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The U.S. Tobacco Industry in Domestic and World Markets Edward Knight, Patricia C. Ayers and Gerald Mayer Economics Division Updated June 9, 1998 98-506 E CONTENTS: Composition and
Performance of the Domestic Cigarette Industry This report examines the operations, production, and sales of the U.S. manufactured tobacco products industry, both domestically and abroad. Americans spent an estimated $51.9 billion on tobacco products in 1997, or just under 1% of their disposable income. Of this amount, $48.7 billion (or 94%) was spent on cigarettes, $2.2 billion on smokeless and smoking tobacco, and $0.9 billion on cigars. Cigarette production in the United States is largely concentrated in the hands of three firms: Philip Morris, RJR Nabisco, and Brown & Williamson. These firms accounted for about 90% of total production in 1996. Domestic sales of major U.S. firms (namely, Philip Morris and RJR Nabisco) grew very little over the period 1992-1996. International sales, on the other hand, increased more rapidly during this period, indicating that these firms are giving high priority to increasing cigarette sales abroad, given the diminished growth potential of the U.S. market in recent years. Cigarette production in the United States registered only a slight gain (0.2%) over 1992-1997. However, cigarette consumption on a per capita basis declined by about 9%. The U.S. share of world production of cigarettes declined from 13.4% to 12.6% over the period 1992-1997. The U.S. share of world exports also declined from 26% to 21% in the same period. China is by far the largest producer of cigarettes in the world; the second largest producer is the United States. In 1997 China produced an estimated 1.7 trillion pieces, almost two and one half times the 720 billion pieces produced in the United States. The United States is by far the largest cigarette exporting nation in the world, with exports in 1997 estimated about 217 billion pieces, or 21% of the world total. China is the largest consumer market in the world, with over 300 million smokers consuming 1.7 trillion cigarettes in 1997. Its market, however, is basically closed to foreign exporters. China's desire to become a member of the World Trade Organization, eventually could lead to an opening of its market to cigarette imports. Like the cigarette industry, the smokeless tobacco industry (including the production of snuff and chewing tobacco) is highly concentrated among a few firms: U.S. Tobacco Company, Conwood Company, and Pinkerton Tobacco Company. In 1996 the companies accounted for abut 83% of total industry sales. The production of chewing tobacco declined by 16% over the 1992-1997 period while the output of snuff products increased by 11%. This rise was due entirely to the increase in the output of moist snuff products. Consumption patterns were also similar in this period: the use of snuff products showed moderate gains of 7%, while chewing tobacco sharply declined by 25%. The annual consumption of smokeless products on a per capita basis is quite small compared to the use of cigarettes about 1 pound for smokeless and 4 pounds for cigarettes. The U.S. cigar industry is primarily composed of four companies. The production of cigars in the United States increased by almost 25% from 1992 to 1997. Imports of large cigars account for a relatively large share of U.S. consumption. Most imports of large cigars consist of premium cigars. This report will be updated as new information or issues warrant. This report examines the operations, production and sales of the U.S. manufactured tobacco products industry, both domestically and abroad. The analysis focuses mainly on the domestic cigarette industry, but also reviews the smokeless tobacco industry (which includes snuff and chewing tobacco) as well as the cigar industry. The information used in this report was obtained from readily available (published) government and private sources. The time periods analyzed vary, depending on the availability of data. A summary of the major findings is provided on pages 28-30. In 1997, the U.S. tobacco industry produced an estimated 720 billion cigarettes, 3.8 billion cigars, and 121.3 million pounds of chewing tobacco and snuff. Americans spent an estimated $51.9 billion on tobacco products in 1997, or just under 1% of their disposable income. Of this amount, $48.7 billion (or 94%) was spent on an estimated 480 billion cigarettes, $2.2 billion on smoking tobacco and smokeless tobacco, and $0.9 billion on cigars. (See Endnote 1.) Composition and Performance of the Domestic Cigarette Industry The domestic cigarette industry is highly concentrated. It is essentially composed of three major companies Philip Morris, RJR Nabisco, and Brown & Williamson/BAT with a combined domestic market share of 90%. Lorillard/Loews and the Liggett/Brooke Group hold a combined market share of less than 10%. Philip Morris Companies Inc. is a holding company whose principal wholly-owned subsidiaries engage in the manufacture and sale of consumer products. Philip Morris Inc. (PM Inc.) conducts the manufacture, marketing and sales of cigarettes in the United States. Its leading premier brands are Marlboro, Benson & Hedges, Merit, Virginia Slims, and Parliament; its discount brands are Basic and Cambridge. Philip Morris International Inc. (PMI) is the largest privately owned cigarette producer in the world. Its leading international brands are Marlboro, L&M, Philip Morris, Bond Street, Chesterfield, Lark, Parliament, Merit, and Virginia Slims. PM Inc. employs 20,000, with nine manufacturing facilities in Kentucky, North Carolina and Virginia. PMI, employing 12,000 outside the United States, has ownership, leasing, or interest rights in 52 manufacturing facilities in 29 countries. RJR Nabisco Holdings Corporation conducts its tobacco business through its wholly-owned subsidiaries, R. J. Reynolds Tobacco Company (RJRT) and R.J. Reynolds International (Reynolds Intl.). Its leading premier brands are Winston, Doral, Camel, Salem, and Vantage. Its discount brands include Monarch, More, Now, Best Value, Sterling, Magna and Century. The leading brands of Reynolds Intl. are Winston, Camel and Salem. RJRT, with 9,000 employees, has manufacturing facilities in North Carolina. Reynolds Intl. employs 16,000 workers in 22 countries at wholly-owned or joint-venture manufacturing facilities and at another 20 locations through licensing agreements. Brown & Williamson is a wholly owned U.S. subsidiary of the UK company BAT Industries PLC, a manufacturer of tobacco products and provider of financial services. Its premier brands include Lucky Strike, Carlton, and Kool. In 1994 BAT acquired American Brands' subsidiary American Tobacco, including its Lucky Strike and Pall Mall brands. In 1997, American Brands completed its divestiture of all tobacco interests by selling its UK-based Gallaher Group tobacco subsidiary to BAT. Brown & Williamson employs 4,800, with manufacturing facilities in Kentucky and North Carolina. It also has offices in Hong Kong, Malaysia, Japan and the UK. Lorillard Tobacco Company is a subsidiary of Loews Corporation. Its premier brands include Newport, Kent, Old Gold and True. In 1977, Lorillard sold the rights to its cigarette brands' trademarks outside the United States to BAT. Lorillard employs 3,500. Its manufacturing and research facilities are located in Greensboro, N.C. Liggett Group Inc. is a subsidiary of Brooke Group Ltd. of Miami, Florida. Liggett's headquarters are located in Durham, North Carolina. Its brands include: L&M, Eve, Chesterfield, and Lark. In 1978 Liggett sold the rights to its cigarette brands' trademarks outside the United States to Philip Morris Companies. Liggett has 570 employees with manufacturing facilities in Texas and North Carolina. As of 1996, Liggett had acquired 95% of the stock of Liggett-Ducat a Russian joint stock company manufacturing cigarettes. Domestic Market Shares of U.S. Cigarette Producers As noted earlier, the domestic cigarette industry is largely dominated by three firms. Figure 1 shows that, in 1997, four U.S. cigarette makers held 98% of the U.S. cigarette market. The largest share was held by Philip Morris, at 49.1%, followed by RJR Nabisco (at 24.2%), Brown and Williamson/BAT (at 16.1%), and Lorillard (at 8.7%). Financial Performance of Major U.S. Cigarette Producers Table 2 below contains data on sales and profits of the three major cigarette producers owned and operated in the United States. Brown & Williamson, the other major U.S. producer, is a wholly-owned subsidiary of BAT, a British company. Comparable data on this firm are not readily available. Figures 2 and 3 show that, overall, Philip Morris Companies, Inc. registered impressive gains in sales and profits over the 1992- 1997 period. Tobacco sales rose sharply from $25.7 billion to $39.8 billion (or 55%), while total operating profits increased by $650 million (or 9%). This success, however, was driven solely by strong gains in sales by its international operations. Domestic sales increased modestly from $12.0 billion to $13.5 billion (or 12%), but domestic profits declined from $5.2 billion to $3.3 billion (a decrease of 37%). International tobacco sales, on the other hand, increased from $13.7 billion in 1992 to $26.3 billion (or 93%) in 1997. Likewise, profits from international sales rose sharply, increasing from $2.0 billion to $4.6 billion (or 128%). Figures 4 and 5 show that the sales and profits performance of the tobacco operations of RJR Nabisco Holding Corp. contrasted markedly with that of Philip Morris. Total domestic sales decreased from $6.2 billion in 1992 to $4.9 billion in 1997 (a drop of 21%). From 1992 to 1996, profits on domestic sales dropped from $1.7 billion to $1.1 billion (a decrease of 36%). International sales, on the other hand, increased from $2.9 billion to $3.4 billion (or 20%) between 1992 and 1997, while profits on international sales increased from $537 million to $761 million (or 42%) between 1992 and 1996. The gains on the international front, however, were not sufficient to offset the declines from domestic operations over the period. Consequently, total sales and profits from the tobacco operations of RJR were lower in 1997 than in 1992 (down by 8% and 54%, respectively). It is apparent from these data that both Philip Morris and RJR Nabisco are giving high priority to increasing cigarette sales abroad, given the diminishing growth potential of the U.S. market in recent years. This trend will be discussed in more detail below. Lorillard Tobacco Company, the third company owned and operated in the United States, experienced only a slight gain in sales over the 1992-1997 period, from $2.2 billion to $2.4 billion (or 11%). Profits, on the other hand, decreased from $524 million to $363 million over the same period (a decline of 31%). As noted earlier, this company in the 1970s sold the foreign production rights of its cigarette brands' trademarks to a British firm, BAT Industries PLC. Indicators of Cigarette Industry Performance From statistics compiled by the U. S. Departments of Agriculture and Labor, one can obtain a relatively good understanding of cigarette industry performance, domestically and internationally, over the past several years. These indicators of industry performance offer interesting insights regarding patterns of growth in domestic production, consumption, employment, and earnings of workers. They also provide information on cigarette markets abroad relating to production, consumption and exports. Table 3 below contains selected data on the performance of the cigarette industry over the period 1992-1997. The major characteristics of industry performance during this period are as follows: -- Cigarette production in the United States totaled 719.6 billion pieces in 1997, which is only 0.2% above the 718.5 billion pieces produced in 1992. (See Endnote 2.) Hence, domestic production has grown very little over this period.
Table 4 below provides selected data on world cigarette markets, covering the period 1992-1997. The major characteristics of these markets are as follows:
Consequently, the U.S. share of world production declined slightly from 13.4% to 12.6% over the period. This trend is shown in Figure 7.
Tables 5-12 and Figures 8-11 below provide additional data on leading world cigarette markets on a country-by-country basis. The People's Republic of China is by far the largest producer of cigarettes in the world. In 1997 (see Table 5), China produced an estimated 1,722 billion cigarettes, almost two and one half times the level produced in the United States (720 billion cigarettes). Japan ranked a distant third at 255 billion pieces, followed closely by Germany, Indonesia, and Brazil. In 197, these leading producing countries accounted for almost 60% of total world production, with China and the United States together producing by far the largest share: 43%; China's share was 30.1% and that for the United States was 12.6%. Neither of these countries experienced any significant changes in their shares of world production over the 1992-1997 period. China is also the largest consumer of cigarettes in the world. In 1997, China consumed an estimated 1,679 billion cigarettes. China was followed by the United States (480 billion), Japan (316 billion), the Russian Federation (230 billion), Indonesia (188 billion), and Germany (151 billion). These countries consumed almost 58% of total world consumption. Among these countries, from 1992 to 1997 the share of world consumption increased only in the Russian Federation and Indonesia. The United States is by far the largest cigarette exporting nation in the world, with exports in 1997 of 217 billion pieces, or 20.7% of the world total (see Figure 10). The other major exporters include the Netherlands, United Kingdom, Germany, Brazil, and Singapore. These six countries accounted for 64% of total world exports. Despite its dominant position as world producer, total exports from China in 1997 amounted to only an estimated 60 billion pieces, or about 5.7% of the world total.
In 1997, China imported about 17 billion pieces or only 2.4% of total world imports. (See Endnote 6.)
Involvement of Major Cigarette Manufacturers in World Markets As shown above, the consumption of cigarettes in the United States has declined in recent years, while consumption worldwide has increased. Therefore, the financial prospects for U.S. cigarette producers may depend, in part, on the their ability to increase cigarette sales abroad. This section examines the world cigarette market and reviews efforts of the two largest U.S. cigarette producers Philip Morris Companies, Inc. (PM) and RJR Nabisco (RJR) to increase foreign production and sales. The world cigarette market can be described in terms of mature markets Western Europe and North America and emerging or developing markets Asia and the Pacific, Central and Eastern Europe, Latin America and the Caribbean, and Africa, the Middle East and Central and South America (AMESCA). According to industry analyst J. Jessup of the British brokerage firm UBS Limited,
In the near future, Jessup suggests that a "pluralistic market" will emerge
Table 13 shows that both Philip Morris and RJR Nabisco have a well-established presence in world markets. RJR dominates the North American market, while PM has a large presence in both North America and Western Europe. PM, RJR, and BAT compete on a relatively equal basis in Central and Eastern Europe, while BAT and Rothmans have large shares in the AMESCA region. Rothmans holds the largest share in the Asia Pacific market, while BAT is the largest player in the Latin America market. BAT has recently enhanced its position in the latter market with the acquisition of Cigarrera La Moderna, which has over 50% of the Mexican market. (See Endnote 8.) Cigarette Sales by Brand. Among premium brand cigarettes, Marlboro, produced by Philip Morris, was the leading brand sold worldwide in 1996. It represented 38.5% of the total volume of 1,189 billion pieces accounted for by the 12 leading brands sold in the world market. See Figure 12. As shown in Table 14 below, Philip Morris also has three other brand names L&M, Prima, and Bond St. in the top 12 leading brands, bringing its total market share to 53%. RJR Nabisco with two brands Winston and Camel holds a 12.5% share, bringing the U.S. market share of the premium brand market to over 65%. The British firm BAT Industries PLC claims a share of 11.4%. Together these three American and British firms account for about 77% of the world market for premium brand cigarettes. Emerging and Potential Markets Given their already dominant position in the U.S. market, the future prospects for PM and RJR may depend, in large part, on their ability to increase sales in foreign markets. Much of the potential for growth may lie in emerging markets. Between 1992 and 1997, the largest increases in cigarette consumption occurred in Indonesia (an increase of 58 billion cigarettes), China (up 57 billion), the Russian Federation (up 37 billion), Turkey (up 25 billion), and India (up 21 billion). See Table 7 above. China: The World's Leading Consumer of Cigarettes. China is the world's largest consumer market for cigarettes, with over 300 million smokers consuming 1.7 trillion cigarettes in 1997. Its market, however, is "formally closed to foreign tobacco companies, but growing pressure...and China's likely accession to the World Trade Organization could open the market." (See Endnote 9.) Consequently, if this large market should open to foreign imports of cigarettes, it could offer substantial potential for U.S. and other foreign firms to expand their markets in China. The state-owned tobacco company, China National Tobacco Corporation (CNTC), employs 10 million Chinese farmers in growing leaf tobacco, over 500,000 industrial workers, and 3 million retailers. (See Endnote 10.) Both RJR and Philip Morris, through joint ventures established in 1988 and 1993 respectively, have a very small portion of the China market, which they would like to expand as the domestic demand for Western brands continues to grow. There are also "informal channels" through which independent traders purchase premium brands of the major international manufacturers and smuggle them into the country. "Estimates put the number of smuggled cigarettes at 50 billion annually, compared with an official import quota of 700 million." (See Endnote 11.) Allowed foreign imports are assessed a 65% tax per pack on cigarettes. The potential for market expansion in China is considered to be immense, despite existing barriers. China is planning to restructure its tobacco industry by closing or merging about 70 small tobacco companies over the next five years. (See Endnote 12.) This proposed consolidation is equivalent to 40% of the state-owned tobacco businesses. China has recently boosted exports, doubling their volume from 30 billion pieces in 1992 to 60 billion in 1997 (see Table 9 above). China is seeking assistance from international leaf tobacco merchants to improve their leaf quality. Based on our discussions with U.S. Department of Agriculture officials, there are several factors affecting the quality of cigarette tobacco in China. These include: handling and curing processes, as well as weather and soil conditions. As China improves the quality of its cigarettes by upgrading its manufacturing and tobacco leaf growing and curing processes, it will be better positioned to compete against potential foreign competition in its domestic cigarette market and in international markets. Other Markets. On a smaller scale, other developing markets offer a potential for increased cigarette sales by U.S. producers. As noted above, in recent years cigarette consumption has increased noticeably in Indonesia, the Russian Federation, Turkey, and India. Other large consumers of cigarettes include Japan, Brazil, South Korea, Italy, and Poland (see Table 7 above). For several reasons, U.S. cigarette manufacturers may be able to expand sales in foreign markets. In some countries, rising incomes have increased the demand for cigarettes. In certain developing areas, there is a relatively high per capita consumption of cigarettes. And the world demand for American-style cigarettes has increased. On the other hand, in several countries, the tobacco industry is predominantly state-owned (e.g., Indonesia, South Korea, Turkey, Italy, Spain, Thailand, Cuba, and Vietnam). But as some of these industries are privatized and as barriers to trade are lowered, the investment and sales opportunities for American producers will likely expand. (See Endnote 13.) International Activities of Major U.S. Companies: Philip Morris and RJR Nabisco This section provides information on the international sales and production of cigarettes by the international subsidiaries of two American Companies: Philip Morris Companies Inc. and RJR Nabisco Holding Corporation. The wholly-owned subsidiaries of these two companies are Philip Morris International and Reynolds International, respectively. Based on reviews of the 1996 and 1997 annual reports of both of these holding companies and their 10- K financial reports to the Securities and Exchange Commission (SEC) for 1997, it is apparent that both companies are interested in expanding their sales of cigarettes in markets abroad. Pertinent excerpts from the 10-K reports are contained in appendix B of this report. Furthermore, available information indicates that, in recent years, Philip Morris has gained market share worldwide. In its 1997 Annual Report, Philip Morris states that it sold 711.5 billion cigarettes outside the United States in 1997, up 7.8% over 1996 (660 billion cigarettes). This total, however, includes both exports from the United States and shipments from its plants, affiliates, and licensees located abroad. An inquiry was made to Philip Morris to obtain data on exports to determine how many cigarettes were actually produced by its operations abroad. The company responded that they no longer publish this information. Nonetheless, according to an earlier Annual Report for 1995, Philip Morris International exported 164.1 billion cigarettes in 1995. When this amount is subtracted from its total international shipments of 593.2 million in 1995, the total volume of cigarettes produced and shipped outside the United States amounted to 429.1 billion. This amount was considerably above the total produced within the United States in 1995, which was 385.9 billion (221.8 billion in domestic shipments plus exports of 164.1 billion). Exports accounted for 28% of Philip Morris's total international shipments of 593.2 billion units in 1995. The firm's total international shipments amounted to about 12% of the total world cigarette market (about 5 trillion cigarettes). In its 1997 Annual Report, Philip Morris reported that its international shipments in 1997 (711.5 billion cigarettes) accounted for about 13.6% of the world market (5.2 trillion cigarettes), which is 1.6 percentage points above the level achieved in 1995. In its 1996 Annual Report, Philip Morris includes information on its market shares of cigarette sales in selected countries for 1996. These shares are shown in Table 15 below. According to these figures, it has market shares of 20% or more in 17 selected countries, including the United States. Its largest share is in Argentina (60.5%), followed by Hong Kong (56.9%), Italy (53.9%), United States (47.8%) and Switzerland (45.6%). This information was not included in its 1997 Annual Report. A review of the recent annual reports of RJR Nabisco and the 1997 10-K report submitted to the SEC found no information on total international sales of the company on a unit basis for 1996 or 1997. The company did state, however, that its international volume of cigarette sales increased by 1% in 1997, compared to a 10% gain in 1996. (See Endnote 14.) In its latest annual report, RJR included information showing its 1997 market shares for cigarette sales in selected countries. These figures are shown in Table 16 below. Its market shares are considerably lower that those achieved by Philip Morris. RJR's largest market share is in Russia (21%), followed by Romania (19%) and (Malaysia (17%). In 1997, RJR's total international shipments minus its exports from the U.S. amounted to 162.4 billion cigarettes. (See Endnote 15.) This sales volume plus 35.6 billion in U. S. exports brings total international sales to 198 billion. When this figure is added to the company's total shipments of 117 billion pieces within the United States, total shipments by the firm in 1997 amounted to 315 billion pieces. Thus, in 1997, RJR shipped more cigarettes from its overseas operations (162.4 billion) than from its domestic operations (152.6 billion). Moreover, according to its 1995 Annual Report, almost 80 percent of its total volume of international shipments was produced by it operations abroad. According to its 1997 Annual Report, this percentage had risen to 82 percent, indicating that RJR has expanded foreign operations in recent years. In its 1996 Annual Report, the company stated that it commanded about 4 percent of the world cigarette market in 1996. This is considerably below the 13.6 percent world market share claimed by Philip Morris in its 1997Annual Report. RJR did not include a figure on its share of the world market for 1997 in its 1997 Annual Report. In addition to cigarettes, tobacco products include smokeless tobacco and cigars. This section provides an overview of these industries. Smokeless tobacco products include dry and moist snuff and chewing tobacco. Like the cigarette industry, this industry is quite concentrated. The firms that have the largest market shares in this industry are U.S. Tobacco Company (37.9%), Conwood Company L.P. ( 23.2%), and Pinkerton Tobacco Company (28.1%). These firms together accounted for 83% of total U.S. production in the industry in 1996. Other firms in the industry include: National Tobacco Company (9.2% market share), Swisher International Group, Inc. (6.8%), Brown & Williamson (0.5%), and R.C. Owen Company of Tennessee, Inc. (0.4%). (See Endnote 16.) Brief descriptions of the principal firms in the industry follow. U.S. Tobacco Company Inc. is the holding company for United States Tobacco Company (USTC) and through its subsidiaries manufactures and markets various consumer products and entertainment services. USTC is the world's leading producer of moist smokeless tobacco, with sales of 46 million pounds in 1996. USTC employed 4,467 workers in 1996 and has manufacturing facilities in Illinois, Kentucky and Tennessee. Conwood Company L.P. is a limited partnership which manufactures moist and dry snuff and loose leaf, plug and twist chewing tobacco. Estimated 1996 sales were 28 million pounds. The firm reported 1,000 employees in 1997. Its manufacturing facilities are in Kentucky, North Carolina, and Tennessee. Pinkerton Tobacco Company, Inc. is a Virginia subsidiary of Swedish Match North America, which is owned by Swedish Match, AB of Stockholm. Operations of Pinkerton and Swedish Match include the manufacture of chewing tobacco, smoking tobacco, and moist snuff. Pinkerton reported sales of 26 million pounds for 1996; total employment was 400. National Tobacco Company, L. P. is a limited partnership engaged in manufacturing chewing tobacco. This former branch of Lorillard employs 270, with 1996 total sales of 11.2 million pounds. Swisher International Group Inc. is a subsidiary of Hay Island Holding Corporation. It manufactures cigars, chewing tobacco, and snuff . Estimated 1996 sales were 8.2 million pounds. It has 1,050 employees and has manufacturing facilities in Florida and West Virginia. Brown & Williamson is a major U.S. producer of cigarettes, producing about 633 thousand pounds of smokeless tobacco products in 1996. (See page 2 above for more information on this firm.) R.C. Owen Company of Tennessee, Inc. is a subsidiary of RCO Holding Company, which through its subsidiaries manufactures chewing and smoking tobacco and redrys and stores tobacco. Estimated 1996 sales for R.C. Owen were 487 thousand pounds; total employment was 80 workers. Tables 17 and 18 below provide data on production and consumption figures for the industry over the period 1992-1997.
Table 19 below shows that exports of smokeless tobacco products accounted for a very small share of total industry production in the United States during 1992-1997. UST Inc., the dominant domestic producer of moist smokeless tobacco products, conducts only an insignificant amount of business outside of the United States, due mainly to low per-capita consumption levels for its products in most international markets. However, UST continues to consider diversification efforts abroad in its long-range plans. (See Endnote 17.) Based on the data shown in Table 19, exports of total smokeless tobacco products (including both chewing tobacco and snuff) exhibited a marked increase from 0.7 million pounds in 1992 to 2.3 million pounds in 1997. Despite this growth in exports, these amounts account for a very small share of total U.S. production of chewing tobacco and snuff. Cigars manufacturers produce three categories of cigars: premium cigars, large cigars, and little cigars. Premium cigars are hand-made of entirely natural, long filler tobacco with a natural leaf wrapper and retail for $1 to more than $25 dollars. Large cigars are machine-made with chopped filler tobacco and may have either a natural leaf or a reconstituted tobacco wrapper. These generally retail for under $1 dollar. Little (or small) cigars are machine-made from cut filler tobacco with a reconstituted tobacco wrapper and a filter; they weigh less than three pounds per thousand. (See Endnote 18.) In 1997, an estimated 3.8 billion cigars were produced in the United States. This volume represented an increase of almost 25% over 1992 production of 3.1 billion cigars. See Table 20 below. The United States produces more large (including premium) cigars than small cigars. In 1997, 61% of the cigars produced in the United States were large cigars. Only 4.3% of the large cigars produced were exported. By comparison, in 1997, 30% of the cigarettes produced in the United States were exported. In contrast to cigarettes and smokeless tobacco, cigar imports account for a relatively large share of cigar consumption in the United States. In 1997, 16% of the large cigars consumed in the United States were imported. This percentage was up from 5% in 1992. Most of the increase in the volume of large cigar imports can be accounted for by a rise in demand for premium cigars. An estimated 99% of all premium cigars sold in the United States are handrolled outside the United States. Thus, the fast-growing demand for premium cigars is dependent on imports. (See Endnote 19.) The majority of premium cigar imports are from the Dominican Republic, Honduras, Jamaica, Nicaragua, and Mexico, with the Dominican Republic and Honduras providing over 80% of all premium imports. (See Endnote 20.) The outlook for the cigar industry, according to several industry analysts, is for continued growth, especially in the premium and large cigar sectors. Characteristics of a likely cigar purchaser, according to 1996 Mediamark Research data, are a white male, age 18-44, with a high school or college education. He would be employed full-time and have a household with children present. Cigar smokers would be found in all regions of the country, although slightly fewer in the South. (See Endnote 21.) The cigar industry is primarily composed of four companies with major market shares in the three cigar production categories (i.e., large, premium, and little cigars), and the balance spread among 13 smaller companies. The top four--Swisher International Group, Inc., General Cigar Holdings, Inc., Consolidated Cigar Holdings, Inc. and Havatampa, Inc.--account for approximately 80% of industry sales. (See Endnote 22.) Brief descriptions of these companies follow: Swisher International Group, Inc. is a subsidiary of Hay Island Holdings Corporation, manufacturing cigars, chewing tobacco and snuff. Swisher dominates the little cigar market, with 46% of the 1997 market share; Swisher Sweets is the leading name brand little cigar. Swisher claims 26% of the market share of the large cigars domestic market and 6% of the premium market. Swisher manufactures more than five million large and little cigars daily at its Jacksonville, Florida facility which they believe "is the most automated cigar manufacturing facility in the United States." Their premium brands are produced in the Dominican Republic, Honduras and Nicaragua. According to their 1997 10-K filing document, the company "is the leading exporter of American made cigars....estimates that its products are available in over 70 countries worldwide. During 1997, approximately 3.5% of the Company's revenues were derived from export sales and royalties." As of December 31, 1997, Swisher had approximately 1,340 full-time employees. (See Endnote 23.) General Cigar Holdings, Inc., through its principal operating subsidiary General Cigar Co., is the largest U. S. manufacturer and marketer of brand name premium cigars with a 1996 sales volume of 41.6 million units. General Cigar "believes its Macanudo brand is the top selling premium cigar brand sold in the U.S." They also manufacture large cigars , but do not compete in the little cigars sector. General Cigar employs approximately 6,000, plus an additional 1,000 seasonal workers, at its subsidiary Villazon & Company manufacturing facility in Tampa, Florida, as well as facilities in Honduras, Jamaica, and the Dominican Republic. While at present their international sales are "not material", corporate plans are "to increase its international presence...focus its efforts in the United kingdom, Germany, France, Spain, China, Russia and certain countries in South America, as well as duty free markets worldwide." General Cigar has recently received approval to market and sell its products in China and has already "begun distributing premium and mass market cigars in China." (See Endnote 24.) Consolidated Cigar Holdings, Inc., which is itself a subsidiary of Mafco Consolidated Group, Inc., operates as a holding company for Consolidated Cigar Corporation of Ft. Lauderdale, Florida. Consolidated Cigar Corp. manufactures and distributes cigars, smoking pipe tobacco, and a variety of smokers' accessories. It competes in all 3 sectors of the cigar industry with manufacturing facilities at its 6 subsidiaries in Florida, Puerto Rico, Honduras, the Dominican Republic, and Jamaica. As of December 31, 1996, Consolidated Cigar reported approximately 4,000 employees. (See Endnote 25.) Havatampa Inc. is a subsidiary of Tabacalera SA of Madrid, Spain, reported to be the world's largest cigar manufacturer. The Tampa, Florida company competes in the large and little cigar sectors with a 24% and 10% market share, respectively. According to the executive vice president of Havatampa, Tommy Morgan, "the purchase by Spanish cigar manufacturer Tabacalera SA, finalized in early December [1977], will most likely result in Havatampa entering the premium and mid-range markets." (See Endnote 26.) Manufacturing facilities are in Florida and Alabama with approximately 800 employees. This review and analysis of the domestic and international operations, production and sales of the U. S. tobacco industry over the period 1992-1997 has produced a number of significant findings. These include the following:
The tables in this appendix show world production and consumption by country for the years 1992 to 1997. The tables are similar to tables 5-8 in the text, but provide information on more countries. The following excerpts from the 10-K financial filing forms are provided in addition to the summary information contained in this report on pages 19-22 concerning the international activities of major U.S. companies. Philip Morris International In its 10-K financial report for 1997, Philip Morris Companies Inc. provides the following information regarding the international operations and sales of Philip Morris International. Philip Morris International's [PMI] total cigarette shipments grew 7.8% in 1997, to 711.5 billion units, including shipments of local Portuguese brands acquired in 1997 (see discussion below). Philip Morris International estimates that its share of the international cigarette market (excluding the United States) was 13.6% in 1997, up from 12.8% in 1996. Philip Morris International estimates that international cigarette industry shipments (excluding the United States) were approximately 5.2 trillion units in 1997, which represent an increase of 1.4% over 1996. Philip Morris International unit shipments (including brands acquired through acquisitions) have grown at a compounded annual growth rate of 11% over the last five years versus compounded annual industry growth of approximately 1.5% over the same period. Philip Morris International's leading international brands MARLBORO, L&M, PHILIP MORRIS, BOND STREET, CHESTERFIELD, LARK, PARLIAMENT, MERIT and VIRGINIA SLIMS collectively accounted for approximately 49% of the international cigarette industry growth (excluding the United States) in 1997. Unit sales of Philip Morris International's principal brand, MARLBORO, increased 5.5% in 1997, to 319 billion units, representing more than 6% of the international cigarette market (excluding the United States). Philip Morris International has a cigarette market share of at least 15%, and in a number of instances substantially more than 15%, in more than 40 markets, including Argentina, Australia, Belgium, the Czech Republic, Finland, France, Germany, Hong Kong, Italy, Japan, Mexico, the Netherlands, the Philippines, Poland, Portugal, Saudi Arabia, Singapore, Spain, Switzerland and Turkey. In 1997, Philip Morris International increased capacity and improved productivity through various acquisitions and capital projects. Major capital expenditures included modernization and expansion of facilities in Germany, the Netherlands, Switzerland, Poland, Russia, Lithuania, the Ukraine, Turkey, Malaysia and Brazil. In January 1997, Philip Morris International acquired a controlling interest in Tabaqueira-Empresa Industrial de Tabacos, S.A., Portugal's formerly state-owned tobacco company, and later in the year restructured its interests in the business of Cigarros La Tabacalera Mexicana S.A. de C.V., a Mexican cigarette company, increasing its ownership in that business from 28.8% to 50.0%. During 1997, tobacco operating revenues of PMI increased $2.2 billion over 1996, including a $1.2 billion increase in excise taxes (primarily reflecting the consolidation of previously unconsolidated and newly acquired subsidiaries). Excluding excise taxes, operating revenues increased $1.0 billion due primarily to price increases ($679 million), favorable volume/mix ($618 million) and the consolidation of previously unconsolidated and newly acquired subsidiaries ($577 million), partially offset by unfavorable currency movements ($961 million). Operating profit for 1997 increased 12.6% over 1996, due primarily to price increases, net of cost increases ($550 million), favorable volume/mix ($371 million) and the consolidation of previously unconsolidated and newly acquired subsidiaries ($114 million), partially offset by unfavorable currency movements ($408 million) and higher marketing, administration and research costs. PMI's volume grew 51.3 billion units (7.8%) in 1997 over 1996 to 711.5 billion units, including local brands manufactured by Tabaqueira-Empresa Industrial de Tabacos, S.A., Portugal's leading tobacco company in which PMI acquired a controlling interest in January 1997. Volume advanced in most major markets, including Germany, Italy, the Benelux countries, Spain, Central and Eastern Europe, the Middle East, Turkey, the Asia/Pacific region, Argentina and Mexico. In addition, PMI recorded market share gains in most major markets. In France, industry and PMI volumes were down, and in Brazil and Australia, PMI lost volume and share. However, volume and market share for Marlboro increased in France and Brazil. Overall volume growth was driven by PMI's portfolio of international brands, including Marlboro, which increased 5.5% over 1996, and Bond Street, Parliament, Chesterfield and Virginia Slims, each of which recorded double-digit volume increases. R. J. Reynolds International In addition to the information already provided on its international operations, RJR provides the following descriptions of its operations and sales activities abroad in its 1997 10-K financial report. The tobacco line of business is conducted by RJRT [RJR Tobacco] and Reynolds International, which manufacture, distribute and sell cigarettes. Cigarettes are manufactured in the United States by RJRT and in over 40 foreign countries and territories by Reynolds International and subsidiaries, joint ventures or licensees of RJRT and are sold throughout the United States and in more than 170 markets around the world. In 1997, approximately 59% of total tobacco segment net sales (after deducting excise taxes) and approximately 66% of total tobacco segment operating income on a reported basis (before amortization of trademarks and goodwill and restructuring expenses) were attributable to domestic tobacco operations. Reynolds International operates in over 170 markets around the world. Although overall foreign cigarette sales (excluding China, in which production data indicates an approximate 2% per annum growth rate) have increased at a rate of only 1% per annum in recent years, Reynolds International believes that the American-blend segment, in which Reynolds International primarily competes, is growing significantly faster. Although Reynolds International is the second largest of two international cigarette producers that have significant positions in the American-blend segment, its share of sales in this segment is approximately one-fourth of the share of Philip Morris International Inc., the largest American-blend producer. Reynolds International has strong brand presence in Western Europe and is well established in its other key markets in the Middle East/Africa, Asia, the CIS [i.e., Commonwealth of Independent States] and Baltics region and Canada. Reynolds International is aggressively pursuing development opportunities throughout the world. Reynolds International markets nearly 100 brands of which WINSTON, CAMEL and SALEM, all American-blend cigarettes, are its international leaders. WINSTON, Reynolds International's largest selling international brand, has a significant presence in Puerto Rico and has particular strength in the Western Europe and Middle East/Africa regions. CAMEL is sold in approximately 140 markets worldwide and is Reynolds International's second largest selling international brand. SALEM is the world's largest selling menthol cigarette and is particularly strong in Far East markets. Reynolds International also markets a number of local brands in various foreign markets. None of Reynolds International's customers accounted for more than 10% of its sales in 1997. Approximately 18% of Reynolds International's 1997 volume was U.S.-made product, with the remainder manufactured outside the U.S. Reynolds International brands are manufactured in owned or joint-venture facilities in 22 locations outside the United States, and through licensing agreements in about 20 other countries. Reynolds International owned or joint-venture manufacturing locations include Azerbaijan, Canada, the Canary Islands, China, the Czech Republic, Finland, Germany, Hong Kong, Hungary, Indonesia, Kazakhstan, Malaysia, Poland, Portugal, Romania, Russia, Switzerland, Tanzania, Turkey, Ukraine and Vietnam. Certain of Reynolds International's foreign operations are subject to local regulations that set import quotas, restrict financing flexibility, affect repatriation of earnings or assets and/or limit advertising. In recent years, certain trade barriers for cigarettes, particularly in Asia and Eastern Europe, have been liberalized. This may provide opportunities for all international cigarette manufacturers, including Reynolds International, to expand operations in such markets; however, there can be no assurance that the liberalizing trends will be maintained or extended or that Reynolds International will be successful in pursuing such opportunities. Reynolds International's volume increased 1% over 1996 despite a decision to reduce quarter-end sales incentives in order to eliminate excess trade inventories. Excluding the estimated impact of eliminating excess trade inventories, volume would have increased by approximately 4%. Unfavorable volume mix (approximately $183 million) and currency translation (approximately $190 million) more than offset higher pricing (approximately $167 million), resulting in a decrease in net sales of 5% to $3.4 billion. Excluding the estimated impact of reducing excess trade inventories and the unfavorable currency translation, net sales would have increased 4% to $3.8 billion. By region, volume declines in Western Europe of 15% and export shipments of 11% were more than offset by volume increases in the CIS and Baltics of 13% and Central Europe of 43%. In Western Europe, short-term pricing pressures in France and Spain, a general shift from the full-flavor segments throughout Western Europe and the decision to reduce excess trade inventories caused the 15% volume decline. Reynolds International's new lights entries (Camel Lights and Camel Medium) are fueling growth in the low tar and nicotine category. Camel Lights grew 5% in Western Europe while Camel Medium grew 17%. Difficult operating conditions affected the volume performance in the European and Middle East export markets. Regional heritage brands such as Peter I in Russia are fueling the growth in the CIS and Baltics region. Peter I is the largest-selling filter cigarette in Russia, where capacity is currently being expanded to meet the growing demand. In addition, other heritage brands have been introduced throughout the region and are also performing well. The volume increase in Central Europe was driven by Winston and Monte Carlo. In Asia, volume declined approximately 3% primarily driven by the trade inventory reduction. Salem Pianissimo, a low smoke, low smell cigarette, continues to outperform competition in Japan. Reynolds International's operating company contribution declined 17%, primarily due to unfavorable volume mix, higher product costs and unfavorable foreign currency translation, partly offset by higher pricing. Excluding the estimated impact of the decision to reduce excess trade inventories and foreign currency translation, Reynolds International's operating company contribution would have increased by approximately 5%. In addition to the data and information on corporate activities of PMI and Reynolds International presented above, a review was made of the 1996 and 1997 issues of World Tobacco, a bimonthly industry trade publication with international coverage of the tobacco industry from leaf cultivation to tobacco products manufacturing to machinery, packaging and advertising. Regular features include a regional review of activities, a detailed report on a specific country and its tobacco market, generally a profile of a major tobacco manufacturer or overview of an issue of interest to the industry, and a compilation of brief news items on various corporate activities. In addition, one issue each year is primarily focused on the United States Several examples of the information and data one may find in reviewing this publication include: Under license from Reynolds International, the Serbian Vranje factory will resume production of Camel and Winston cigarettes World Tobacco, January 1997, p. 9 In the Finnish market, American Tobacco is under license to PMI for production of Marlboro, which holds a 33% share of the brand market in Finland. RJR Finland production statistics were provided, as well. World Tobacco, July 1997, p. 42 From a detailed profile of Brazil and Souza Cruz (Brazil's largest cigarette manufacturer), a number of details on PMI are presented the article. Of special significance are the comments on PMI's export capacity: With the two factories "PM [Philip Morris] will be in the position to export up to 70,000 m pieces again....According to PM, in 1999, when both the PM factories are operating at full capacity, Brazil will become the world's second largest manufacturer of cigarettes after the US (discounting the People's Republic of China)." World Tobacco, March 1997, p. 40 Contraband cigarettes smuggled from the United States to Mexico, "reportedly coming into Mexico by way of duty-free shops...", are impacting on the Mexican market. Sales of the U.S. made cigarettes, mainly Marlboro, "apparently accounted for 5-6% of the Mexican market last year...." World Tobacco, March 1997, p. 44 An overview is presented of the French cigarette market in this article, including PMI and RJR Tobacco France with brand market share, consumption, etc. Philip Morris has 30.1% of the French market, with R.J. Reynolds at 10.6%. Information on the switch to low-tar brands is provided, as well as selected data on cigarette smuggling. World Tobacco, March 1997, p. 47. Reynolds International will form a 50/50 joint venture with Bakr Tobacco Facility (BTF), Azerbaijan's only cigarette manufacturer. The company will be called RJR Tobacco Bakr and is anticipating "at least a doubling of cigarette sales by the year 2000." World Tobacco, November 1996, p. 3 ENDNOTES 1. U.S. Department of Agriculture. Economic Research Service. Tobacco Briefing Room. Available on the Internet at http://www.econ.ag.gov/briefing/tobacco (as of May 7, 1998). 2. The data on U.S. production include production of U.S. and foreign firms in the United States, as reported by the U.S. Department of Agriculture. 3. Calculations of per capita consumption of cigarettes are based on size of the adult population, 18 years and over. 4. Tobacco Dollars and Jobs. Tobacco Situation and Outlook. TBS- 39. September 1997. P. 41. 5. U.S. exports by destination provide an indication of how many U.S. produced cigarettes are shipped to each country. These figures do not show how many of these cigarettes are actually consumed in each country. Some may be subsequently shipped from these countries to other markets in the world. 6. World Tobacco. January 1998. P. 8. 7. Jessup, J. (Dec. 1, 1997). British American Tobacco-A Review of Growth Prospects [Online]. Available: Dialog: File 563. 8. Jessup, J. P. 13. 9. Financial Times, July 3, 1997, p. 36. 10. The Independent [a British newspaper], Aug. 26, 1997, p. 8. 11. The Independent, October 19, 1997, p. 1. 12. South China Morning Post, August 22, 1997, p. B4. 13. Jessup has argued that, through direct investment, an increase in trade barriers would improve the position of the multinational producers, relative to smaller manufacturers. Jessup, British American Tobacco-A Review of Growth Prospects. 14. 1997 Annual Report, p. 21; 1996 Annual Report, p. 31. 15. Public Relations Department. RJ Reynolds. Fax to authors. May 8, 1998. 16. Information obtained from: Wheat, First Securities, Inc. The Smokeless Tobacco Industry in 1996, April 24, 1997. [Online] Available: Dialog: File 563. 17. S &P Industry Surveys, September 11, 1997, p. 11. 18. Wheat, First Securities, Inc. The Cigar Industry in 1996, March 21, 1997. [Online] Available: Dialog: File 563. 19. Merrill Lynch Capital Markets. Tobacco/Cigar Industry, January 14, 1998. [Online] Available: Dialog: File 563. 20. Wheat, The Cigar Industry, 21. Wheat, The Cigar Industry. 22. Merrill Lynch, Tobacco/Cigar Industry. 23. Swisher International Group, Inc., [Form 10-K for 1997 filed with the Securities & Exchange Commission] March 28, 1998. Available on the Internet at http://sec.gov/edgarhp.htm. 24. General Cigar Holdings, Inc., [From 10-K for 1997 filed with the Securities & Exchange Commission] February 27, 1998. Available on the Internet at http://sec.gov/edgarhp.htm. 25. Consolidated Cigar Holdings., 1st Quarter/1998. [Online] Available: Dialog: File 519. 26. New Owner Has Havatampa Eyeing Premiums. US Distribution Journal. January 1998. P. 40. |
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