Tobacco Industry Research Paper

Except for a few state monopolies, businesses that are dependent on tobacco sales seek to increase their assets and the profits on the capital invested. In some countries, the laws for business companies and corporations require that the company officials must act to maintain and increase profits.

Tobacco Company Characteristics

The characteristics of the major multinational tobacco companies include large size, having a substantial or predominant part of their business relating to tobacco, being global in their operations (except for CNTC), and being relatively capital intensive. Other characteristics include the reliance on brand differentiation (and a high degree of marketing ability), a high investment in research and public relations, and ownership of key related businesses, such as those making cigarette machines.

Tobacco manufacturers usually require economies of scale and access to significant sources of new capital. Some tobacco manufacturing in developing countries has been an exception to this rule, for instance bidi and kretek making in India and Indonesia. Of the approximately 1.5 million people with jobs in the tobacco processing industry, over half are in China, India, and Indonesia, with over a third in the latter two (van Liemt, 2002).

The economies of scale stem from the comparative efficiency of cigarette making machines with large output volumes, the ability to dominate the tobacco leaf-buying environment, and the comparative cost-effectiveness of world-scale marketing through brand development, among other things. The increased globalization of commerce (the erosion of national borders, and the relative decline of the power of national governments relative to commercial organizations) has also encouraged an increase in the size of tobacco companies (UNCTAD Secretariat, 1978).

Access by the dominant companies to sufficient extra capital is necessary in order to buy competitors, be able to invest for the long term in brand marketing, and acquire the most efficient manufacturing machinery. The very large investment by the dominant companies in creating international brands, and the large minimum costs of establishing international tobacco brands, increases the cost of international market entry for competitors. This, and the dominant companies’ relative ability to outbid competitors for the purchase of smaller companies, has produced a trend to larger and fewer companies with greater market dominance. The movement of foreign tobacco company competitors and investors into developing countries has also resulted in the greater use of more productive machinery and fewer factories (van Liemt, 2002).

For much of the twentieth century, a number of countries made tobacco manufacturing and marketing a state monopoly. Over the last 20 years, the number of such monopolies has sharply diminished, and the state-owned companies have been sold off (usually to a multinational tobacco company).

Cooperation Among The Largest Tobacco Companies

Although the largest tobacco companies compete on brand sales, much of their activity is done in cooperation with each other, including strategies to delay or prevent regulations that affect them, present public relations images that advantage the whole industry, and prepare for and delay litigation. This cooperative activity appears to have occurred from the 1960s or before, for at least the companies with headquarters in Britain and the United States. For instance, from 1977 or before, seven of the largest companies organized the International Committee on Smoking Issues (later the International Tobacco Information Centre – INFOTAB) which carried out a ‘defensive smoking and health strategy.’ In these organizations, the tobacco companies worked together to assemble arguments for their case and to apply pressure against tobacco control interventions and supporters (Francey and Chapman, 2000).

Risks For Tobacco Companies

Tobacco companies face efforts by many groups to establish the companies’ legal liability for the harm from their products. The plaintiffs include governments (e.g., Canadian provinces), unions, health insurers, and individuals. Although about 300 such cases against the companies were presented up to the early 1980s, with no awards being paid out, in the 1990s over 1500 cases were filed. A number in the United States resulted in large awards to plaintiffs. Most prominent was the Master Settlement Agreement between most U.S. states and some tobacco companies. Besides payments by the tobacco companies, the settlement included the release of millions of internal tobacco industry documents. By 2001 well over 4000 cases had been filed in the United States alone.

However, the degree of risk to tobacco companies from litigation is unclear. Some research has indicated that initially, successful nongovernment suits in the United States had an adverse impact on tobacco industry market values. However, the Master Settlement Agreement appears to have provided some assurance of reduced risks to the suppliers of new capital to the tobacco companies, with a result of reduced capital costs to the companies (Sloan et al., 2005). For other risks faced by tobacco companies, see the section Future Issues.

The Documentation On The Industry

Legal and government action, largely in the United States, has resulted in the publication of the most comprehensive set of primary documents from any industry that adversely affects health. This set comprises largely the documents released by the Master Settlement Agreement, and can be found on websites (see the Relevant Websites section). However, some documents are missing or have been deliberately destroyed or concealed in a number of ways, and tobacco companies have deliberately avoided documenting many actions and practices.

Companies And Possible Endgames

At least some of the major companies may have some sort of exit strategy to protect their asset bases from the threat of successful lawsuits or major revenue declines. One possible avenue is divestment. In the last 10 years the RJ Reynolds and Philip Morris/Altria companies have divested assets and distributed cash to shareholders, effectively removing some of their capital from these threats. Another possible avenue is protective bankruptcy. Philip Morris suggested in 2003 that a proposed court bond in the United States would bankrupt it. Japan Tobacco’s Canadian branch sought protection in 2004 to avoid a court order for the payment of taxes. A further avenue could be legal relocation. In a situation similar to that for tobacco companies, an Australian asbestos materials company, James Hardie, in 2001 moved much of its assets to an associated company in the Netherlands in the face of impending claims for compensation from asbestos victims.

Tobacco Industry Markets, Marketing, And Public Relations

Market Trends

Despite sustained growth in the previous 40 years, there was no change during the 1990s in world tobacco consumption (van Liemt, 2002). Sales are predicted to rise in the 10-year period up to 2008 in Latin America, Asia, Africa, and Eastern Europe but to fall in North America and Western Europe. The greatest potential for increased tobacco sales (in the absence of an adequate public health response) is to women in developing countries ( Jha and Chaloupka, 1999; Mackay and Eriksen, 2002).

The Change In Market Focus

In the last half-century, the largest tobacco companies have been moving their focus from the developed world to developing nations. International trade law, and pressure from nations that host large tobacco companies, have been used to allow the companies to enter countries and use the advanced marketing tactics developed elsewhere.

Some authors have suggested that removal of barriers to international trade in tobacco, along with increased foreign investment in tobacco production and marketing in developing countries, have increased the likelihood of greater tobacco consumption in those countries, because the regulation of tobacco marketing generally does not advance sufficiently to counter the advantages to tobacco companies of changes in trade and investment law (Shaffer et al., 2005).

Marketing

How do tobacco companies capture and hold their customers? Their marketing involves advertising, sponsorship, the use of in-store placement and salience for products, packaging, and many other means of promoting their brands. A wider definition of tobacco marketing is all of the means used to encourage brand loyalty in smokers, minimize the doubts of smokers about smoking, and ensure that some nonsmokers will find the image of smoking or particular brands attractive and normal. This includes setting and maintaining sufficiently low prices for the products. The efforts to decrease effective risk perception by consumers includes the use of deceptive product brands and descriptors, the use of colors associated with health, and product pack design (Wakefield et al., 2002).

Tobacco Brands

Tobacco brands are created through extensive research. The most effective brands have a worldwide reach to a wide target market. To a large extent, the success of product promotion by a tobacco company is encapsulated in the value of its brands. Brand value is the total effect of the projection of names, logos, shapes, colors, images, and their associations in creating an attraction for a product, differentiating it from others, and providing a competitive advantage over other companies. Brands are particularly important with a product such as cigarettes or tobacco, in which there can be few other differences between the items produced by different companies. Brands create a difference – a ‘unique selling point.’ The value of the brands is part of the tobacco industry’s intangible assets, which also includes human resources and business and political connections.

The value put on brand worth by the companies was demonstrated by a 1985 BAT report on Philip Morris, which ascribed the Philip Morris success to its long-term investment in marketing and in its brands.

The belief that success in the market place, and consumer orientation will lead to long-term business profitability, lies behind the business strategy of Philip Morris. This is a belief in which they are prepared to invest, and accept losses for periods of up to, and in excess of, ten years, provided that the long-term holds out a possibility of viability .. . [Philip Morris’s] strong commitment to the construction of the brand image over the longterm .. .[and to] all aspects of the brand that contribute to the image – product, packaging etc (British American Tobacco, 1985).

Transnational Marketing

The large tobacco companies have increasingly used transnational means to add to the impact of their brands, such as Internet marketing and satellite television coverage of sponsored sports and other events. The nature of the increasingly large-scale and transnational media has meant that tobacco brand marketing has been progressively concentrated on fewer, selected brands. In turn, this has meant that the best-selling brands have taken a larger part of the world market and become increasingly valuable. The resilience of the largest brands has insulated the companies who invested in them from market downturns.

The worldwide trend toward limiting some forms of tobacco advertisements, from the 1970s on, stimulated the tobacco industry to research and develop transnational and nonadvertising means of projecting brands and reaching customers. These include sponsorship, retail displays, product placement in film and other media, tobacco pack design, and social communication (for instance, word-of-mouth).

International Trade In, And Smuggling Of, Tobacco

The world trade in cigarettes has grown rapidly in the last 50 years, and the large companies are among the most active in this growth. The proportion of internationally traded cigarettes that are smuggled may be over 30%, accounting for between 6–8% of world tobacco consumption (Merriman et al., 2000). Significant parts of the international distribution process used by the tobacco industry are illegal. A number of governments (e.g., Canada) and courts (e.g., in Hong Kong) have stated that multinational tobacco companies have been involved in smuggling. The Deputy Chairman of BAT, in a February 2000 letter to the Guardian newspaper, stated: ‘we act, completely within the law, on the basis that our brands will be available alongside those of our competitors in the smuggled as well as the legitimate market’ (Clarke, 2000). This statement appears to be saying that BAT ensures that its brands are smuggled.

Other Parts Of The Tobacco Industry

The dominance of the large multinational tobacco companies extends to an effective control of all stages of the industry from leaf production to retail supply. Although tobacco growers have formed associations, these do not appear to have been able to effectively counter the strength of the large tobacco manufacturing and marketing companies. The relative proportions of the final retail price of tobacco products going to various parts of the production and marketing chain varies widely across countries. Although the proportion of the final retail product value going to tobacco farmers may be small (often under 2%), farmers in some countries find that tobacco is a more profitable and reliable source of revenue than other crops ( Jha and Chaloupka, 1999).

Compared to manufacturing and marketing, the growing and retailing of tobacco is far more fragmented. Tobacco growers are generally individual farmers. Tobacco is usually grown in areas with warm summers, lighter soils, adequate rainfall, and a sufficient labor force. The largest producers of tobacco leaf in 2001 were China (by far the biggest), India, Brazil, United States, and Turkey. Significant exporters of tobacco leaf include Brazil, United States, Zimbabwe, China, and Turkey. For nations such as Malawi, tobacco leaf export is a significant part of their economy.

In a number of countries, tobacco retailing is dominated by a limited number of retail organizations (often supermarket or service station chains), and for these retailers, tobacco products usually form a minor part of their overall turnover. However, for many retail businesses, large or small, tobacco products provide both a high profit margin per item sold and a stream of customers who will also buy other items.

A number of other industries are closely linked to the process of producing and marketing tobacco. These include suppliers of materials involved in the manufacturing process (e.g., paper, filters, additives, packaging) and those involved in marketing tobacco (e.g., advertising agents, media carrying tobacco advertising).

Tobacco companies are part of an investment process that includes pension funds, government agencies, universities, and other investors. The investment process for tobacco companies requires the participation of financial advisers, stockbrokers, banks, law firms, and other parts of the finance industry.

The Context In Which The Tobacco Industry Operates

The regulation of the industry by international agreements and attempts to affect the industry by public or commercial pressures have largely developed in the last 20 years. For instance, the Infact organization developed an international boycott of two of the most active multinational tobacco companies, Philip Morris and RJ Reynolds, and organized actions against others such as BAT. The actions targeted the companies’ food products, which included the brands Kraft, Post, Nabisco, and Maxwell House.

The Framework Convention On Tobacco Control

In 1996 the World Health Organization (WHO) began the work that led to the Framework Convention for Tobacco Control (FCTC). This is an international treaty designed to control tobacco industry activities, such as marketing and smuggling. The FCTC promotes health objectives and long-term economic and social objectives in the control of the tobacco industry over the consideration of short-term trade or financial grounds. The final agreement was accepted by the World Health Assembly in May 2003 and became part of international law for the ratifying nations in February 2005. By May 2007, 168 nations had signed the treaty and 147 had proceeded to the stage of ratification.

The FCTC treaty requires the ratifying countries to implement policies that directly affect the tobacco industry. This includes restricting tobacco marketing (including banning advertising, sponsorship, and promotion, as far as the countries’ constitutions allow) and requiring effective warning labels for tobacco products. It requires policies for smoke-free indoor workplaces and public places where there is national jurisdiction. One section is particularly relevant to the industry:

Parties shall act [to protect public health] from commercial and other vested interests of the tobacco industry in accordance with national law (Article 5, section 3).

The conditions of the FCTC are particularly demanding for some small nations because of trade relations with larger nations with strong tobacco industry interests.

Why Is The Tobacco Industry So Significant For Public Health Policy?

Product Harm

The industry’s main product, cigarettes, is addictive for nearly all users and kills over half the long-term users. Indeed, all tobacco products are addictive and dangerous to health, including chewing tobacco and other ‘smokeless’ tobacco such as snus and snuff. Particularly dangerous are those products involving tobacco heating or combustion: cigarettes (including kreteks, bidi, and other variants), cigars, pipe and ‘roll your own’ tobacco, and tobacco used in water-pipe variants. Altogether, tobacco products cause the early and preventable deaths of at least 1 in 10 people worldwide, and this proportion is predicted to increase to at least 1 in 6 within 25 years. Tobacco is also a significant cause of health inequalities within and between countries.

The Health Impacts Of Insufficient Information

The industry is unusual in the extent to which it relies on consumers having insufficient knowledge of the health consequences of long-term use, which means they disproportionately discount the future effects of being addicted. This lack of knowledge changes with experience, and in developed countries, most smokers do not want to continue to smoke. However, they are forced to continue buying the products because of their addiction. (In a 2002 survey across Canada, the United States, the United Kingdom, and Australia, about 90% of smokers regretted having started smoking.)

The extent of the addiction is shown by the 95% or more of unaided attempts at quitting smoking, which are followed by a return to smoking within a year. Because of the lessened ability of smokers to give up smoking due to addiction, and despite the proportion of the price of tobacco that is government tax (over 70% in some jurisdictions), tobacco companies frequently are able to make more profit on less volume by increasing the profit margin per unit sold.

The Health Sector And The Industry

The nature of the industry and its products has attracted considerable attention from the world health sector. Public health advocacy groups, communities, and nations have tried a range of strategies in their attempts to control the tobacco industry. These include the creation of new laws, application of existing laws, public relations, and social and economic pressure on the industry, its employees, and investors by means such as disinvestment and consumer boycotts.

The distance between the objectives of public health groups and those of the industry has meant that health authorities and the industry often tend to be in direct conflict. For instance, a World Health Organization report in 2000 stated:

[T]obacco companies have operated for many years with the deliberate purpose of subverting the efforts of the World Health Organization to control tobacco use. The attempted subversion has been elaborate, well financed, sophisticated, and usually invisible. .. . tobacco companies instigated global strategies to discredit and impede WHO’s ability to carry out its mission. .. . tobacco companies sought to divert attention from the public health issues, to reduce budgets for the scientific and policy activities carried out by WHO, … to distort the results of important scientific studies on tobacco, and to discredit WHO as an institution. (Zeltner et al., 2000)

The tobacco industry has resisted control by health authorities by exerting pressure on national and international political processes. Although the forms of pressure and the tactics and strategies used have varied, some common themes have emerged. They included the creation of alliances with other interest groups; the investment in social, economic, academic, and political contacts and in political access and favors; and the use of every possible avenue of the legal process (Sweda and Daynard, 1996).

By these means, industry groups have sought to oppose all substantive actions to reduce smoking and the harms from second-hand smoke. They have also sought to erode the ability of tobacco control organizations and individual advocates to function in a multitude of ways.

Adverse Environmental And Occupational Health Impacts

Besides the direct health effects of the use of tobacco products, other effects from tobacco industry activity that have health consequences include those on the physical environment (e.g., litter that pollutes waterways, air pollution from curing) and those stemming from the cultivation of tobacco (e.g., fertilizer and pesticides). The removal of trees for use in the tobacco curing process is estimated to account for over a quarter of all deforestation in some developing countries and to cause an average of 5% of the deforestation in 66 developing countries (Geist, 1999). Besides pesticide exposure, working with tobacco leaves can result in the absorption of nicotine through the skin, resulting in poisoning.

Future Issues

Developments that may face the world tobacco industry include the greater organization and implementation of tobacco control at an international level (e.g., the FCTC of WHO) and damaging events at a local or national level (e.g., lawsuits) whose effects are felt over national borders. However, the industry’s sales and profits in the developing world may continue to grow, in the absence of sufficient effective national and international tobacco control efforts.

National or international tobacco control activity could have an impact on the tobacco industry. The potential impacts include decreased demand for tobacco (for instance, through increased tobacco taxes, more attractive alternative nicotine products, or greater controls on tobacco marketing and promotion), the removal of the ability to trade in or profit from the sale of tobacco, and the making of the industry’s executive processes more open to surveillance and control. Another possible development is the withdrawal of investments in tobacco companies by government-controlled agencies.

Future developments, positive or negative for the industry, are likely to result from a combination of social, economic, and legal changes. Law that is adequately enforced has the potential for controlling most aspects of the tobacco industry. The potential scope of legal regulation includes controls on brand promotion and marketing, increased requirements for the disclosure of business and government-relations methods (including political donations), the increased disclosure of product ingredients, and requirements for safety measures (e.g., fire-safer cigarettes). At the more restrictive end of the control spectrum, the right to operate in certain ways, or at all, could be removed, or the companies could be subject to civil legal actions or criminal prosecutions for a range of their actions.

A more direct approach to controlling the industry would be to remove its ability to trade in, or profit from, tobacco. This could occur by disallowing companies from selling to wholesalers, retailers, or the public, or by a combination of levies and price freezes.

If tobacco-manufacturing companies were required to sell only to an official or nonprofit agency with public health objectives, that agency would have the ability to control both the nature of the product and the distribution and retail structure for tobacco. The systems used could graduate from the agencies’ use of the present retail arrangement to the eventual supply of tobacco in relatively clinical settings, where health promotion and the treatment of nicotine dependence could be the dominant imperative. In one option, the tobacco companies would be involved only where they met the agency’s supply requirements for products of a specified nature (Callard et al., 2005).

The model would require legislative arrangements to ensure that before the tobacco companies exited markets in any way, they would be required to be bonded to cover their liabilities. Otherwise, the companies could escape their liabilities by bankruptcy proceedings or by transferring assets out of jurisdictions where the assets are threatened.

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