For tobacco, a real drag

The White House physician gave President Obama a little advice the other day: Lay off the butts.

Dr. Jeffrey Kulhmann recommended that the president, who has acknowledged smoking the occasional cigarette, stick with nicotine patches. In fact, some smokers have been able to cut back or kick the habit with the help of cessation programs. But the most powerful antismoking force in America is simple economics. Steep tax increases and a terrible economy probably reduced the number of cigarettes smoked in the United States last year by about 10 percent, one of the steepest annual declines in decades.

Cigarette sales have been declining for many years. But that slide has been slow and steady, reliably cutting consumption by about 2 percent a year. By comparison, the sales decline last year was off the charts.

“Both taxes and diminished income are playing a big role in declining sales of tobacco, and the nation is going to be healthier for it,’’ says Gregory Connolly, director of the Tobacco Control Research Program at the Harvard School of Public Health.

Harder economic times might seem like an obvious deterrent to smoking. At about $7.50 a pack in Massachusetts, the expense of cigarettes is increasingly difficult to justify for people trying to make ends meet. Looking back, one of the nation’s few sustained declines in cigarette smoking was recorded during the Great Depression.

But tax increases almost certainly played the biggest role in smoking declines nationwide last year, according to industry officials, investment analysts who follow tobacco stocks, and antismoking advocates. They say price elasticity models, which measure how price changes affect demand for products, anticipated a sales decline of about 10 percent as a result of last April’s 62-cent increase in the federal excise tax on a pack of cigarettes.

“These are really eye-popping numbers, there’s no question about it,’’ says Thomas Russo of Gardner, Russo & Gardner, a Lancaster, Pa., investment firm that owns shares of the tobacco company Altria Group Inc. “I can’t remember a time when the decline was so severe as that.’’

There are no rock-solid national cigarette sales numbers for 2009. The US Agriculture Department, which had kept the most reliable data on cigarette sales, stopped counting in 2007. But large tobacco companies such as Altria recently issued quarterly reports, which included detailed information about unit sales of cigarettes in the US market.

Altria’s Philip Morris USA unit, which sells brands including Marlboro, Parliament, and Virginia Slims, recorded a 10.5 percent decrease in 2009 domestic cigarette shipments. The decline was even steeper in the last three months of the year, when US cigarette sales at Philip Morris USA slumped by 12 percent.

“Total cigarette industry volume was down an estimated 10 percent in the fourth quarter of 2009,’’ the company said.

Here’s what those percentage declines looked like behind the counter: Philip Morris USA sold nearly 21 billion fewer cigarettes last year than it did in 2008. The company sold 3 billion fewer Marlboros in the last quarter of 2009 alone, compared with the same three months of the previous year. That’s a lot of cigarettes.

Altria and other tobacco companies have suffered through only one other year in recent decades that compares with 2009. Cigarette sales declined by roughly the same amount in 1998, when tobacco companies settled lawsuits brought by states across the country and jacked up prices to pay for it.

Comparable sales numbers provided by Altria suggest 1998 was nearly as bad as 2009, but not quite. The company’s domestic cigarette sales declined by 19.4 billion cigarettes, or 9.1 percent, that year.

National cigarette sales stabilized for a period after 1998, and Altria actually sold slightly more cigarettes the next year. But overall tobacco industry sales resumed their slow decline through the next decade, until they took the next hard punch last year.

Though industry watchers and antismoking advocates point first to the federal excise tax increase, other factors contributed to the sharply rising cost of cigarettes. Fifteen states increased cigarette taxes in 2009, and tobacco companies themselves raised prices to offset declining sales.

Researchers such as Connolly say some cigarette smokers don’t quit so much as switch to other products, including cigars and smokeless tobacco.

But most of the huge cigarette sales decline of 2009 is very real. Taxes, and basic economics, do more than anything else to make smokers quit.

By Steven Syre, Globe Newspaper Company
March 2, 2010

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