Tobacco and Tobacco Products

SIC 5194

Companies in this industry

Industry report:

This category covers establishments primarily engaged in the wholesale distribution of tobacco and its products. Leaf tobacco wholesalers are classified in SIC 5159: Farm-Product Raw Materials, Not Elsewhere Classified, and establishments primarily engaged in stemming and redrying tobacco are classified in SIC 2141: Tobacco Stemming and Redrying. Items handled by establishments in this business include: chewing tobacco, cigarettes, cigars, smoking tobacco, and snuff.

The wholesale distribution of tobacco and tobacco products employed about 27,250 workers at 2,700 establishments in 2009. The tobacco industry as a whole declined during as cigarette consumption continued to fall. However, cigar and snuff consumption rose slightly in 2006.

Wholesalers of tobacco and tobacco products benefited from the explosive growth of the cigar trend in the United States in the late 1990s. The cigar emerged as a symbol of success and even celebrity. After cigar sales fell 5 percent annually for three decades until the mid-1990s, the industry surged on the strength of the endorsement by celebrities and pop culture generally. Glossy magazines like Cigar Aficionado featured movie stars and athletes sporting cigars on its famous covers. Moreover, the industry moved to acquire premium product placement in motion pictures. Premium cigars sold 370 million units, valued at $1 billion, in 1997, an almost 400 percent increase from 1992.

Despite the high profile of cigars, they still constitute a miniscule market sector next to cigarettes and smokeless tobacco. Throughout the entire industry, heightened regulatory scrutiny has forced wholesalers to raise their prices in order to remain competitive with increased expenses. Moreover, distributors have begun to more aggressively diversify their activities. While many have traditionally combined their cigarette shipments with the distribution of candy to capitalize on the lucrative convenience-store market, many have expanded into packaged and fresh foods as well. Like many other industries, e-commerce had been another source of distribution that had increased sales for the tobacco industry also.

Negative media attention has caused a gradual decrease in production. Cigarette output in the United States in 2006 was roughly 484 billion pieces, the lowest level since 1958. Cigarette output has decreased through the decade at approximately 1 percent per year. Moreover, domestic consumption continued to slide, dropping 3 percent in 2005 to 376 billion pieces and another 1 percent in 2006 to approximately 371 billion pieces.

Research and litigation continued to play a major role as the industry focused on secondhand smoke and an effort to produce a "smokeless" cigarette. In 2001, The European Union had required health warning labels located on every pack of cigarettes. The mandated labels would cover 30 percent of the front of a single pack of cigarettes, as well as 40 percent on the backside.

The tobacco industry will continue to deal with litigation, competition, and higher Federal excise taxes. With many individual states dealing with budget deficits, the tobacco industry is usually their first target for additional funding through excise taxes. The total number of states passing excise taxes increased from three in 2000 to 21 by 2002. In 2002, state tax had jumped from $1.1 billion to $9.5 billion.

Taxes on cigarettes continued to dominate the industry's landscape in the late 2000s and into the early 2010s. The federal tax on cigarettes in 2009 was $1.01 per pack, but state and local taxes varied widely. For example, in 2010, Missouri charged the lowest rate, at just 17 cents per pack of cigarettes, followed by Virginia at 30 cent per pack and Louisiana at 36 cents per pack. On the other end of the spectrum, New York charged the highest taxes, at $4.35 per pack. New York City's combined state and city's taxes led the nation at $5.85 per pack, followed by Chicago at $3.66 per pack.

These high tax rates in such places at New York led to the controversial practice by some wholesalers of shipping large quantities of cigarettes to nearby Native American reservations, which are exempt from tobacco taxes. From there, cigarettes can be sold tax free, or, as New York charged in a 2006 lawsuit, are sold at off the reservation to illegally at deeply discounted prices because the wholesalers unfairly and illegally bypass state and local taxes.

Tobacco companies continued to withstand the onslaught of lawsuits and declining sales. Federal and state taxes were expected to hold steady for 2011, and the tobacco companies were expected to post single-digit sales increases (despite expected single-digit declining sales) based on a slight uptick In price. One issue that could potentially negatively impact the industry was a pending ruling from the Food and Drug Administration's Tobacco Products Scientific Advisory Committee on the menthol flavoring. Working in tobacco companies' favor were several favorable rulings that eased concerns over litigation. Thus, the industry was essentially refocusing its risk assessment toward the possibility of increased regulation, which could potentially increase costs and cut revenues.

The leading companies in this industry included Philip Morris of New York, operating under the umbrella of the Altria Group Inc., and Reynolds American Inc. of Winston-Salem, North Carolina, formed by the merger of when R.J. Reynolds Tobacco Holdings and Brown & Williamson. Altria--which, through Philip Morris, sells 7 of the 15 most popular cigarette brands, including the best-selling Marlboro brand--posted revenues of $25 billion in 2009. Philip Morris International, which spun off from Altria in 2008 and sells the Philip Morris brands internationally, posted sales of over $18 billion. U.S. Smokeless Tobacco (UST) Inc. of Stamford, Connecticut, another Altria company, was the leader in the snuff market under the brands Skoal and Copenhagen. RJR Tobacco boasts 5 of the top 10 U.S. brands of cigarettes: Camel, Doral, Kool, Pall Mall, and Winston. The company posted revenues of $8.4 billion in 2009.

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