Antismoking activists may be dancing on the Marlboro Man’s grave, but don’t expect giants like Philip Morris to waste time weeping over lost profits. The tobacco merchants have been anticipating the demise of the U.S. market for years, and they have bigger plans. The rally they orchestrated last week in Washington to fight the health-care tax on cigarettes may have seemed futile, but it served its purpose. It was designed to slow down-not stop-the antismoking movement in Congress as cigarette companies expand overseas and diversify into other businesses. “These are difficult times for cigarette makers, no doubt,” says analyst Roy Burry of Kidder, Peabody. “But they still have more clout than most people imagine.”
The tobacco industry is gasping in the United States. Ten years ago 37 percent of the population smoked; today less than 30 percent do. And while Americans consumed 640 billion cigarettes in 1981, they smoked only 500 billion last year. Still, that’s a lot of smokes and a lot of cash. Industry leader Philip Morris, the maker of Marlboro and Virginia Slims, reports profit margins of 27 percent. That even beats the pharmaceutical business, which was assailed by Mrs. Clinton when its margins topped 20 percent. Profits like that “can buy a lot of influence,” says an aide to Rep. Henry Waxman.
The tobacco companies’ defense strategy is elegantly simple: lobby Congress to slow antismoking forces, raise prices to build profits, cultivate niches here at home, shore up the food divisions and plot for future domination of the world cigarette market.
In Washington, tobacco lobbyists cover Congress like a thick film. In 1991 and 1992 alone, tobacco interests contributed more than $2 million to Congress. Since 1987 contributions to the U.S. Senate from tobacco political-action committees have increased by more than 62 percent. Last week’s rally of 16,000 tobacco workers was a reminder to legislators that the cigarette firms plan to get what they pay for: analysts say such efforts may help to hold down the inevitable tax increase to between 24 cents and 50 cents per pack. “This is the kind of thing that moves legislators,” says RJR Nabisco spokesman Mark Smith. And big-ticket pep rallies serve another purpose as well: they make hard-core smokers feel better. “‘Ale show them we’re fighting for their rights,” says a Philip Morris spokesman. “They pay us back with loyalty.”
Such ploys, cigarette companies say, also play into what they claim is a mounting backlash against rabid antismoking rhetoric. A Prevention magazine survey shows there was a 5 percent rise in the number of people who said they smoked last year-the highest level of smoking in the United States since polling began in 1983. Many of those were “social smokers” tired of the healthy ethic of the 1990s. “You see people smoking now in the movies, in Hugo Boss ads,” says Prudential Securities analyst Leigh Ferst. “That wouldn’t have happened three years ago.”
But cigarette makers are not waiting around for the tide to turn. Instead they are focusing on niche markets, like young adults and minorities, where their products are still strong. According to the Centers for Disease Control, the number of African-Americans who smoke has risen 13 percent recently; a federal report says smoking is on the rise among children as ‘well. The industry’s most infamous campaign, featuring cartoon spokesmodels Joe Camel (RJR) and his new girlfriend, Josephine, seems to be a magnet for kids. But cigarette companies are advancing on many other fronts. Last year smokers were able to exchange empty packs for racy Marlboro Adventure Team gear. This spring there’s a new promotion: the mail-order Marlboro Country Store, offering cowboy boots, belt buckles and denim jackets stenciled with logos to turn millions of Americans into walking billboards. Cigarette companies are also adjusting to the changing marketplace by introducing new products. Next up: Marlboro Express, a shorter cigarette with the same amount of tar and nicotine. It’s aimed at those hurried folks who now must suck down whole cigarettes as they huddle outside their smoke-free office buildings.
But cigarette makers have been rapidly diversifying, primarily into the food and beverage business. Philip Morris, which owns Kraft, bought a big stake in Femsa, the Mexican beer maker, last year. RJR, which in the past few years had unloaded lots of food assets to offset the enormous debt it took on in its 1988 leveraged buyout, now plans to buy more overseas cookie makers to augment a stable that includes Oreo, Chips Ahoy, Ritz and Triscuit.
Those moves will add ballast to the balance sheet while the tobacco firms pursue their real goal: hooking the world’s smokers. Sixty percent of Philip Morris’s sales already come from outside the United States; in the next decade it hopes to push its overseas profits closer to that 60 percent mark. As sales in Japan and Europe trail off in response to the antismoking campaigns, growth is mushrooming in developing markets in Asia and Eastern Europe. “As poor countries get richer, they smoke more American cigarettes,” says Kidder, Peabody’s Burry. “That doesn’t change until they get rich enough to worry about their health. And that’s a long time off.”
For now, the American companies must sell cheaper, less profitable smokes in the Third World, but margins will improve as those economies develop and prices rise. Already, Philip Morris, RJR and England’s BAT Industries have snapped up newly privatized companies in the former Soviet Union and Eastern Europe; by the end of the year China will open its market of 298 million smokers-more than the entire population of the United States-to American cigarettes for the first time.
On Wall Street such rosy scenarios have taken the edge off the recent bad news at home. Even prices have recovered since the infamous “Marlboro Friday” last April, when Philip Morris cut prices to stave off encroachment by discount brands. In fact, many analysts say this is a good time to buy cigarette-company stocks. “They’ve been beaten, but they will rise again,” says Burry. The outlook may be gloomy at home, but wherever there’s smoke, it seems, American cigarette makers will provide the fire.
