TOBACCO: INDUSTRY

The tobacco industry is made up of the complex of primary suppliers, manufacturers, distributors (both wholesale and retail), advertising agencies, and media outlets that produce, promote, and sell tobacco products, as well as the law, public relations, and lobbying firms that work to protect these products from stringent public-health regulation and control. In due time, however, these precautions failed. The industry evolved in the late nineteenth and early twentieth century from many, relatively small enterprises that produced tobacco products for puffing, snuffing, and chewing. The products of these small firms delivered nicotine to the nasal and oral mucosa. With the evolution and refinement of the cigarette, the industry developed first into a monopoly and then into an oligopoly in which a handful of major producers made this more sophisticated nicotine delivery system: a device that delivers nicotine by inhalation to the lungs and thence rapidly to the brain. Although its popularity is declining in the United States, cigarette use is increasing worldwide at over 2 percent per year, especially in much of Asia, Eastern Europe, and the former Soviet Union. An integrated system of suppliers, manufacturers, marketers, and sales outlets is constantly evolving to supply this vast and growing market. In the past, sophisticated legal and lobbying enterprises managed to protect this industry from the sort of regulation advocated by a number of public health groups—regulations that governments routinely impose on far less toxic products, but an admonition from an internal source as to the effects of tobacco led to a dramatic increase of public and regulatory pressure on the tobacco industry.

PRIVATE ENTERPRISE VERSUS STATE MONOPOLY

Tobacco (nicotiana) is a plant of the nightshade family (genus Nicotiana ) and is native to the Americas; it was a major commodity of commerce in colonial times. Cigar tobaccos were key exports from the Spanish and Portuguese colonies of the Caribbean and South America, while tobaccos for snuff, pipe, and chew were the economic mainstays of the English colonies in Virginia, Maryland, and the Carolinas. Whereas most of Europe (and the rest of the world) established state-run monopolies for tobacco distribution, private enterprise was the vehicle of tobacco commerce in Great Britain (and eventually in the United States). The state monopolies provided both a popular product for the populace and revenue for the national treasury—but private enterprise, which always paid excise tax in Great Britain, was more resourceful in expanding the market. This phenomenon was exploited in the twentieth century and was especially apparent in the 1990s, with the remaining state monopolies becoming privatized and adopting the marketing techniques of the by-now enormous transnational tobacco companies, often actually merging with them.

FROM COTTAGE INDUSTRY TO MONOPOLY TO OLIGOPOLY

Relatively expensive, hand-rolled cigarettes became popular novelties in the United States and Europe in the mid-nineteenth century. The novelty came to dominate the industry over a period of forty years, from the mid-1880s to the mid-1920s, when, for the first time, more tobacco in the United States was used for cigarettes than for chewing tobacco.

A number of changes in the nineteenth century laid the groundwork for the cigarette's commercial success. The development of flue-cured tobacco and air-dried burley tobacco—easily processed into tobaccos for smoking (where the smoke might be inhaled) were major factors (Slade, 1993). Cigarette-making machines—first used commercially in 1883 by the American Tobacco Company—the development of safe matches, and an extensive railroad network to transport centrally manufactured cigarettes throughout the United States were among the other key factors responsible for this product's success.

Duke of Durham, North Carolina.

These elements were successfully harnessed by Benjamin Newton (Buck) Duke, head of the American Tobacco Company. A working cigarette-making machine had been invented in 1881 by James Bonsack in response to a contest held by the cigarette maker Alan & Ginter of Richmond, Virginia (Smith, 1990). But the contest sponsors decided against using the invention since they did not know how to sell as many cigarettes as the machine was capable of making. Duke, however, realized that the low prices made possible by mass production, together with advertising to stimulate demand, would create a large enough market to absorb the vastly expanded production. He obtained favorable terms for using the machine in exchange for technical assistance in perfecting it. The machine Duke put on line in 1883 produced 120,000 cigarettes per day, the equivalent of 60 expert hand rollers. Duke's competitors had to pay more for Bonsack machines than he had, and Duke engaged in price wars to further weaken other manufacturers. Gradually, he bought out his competitors and monopolized the U.S. cigarette industry. By 1890, Duke controlled the cigarette market, and by 1910, just before his monopoly was broken, he controlled more than 80 percent of all tobacco products manufactured in the United States, except for cigars (Robert, 1952).

Seeking further growth, Duke began to expand his cigarette business overseas (Robert, 1952). By 1900, a third of America's domestic production was being sent to Asia, and company factories were operating in Canada, Australia, Germany, and Japan. In 1901, Duke purchased a cigarette factory in Liverpool, England. Alarmed British manufacturers, seeking to avoid the fate of their U.S. compatriots, banded together as the Imperial Tobacco Company. The resulting trade war between American and Imperial ended in a truce. American was given exclusive trading rights in the United States and Cuba, and Great Britain became Imperial's exclusive territory. A new company, jointly controlled by both giants, was to sell cigarettes to the rest of the world. This modest sinecure was the birthright the parent companies gave the British-American Tobacco Company (BAT).

Antitrust Litigation.

In 1907, the U.S. government filed an antitrust case against the American Tobacco Company. The result of this litigation was the dissolution of the trust four years later into a number of successor companies, some of which retain major roles in the U.S. cigarette market. These companies were the American Tobacco Company, the R.J. Reynolds Tobacco Company, Liggett & Myers, and P. Lorillard.

Once it had emerged from the confines of the trust, R.J. Reynolds, which had never before made cigarettes, developed and introduced Camel, a novel brand, in 1913 (Tilley, 1985). Camel was the first brand to combine air-dried burley, which had previously been important in chewing-tobacco products, with the then-conventional cigarette tobaccos—the flue-cured and Turkish (Oriental) varieties (Slade, 1993). Camel featured a coherent, national advertising campaign from N.W. Ayer that relied entirely on mass-media outlets in magazines and on billboards instead of on package-based promotions such as cigarette cards, coupons, and premiums. The legacy of this startling departure from the conventional cigarette-marketing techniques of the time is captured by the sly legend that still graces each pack of twenty unfiltered Camels sold in the United States: "Don't look for premiums or coupons, as the cost of the tobaccos blended in CAMEL Cigarettes prohibits the use of them."

The other thing that distinguished Camel from its competitors was its price. While the leading brands of the time, such as Fatima, sold for fifteen cents per pack of twenty, a pack of Camel sold for a dime. In short order, Camel overwhelmed the competition and ushered in a dramatic expansion of the domestic cigarette market. American Tobacco copied the Camel formula with Lucky Strike, and Liggett & Myers followed with its copycat product Chesterfield. Cigarette cards, premiums, and coupons were abandoned in favor of the mass media, and prices fell. Cigarette use, then only rising slowly, began an unprecedented increase. This growth continued virtually unabated for forty years or so, until finally slowed and eventually reversed by alarms that lung cancer and other major diseases could be caused by cigarettes (Fiore et al., 1993).

Only two firms that had no roots in the tobacco trust have played major roles in the U.S. cigarette market (Sobel, 1978). After Buck Duke's death in 1929, BAT purchased the Brown & Williamson Tobacco Company in Louisville, Kentucky. BAT gradually built this company into a major cigarette producer. For decades, its Kool brand dominated the menthol category, and during the 1930s and 1940s, its Wings brand gained market share by undercutting the prices of the majors. Brown & Williamson continues to offer a full range of cigarettes for the U.S. market. It also produces cigarettes for export to many of BAT's international markets.

The other upstart company was Philip Morris, which began its U.S. operations as a specialty cigarette maker in New York in the first quarter of the century. In addition to its standard brand called Philip Morris, it produced Marlboro—a cigarette for "ladies." The company expanded in the 1930s with a low-priced brand (Paul Jones) and a clever pricing scheme for Philip Morris English Blend (Robert, 1952; Sobel, 1978). It suggested a retail price for the latter slightly above that for the major brands, but it gave retailers a larger margin, thus encouraging prominent display of the brand in stores. In the mid-1950s, Philip Morris gave Marlboro a filter and had the Leo Burnett advertising agency remake its image entirely to one of rugged masculine outdoor daring on horseback. (The entire sweep of Marlboro advertising is included in the special advertising collection of the American Museum of National History in Washington, D.C.) By the mid-1970s, Marlboro was the leading U.S. cigarette and by the 1990s, thanks to the strength of Marlboro's appeal to teens and young adults, Philip Morris overtook R.J. Reynolds to become the nation's largest tobacco-product manufacturer.

Smokeless Tobacco.

Moist snuff and chewing tobacco enjoyed a 1980s and 1990s resurgence in popularity—this is based on the successful efforts of U.S. Tobacco (UST). It sells oral tobacco (e.g., Skoal Bandits, Skoal, Copenhagen) to adolescents and preadolescents (Denny, 1993). Oral tobacco is the only category of tobacco product whose consumption has increased in recent years in the United States. This increase is attributable to UST's innovative marketing of moist snuff to adolescent boys, and to imitation products from other manufacturers. Although UST envisions a global market for snuff, the World Health Organization has declared that countries in which oral tobacco is not a traditional product should ban it. A number of countries—including Australia, New Zealand, Hong Kong, and the European Community—have taken this step, often defying intense pressure from the U.S. government when doing so.

Table 1 lists the major tobacco-product manufacturers in the United States, the location of their corporate headquarters, and the major tobacco brands they market.

INNOVATION

The tobacco industry adapts to changing circumstances in many ways. Product innovation is a key strategy. Since the early 1950s, the major changes in cigarette design have come in response to public-health concerns that cigarettes constitute a leading cause of illness and death (McGinnis, 1993; Slade, 1993). Most of these innovations have been variations on filters and so-called low-tar designs. Ballyhooed with multibillion-dollar advertising budgets, these innovations propped up cigarette consumption over the years despite the complete absence of demonstrated benefit at the time they were introduced. Years of study (and as many years of unregulated sale) have only produced evidence for decidedly marginal benefits, yet the innovations have become firmly established. These supposed advances have been criticized by some as being nothing more than public relations gimmicks in the face of and in mocking response to profound public-health problems.

The cigarette companies continue to invent novel ways to deliver nicotine to the brain. Electronic devices, smokes with charcoal fuel elements, and tiny aerosol cans are but some of the gimmicks the companies have patented to facilitate the inhalation of nicotine. Despite these efforts, the industry remains dependent on smoking, with variations of the tobacco-filled cigarette the mainstay of its business for the foreseeable future.

INTERNATIONAL EXPANSION

Cigarette smoking has been declining in the United States, Canada, and Western Europe. Since the 1960s, however, the biggest cigarette manufacturers (BAT, Philip Morris, RJR/Nabisco, and, recently, Japan Tobacco Incorporated) have steadily increased their business in international markets (Taylor, 1984). This expansion has been accompanied by the weakening and dissolution of both national private and state-owned tobacco companies. The process got under way in Latin America in the 1960s, spread to eastern Asia in the late 1980s, and developed into a frenzy of deal making in Eastern Europe and the republics of the former Soviet Union in the early 1990s (Shepherd, 1985; Sesser, 1993).

Shepherd has described the process whereby a transnational corporation moves toward dominating a formerly self-contained market through product innovation, smuggling, aggressive advertising, and pricing policies. The result is a larger market for tobacco products than existed previously and a corporate management that is better able to oppose public-health efforts at regulation and control. Although cigarette consumption is down in the United States, Canada, and Western Europe, it is rapidly growing in most of the world—especially the so-called third world. The transnational companies have positioned themselves to both fuel and profit from this trend.

DIVERSIFICATION

The giant cigarette makers have invested their tobacco profits in other enterprises for more than twenty years, ranging from soft drinks and cookies to office products, insurance, and real estate. This process has resulted in the ownership by tobacco companies of some widely known consumer-product companies, including Kraft and Nabisco. Although the parent tobacco companies pretend that this phenomenon makes them somehow less involved in tobacco (none now have the word "tobacco" in their corporate name), a thoughtful examination of these businesses reveals the following:

Tobacco products remain by far the most profitable sector of each of these conglomerates; and tobacco products are always responsible for most of the company profits (see Tables 2 and 3).

Not one of these companies has backed away from any available opportunity to sell tobacco products. Indeed, the strongest companies continue to invest in domestic and overseas ventures that have as their goal the expansion of tobacco consumption.

These companies make ready use of nontobacco subsidiaries to support their tobacco businesses. For example, RJR/Nabisco fired the ad agency that did their Oreo Cookie advertising after that agency also produced ads promoting an airline offering smoke-free flights. Philip Morris has used one of its Kraft-General Foods warehouses for its coupon-redemption program for the Marlboro Adventure Team.

Tobacco companies do not diversify to get out of the tobacco business. They diversify because tobacco has given them profits, the acquisitions seem sound investments, and the resulting product mix complements the core business in some manner.

PRICE WARS

Price competition has long been part of the tobacco industry strategy. It was the major tool for the achievement of monopoly power in the 1880s and was a key element in the early twentieth-century dominance of the market by Camel. In the 1930s, price competition, made possible by overly aggressive price increases by the majors, contributed to the emergence and growth of Brown & Williamson and Philip Morris (Sobel, 1978). From the end of World War II (1945) until 1980, however, price competition was virtually absent from the U.S. cigarette market.

In 1980, tiny Liggett & Myers, a firm that had become too small to enjoy oligopolistic profits, broke ranks with its fellows by introducing generic cigarettes. The strategy was made possible by the pattern of price increases in the industry—increases that had exceeded the rate of inflation for years. Brown & Williamson soon followed suit with its own generic brands, and within a few years every cigarette manufacturer had a multitiered pricing structure, with the heavily advertised, standard brands at the top. Prices for the major brands continued to rise steeply, far faster than inflation, through early 1993. Customers who might have stopped smoking because of high prices were kept in the market by the increasingly available lower priced offerings. By early 1993, however, investment analysts had become concerned because lower priced brands accounted for more than 25 percent of all cigarette purchases—with attendant threats to profits—and Philip Morris had become alarmed by the market share losses sustained by its cash cow, Marlboro, to less than 25 percent of all cigarettes sold.

Philip Morris had a number of key strengths that gave it a flexibility not possessed by its competitors, including market leadership, an absence of corporate debt, and a strong youth market for Marlboro. Its principal competitor, RJR/Nabisco, had an enormous corporate debt—and although Camel had been making inroads into Marlboro's youth market, it was still far from the dominant cigarette. These factors led Philip Morris to cut prices substantially (while mounting the most elaborate promotional campaign ever seen in the industry). The competition was forced to follow suit with lower prices. Marlboro's brand share surged; the threat to profitability from lower priced brands subsided; and the competition was left somewhat weakened.

LOBBYING AND PUBLIC RELATIONS

In 1915, the U.S. tobacco industry formed the Tobacco Merchants Association (TMA) to lobby against the anticigarette laws that had become a problem for the industry in a number of states (Robert, 1952). These laws came about as a result of the efforts of antitobacco advocates, including Henry Ford and Thomas Edison. The TMA accomplished its objectives: By 1930, the state prohibitions on cigarettes had been diminished to easily ignored prohibitions that only barred the sale of cigarettes to minors.

In the 1950s, the industry faced a more substantial challenge—proof that cigarettes caused lung cancer. In addition to putting cosmetic filters on the product and making outrageous claims for their benefit (P. Lorillard trumpeted its asbestos-filtered Kent as "the greatest health protection in cigarette history"), the industry developed a sophisticated public relations and lobbying capability (Wagner, 1971). The public relations firm of Hill & Knowlton organized the Tobacco Institute to meet the industry's public relations and lobbying needs. The cigarette makers also formed the Tobacco Industry Research Committee (later reorganized and renamed the Council for Tobacco Research) to create the pretense that the industry was conscientiously involved in biomedical research to get to the bottom of the smoking and health question (Freedman & Cohen, 1993).

Although speculation existed as to how diligently the tobacco industry would pursue smoking research, they did in fact do so, but their conclusions, giving more light to the fact that tobacco is addictive and harmful, were not released. Routinely called the "tobacco cover-up" it resurfaced in later years with much of its strength coming from Bennett S. LeBow's agreeing, in 1997, to put warnings on cigarette packs stating that smoking is addictive. Leaked internal documents also served as evidence of the dangers. In 1998, however, other tobacco companies still contested that tobacco was not an addictive drug. Discovery, through LeBow, of the industry's nondisclosure and the understanding that the industry had evidence of the thereat of smoking, however, caused severe public attacks on the tobacco industry to be more common. Public campaigns have also been more potent with reducing youth smoking. Between 1998 and 2000 smoking had declined 54 percent in middle schools and 25.2 percent in high schools. Recently tobacco advertising legislation has weakened the strength of tobacco propaganda among youth populations, by banning all advertising that is determined to be too appealing to a minor. More legislation is in being proposed and being worked on to make nicotine a drug regulated by the FDA. Previously, the FDA has tried to apply regulations to tobacco and cigarettes as a nicotine delivery agent, but the courts had determined that Congress had not yet given the regulatory administration such authority, so new legislation must be passed for successful and lawful regulation. If such a bill is passed tighter control will be possible so that tobacco can be prohibited in public events where minors may be part of the targeted demographic, in response to public outcry. Furthermore, tobacco companies are prohibited from sponsoring public events and athletic competitions. In some states, legislation has also already been passed, and tried, winning large cash settlements to recover lost health costs suspected to be to tobacco use related. Included in some of these settlements have also been requirements for the tobacco companies to pay for more advertisements, but these advertisements are intended to reduce youth smoking. Despite the research, such as it was, the mounting costs to the tobacco companies because of lawsuits and penalties, and in the face of growing evidence of harm from a variety of other quarters, the smoking epidemic continues.

The Tobacco Institute, in alliance with the various branches of the industry, has stood as a bulwark against public-health activities for a generation. The Council for Tobacco Research has funded studies of marginal importance for public relations gain while operating a Special Projects branch for the benefit of tobacco-product liability defense. In these and other ways, the tobacco industry has attempted to insulate itself from significant regulation and from acceptance of any responsibility for the harm its products cause. Similar organizations exist to protect the interests of oral-tobacco manufacturers.

OWNERSHIP

The major tobacco-product manufacturers are publicly owned and traded corporations. As such, they are owned by their investors. Major institutions, including banks, insurance companies, and pension funds, hold the majority of shares in the tobacco industry.

SUMMARY AND CONCLUSION

The tobacco industry is a powerful oligopoly of product manufacturers in alliance with a network of suppliers and associated service organizations. Although its products form the leading cause of preventable death, it continues despite public sentiment and attempt to protect itself against appropriate regulation by extensive legal, public relations, and lobbying efforts. The industry is understandably driven by an interest in making money. It has never acted out of a primary concern for the health of its customers or the health of those around them. For a variety of reasons, including clever intervention by the industry, government has utterly failed to provide the sort of regulatory control expected when it comes to something as addicting and toxic as nicotine-containing tobacco products until a critical documentation leak occurred from within the companies of the tobacco industry.

(See also: Advertising and Tobacco Use ; Nicotine )

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John Slade

Revised by Andrew J. Homburg