More than a decade after Big Tobacco apparently knuckled under to a coalition of 46 state attorneys-general, how is the industry faring?
Like most such questions, that depends on who you ask.
Ask Michael Cummings, PhD, of Roswell Park Cancer Institute in Buffalo, N.Y. and he replies: “My impression is that the tobacco industry is on life support.”
Ask economist Kenneth Warner, PhD, of the University of Michigan in Ann Arbor, and he replies: “They’re doing fine.”
Other experts reached by MedPage Today had shades of opinion between those two poles.
Part of the reason for the differing views is that the effects of the 1998 Master Settlement Agreement on the corporate health of the tobacco industry are hard to quantify – and probably not what most people would have expected.
The agreement – universally referred to as the MSA – had two main planks.
It required the tobacco companies to fork over $206 billion to the states involved over a 25-year period. So far — half way through — they’ve paid out some $80 billion.
But it also shielded the companies from individual lawsuits that could have cost far more as well as from competition from smaller tobacco firms that didn’t sign the deal.
The MSA was signed in November 1998, against a background of legal action against the industry. The attorneys-general of 46 states, as well as the District of Columbia, Puerto Rico, and the Virgin Islands, entered into the agreement with the four largest manufacturers of cigarettes in the U.S. — Philip Morris USA, R.J. Reynolds, Brown & Williamson, and Lorillard.
Florida, Minnesota, Texas, and Mississippi had already reached individual agreements with the industry.
Smoking Down, Income Up
The effect of the agreements was, predictably, an increase in cigarette prices. Many smokers greeted the increase by butting out, but it was what economist Warner calls a “little blip” in consumption.
Indeed, CDC data show that cigarette consumption, which had already been falling slowly for a decade, took a sudden 6% drop from 1997 to 1998 and fell again by another 7% over the following year.
The number of cigarettes sold in the U.S. dropped from 480 billion in 1997 to 465 billion the next year and 435 billion in 1999, eventually reaching 380 billion in 2006. The numbers have since stabilized, with the CDC reporting in September that just under one in five working Americans still smokes.
“The total consumption of cigarettes has massively declined since the MSA,” Cheryl Healton, DrPH, of the Washington-based American Legacy Foundation told MedPage Today. The foundation is one of the spin-offs of the settlement; it gets cash to pursue the public health end of the smoking issue.
But at the same time industry revenue has been going up.
For example, in a 2006 study published in Tobacco Control, Healton and colleagues examined the effect of the agreement on teenage smoking. They found that in 1997, high school seniors smoked 890 million packs of cigarettes, generating $737 million in revenue.
By 2002, high school seniors smoked only 541 million packs – but revenue from their smoking had increased to nearly $1.2 billion.
When you take all smokers into consideration, over the long haul the domestic tobacco industry has done very well indeed.
According to an industry analyst who did not want to be named, operating income from domestic cigarette sales (which excludes other forms of tobacco) has grown from $7.195 billion in 1996 to about $9.269 billion last year, even though the cigarette sales dropped more than 40% over that time.
That’s about a compound annual income growth rate of 2%, he noted.
States Looked to Cash In
If anyone was expecting the MSA to help control smoking and eventually shut down the industry, they were dreaming in Technicolor, according to Warner.
“It was not set up to be a tobacco-control settlement at all,” he said. “It was set up to get money to the states – and it worked.”
Still, if the states had used the money to support anti-smoking campaigns, the industry might have been hurt, according to Vince Willmore, communications vice-president of the Campaign for Tobacco-Free Kids.
The states involved said they would use the settlement cash to combat smoking, but they “have largely broken that promise,” he said.
Indeed, Healton said, “you can count on the fingers of one hand the number of states that spend what the CDC says needs to be spent on tobacco control.”
She contrasts her foundation’s yearly budget of about $70 million a year, with the $12.6 billion spent on tobacco marketing annually.
The industry is “trying very hard to keep as many paying customers as they can,” she said.
For instance, she said, they fight back violently against most attempts to influence the public against smoking. The most recent example is a lawsuit filed in August against the FDA by R.J. Reynolds, Lorillard, Commonwealth Brands, Liggett Group, and Santa Fe Natural Tobacco.
The five firms want to prevent the FDA from requiring graphic warning labels on cigarette packs. The U.S. market leader, Altria (owner of Philip Morris), did not join the suit.
Firms Face Bonanza Abroad
But if the big U.S. firms face a stagnant U.S. market that they must fight to protect, the rest of the world offers fertile ground for the tobacco industry – and a potential medical disaster of gargantuan proportions.
The World Health Organization estimates that half of current smokers will die prematurely of tobacco-related illness. Until recently, the developing world was relatively sheltered from that by poverty – when it’s a choice between cigarettes or food, most people opt to buy food.
But that is changing, according to Warner. Now more people can afford to smoke and international trade agreements make it hard to regulate the big international companies.
If the developing world embraces the allure of the cigarette with the same fervor the richer nations did 65 or 70 years ago – and especially if women take up the habit – the result would be hundreds of millions of deaths.
WHO estimates there were 100 million smoking-related deaths in the 20th century. “If we don’t do anything different,” Warner said, “that will be a billion in the 21st century.
The world’s largest tobacco company, interestingly, is China National Tobacco, a state-owned monopoly. It’s followed by some familiar names — Philip Morris International (spun off by Altria in 2007), British American Tobacco (which holds more than 40% of Reynolds), Altria, and Imperial Tobacco.
They have a huge potential market, but the catch for the world’s industry is that the Master Settlement Agreement mandated the release of reams and reams of documents and studies that made the dangers of tobacco crystal clear – and developing countries and their citizens are perfectly aware of those facts.
“The world is not ignorant of the health effects of smoking,” said Roswell Park’s Cummings.
That’s why African nations are spearheading WHO’s Framework Convention on Tobacco Control, according to Cummings. The convention, now ratified by and binding on more than 170 countries, but not the U.S., aims at a universal set of standards that will limit the use of tobacco.
Giving the tobacco industry free rein, he said, means “short-term gain and a lot of long-term pain” for those nations, and their leaders know it.
In the developed world, he said, cigarette use has been falling – Australia’s smokers, for instance, now make up only 15% of the population “and the U.S. is heading in that direction” despite the recent stagnation.
And in the developing world, the ranks of smokers are not expanding as quickly as had been feared, Cummings noted. Thai men, for instance, are quitting and Thai women are not taking up the habit, and similar shifts are being seen in other countries.
Even the giant China National Tobacco, with about 40% of the world market, is pulling in its horns a bit – closing plants and reducing the number of its brands.
But the developing world remains a “battleground” for the tobacco industry, Cumming said, and even if the industry needs life support, it’s too early to call a time of death and wheel the gurney away.
By Michael Smith, MedPage Today