Replies

Hostility from States, Smokers Clouds Big Tobacco's Future
By Robert B. Bluey
CNSNews.com Staff Writer
January 28, 2003

(Editor's Note: This is the first of a three-part series examining the current difficulties facing Big Tobacco and the cigarette-buying public.)

(CNSNews.com)- When activity began Monday on Wall Street, a major name was noticeably absent from the Dow Jones Industrial Average.

Philip Morris, which had celebrated its centennial anniversary in 2002, had changed its name to Altria -- to reflect "the fact that we are no longer the same company we once were structurally, culturally or behaviorally," according to a statement.

Despite the new name (Altria maintains the stock ticker symbol of MO), America's leading cigarette manufacturer is still confronted with old problems -- lawsuits from individual smokers, rising taxes that make cigarettes more expensive and a growing trend of no-smoking ordinances that prohibit smokers from lighting up in their favorite places.

But not all smokers are rallying to Altria's defense. Already under constant assault from anti-smoking groups, Big Tobacco is also taking it on the chin from some of its most loyal customers.

"Big Tobacco is in partnership with the government, and they're not going to oppose any government initiative unless it affects their bottom line," said Enoch Ludlow, president of FORCES USA, an international group that fights for smokers' rights.

Settlement Ended Lawsuits but Angered Smokers

Altria's bottom line and that of its chief competitors was affected by the 1998 Master Settlement Agreement, in which the companies agreed to pay $246 billion over 25 years to the 50 states as reimbursement for the states' tobacco-related medical expenses. In exchange, state attorneys general dropped class-action lawsuits against Big Tobacco.

"It was politically expedient for Big Tobacco," Ludlow said, "and it certainly has helped them maintain their monopoly."

Barbara Aucoin, president of the FORCES Massachusetts chapter, said Big Tobacco is not suffering from the settlement, smokers are.

"Smokers are paying 100 percent of the Master Settlement Agreement through higher cigarette prices," she said. "Manufacturers haven't lost a penny, so of course, they stay profitable."

Big Tobacco will shell out $8.7 billion to the states in 2003 related to the tobacco settlement, but the extent of the damage to the companies' balance sheets will be brought into sharper focus this week when Altria and R.J. Reynolds Tobacco Holdings release their 2002 earnings reports.

The companies have already warned their investors about the current challenges, which include rising tobacco taxes, a growing number of cheap domestic and imported cigarettes, emergence of a black market, counterfeit products and competitors that are not complying with the Master Settlement Agreement.

Michael E. Szymanczyk, chairman and chief executive officer of Philip Morris USA, a division of the newly named parent corporation, addressed those difficulties at Morgan Stanley's Global Consumer Conference in November. At the time, the company retreated from revenue projections it had set for 2003.

Financial analysts interviewed by CNSNews.com said Philip Morris USA was dragging down Altria, which also owns the nation's second biggest food company, Kraft Foods. But the analysts were split over whether the tobacco division could rebound.

"I see it as a slow, painful death over the next 30 years," said Sandy Sanders, a tobacco analyst for Evergreen Investments. "This whole industry is facing the same problems. I don't think there's much growth in tobacco."

In the long run, Sanders said Philip Morris USA was in "serious trouble," especially if the thousands of lawsuits pending in courts across the country result in guilty verdicts against the company. The plaintiffs in those cases started smoking prior to the 1998 settlement and therefore are not subject to its provisions.

The company has "massive cash flow," about $4 billion by Sanders' estimates, which might make it easier to shoulder a $20 million verdict. But if those lawsuits start adding up, the cost could start to run into the billions, and then Philip Morris USA would face a daunting challenge, Davenport & Co. analyst Ann Gurkin said.

Gurkin said Altria is not a stock to run out and buy, but she was not ready to proclaim the end of the tobacco division. She said profits would be hard to come by in the short term but predicted a brighter outlook on the horizon.

"Given the weak economy, more consumers are trading down to lower-priced cigarettes," Gurkin said. "The whole industry, not just Philip Morris, needs to right that price gap. When it becomes more in line, these companies will once again grow their margins of profit for their tobacco businesses."

Tobacco's Healthy Contribution to Government Coffers

State and local governments expect to collect $11.6 billion in tobacco taxes in 2003, a cost picked up by smokers.

Twenty-one states and the District of Columbia raised their cigarette excise taxes in 2002, hiking the national average from 44 cents a pack in 2001 to 65 cents a pack by the end of last year, prompting some smokers to abandon their favorite brands like Marlboro.

"Smokers are starting to go to other brands, and that's going to continue," Ludlow said. "Philip Morris will slowly start losing its share, but it's hard to know exactly how it's going to play out."

Smokers in New York City now pay $7.50 for a pack of cigarettes, thanks to a $3 hike in state and city taxes. They have also been told that even bars and restaurants are off limits for smoking, and more ordinances could soon follow.

Some anti-smoking advocates have even taken their campaign to Southern states like Georgia, Kentucky, North Carolina and Virginia, where taxes remain low and smoking bans are few and far between.

Even with the challenges ahead, some observers think Big Tobacco will be able to survive for years to come.

"This is a product that is addicting. People can't easily give it up," said Mary Aronson, a tobacco litigation and policy analyst with Aronson Washington Research.

"Maybe some people will quit, or some people will attempt to quit when there's a price increase, but eventually, a large number of them accommodate to the price increases," she added. "It's just something a lot of people can't live without."

Tomorrow: States are expected to collect more than $20 billion in tobacco-generated revenue in 2003, but much of the money intended to fund tobacco prevention programs is being spent for other deficit-reduction purposes instead.