SIC 2111
CIGARETTES



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

NAICS Code(s)

312221 (Cigarette Manufacturing)

Industry Snapshot

Battered by multibillion-dollar lawsuits and anti-smoking campaigns, the U.S. tobacco industry confronts 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. Although price increases have helped to prop up sales and profits, a weak economic climate coupled with cigarette tax increases were affecting the industry's profitability in the early 2000s. At this time, continued price increases were helping discount brand cigarettes to gain popularity with cost-conscious consumers.

Tobacco companies have been so besieged with lawsuits that investment reports on the industry, once flush with statistics and commentary on short-term profits, have found it necessary to delve into arguments, proceedings, and other minutia of individual cases at trial. The biggest legal initiative, brought collectively by the attorneys general of 46 states, resulted in a massive 25-year, $206-billion settlement by cigarette manufacturers. Hundreds of other lawsuits, most from private individuals, have inundated tobacco companies as well. By the end of 2002, the industry had lost five lawsuits on the West Coast since the late 1990s. In December of that year, a California Superior Court judge reduced a record $28 billion judgment against Philip Morris—which a jury awarded to a 64-year-old terminal lung cancer patient—to $28 million, calling the initial amount "legally excessive," according to Forbes. Cases such as these have allowed lawyers to collectively take in hundreds of millions of dollars a year—and they will continue to do so for decades to come.

The industry remains highly concentrated. The top three cigarette makers—Philip Morris, R.J. Reynolds, and BAT/Brown & Williamson—controlled about 82 percent of the U.S. market as of 2002. Indeed, Census Bureau reports show that in recent years, only nine cigarette companies operated in the United States. Market share evidence suggests that the larger producers, especially Philip Morris, which alone makes up half of all U.S. production, could continue to crowd out smaller producers.

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.

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 20-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 15 minutes what it took an experienced production worker 10 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 20 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 20 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 15 to 20 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.

Clearly, 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's 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 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 lowend 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 Clinton 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. Separately, in 2000 a pair of cigarette wholesalers filed suit in federal court accusing major cigarette makers of price fixing.

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 lownitrosamine 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. Lownitrosamine 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.

Current Conditions

Value Line reported that industry sales, which totaled $141.1 billion in 2000, fell sharply to $102.5 billion in 2001. Sales were estimated to reach $130.0 billion in 2002 and $165.0 billion in 2003. Net profits, which totaled $10.9 billion in 2000, fell to $9.5 billion in 2001. However, this figure was expected to reach $11.5 billion in 2002 and $12.5 billion in 2003. In 2002, Philip Morris remained the industry leader, with more than 49 percent of the market, followed by R.J. Reynolds Tobacco Co. (23 percent), BAT/Brown & Williamson (10 percent), and Liggett & Myers (2 percent). Approximately 7 percent of the market was controlled by a handful of smaller industry players.

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.

Cigarette prices have increased significantly since the late 1990s, according to data from IRI/Capstone and R.J. Reynolds Tobacco Co. From an average of $2.69 per pack in 1999, cigarette prices increased to $2.98 in 2000, $3.23 in 2001, and $3.47 in 2002. In the wake of a sluggish economy, many states increased taxes on cigarettes in an effort to improve their budgets. In its August 2002 issue, National Petroleum News reported that in the first half of 2002 alone, nine states "enacted a cigarette/tobacco tax increase as part of their budgetary process, while as many as another 21 states have some type of tax increase still simmering." In July of 2002, New York Mayor Michael Bloomberg raised his city's tax from 8 cents per pack to $1.50 per pack. This increase made New York City's cigarette tax the nation's highest and pushed prices as high as $7.00 per pack. New York City's tax came on top of New York State's tax of $1.50 per pack—then the nation's highest state cigarette tax.

In recent years, ways to mitigate tobacco taxes—some with questionable legality—have gained attention. E-commerce has emerged as one way to beat high state taxes. 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 more than 40 percent off 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.

Industry Leaders

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. By 2002, Philip Morris held about 49 percent of the market. That year, it recorded revenues of $18.9 billion, down almost 24 percent from the previous year.

R.J. Reynolds. 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 20 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 effect 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.

Though heralded as a success in its first years, tensions between its food and tobacco businesses dogged RJR Nabisco throughout the 1990s. Investors clamored for the company to issue a separate stock for the tobacco business, hoping to avoid the volatility and risks associated with the tobacco litigation. In 1999 R.J. Reynolds sold its international tobacco unit to Japan Tobacco and was spun off as a separate company. The reorganized R.J. Reynolds Tobacco Company, owned by a holding company called R.J. Reynolds Tobacco Holdings, Inc., competes only in the United States. In 2000, Philip Morris (later re-named Altria Group, Inc.) acquired Nabisco in a deal valued at $18.9 billion.

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. This was particularly the case after RJR sold its international operations in 1999. That year Philip Morris International shipped 667.9 billion units, or about one-seventh of global non-U.S. production.

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—would be implemented there within two years. Finally, although faster growth has been common in international markets, economic slowdowns and turmoil in areas like Asia, Russia, and South America doused market growth in the late 1990s, highlighting the risks of international expansion.

Only one major U.S. tobacco concern, Brown & Williamson, is held by a non-U.S. company. Its parent, British American Tobacco Plc, commonly known as B.A.T., is based in the United Kingdom.

Further Reading

"All the Tar and None of the Taxes." Business Week, 13 December 1999.

Centers for Disease Control and Prevention. "Targeting Tobacco Use." Tobacco Information and Prevention Source. Washington, D.C., 1999. Available from www.cdc.gov/tobacco .

"Cigarettes with Low-Nitrosamine Tobacco an Exciting Prospect." World Tobacco, May 1999.

Curriden, Mark. "Despite Settlements, Tobacco Industry Still Battles Individual Suits." Dallas Morning News, 27 July 1998.

Eaton, Lynn. "United Kingdom Finally Bans Tobacco Advertising." Student BMJ, March 2003.

Egan, Cathleen. "Tobacco Cos. 4Q Profits Soft as Volume Continues to Drop." Wall Street Journal, 11 January 2000.

Fromson, Brett D. "Slugfest in the Smoke Ring." Washington Post, 1 March 1998.

Geyelin, Milo. "Fat Legal Fees in Tobacco Cases Face Challenge as Honeymoon Ends." Wall Street Journal, 16 June 1999.

——. "Group of 46 States Agree to Accept $206 Billion Tobacco Settlement." Wall Street Journal, 23 November 1998.

Gibbs, Nancy. "Up In Smoke." Time, 29 June 1998.

"Grey Market Attacked." World Tobacco, September 1999.

"Still Hooked on the Evil Weed." Business Week, 5 July 1999.

"Tobacco Industry." Value Line Investment Survey. New York: Value Line Publishing, Inc. 8 November 2002.

Traczek, Chris. "Cigarettes: Category Under Fire; With Tax Hikes, Margin Pressures and a Growing Number of Tiers, the Top-in-Store Category Is Under the Industry Microscope." National Petroleum News, August 2002.

"U.S. Cigarette Market Overview." R.J. Reynolds Tobacco Co. 19 April 2003. Available from http://www.rjrt.com .



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