Tobacco Industry In The USA Case Studies Examples

Executive Summary

Tobacco was one of the most profitable businesses in the US during the 1950s and 1960s. However, after the discovery was made as regards the carcinogenic effect of tobacco and addictive substance, the government introduced an array of policies to curb tobacco sales and marketing, which reduced the total tobacco consumption in the world. However, tobacco companies continue to make money.
Altria, which is the largest tobacco manufacturer, is diversifying its portfolio. It knows that selling only cigarette will not be a good business strategy in the long run. It is diversifying into smokeless tobacco, e-cigarette and cigars. It is also diversifying into other business segments like wine and financial services.
Reynolds American Inc. (RAI) and its majority shareholder BAT (British American Tobacco) continue to grow their businesses through merger and consolidation. To increase the market share, recently RAI has proposed to acquire Lorillard. This will help RAI/BAT reduce the market share gap with the market leader Altria in both cigarette and smokeless tobacco. RAI deems menthol cigarette segment to be growing, and hence, it plans to use the Lorillard menthol brand to expand its cigarette operation. Apart from that, RAI is also diversifying into Nicotine therapy products like Niconovum and digital vapor cigarette business.
Universal Corporation is the largest independent supplier of tobacco leaves to the manufacturers. Universal knows that if any downturn comes to the tobacco business, it will be hit hard. Therefore, it is using its agricultural expertise to diversify into other agricultural products. Currently, it is also supplying sweet potato, healthy fruit and vegetables and pet foods to the wholesalers as an initiative to diversify its risk and reduce its dependency on tobacco leaf.

It is a well-proven fact that tobacco is not good for health and smoking cigarette causes cancer. Still tobacco companies continue to do well across the globe. They made enormous profit in the middle of the 20th century and grew at a phenomenal rate. However, upon the discovery that nicotine is addictive and carcinogenic, the overall growth rate of the tobacco industry plummeted significantly. Nevertheless, tobacco companies continue to thrive and generate profit in the face of huge public protests, laws and policies against the tobacco industry. China is the largest producer of tobacco followed by India, Brazil and the USA. These four countries put together account for almost 70% of the total global tobacco production (CDC, 2014).
The US tobacco market has shrunk substantially between 1960 and the present day. Approximately 44% of the Americans used to smoke in the 1950s, but currently only 18% of the population are smokers. The total consumption of cigarettes in 2003 was 450 billion, which has reduced to 297 billion in 2012 (CDC, 2014). Almost 85% of the cigarette market is dominated by three players namely Altria (Phillip Morris), Reynolds (British American Tobacco), and Lorillard (recently acquired by Reynolds American Inc.). Among all the types of cigarettes, only menthol cigarettes are witnessing a growth; rest of the cigarette sales is mostly stagnant or declining. Apart from the cigarette market, which is going through a sluggish period, smokeless tobacco market is also big in the USA (Cavale, 2014). 124.6 million pounds of smokeless tobacco were sold in 2011. This market is slowly picking up due to fewer regulations on smokeless tobacco. Even this market is monopolized by two to three players like the U.S Smokeless Tobacco (acquired by Altria in 2008) and American Snuff Company (Acquired by Reynolds American Inc. in 2006). These two companies control almost 75% of the market (Cavale, 2014). Cigar is another market seeing a slight growth after years of decline. In 2011, 13.7 billion cigars were sold. This market is relatively less consolidated, and there are many players in little cigars and large cigars market. Apart from that, e-cigarette market is experiencing a huge growth and expected to grow at a rate faster than any other tobacco segment (Cavale, 2014). Although it is currently only a fraction of the market, but it can be the product of the future. Apart from e-cigs, vapor products are also gaining popularity in the US market.

Reynolds American Inc.

Company History
Reynolds American Inc. (RAI), an American tobacco company, is the parent company of R.J. Reynolds Tobacco Company (RJRTC), Santa Fe Natural Tobacco Company (SFNTC), American Snuff Company, Niconovum AB, Niconovum USA, and R.J. Reynolds Vapor Company (RJRVC). Founded in the month of January 2004, the company was listed in the New York Stock Exchange in 2004 as a public trading company. It was in July 2004 that British American Tobacco (BAT) got merged with RJRTC under the name of R. J. Reynolds, which soon became a subsidiary of Reynolds American. RJRTC is the second largest tobacco company in the USA (RAI, 2015). The leading brands of RJRTC in the USA are Pall Mall and Camel. Santa Fe Natural Tobacco Company, which produces 100% additive-free natural products of tobacco, also became a subsidiary of RAI at that time. RAI made the acquisition of the second largest smokeless tobacco company of the USA, Conwood in 2006, and the name of Conwood was changed into American Snuff Company in 2010. ASC's leading brands are Kodiak and Grizzly. In 2009, RAI acquired Niconovum AB, a nicotine replacement therapy company based in Sweden (RAI, 2015). Its US branch Niconovum USA sells unique nicotine replacement therapy products in the USA. Recently, RAI has made an announcement in 2014 about its plan to purchase Lorillard Tobacco Company for a whopping $25 billion (Cavale, 2014). If the acquisition becomes a reality, then RAI would enter the market of menthol cigarettes soon.

Future Growth Strategy

RAI wants to become a tobacco company wholly in future. It is aware of the fact that it cannot grow big only by selling cigarettes. Therefore, it plans to expand its product portfolio in the direction of high growth. It continues to make use of its old strategy of growth through merger and acquisition. It has recently announced of its decision to acquire Lorillard, the third largest player in the US tobacco industry to expand its portfolio. RAI's purchase of Lorillard's Newport brand will give the company a strong presence in the market of menthol cigarettes, which is showing signs of promising growth. The market of menthol cigarettes constitutes 31.4% of the total market in comparison with 26% in 2002 (Cavale, 2014). Apart from menthol cigarette market, RAI is also trying to expand rapidly into the digital vapor cigarette market through its VUSE vapor cigarettes (RAI, 2015). This is already an established brand in the US, and RAI is aggressively marketing it as it may be the product of the future.

British American Tobacco

Company History
Headquartered in London, the UK, British American Tobacco (BAT) is a British multinational tobacco company. Ranked as one of the five largest tobacco companies in the world, it leads the market in 50 countries with its operation present in 180 countries (BAT, 2015). The four largest selling brands of the company include Pall Mall, Kent, Lucy Strike, and Dunhill. Formed in 1902, the company started as a joint venture between the Imperial Tobacco Company of the UK and the American Tobacco Company under the name of the British American Tobacco Company Ltd. The parent companies had an agreement that they would not trade in the domestic territory of each other and would assign trademarks, overseas subsidiaries, and export businesses to the joint venture. Soon, BAT expanded into a host of countries, including China, Canada, Germany, New Zealand, South Africa, and Australia (BAT, 2015). By 1910, the company had cigarette sales exceeding 10 billion per year. The American Tobacco Company sold its share in 1911, and slowly, Imperial Tobacco decreased its shareholding, and finally in 1980, Imperial Tobacco divested all its interest in the joint venture. BAT acquired Ente Tabacchi Italiani (ETI) in 2003, and this elevated its position to the number two in Italy, which is the second largest market of tobacco in the European Union (BAT, 2015). It has 42% share in the RAI. As of the report of 2012, BAT owned a market capitalization of £65.6 billion, which is the sixth largest of any company listed under the London Stock Exchange (BAT, 2015).

Future Growth Strategy

BAT has no direct presence in the US, but it is the majority stakeholder of the US giant Reynolds. Therefore, the future growth strategy of BAT is as same as that of RAI. If Reynolds grows, BAT also grows. Apart from organic growth in the US through merger and acquisition as chalked out by RAI, BAT continues to expand into economies that have a huge potential for growth or expanding into economies where there is no legal and policy issues against tobacco. For example, BAT is currently expanding in Vietnam that is about to become a big market of tobacco in the coming days (BAT, 2015). It is also expanding in the African markets like Uganda where it can sell all its products easily without much problem.

Altria

Company Background
Altria, previously known as Phillip Morris Companies Inc., has changed into Altria Group Inc. in 2003. In March 2008, Phillip Morris International was spun off from Altria. In 2009, Altria Group Inc. completed the acquisition of Smokeless Tobacco Company, UST. Headquartered in Richmond, Virginia, Altria is not only the number one player in the cigarette market with products like Marlboro and a market share of 46%, but also is the number one player in the smokeless tobacco market with products like Snus, Copenhagen and Skoal with a market share of 45% (Altria Group, 2015). Altria is also a major player in the cigar market. Although its Black and Mild brand is not the number one seller in the USA, but it has a substantial market share. Apart from tobacco business, Altria group also earns a large part of its revenue from foods, wine and financial services business. Altria also produces and sells blended table wine under the brand names Chateau Ste. Michelle, Columbia Crest and 14 Hands. For Altria, tobacco contributes only 33% of the total revenue but contributes almost 50% of the profit (Altria Group, 2015). It earned total revenue of about $24 billion and posted a net profit of $3.7 billion in 2013. The company has one of the largest profit margins in the tobacco industry due to consolidation, restructuring and modernization of its production and procurement process between 2009 and 2011.

Future Growth Strategy

Altria, like other tobacco companies, is also diversifying its risk. Altria already has other business divisions like financial services and wine, which provide a substantial amount of revenue and profit. Even if in the coming future, tobacco does not perform well due to law restrictions and policy related issues, then Altria has an option to get into other business easily.
However, it is not losing its focus on the tobacco business as it is highly profitable. Also, Altria is the number one player in the US market, and it wants to retain that position. Though the company has a meaty presence in the smokeless tobacco business, it is further putting more focus on the growth of that division. The current policies restrict smoking in public places in the USA, but there is no clear rule against smokeless products. Tobacco addicts are using smokeless tobacco when travelling in a bus or plane or even while inside office. Altria believes that this will be a growth driver in the coming days, and hence, it is introducing new variants of the smokeless tobacco products like herbal smokeless chewing tobacco and snuff. Altria is trailing RAI in the e-cig market. RAI has recently sold its e-cig (BlueCig) brand to Imperial Tobacco and concentrating on launching Vuse (Cavale, 2014). It is a perfect time for Altria to launch its MarkTen e-cig and take market share away from BlueCig before Imperial Tobacco starts its campaign on the US soil (Altria Group, 2015). Product innovation, diversification and concentrating on e-cig market seem to be the main future strategy for Altria.

Universal Corporation

Company Background
Universal Corporation is a US based tobacco merchant company. It does not produce final tobacco products like cigarette or cigars, but it is the leading tobacco leaf merchant and processor in the world. Apart from tobacco, it has operations in the agricultural business. It has operations over 30 countries and employs almost 24,000 employees (Universal Corporation, 2014). Universal selects, buys, ships, processes, packs, stores and finances leaf tobacco from emerging countries like China, India, Caribbean countries, and the USA. Then it sells those tobacco leaves to the manufacturers like Phillip Morris, BAT, and other big players. Universal earns its revenue from selling processed tobacco to the tobacco manufacturers and from fees and commissions from sourcing. Universal primarily buys and sells flue cured and burley tobacco. The company also has a minority stake in Socotab, LLC, a big dealer in oriental leaf. The largest customer of Universal Corporation is Altria Group. The company has revenue of $2.5 billion with a net profit of $246 million (Universal Corporation, 2014).
Future Growth Strategy
If the tobacco market goes down, the worst sufferer will be tobacco leaf suppliers like Universal. Tobacco manufacturers can diversify into other products like tobacco lozenges, nicotine free cigarettes and digital cigarettes. However, if tobacco consumption reduces, the total cumulative effect will be disastrous for many manufacturers like Universal Corporation. Universal knows this very well. Universal has already started diversifying its business. Tobacco is a rotational crop, and sweet potato is the other crop cultivated with tobacco as part of the crop rotation cycle. Universal already has started acting as the sweet potato supplier to many agricultural wholesalers. Universal is also using its expertise in agricultural business to diversify into healthy food and vegetable business and pet food business (Universal Corporation, 2014). This business segments are already on a rapid growth path, and Universal expects that if it achieves success in its other business segments before the demand for tobacco leaf declines, then Universal will have an option fall back upon.

References

Cavale, Siddharth (2014). "Reynolds American to buy Lorillard for about $25 billion". Reuters. Retrieved on 10th February 2015 from <http://www.reuters.com/article/2014/07/15/us-lorillard-reynolds-amricn-idUSKBN0FK15X20140715>
Reynolds American Inc. (RAI). (2014). Frequently Asked Questions. Retrieved on 10th February 2015 from <http://www.reynoldsamerican.com/faq.cfm>
British American Tobacco (BAT). (2014). Our history – a timeline. Retrieved on 10th February 2015 from <http://www.bat.com/group/sites/uk__9d9kcy.nsf/vwPagesWebLive/DO52ADGE?opendocument&SKN=1>
Universal Corporation. (2015). History. Retrieved on 10th February 2015 from <http://www.universalcorp.com/AboutUs/AboutUs-History.asp>
Centers for Disease Control and Prevention (CDC). (2014). Economic Facts About U.S. Tobacco Production and Use. Retrieved on 10th February 2015 from <http://www.cdc.gov/tobacco/data_statistics/fact_sheets/economics/econ_facts/>
Fox 8. (2014). Reynolds to go national with sales of nicotine therapy gum. Retrieved on 10th February 2015 from <http://myfox8.com/2014/09/05/reynolds-to-go-national-with-sales-of-nicotine-therapy-gum/>
Altria Group, Inc. (2015). Financial Press Release. Retrieved on 10th February 2015 from <http://investor.altria.com/phoenix.zhtml?c=80855&p=irol-newsArticle&ID=1949623>