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Industry Center - Tobacco
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Tobacco Industry Profile

Despite the health problems, lawsuits, and rising prices associated with cigarettes, there's still something seductive about tobacco -- the profits. Altria Group (owner of Philip Morris and its international division), the US and global tobacco leader grew revenues by 17% in 2003 as economies both in the US and abroad grew. British American Tobacco (BAT), #2 in the world, also held its own with about 15% growth in sales.

The US market is dominated by four key manufacturers known as Big Tobacco: Altria, which sells roughly half of the nearly 500 billion cigarettes sold in the US, Reynolds American, Loews subsidiary Lorillard Tobacco Company (part of Carolina Group), and Vector Group's Liggett unit.

Legal battles continue to dog the tobacco industry. Smokers stricken with cancer and other smoking-related health problems have tried to pool their complaints together in large class-action lawsuits. Often, the courts frown upon such tactics; however, individuals have fared much better, but face lengthy appeals from the tobacco giants. The US Department of Justice also is pursuing a case against the industry, citing 50 years of evidence it claims points to a cover-up of the health risks associated with smoking.

Tobacco companies have initiated ads and other material to help stop kids from lighting up. Also, many companies are pursuing cigarettes that they hope one day will prove to reduce the health risks associated with smoking. One such example is Brown & Williamson's Advance, which it says is not a safe cigarette but does reduce exposure to toxins. Of particular concern is nitrosamines or TSNAs. Other safety initiatives include improvement in the way cigarettes actually burn. The state of New York now requires cigarettes sold within its borders to be "fire-safe." Such cigarettes have bands of paper that will extinguish a cigarette unless it is puffed.

Ironically, the most immediate challenges to Big Tobacco lie within the industry itself. Smaller, discount cigarette manufacturers, many who are free from a massive $246 billion settlement with US state governments, have gained nearly 15% market share as the cost of smoking has risen. Not only has Big Tobacco raised the price of smokes to help pay its lawyers, but federal and state taxes also have significantly boosted the retail price to more than $7 per pack in some areas of the country. This high cost encourages smuggling. Contraband sales of cigarettes via the Internet and other means could represent as much as 10% of the US market. Perhaps hoping tighter regulation of tobacco will help curb illegal sales and reduce their exposure to lawsuits, at least one cigarette manufacturer, Altria, now endorses limited regulation by the US Food and Drug Administration.

The US Senate has approved a measure that would give the FDA oversight of the sale, marketing, and manufacture of cigarettes while also ending price and production controls the US government has placed on tobacco. The bill is now in conference committee.

These industry developments have forced some major reshuffling among members of Big Tobacco. To combat challenges from discount brands as well as the industry giant Altria, R.J. Reynolds and British American Tobacco joined forces in the US, forming Reynolds American.

Of course, Big Tobacco manufacturers aren't the only companies important to the tobacco industry. Companies such as Universal Corporation, DIMON, and Standard Commercial act as middlemen, buying from farmers and/or tobacco auctions and then processing and shipping leaf tobacco to manufacturers. Globally, other companies, such as Société BIC and Zippo Manufacturing, provide tobacco-related accoutrements; UST markets snuff and chewing tobacco; and companies such as Swedish Match sell a combination of tobacco-related products. Altadis, created from a merger of France and Spain's top tobacco producers, makes 50% of the cigars sold in the US. In Japan the tobacco industry is dominated by government-owned Japan Tobacco, which controls 75% of the market. Other top markets include Germany (dominated by Altria and Reemtsma Cigarettenfabriken), the UK (where smokes by Gallaher Group and Imperial Tobacco are preferred), and France. As discount manufacturers such as Commonwealth Brands chip away at market share, the global companies have increasingly turned to developing nations for new smokers. The Asia/Pacific region accounts for much of this new frontier. China, with some 25% of the world's 1.2 billion smokers, is the big prize. Government-owned China National Tobacco, the world's largest tobacco producer, principally serves China and the estimated 1.5 trillion in annual cigarette sales. Both Imperial Tobacco and Gallaher Group have signed agreements to produce and sell cigarettes in China.

Top Top 10 Global Cigarette and Cigar Manufacturers by Revenue
1. Philip Morris USA Inc.
2. R.J. Reynolds Tobacco Holdings, Inc.
3. Brown & Williamson Tobacco Corporation
4. Carolina Group (CG)
5. Altria Group, Inc. (MO)
6. British American Tobacco p.l.c. (BTI)
7. Japan Tobacco Inc.
8. Gallaher Group Plc
9. Altadis, S.A.
10. Imperial Tobacco Group PLC
11. Swedish Match AB (SWMAY)
Key People
Louis Camilleri - Chairman and CEO, Altria Group. Camilleri took the reins from the retired Geoffrey Bible as the company began working to revamp its corporate identity.
Paul Adams - Managing Director, British American Tobacco. Adams is trying to weather the litigation hampering Brown & Williamson and deal with increased global competition while focusing on organic growth in emerging markets.
Tadashi Ogawa - Chairman, Japan Tobacco. Ogawa heads up a company that must slash costs while rolling out a slew of new products. In April 2005 it must kick the Marlboro habit. At that time, an agreement to make and sell Marlboros comes to an end.
Andrew J. Schindler - Chairman, President, and CEO, R.J. Reynolds Tobacco Holdings. Schindler sold his firm's international operations to Japan Tobacco after fierce bidding and won another bidding battle for Nabisco Group Holdings, which once owned R.J. Reynolds. The latter deal netted the company $1.5 billion. He now turns his attention to a proposed merger with Brown & Williamson.
Associations & Organizations
Coalition for Responsible Tobacco Retailing
International Tobacco Growers' Association
Tobacco Merchants Association

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