Tobacco

Corporations

Table 6 - Corporate Strategies and North Carolina Activity - Tobacco Corporations

Introduction

For the past few decades, the tobacco industry has been dominated by the Big Four Tobacco companies: Philip Morris, RJ Reynolds, Brown & Williamson, and Lorillard. A merger between RJ Reynolds and Brown & Williamson in summer 2004 created Reynolds American Inc. The Big Three hold over eighty-five percent of the current US market for cigarettes.

Liggett Vector is a slightly smaller North Carolina-based company that has had some recent internal restructuring. Cheyenne International is a tiny firm of just forty employees located in Cleveland County, North Carolina. While Cheyenne does not hold a significant amount of the cigarette market, it represents a recent trend in the industry as a whole. There are currently over 150 of these small cigarette companies throughout the United States. As of 2004, the market share of these small firms has increased from 3% to nearly 15% in the last seven years.1

Standard Commercial Corporation is an independent leaf merchant, a stage in the value chain that precedes cigarette manufacture. This company provides manufacturers with tobacco to produce cigarettes and is the most globally active company discussed here.

Altria

Altria Group is the parent company of long-time American tobacco giant Philip Morris, and operates most of its cigarette business through two subsidiaries: Philip Morris International and Philip Morris USA.2 Today, it is one of the leading tobacco manufacturers in the world, though as late as 1960, it was the smallest of the six large companies at the time. Philip Morris conducts a diverse array of activities in the value chain, including R&D, manufacturing, sales, and marketing."3 However, it does not grow or refine tobacco leaf. As of 2006, Philip Morris USA holds 50.4% of US market share, including 40.8% held by Marlboro alone.

Within the United States, the company owns manufacturing facilities in Virginia and North Carolina (employing approximately 8,900 workers), as well as a material conversion plant in Kentucky (approximately 125 employees) and sales offices across the United States and Puerto Rico (nearly 2,700 employees). In terms of domestic investment, in 2004 Phillip Morris USA invested about $200 million in improvements to help protect jobs and modernize the manufacturing facility in Cabarrus County, North Carolina. The company currently employs about 2,500 people in North Carolina and contributes $268 million annually to the state's economy. In 2003, Phillip Morris USA purchased nearly half of all tobacco grown in North Carolina, making it a strong demonstration of commitment to the state. John R. Nelson, Phillips Morris USA president of operations and technology said, "We believe in North Carolina. We believe in the people here, and we believe that our future together is bright."

The company actively markets its products abroad, and it currently holds 15.4% of the international cigarette market.4 Philip Morris International is headquartered in Switzerland and employs over 80,000 worldwide. In addition, the company buys tobacco from leaf merchant companies and farmers all over the world.

Within the United States, Philip Morris has tried to deal with recent, nationwide events that impact this industry, such as the Master Settlement Agreement and recent smoking bans in public places. One set of initiatives has focused on the issue of youth smoking prevention, a particularly visible issue in the Master Settlement agreement. Such programs as the Action against Access program, launched in 1995, and support for the Coalition for Responsible Tobacco Retailing's We Card program, are a part of this initiative. In April 1998, the company established its Youth Smoking Prevention department. Since its inception in 1998, the department has spent over $500 million on youth smoking prevention and youth access prevention initiatives.

Reynolds American Inc.

Richard Joshua Reynolds founded RJ Reynolds Tobacco5 in 1875, initially as a chewing tobacco manufacturing operation. Today, Reynolds is the second-largest tobacco company in the United States, and it manufactures about one of every three cigarettes sold in the United States. Reynolds American Inc. became a public company on July 30, 2004 after a transaction that merged two older companies - the Brown & Williamson Tobacco Corp. and the Winston-Salem based RJ Reynolds Tobacco.

The reasons behind this merger stem from the dramatic changes in the US cigarette market currently underway. Settlement payments, higher excise taxes, and competition from discount cigarette producers have reduced the size of the product market while increasing the number of competitors in that market.7 As a result, major manufacturers, including Reynolds American, have taken steps to increase brand promotion.

In addition, Reynolds American has taken efforts to consolidate and expand its operations within the United States in order to reduce costs of production. They have begun efforts to cut $1 billion in costs to improve profit margins. Second, Reynolds has undertaken a comprehensive analysis of the strength and long-term potential of each brand (Camel, Winston, KOOL, Salem, and Doral) to determine where to devote promotional efforts. Finally, on the international front, RJ Reynolds sold its operations to Japan Tobacco in 2001. RJ Reynolds gave Japan Tobacco rights to market its products globally.

The tobacco buyout has had a far-reaching impact on Reynolds American. The company lobbied extensively to eliminate the FDA regulatory authority provisionally contained in the tobacco buyout legislation of 2004. This authority would have given the FDA power to drastically limit how and where manufacturers advertise and sell products. Reynolds opposed this because it would have likely protected Philip Morris' market share by limiting Reynolds' big weapon of advertising. Second, some of the costs of the buyout are covered by the cigarette stage of the industry. Due to the economies of scale possessed by large cigarette manufacturers, per pack costs of this legislation is lower for the major manufacturers than for smaller, deep-discount producers. Nevertheless, in combination with the Master Settlement Agreement, large cigarette producers have faced high and unexpected costs to doing business in the United States.

Please see the included document for a more detailed case study of RJ Reynolds.

Lorillard

Lorillard Tobacco Company8, the country's third largest tobacco producer, is an indirect subsidiary of the Loews Corporation.9 Founded in 1760, it is currently the oldest tobacco company in the United States. Lorillard manufactures well-known brands, such as Newport, Kent, True, Old Gold, and Maverick. The company maintains its headquarters, manufacturing facilities, and storage facilities in Greensboro, and currently controls 9.7% of the national market. Lorillard is also a member of the Big Four tobacco companies that control a combined 85% of the American market.

Similar to the threats faced by other large manufacturers, Lorillard must compete in a declining national market and with a rising number of small, discount producers. Lorillard has adjusted its corporate strategy through increased promotional initiatives and adjustments to its pricing strategies. For example, Lorillard halted its wholesale price increases in March 2002 and decreased the price of its Maverick cigarettes by $1.10 per pack.

However, company profits fell in 2003. Lorillard saw overall sales decrease from $3.86 billion dollars in 2002 to $3.30 billion dollars in 2003 while net income decreased 31% percent during the same period.10 In recent years the company has recovered with 2006 revenues rising 6.1%, while income rose 17% year-on-year. This is due to rising sales volume and declining advertising expenses.11 Finally, Lorillard does not conduct operations abroad.

Liggett Vector Brands, Inc.

Liggett Vector Brands12 is the sales, marketing and distribution agent for Liggett Group, Inc. and Vector Groups, Inc. The company sells well-known tobacco products, including Pyramid, Jade, Eve, Liggett Select, and Quest. Liggett Vector's corporate offices are in Research Triangle Park, NC and New York, NY. This company was formed in 2002 in order to coordinate the sales activities of the Liggett and Vector companies.

Liggett Group, Inc., one of the companies represented by Liggett Vector Brands, Inc. is a high-quality cigarette manufacturer that has been based in North Carolina for over 100 years. It was originally founded in 1873 in Durham, NC as Liggett Myers. It then moved its operations to Mebane, NC where it constructed a new, technologically modern cigarette manufacturing facility with the ability to produce more than 16 billion units per year. In order to ensure that their facilities remain among the most modern in the industry, the company has invested more than $60 million since 1999 for major capital improvements.

Vector Tobacco, Inc., the other company represented by Liggett Vector Brands, is concentrated in research and cigarette manufacturing and develops new methods of manufacturing and marketing cigarette products.

More visibly than the other companies in this industry, Vector Tobacco, Inc. provides Liggett Vector Brands with recognition for developing smoking products with reductions in harmful smoke and tobacco compounds. These research and development efforts provide the company with a potential niche in the industry. As revenues were only $506 million in 2006, this strength is critical to the continued viability of the company in this industry.13 This company is relatively small when compared with the companies above, and so it cannot compete strictly on price competition.

Alliance One International

Alliance One International is one of the world's leading leaf tobacco dealers. Currently, this company is the second largest leaf processor in the world, after the merger of second-ranked DIMON and third-ranked Standard Commercial Corporation, this company will likely become the largest in the near future. Alliance purchases and processes tobacco from 45 countries and sells to domestic and international manufacturers of cigarettes, cigars, and most other tobacco products.15 Alliance One International is not involved in the growing of tobacco; it only buys, processes, and stores tobacco. From its activities, the company produces certain types of tobacco, such as toasted burley, cut rag, and blends.

Since the company is a global leaf tobacco merchant, its purchases, processes, and sales of tobacco occur in many locations around the world, and relatively few occur in the United States. It has processing facilities in North Carolina and Kentucky and in other countries, including Italy, the Commonwealth of Independent States, Spain, and Thailand. It also has strategic interests in countries where production of specific types of tobacco are produced. Standard has taken some interest in most counties where export-quality tobacco is produced.16 Some of these countries are: Greece and Turkey for oriental tobacco; Argentina, Brazil, and Zimbabwe for flue-cured tobacco; and Malawi for burley tobacco.

One reason that Alliance One International conducts most of its business outside of the United States, and specifically not in North Carolina, is because it serves multinational cigarette manufacturers. With $2.1 billion in sales in 2006, it is clear that this stage of tobacco product production is of lower value than the consumer product stage of production.

Cheyenne

Cheyenne International17 is a relatively small tobacco company located in Cleveland County, NC. The company is comprised of a small manufacturing facility where cigarettes are produced and packaged by hand at much slower rates of production than that of larger companies. While Cheyenne contains only 40 employees and possesses a microscopic share of the US market, it is one of many small tobacco companies throughout the country that are causing a shift in the industry as a whole. Whereas small tobacco companies controlled less than 3% of the market in 1997, they collectively controlled 10% by 2004. Over one hundred and twenty small tobacco companies have opened in an attempt to appeal to customers looking for cheap cigarettes. Interestingly enough, less than a dozen of these companies are located in North Carolina, which is where their main competitors are located.

Cheyenne is able to beat out the competition by selling cigarettes at lower prices. Since it lacks the overhead of a large company, it can sell a pack of cigarettes at $1.50 compared to the $3 or more charged for well-known brands. The larger companies, however, have recently started to attack their smaller competitors. Philip Morris and RJ Reynolds have hired lawyers to persuade state governments to increase taxes on small tobacco companies and force them to raise their prices. The North Carolina Senate voted to allow this increase in 2003, but the bill was delayed in the House. This increase in taxes could be devastating to Cheyenne, which is already having trouble surviving in an extremely competitive industry.18

References

1. Robert W. Kidd "No More Big Four?" Region Focus, Spring 2004.
2. Philip Morris. Philip Morris Corporate Web Site. Various pages. Last accessed July 27, 2007.
3. Ibid.
4. Ibid.
5. Reynolds American. Reynolds American Corporate Web Site. Various pages. last accessed July 27, 2007.
6. Reynolds American. "Who We Are." Reynolds American corporate web site. [downloaded March 14, 2005].
7. Ibid.
8. Lorillard. Lorillard Corporate Web Site. last accessed July 27, 2007.
9. Hoover's. "Carolina Group: Company Profile." Last accessed July 27, 2007.
10. Ibid.
11. Forbes, "Carolina Group." Last accessed March 31, 2005
12. Liggett Vector. Liggett Vector Corporate Web Site. Last accessed July 27, 2007.
13. Forbes, "Vector Group Ltd." Last accessed March 31, 2005.
14. Standard Commercial Corporation. Standard Commercial Corporation Corporate Web Site. Last accessed March 14, 2005.
15. Hoover's. "Standard Commercial Corporation: Company Profile." Last accessed March 14, 2005.
16. Standard Commercial Corporation. "SCC - Tobacco." Corporate Web Site. Last accessed March 14, 2005.
17. Kidd (fn. 1).
18. Tony Mecia, "Higher Fees Strain Small North Carolina Cigarette Company." The Miami Herald, March 14, 2004.