annually from second-hand smoke. Many communities instituted strict rules regarding cigarette use, and even the U.S. Department of Defense issued restrictions that banned smoking in all military work spaces, including military bases. Businesses, too, banned smoking in response to state laws and public outcry.

Another threat to the cigarette industry was repeated attempts at regulatory oversight under the Clinton administration, particularly the zealous efforts of Commissioner David Kessler, head of the Food and Drug Administration (FDA). In a campaign that was part politics and part science, Kessler testified before Congress that he believed nicotine was a highly addictive drug being manipulated by tobacco companies. He argued that if tobacco functioned as a drug, it should be regulated as one too, pleading the case for FDA jurisdiction over tobacco products. Ultimately this controversial assertion was heard in 1999 before the Supreme Court, and the Court decided in March 2000 that tobacco does not fall under the FDA's purview as defined by Congress.

In the meantime, a flood of lawsuits deluged tobacco companies. Emanating from the Supreme Court's 1992 ruling, the suits were brought by individuals and groups who sought damages from cigarette manufacturers for smoking-related illnesses and by government agencies that wished to recover the costs to the public health system for treating such ailments. In total, according to one report, more than 800 individual and class-action suits were brought against tobacco companies between 1990 and mid-1998. However, only a handful made it to trial, and even fewer produced verdicts against the industry.

Government Settlements.
In early 1997 the anti-tobacco forces gained new ground. They successfully split the tobacco companies' united front by pressuring the Liggett Company to settle a class-action lawsuit. Liggett's move was not entirely unexpected--with only a 2 percent share of the U.S. market, the company lacked the resources to fight an extended court battle. Liggett broke with long-established industry policy and admitted that cigarettes cause cancer and that nicotine is addictive.

By 1997 tobacco companies were in extended negotiations with state attorneys general and began to test the waters for a large national settlement that would spare the industry some or all of the seemingly endless litigation before it. In a mammoth $370 billion proposal, the companies even contemplated submitting to limited FDA regulation, as well as significant measures to curb underage smoking. In return, they hoped to gain at least partial immunity from the barrage of litigation coming at them.

Some attorneys general were receptive, but the focus shifted to Congress and a plan to pass the settlement and immunity framework as federal law rather than as agreements approved separately by each state. In Washington, however, the settlement became mired in politics and competing proposals. A number of lawmakers called for a steeper payout, as much as $500 billion, and debated the merits and legality of the proposed immunity. Meanwhile, the Clinton administration, deeply divided over the matter, was slow to weigh in on what terms it would support.

In March 1998 Senate leaders tried to revive the federal tobacco settlement with a bipartisan bill negotiated by Senator John McCain. Tougher on the industry than the companies' own proposal, the bill was supported by President Clinton and a diverse mix of senators. The legislation was to include annual liability caps for punitive damages paid by tobacco companies. However, after weeks of bruising debate and a fistful of conflicting amendments put forth, in June the Republican leadership withdrew its support for the bill, and it never went before the full Senate. The House failed to produce anything even close to viable, and the federal initiative lost nearly all of its steam.

Meanwhile, state attorneys general renewed their attack, aided in some states by specially crafted laws that made it easier for them to prove their cases and collect damages. Settlement talks also restarted in June after the McCain bill died. The companies appeared more hesitant now, and some may have sensed rising political clout with Congress's failure to act. But the attorneys general, led by Washington Attorney General Christine Gregoire, pressed ahead with negotiations, attempting to unite their conflicting demands and reach a consensus the industry was likely to accept.

In November 1998 both sides finally reached an agreement. Ultimately, 46 states and the country's five largest cigarette makers were party to a deal that would pay states $206 billion over 25 years, funded by new cigarette taxes. What's more, the settlement was somewhat more lenient on tobacco companies than the defunct 1997 proposal. It required less money for the states, fewer restrictions on marketing and advertising, and no stipulation that the industry be regulated by the FDA. The remaining four states, Florida, Minnesota, Mississippi, and Texas, had previously obtained settlements worth $40 billion.

Just as government litigation seemed to be winding down, however, the Justice Department in 1999 announced its intentions to sue tobacco companies on similar grounds to the state suits. Preliminary hearings on the federal suit began in 2000 but the trial itself was not completed until June 2005. In August 2006, the decision was rendered that cigarette companies violated the Racketeer Influenced and Corrupt Organizations Act (RICO) and ordered product descriptions altered to remove "light" and "ultra light" references along with issuing health-related statements about their products. However, a $10 billion smoking cessation program and $4 billion youth advertising program to dissuade teenagers from smoking were nixed by U.S. District Court Judge Gladys Kessler. An appeal was filed in May 2007 and final briefs were expected by May 2008.

Rising tobacco taxes and widening antismoking policies have resulted in a diminished U.S. market for cigarettes. The industry raised cigarette prices by 45 cents in 1998 and by another 22 cents in 1999 in order to finance the state settlements. In 1999 U.S. tobacco companies shipped 419.3 billion cigarettes, a 9 percent drop from a year earlier and 13.5 percent below 1997's 485 billion. Totaling about 76 packs of cigarettes for every person in the United States, industry shipments in 1999 were valued at $52 billion. In 2000 between 45 million and 50 million U.S. adults were smokers, equal to an adult smoking rate of about 23 percent.

In 1999 Philip Morris continued to lead the industry by a huge margin. That year, it supplied 49.6 percent of all U.S. cigarette shipments. This was up slightly from the year before in part because Philip Morris acquired three minor brands from Liggett. The company's market-leading Marlboro brand alone represented 36.4 percent of shipments. R.J. Reynolds was second, with a 23.2 percent share in 1999, followed by Brown & Williamson (13.5 percent), Lorillard (9.3 percent), and Liggett (1.2 percent).

Although discount cigarettes had for years eroded market share of the premium brands, in the late 1990s premium labels regained ground. As of 1999, premium brands accounted for 73.4 percent of all domestic cigarette sales by volume, up slightly from the year before. Earlier in the decade, premium volume had sunk as low as 68.6 percent due to the popularity of discount brands, which gained favor rapidly during the 1980s. Interestingly, premium's share rebounded just as tax increases and litigation caused cigarette prices to soar.

In another surprising trend, as cigarette prices rose, according to some research, smokers tended to consume fewer but stronger cigarettes. With young smokers, this pattern can actually increase a smoker's intake of tar and nicotine.

The industry regularly develops new products, many targeted at special niches of the cigarette market. One area under active development by several companies during the late 1990s involved cigarettes made from low-nitrosamine tobacco. By altering the tobacco-curing process, manufacturers are able to reduce or even eliminate nitrosamines, chemicals that some scientists have identified as a key carcinogen in tobacco products. Low-nitrosamine tobacco could be used in a special line of products for health-conscious smokers or could one day become the standard in all cigarettes. Test marketing of a few products was expected to begin in 2000. The link between nitrosamines and cancer was far from certain, though, and some observers questioned the benefits of low-nitrosamine tobacco. Smoking has been linked to lung cancer, heart disease, chronic lung disease, and a wide number of other cancers and disorders.

According to data from Management Science Associates and R.J. Reynolds Tobacco Co., in 2002 manufacturers shipped more than 391 billion cigarettes in the United States, down from 406 billion in 2001 and 420 billion in 2000. Some 73 percent of this total was attributable to full-price or name-brand cigarettes. Manufacturers shipped cigarettes via a distribution chain that involved almost 40 warehouses, 770 wholesalers, and more than 280,000 retailers that marketed to an estimated 44 million U.S. smokers. On the retail front, more than 71 percent of cigarettes were sold via so-called "pack outlets," which included gas stations, convenience stores, drug stores, and liquor stores. More than 12 percent were sold at discount stores and supermarkets, and cigarette outlets accounted for almost 17 percent of retail sales.

By 2006 the multi-billion dollar industry was down to two major players, Philip Morris and Reynolds American, which together held about 77 percent of the industry's sales. Cigarette prices have increased significantly since the late 1990s. From an average of $2.69 per pack in 1999, cigarette prices increased to $2.98 in 2000, $3.23 in 2001, $3.47 in 2002, and $3.90 in 2004. In 2006, the average price of a pack of cigarettes was $4.63, according to the Campaign for Tobacco-Free Kids, and that price did not include any applicable local taxes except New York City. Many states increased taxes on cigarettes in an effort to improve their budgets in addition to serving as a deterrent to smoking. The average state tax was $1.112 per pack in 2006--a significant jump from the 84 cents per pack in 2004. New Jersey led with $2.58 tax per pack while Rhode Island was second with $2.46; coming in last was Missouri with only a 17 cents tax.

According to the U.S. Department of Agriculture's Economic Research Service, a total of 371 billion cigarettes were consumed in the United States during 2006, which represents a trend of annual decreases since 1980 when a total of 631.5 billion cigarettes were consumed. In contrast, the 2004 total equaled 388 billion cigarettes consumed and the 2000 total was 430 billion cigarettes.

In recent years, ways to mitigate tobacco taxes--some with questionable legality--have gained attention. E-commerce emerged as one way to beat high state taxes. As cigarette tax rates have gone up 70 times in 43 states (as well as Washington D.C. and several U.S. territories) from 2002 to 2007, many smokers have attempted to avoid buying cigarettes in high tax states as much as possible by turning to other suppliers. When the tobacco store is based in a low-tax state or on a Native American reservation, shoppers anywhere in the country can purchase cigarettes over the Internet with little or no tax added. In high-tax states, the savings could add up to about 40 percent off or more as compared to local prices. However, in some states cigarette buyers are required to report their purchases from out-of-state sources and pay tax accordingly. Another cost-cutting strategy on the rise is to import cigarettes that were previously exported for foreign sale. Known as gray marketing, and often considered illegal, this practice does not circumvent all taxes but provides cigarettes at significant mark-down compared to normal domestic prices.

Lower prices were not the only reason some smokers were turning to out-of-state suppliers. In the summer of 2004, for example, New York enacted a law requiring that all cigarettes sold in the state be self-extinguishing types. Wrapped in special paper designed to slow or suppress burning, the fire-safe cigarettes were annoying to smokers because of a tendency to stop burning while being smoked. Since then, Vermont and California have enacted legislation to require distribution of such cigarettes.

Current Conditions

There were more than 345 billion cigarettes consumed in the United States in 2008. Of these, Philip Morris retailed 169.4 billion cigarettes with 49.1 percent of industry market share, followed by Reynolds American, Inc. who retailed 89.4 billion cigarettes comprising 25.9 percent in market share. Another significant cigarette manufacturer, Lorillard retailed 36.9 billion cigarettes with a market presence of 10.7 percent. The all other companies with brands such as American Spirit, USA Gold and Eve retailed 49.4 billion cigarettes and accounted for 14.3 percent of the market.

Cigarette manufacturers continued to reap the benefits as the price for a single pack of cigarettes on average increased to $4.80 as opposed to $4.63 per pack in 2006. In April of 2009, the federal cigarette tax increased by 62 cents to $1.01 per pack, while the average state tax was an estimated $1.44 per pack by July 2010. This was by far the largest tax increase in U.S. history. One month earlier cigarette producers Philip Morris and Camel increased prices for a single pack of cigarettes by 71 cents and 42 cents, to reflect the tax increase.

"The weak economy and higher prices are snuffing out cigarette demand around the world--most vigorously in the U.S., where a federal tax hike, smoking bans, health concerns and social stigma have cut demand at least 10 percent," Michael Felberbaum wrote in the October 2009 issue of Tobacco Facts. One industry spokesperson, Reynolds American Inc.'s CEO Susan M. Ivey predicted U.S. cigarette demand to decline 8 percent to 9 percent annually before settling back to 3 percent to 4 percent during the next few years.

The overall tobacco industry completed a milestone with the passage of the Prevent All Cigarette Trafficking (PACT) Act (S.1147) in March 2010 following a decade long battle. This legislation put an end to the illegal sale of tobacco products via the Internet and mail-order. Under the act, the U.S. Postal Service can not longer ship cigarettes.

Industry Leaders

Based on data from Hoover's and cited by the Department of Health and Human Services' Centers for Disease Control and Prevention (CDC), 90 percent of the total annual sales in the industry were derived from the largest five cigarette companies in the United States. These included: Altria Group Inc. (parent of Philip Morris) with 2005 sales of $10.4 billion; Reynolds American Inc. with 2006 sales of $8.5 billion (per Gale Cengage Learning's Business and & Company Resource Center); Loews Corporation (parent to Carolina Group and its subsidiary Lorillard) with 2006 sales of $2.49 billion; Houchens Industries (of Commonwealth Brands) with 2005 sales of $2.36 billion; and Vector Group Ltd. (of Liggett) with $52.4 million in 2005 sales.

Altria Group Inc. reported revenues of $16.8 billion in 2009 with 10,000 employees, a significant decline compared to $38 billion in 2007. The company was in the process of diversifying with the acquisition of smokeless tobacco maker, UST in early 2009. Reynolds American Inc. reported revenues of $9 billion in 2007, falling to $8.4 billion in 2009 with 6,550 employees. Lorillard, Inc., named Carolina Group until it split from former parent Loews in 2008. Lorillard had sales of $5.2 billion in 2009 with 2,700 employees. Commonwealth Brands became part of Imperial Tobacco Group PLC in 2007 based in the United Kingdom. In 2008, Vector Group Ltd. posted sales of $565.2 million reaching $801.4 million in 2009 with 435 employees.

Philip Morris USA Inc.
Philip Morris' ascension to the number-one position in the cigarette industry began shortly after the 1911 decree intended to dilute the staggering power of the American Tobacco Co. Although Philip Morris' initial magnitude paled in comparison to the industry's Big Four--the American Tobacco Co., R.J. Reynolds, Lorillard, and Liggett & Meyers--its rise stands as a remarkable achievement. Beginning as the U.S. operations of a British manufacturer named Philip Morris Company, the manufacturing facilities were purchased by U.S. financier George J. Whelan, who acquired several of the small manufacturing concerns left for sale after the break up of American Tobacco. Formed as a U.S. company in 1919 and renamed Philip Morris & Company Ltd. Inc., the company introduced the brand of cigarette that would eventually catapult the fledgling manufacturing concern toward the top of its market in 1925. That brand, Marlboro, did not begin its meteoric rise until the ubiquitous Marlboro Man, the rough-hewn American cowboy, first appeared on cigarette packages in 1955. In the interim, Philip Morris slowly climbed the industry's ladder through effective marketing and a strong relationship with cigarette jobbers on the East Coast, ensuring that the company's products received preferential treatment during the all-important journey from manufacturing site to retail stores.

By 1936 Philip Morris maintained a firm grip on the industry's fourth position through its widely popular English Blend cigarettes introduced three years earlier. Following World War II, several poor management decisions, including an overestimation of the nation's consumption capacity and a belated entry into the filter segment of the industry, sent the company's sales spiraling downward. By 1960 Philip Morris had fallen to sixth place in the U.S. cigarette market--last among the major U.S. manufacturers.

The introduction of the Marlboro Man in 1955, however, strengthened Philip Morris' domestic sales, while an early move into foreign markets underpinned the company's domestic resurgence. By 1973 Marlboro cigarettes were the second most popular brand in the United States, ranking only behind RJR's Winston brand. Three years later, Marlboro eclipsed Winston, and Philip Morris became the second-largest seller of tobacco in the world. As Marlboro became the nation's preferred cigarette, Philip Morris branched into the production of low-tar cigarettes with its Merit brand, then intensified its efforts toward overseas expansion. As a result of these two marketing strategies, plus the growing popularity of Marlboro cigarettes, Philip Morris surpassed RJR in 1983 to become the world's largest cigarette manufacturer. In the 1990s the company consolidated its lead, with a market share just shy of 50 percent during the late 1990s. In 2002 the parent company officially changed its name from Philip Morris Companies to Altria Group, Inc. The New York-based company's 2006 annual report boasted a 50.3 percent U.S. retail share of the market with operating income of $4.8 billion, a 5 percent increase from 2005.

Reynolds American Inc.
In 2004, number two R.J. Reynolds and number three Brown & Williamson joined forces to form Reynolds American Inc. The newly merged company based in Winston-Salem, North Carolina, remained behind Philip Morris, however, with 2004 sales of $6.4 billion, which increased to $8.5 billion in 2006. Incorporated in 1879 as R.J. Reynolds Tobacco Company, RJR garnered initial success through the efforts of the company's founder, Richard Joshua Reynolds, and by virtue of its association with the American Tobacco Co. during the lucrative "trust years" in the tobacco industry. Operating as a subsidiary of American Tobacco from 1899 until the dissolution decree of 1911, Reynolds' company thrived, earning a majority of its profits through the sale of chewing and smoking tobacco under the respective Schnapps and Prince Albert brands. The company did not manufacture cigarettes until 1913--shortly after Reynolds had resumed control of the company following the U.S. Supreme Court's ruling--but once it did, the company's success came quickly with its widely popular Camel brand of cigarettes.

For the next twenty years, the company's success was primarily predicated on the popularity of Camel cigarettes, but by the late 1930s and throughout the 1940s, the company's exponential growth began to slow due to labor problems, antitrust suits, and one particular product flop, Cavalier cigarettes. By the 1950s, however, R.J. Reynolds began to affect a turnaround by selling its new filter tip brand of cigarettes, Winston, which first appeared in 1954. Two years later, the company introduced its Salem brand, the industry's first king-size filter-tipped menthol cigarette. This, combined with the continuing success of the Camel and Winston brands, elevated the company's standing in the market above all others.

When Philip Morris' Marlboro surpassed Winston in 1976, the company countered with the introduction of a "back-to-nature" brand of cigarettes called Real, but the effort failed miserably and the product was discontinued in 1980. In that same year, the company's management sought to ameliorate its position by expanding overseas, leading to an agreement with China to manufacture and sell cigarettes there, the first U.S. company to reach an accord with that country.

However, this historic move abroad was not enough to stop the company's slide to the industry's number-two position three years later, when Philip Morris ascended to the industry's number-one position. In 1985, to stave off further losses, R.J. Reynolds purchased Nabisco Brands Inc. for $4.9 billion (the same year in which Philip Morris acquired General Foods Corporation). Three years after the Nabisco purchase, Kohlberg Kravis Roberts & Co., an investment firm, purchased RJR Nabisco for $24.88 billion in what was then the biggest leveraged buyout in U.S. history.

Workforce

According to the U.S. Department of Labor's Bureau of Labor Statistics, a sizable drop in employment in the tobacco industry is expected through 2014 (from 29,000 workers to 17,000 workers) after a considerable decline from 1994 to 2004 of 11,000 workers. A BLS report in May 2006 indicated overall employment stood at 23,340 workers with production occupations leading all categories with nearly 46 percent with a mean hourly wage of $18.62 for a mean annual salary of $38,720. Installation, maintenance, and repair occupations ranked second with more than 13 percent of the industry's workers with a mean hourly wage of $23.52 for a mean annual salary of $48,920.

America and the World

As legislation, litigation, and other antismoking initiatives have dampened the cigarette business at home, U.S. tobacco companies have made aggressive overtures to foreign markets. Despite its attacks on domestic tobacco, the U.S. government has lent considerable support to U.S. tobacco interests abroad, prompting some comparisons to the narcotics trade U.S. officials have chided other nations about. In recent years, Philip Morris--through its Philip Morris International unit--has been perhaps the most ardent expansionist among U.S. companies. Based in Lausanne, Switzerland, the company had more than $97.9 billion in 2006 net revenues with 70,000 employees in more than 50 factories worldwide in about 160 countries which produced about 600 billion cigarettes every year, per the company's website. Further, cigarette shipment volume increased by 3.4 percent from 2005 to 2006.

Nonetheless, U.S. cigarette makers must surmount a variety of obstacles in foreign markets. They contend with government-licensed monopolies, different tastes, and in some cases, more established competitors. Increasingly, they also face the same health concerns and activism that has saddled their U.S. operations. For example, in February of 2003 tobacco advertising became illegal in the United Kingdom, and further restrictions--including the sponsorship of sporting events by tobacco companies--was implemented there within two years. Further, the European Union (EU) enacted a tobacco advertising ban in print, radio, and the Internet media types (television ads had been forbidden since the 1990s) as well as cultural and sporting events.

© COPYRIGHT 2018 The Gale Group, Inc. This material is published under license from the publisher through the Gale Group, Farmington Hills, Michigan. All inquiries regarding rights should be directed to the Gale Group. For permission to reuse this article, contact the Copyright Clearance Center.

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