The original intent of this paper was to examine how the six American tobacco companies have interacted within a competitive strategy framework. During this study, I discovered that their competitive strategy was controled by the history of tobacco and that the history of tobacco was intertwined with the history of our country. While many major industries, such as electricity and oil for transportation and heating, have been built up within a lifetime, other industries, such as pharmaceutical, computers and air transport, have come about in an even shorter period of time. However, in a time comparison with tobacco, all of these industries are actually just in the infancy stage.

Tobacco's recorded history is about 500 years old. Records older than this were destroyed with the Spanish and Catholic invasions. Tobacco was both valuable and portable enough to be of great interest. However, unlike gold and silver, it was not a finite supply that could be taken back to the old world. Instead, people had to come to the new world to produce it. This, therefore, required expanding the settlement of the new world.

We all know of George Washington, the father of our country. With the recent election of President Clinton there are now many references to Thomas Jefferson. Both of these founding fathers were heavily involved in tobacco production. In fact George Washington was one of the largest tobacco farmers in Virginia. Both he and Jefferson were up to their keester in debt to the London tobacco merchants. If the Colonies separated from England, this debt would be less oppressive. (After the Revolutionary War, Jefferson repaid his debts for moral reasons.)

We think of the six tobacco companies competing against both the government and emerging health interests. Yet, the tobacco industry's fight with anti-smoking actually seems to have started with smoking. The English king, James I, put his power to fighting tobacco use. Sir Walter Raleigh, who brought tobacco to England from the new world, was beheaded by King James I. The saying "where there's smoke, there's Ire" comes from the 16th century reign of James I.

In 1689 the Medical School of Paris published a scientific study connecting tobacco use with a reduced life span. This comes from the beginning of modern scientifically based medicine. During the earliest quarter of this century, several states banned smoking.

We usually think of tobacco companies as having big advertising campaigns with the "Marlboro Man" being the pinnacle of advertising success. Yet, when John Rolf took Pocahontas to England in part to promote tobacco, it resulted in the same publicity effect that could today be compared to having a flying saucer with tobacco advertising on it landing at the United Nations building in the middle of New York City.

The reason that the tobacco industry has lasted and will continue to survive is the product itself. Tobacco very much takes its' unique characteristics from the area where it is raised. Tobacco contains nicotine, and except for a very few pharmaceuticals, such as the nicotine patch and nicotine gums, there are no substitutes. For some reason people want tobacco. I don't know why, but they do. Perhaps G. L. Hemminger summed it up when he published the following in the Penn State Froth in November, 1915:

"Tobacco is a dirty weed. I like it.
It satisfies no normal need. I like it.
It makes you thin, it makes you lean,
It takes the hair right off your bean.
It's the worst darn stuff I've ever seen.
I like it."

The six firms in the American tobacco industry are Philip Morris, R. J. Reynolds, American Tobacco, Brown & Williamson, Lorilard and Liggett & Myers. All of these firms came about as a result of the breakup in the tobacco trust of John Duke. They have very rarely competed in price. Most of the competition has been in the areas of advertising and product development. The nature of consumer behavior is that they are inelastic to price and that tobacco tax increases will apply to all products equally.

Tobacco growers and tobacco manufacturers have always had divergent interests which at times has flamed into violence. However, the cost of tobacco, which was once the major cost, has now dropped to a small percentage in the product. As a result, this conflict between manufacturers and suppliers has remained manageable.

In spite of the anti-smoking efforts and many years of decline in sales volume, the sales volume has again increased. While many Americans complain of Japanese imports, the Japanese buy nearly 55 billion cigarettes from the United States each year. China may become a new customer, and with it's large population a one percent market penetration would more than double the volume sold in the United States. In spite of many well-financed product liability suits, no one has yet won a single dollar from a tobacco manufacturer. For these reasons the tobacco industry will be around for a long time.

When Christopher Columbus reached the beaches of San Salvador on October 12, 1492, the Admirals journal says that he was greeted by natives who brought fruit, wooden spears and "certain dried leaves" which gave off a distinctive fragrance. The Spanish sailors under Columbus' command welcomed the fruits, but the unfamiliar dried leaves were thrown away. The Spanish who came for gold and riches had just thrown away what would bring more wealth to them than all the gold or silver that they were to find. Later, on November 6, 1492, according to Bartholomio de Las Casas, who edited Columbus's journal, they were the first Europeans to see tobacco used.

West Indian natives used a Y-shaped piece of hollow cane as a pipe. They called this a itobago. From this came the common name of tobacco. As later European voyagers would discover, tobacco had long been used by the inhabitants of the Americas. The Quiche Mayas were fond of cigars although they may not have been the first to have smoke-filled rooms in which to discuss politics. Their word for smoking was izikar from which the Spanish may have gotten the word "cigarro" from which we in turn get cigar. A word on definitions: A cigar is smoking tobacco wrapped in tobacco while a cigarette is smoking tobacco in a non-tobacco wrapper.

In a world as large as the new world there were many different names for tobacco. In Brazil it was called ipetum; in Aztec, Mexico, it was ipicietl; in Virginia it was iuppowoc; along the St. Lawrence River, it was iquiecta; in Pennsylvania isayri; in Columbia iyuri; and in Trinidad it was called iureit.

The actual length of time that tobacco has been used by man is not known. However, the inhabitants of the new world used tobacco for various purposes, including trade, politics, religious and medicinal uses. A stone carving from a Maya temple shows a priest with a pipe. This dates from around 400 A.D. Some authors say that tobacco has been in commerce for 4,000 years.

The two main types of tobacco were Nicotiana rustica which was native to the east coast of North America and Nicotiana tabacum which was found in South and Central America. A truly wild variety, Nicotiana petunoides, may have flourished west of the continental divide. However, reports of the varieties in the west occured just as it is being replaced by Virginian varieties. The Nicotiana rustica was harsh and rough, but the Nicotiana tabacum was considered a great luxury. Quite by accident, the Spanish colonized areas where Nicotiana tabacum grew, and the English colonized areas where Nicotiana rustica grew. The Spanish could re-export tobacco to the world where as in spite of hostilities, English wealth went for Spanish tobacco.

In 1564 Sir John Hawkins and his men were to have described and introduced pipe smoking to Elizabethan England. Pipe smoking was necessitated because of the English access to only the harsh Nicotiana rustica variety.

Tobacco trade grew quickly, and by 1523 there was a tobacco merchant in Lisbon. Much of their supply was from Brazil, central Cuba and Santa Domingo. By the end of the century, Portugal was trading tobacco in Japan and China. The Arab word for tobacco became Bortugal. The Spanish introduced tobacco to the Philippines. As the industry developed, the Monk Fernandez de Griedo, saw the devil in tobacco and in 1535 published his writings about the evils of tobacco use.

While the Portuguese introduced tobacco to exotic places, the Spanish introduced it to Europe. In 1554 Tobacco was planted in Belgium, in 1556 in France, in 1559 in Germany, in 1569 in Holland and in 1570 in England. Holland was a Spanish possession until 1590 and during that time their tobacco trade with England flourished. This occurred in spite of a bitterness between Spain and England.

Sir Walter Raleigh popularized pipe smoking at the English court of Queen Elizabeth I. Raleigh had tobacco seeds brought back to his estates in Ireland, but in spite of his efforts, the English would always choose the Spanish leaf whenever it was available. In spite of his accomplishments in establishing the first English colony in the new world and his accomplishments with tobacco (and the potato), Raleigh was to see his fortunes turn to the worst. After Queen Elizabeth's death, James I became English monarch. James I despised tobacco and in 1604 issued his Counterblaste to tobacco. This was the Surgeon General's warning of its day only with teeth to it. The actions of King James I included an increase on the import duty on tobacco by 4,000 percent. In 1618 he had Sir Walter Raleigh beheaded...which no one could argue was hazardous to his health!

King James I was known as "where there's smoke, there's Ire". However, he was not alone in his hatred of tobacco. The German ambassador to the Hague wrote the following in 1627:

"I cannot refrain from a few words of protest
against the astounding fashion lately introduced
from America--a sort of smoke-tippling, one might
call it, which enslaves its victims more completely
than any other form of intoxication, old or new.
These madmen will swallow and inhale with incredible
eagerness the smoke of a plant they call Neba
Nicotiana or tobacco."

In 1642 Pope Urban VIII issued a Papal Bull stating that "The use of the herb commonly called tobacco has gained so strong a hold on persons of both sexes, yea, even priests and clerics" that it behooved the Pope to prohibit its use in churches.

Underlying the success of the Spanish and Portuguese with tobacco was the fact that they raised Nicotiana tabacum while Sir Walter Raleigh and the English raised Nicotiana rusticaNicotiana tabacum) and shipped some to England in 1613. For this action Rolfe may be considered the father not only of modern tobacco, but in many ways of an English speaking country. In 1615 Virginia was supplying one pound for every twenty pounds of tobacco that was supplied by Spain. In 1619 Virginia supplied more than Spain, and during the next year, 1620, they doubled their supply to England. Although Rolfe is owed many debts by millions of future Americans, he is best remembered for marrying the Indian Pocahontas or "Little Wanton" as she was known to her people. By this arranged marriage and Pocahontas' conversion to Christianity and subsequent baptism, a major war with the Indians was avoided. If there had been a war, it is unlikely that Jamestown would have survived. Rolfe took Pocahontas to London in 1616, partly as a promotional stunt for tobacco. She later died while living in London.

At the same time that Rolfe was getting England into the tobacco trade the king of Spain ordered (in 1614) that all tobacco coming from the Spanish colonies to be landed in Seville on penalty of death! This created a severe bottleneck that the English could fill with Virginia tobacco. It also caused Seville to be associated with the best tobaccos.

In 1619 James I, who hated tobacco, ordered that all tobacco leaves should be inspected and sold the concession to do inspection. That same year the Virginia House of Burgess initiated an inspection system. They ordered trashy grades of tobacco destroyed and banned any second growth tobacco. These measures to boost Virginia quality also helped to increase its importance to Europe. However, James I was not through and in 1621 ordered that all tobacco growing in England cease. He also ordered that all tobacco trade with Spain would end and that all American tobacco would be landed in London. The main effect of this was to make Virginia dependant on the wealthy London leaf merchants for the next several centuries.

Along with the many things that James I did to hurt the Virginia planters, the Maryland Charter was passed in 1632. The Maryland Charter was conceived by George Calvert, who was the first Lord Baltimore. His son, the second Lord Baltimore, started colonization in 1635 after his father's death. Their first crop was tobacco. Maryland was not a crown colony, but a palatinate which gave the colonists more freedom. Maryland tobacco, although called Virginia leaf in Europe, acquired a character of its' own.

While James I was waging his war against tobacco--but not against the tobacco profits, the Dutch were getting into tobacco. In 1625 New Amsterdam was settled. Like James I, it's director-general despised tobacco and issued a ban on smoking in 1639. Although the ban on tobacco was not successful, the Dutch were successful in trading. Much of their trade was in tobacco. The shorter growing season around New York did not allow for the widespread success with cultivation of tobacco. As a result, the Dutch turned to trade and later to manufacturing. This activity increased after 1664 when the English took over the Dutch possession and changed the name from New Amsterdam to New York.

One of the most difficult problems relating to tobacco was finding a suitable container to ship it across the ocean. Glass bottles required import, and the Spanish tried animal bladders with only limited success. The Hogshead, a wooden barrel holding about 500 pounds of packed tobacco was the answer. Much of the success of the North American tobacco industry was due to the Hogshead, as well as the product itself.

Much of the Virginia and Maryland tobacco was grown near the coast. A Hogshead could be rolled to the shoreline, and the Chesapeake waters had over 4,600 miles of shoreline. Most ocean going ships could sail into the rivers, and the Hogsheads could be rolled to a wharf. If the planters were too far up the river or on too small a river, two canoes with crossbeams could be fashioned into a catamaran to bring the Hogsheads to the ships. This arrangement lended itself well to smuggling, thus defying the decree of James I that tobacco leaves only be landed in London and shipped only on English ships. It was possible for a Dutch, Scotch or Irish vessel to load tobacco and take it anywhere. This was a threat to the London merchants who gave little to the planters and conducted sham auctions to keep leaf prices down.

In the middle 1600's the combination of over-production, the London merchants depressing leaf prices and high taxes payable in tobacco caused a rebellion among planters who saw their livelihood gone. Planters from the upper James River area met and named Nathaniel Bacon to be in charge of forming a militia and later a navy to defy the English governor. Before a showdown with Governor Berkeley could occur, Bacon died of fever. As a result, the American Revolution was delayed from 1676 to 1776.

The next century brought on a continuation of the same but slightly better conditions. Over-production led to low prices leading to setting up small manufacturing plants mostly in cotton which led to higher leaf prices which in turn led to over-production. This cycle repeated itself often. At the same time Virginia started crop control and quality inspections. All the time the planters were dependent on the prices that London merchants would give them for their crops at the auctions in London. Taxes were payable in tobacco as well as clergymen's salaries. A small crop in 1758 caused a law to be passed stating that clergy could be paid in cash instead of tobacco. The clergymen were not happy, and they went to court. A young lawyer named Patrick Henry argued the taxpayers case "on the right of Virginia to manage its' own affairs without arbitrary interference from a tyrannical King."

In 1763 King George III proclaimed that no settlements or land grants were to be west of the Appalachians. The largest victims of this proclamation included the Mississippi Company of Virginia, organized by the tobacco farmer George Washington, and others who were realizing that their tradewaters were being worn out. Virginia planters owed almost two million pounds sterling to British merchants. The role of their huge debts in bringing about the Revolutionary War is subject to interpretation by many historians. Yet, they were a large factor before, during and long after the war. In October 1776 Virginia passed a law restructuring the debt to the British. Thomas Jefferson, Patrick Henry and the Marshall family swapped their debt for paper money that was nearly worthless. A clause contained in the Treaty of Paris which ended the war said that the states would not impede debt collection. This made the treaty much more acceptable to the British.

During the Revolutionary War, Virginia leaf tobacco was used as payment on loans to France for war materials. Much of Dr. Franklin's credibility with the French was due to his ability to land tobacco in France. In 1776 George Washington appealed to the colonists, "If you can't send money, send tobacco." The British, although aware of tobacco's importance, intercepted only about half of it on the high seas. During 1780 and 1781, Cornwallis made the destruction of tobacco in Virginia his primary mission. This included that held by Thomas Jefferson.

During and after the Revolutionary War, settlers were going into Kentucky and Tennessee. (Lexington, Kentucky, was named after the Battle of Lexington.) They saved the best land for tobacco crops. However, there was a problem in getting tobacco to a market since there were no roads that could be used to transport cargo. The only way to transport their crop was by way of the Mississippi River. However, the Spanish controlled New Orleans and would not let leaf tobacco through. By 1790, New Orleans was opening up to exports upon payment of duty. By 1790, Kentucky shipped a quarter million pounds of tobacco to New Orleans. Kentucky then joined the United States in 1792. Unfortunately, in 1802 Spain stopped leaf traffic. Then Napoleon Bonaparte acquired the entire Louisiana Territory, including New Orleans. By 1803, Louisiana was up for sale, and the United States purchased it for $11,250,000. After that, tobacco started going down the Mississippi River again with goods coming back on the return trip. Following the War of 1812, the sea lanes were secure and Kentucky and Tennessee turned out a third of the United States crop by 1830 and half by 1843.

Burley tobacco was a major factor in this growth. Before the Civil War, most tobacco was in plug form. Burley tobacco had a low sugar content. As a result, a considerable amount of "casing" or sugared flavoring agents could be added to burley but not as much flavoring could not be added to Virginia leaf. In 1850 Dr. R. T. Patterson quit medicine to produce which was based on burley tobacco.

The Civil War closed the Mississippi River and the tobacco industry went on hold for seven years. In 1964 a white burley was found in the Ohio Valley. This white burley had many desirable properties of both Virginia tobacco and burley tobacco. Some plugs were 25% licorice. Some merchants in Winston found they could use saccharin in its plug and use more Virginia leaf.

The Crimean War of 1854-56 predates the Civil War and two big tobacco developments came from it. The first was the use by the British of the paper rolled cigarette. The second was the widespread use of milder Turkish tobacco. In the late 1850's a London tobacco merchant named Philip Morris began the custom manufacture of cigarettes. He used a variety of Turkish tobaccos and introduced a cork tip. Turkish tobacco was to be a big factor for the next century.

Along with Turkish tobacco, the last half of the 19th century led to the rise of manufacturing and branding. Through history, tobacco had been used with little manufacturers except for snuff. Along with General Grant's military and political success came demand for well-made cigars. Manufacturing had been done by small family firms. They would hide the bad or undesirable materials in the finished product and switch trade names when their reputation slipped. Larger firms, although having higher cost, could provide consistency and quality to the consumer.

As brands appeared, so did salesmanship. Premiums were very popular way of competing. Advertising was heavy. Further, the popularity of the cigarette grew. By the turn of the century, blends were being turned out that had many desirable characteristics of many different tobaccos. In 1904 John Duke merged American, Continental and Consolidated into the American Tobacco Company. This was a tobacco trust just like the other trusts that existed in other large industries. The American tobacco company made 88% of the cigarettes, 75% of the smoking tobacco and 14% of the cigars in 1904. By 1906 it owned 66% of British-American tobacco and 85% of American cigar. The principle advantage of a large trust such as American tobacco was its ability to get leaf at favorable prices and the great benefit of spreading advertising costs over a lot more sales volume. Their ability to outspead in advertising resulted in maintaining a .

Surprisingly, just as rapidly as it formed, the tobacco trust broke up under the direction of John Duke, its founder. In May 1911, the trust was ruled by the courts to be in restraint of trade. From this breakup prepared by Duke and published as a court decree in November, 1911, came most of the tobacco firms we know today. R. J. Reynolds, British- American Tobacco, Liggett & Myers, P. Lorilard and a striped down American Tobacco Company. Duke himself went on to become Chairman of the Board of British-American Tobacco and founded Duke Power. The only major firm not to come out of the American Tobacco breakup was Brown & Williamson which was an independent until purchased by British-American in 1927.

The outbreak of World War I provided a shortage of Turkish leaf. This was countered by blending. Later General Pershing was to say "You ask me what we need to win this war. I answer tobacco as much as bullets." The federal government commandeered the entire production of many factories and a civil shortage existed. The great war increased tobacco's popularity.

The aftermath of the World War was the temperance movement. Tobacco had its detractors then as always. The English Medical Journal, The Lancet, had "the Great Tobacco Question" bringing up warnings of tobacco dangers as early as 1856 and 1857.

Many other cries arose in 1912. Dr. Tidawell opined that "the most common cause of female sterility is the abuse of tobacco by males...those countries which use the most tobacco have the largest number of stillbirths." In 1920 Lucy Page Gaston announced that she would run for President of the United States on a no-tobacco issue. Much of the temperance movement focused its attention on outlawing alcohol first. However, after their success with the 18th amendment, the movement ran out of steam. During the 1920's, Lucky Strike added this line to its advertising "Be moderate--be moderate in all things, even in smoking". In 1915 nine states prohibited smoking. By 1920 the number had dropped to five. Smokers Leagues were established. The most notable being the Smoker's League Against Tobacco Prohibition that was formed in 1921 in New York. They promoted smokers rights.

The Great Depression and World War II brought the downturn and shortages that were associated with that period. However, it was the 1950's that brought about many new developments in the tobacco industry, including homogenized tobacco leaf, the filter cigarette and the first connection with cancer.

In 1953 a researcher painted mice with concentrated tobacco extract and produced skin cancer. Partly in response to health concerns and largely because filters cost much less than the tobacco they replaced, the filter cigarette volume experienced tremendous growth during the decade of the 1950's. Although denying health concerns, the tobacco industry used them to promote the "filter" and, as a result, was able to cry all the way to the bank. This same strategy was repeated in the 1970's with the "low tar' cigarette. Many of today's brands date from this time, including Kent in 1952, L & M in 1953 and Winston in 1954. Marlboro also came out in 1954, Salem in 1956, Newport and Kool in 1957. In 1957 Dr. Charles W. Mayo, head of the famous Mayo Clinic, announced, "I just don't believe smoking causes lung cancer."

Along with the filter, another cost-saving innovation was the development of HTL for homogenized tobacco leaf. The tobacco was pulverized and reconstituted into sheets. This HTL was of use at first by Cigar and later for cigarettes. It saved quite a bit of leaf cost. Although fought by growers, HTL became common during the decade.

In 1953 the connection between tobacco smoke extracts and skin cancer was reported. The tobacco company representatives met in December, 1953, in the Palace Hotel in New York to plot a strategy and adopted a plan by the public relations firm of Hill & Nolton. In January, 1954, the tobacco firms formed an independent research council called the Council For Tobacco Research U.S.A. Inc. or CTR. From then to now the CTR has "found no conclusive proof that smoking causes illness or death." A separate industry trade group, The Tobacco Institute, with Fred Panner as its Vice President, stated in a 1972 memorandum referring to the CTR that the "Holding Strategy" has been "Brilliantly conceived and executed and creating doubt about the health issue without denying it."

In 1964 the Surgeon General's report linking cigarette smoking and various diseases spawned a new era for tobacco. Soon afterward, the Federal Trade Commission proposed that health warnings appear on cigarette packages and advertisements. This was enacted in July, 1965, and became effective in 1966. This was soon followed in 1970 with the public Health and Cigarette Smoking Act. This Act required stricter warning on packages and banned cigarette advertising on radio and on television stations starting in 1971. Tobacco companies have been voluntarily disclosing tar and nicotine content of cigarettes with the legislated warnings. In 1974 Arizona and Oregon enacted laws restricting smoking...a return to the earlier part of the century.

As over history, a company's fortune goes with it ability to meet its consumers demand by supplying their needs. Two recent developments were the smokeless cigarette which was tested in late 1989 or early 1990 by R. J. Reynolds. Lack of consumer demand and built-up anti-smoking forces along with company problems saw its failure. Another development was a "low cancer" cigarette was developed by the Liggett & Myers Tobacco Company. It was developed by finding the cancer forming components and removing or replacing them with components that hadn't been shown to be cancer causing. This product, called the XA, was readied for production in 1978. Apparently, their legal department killed the product.

As to product liability, the General Product Liability Rule is that if a manufacturer makes a product, it must be safe. The reason for this rule is that safety is generally in the control of the designers and manufacturers. However, some things cannot be made safe.

Restatement of torts, second. TOPIC 5. STRICT LIABILITY

§ 402 A. Special Liability of Seller of Product for Physical Harm to User or Consumer

(1) One who sells any product in a defective
condition unreasonably dangerous to the user or
consumer or to his property is subject to liability
for physical harm thereby caused to the ultimate
user or consumer, or to his property, if

(a) the seller is engaged in the business of
selling such a product, and
(b) it is expected to and does reach the user or
consumer without substantial change in the condition
in which it is sold.
(2) The rule stated in Subsection (1) applies although
(a) the seller has exercised all possible care in
the preparation and sale of his products, and
(b) the user or consumer has not bought the product
from or entered into any contractual relation with
the seller.

A good example of this would be in the area of pharmaceuticals. If there is a product that cannot be made safe, the user must be warned of the tort or resultant dangers. With pharmaceutical products a doctor will often give the warning. With tobacco the warning is right on the package. In Cipollone V. Liggett Group, Inc., the United States Supreme Court ruled that by Federal law this was a valid warning to users. This issue had split the Supreme Court until the appointment of Justice Clarence Thomas, who happened to be a cigar smoker. After his appointment, they were able to reach a decision that settled the issue.

Starting in the Seventies, the tobacco industry did what was then in management vogue. It re-examined its product. They determined that their product was nicotine. Then they proceeded to create a product with less nicotine. This was the light or safer cigarette. They also voluntarily put tar and nicotine content on each pack. Consumers were told that the product was less risky, but to receive the same nicotine dose, the consumer had to buy more. Just as with the filter cigarette's introduction into the marketplace, the tobacco industry was able to turn the bad press regarding health concerns into a profit. This product development supported the industry for many years. Unfortunately for the tobacco industry, the low tar, low nicotine cigarettes coupled with a massive media campaign by the anti-tobacco interests reduced overall consumption in the United States during the last decade.

In spite of a reduced sales volume and an organized resistance, the six tobacco companies thrived. Their biggest asset was their ability not to price complete. Between 1980 and 1990, the average price doubled. Unfortunately, a few years ago, Liggett & Myers introduced generic cigarettes at reduced prices. The last time this was done was in the Twenties. Then the major brands reduced their prices to that of the lowest priced product. With the larger and better advertised brands available at the same price as cheap ones, consumers will buy the premium brands and the cut-rate ones will disappear. Generics have grown to about 36% of the United States market. In light of this, Philip Morris reduced the price of its popular Marlboro brand by 40 cents a pack. To drive home his company's resolve, William Campbell, President and CEO of Philip Morris, appeared on national television to say that his product was overpriced in a recessionary economy and that his product price would stay at the low price as long as the economy was doing poorly. Philip Morris stock dropped dramatically as a result of this news. The typical pack of Marlboro sells for $2.15 retail and has in it 6 cents of tobacco and 17 cents of advertising. Marlboro's products share among smokers (18 years of age and over) is a whopping 24.4%

Whether Philip Morris forces discounters back into line, whether the Federal Government will impose its proposed $2 per pack tax, whether smoking is further restricted or even banned, all of these things will have an impact on the tobacco industry. Yet, they will not be decisive. In a word the future of the tobacco industry is Asia. Currently, Japan is the leading buyer of cigarette exports. China is the world's largest tobacco producer at the present time. The United States follows in second place. In spite of the large production in China, tobacco use is limited within the country because of their enormous population and the poor quality of their tobacco. A one percent market penetration in China would result in the equivalent of doubling the United States tobacco market. Both China and Africa have not been large tobacco consumers because of their poverty. However, as people in China and other poor countries increase their income levels, their ability to become tobacco consumers will increase.

In the past smokers have fought smoking restrictions through the democratic processes. If a $2 per pack tax is imposed on cigarettes, the outcome may not be as bad for the tobacco industry. Consumers, if they have the money will spend it on tobacco and let other things go. Therefore, the demand is price inelastic. A price hike due to a tax hike would be uniform over all suppliers. Any price advantages of discount brands would be a much smaller percentage. Further, if tobacco becomes more expensive, it will more likely be associated with the wealthy just as it was when it was first introduced in Europe.

The big question will be what will happen in Asia. Japan, out biggest customer, has resisted agricultural imports on other things, but not on tobacco. Tobacco very much takes its characteristics from where it is grown, and Japan has little tobacco production. Large Japanese firms have tried to become an equity interest in many large manufacturing firms. Time will tell if they become interested in the tobacco firms. Whether communist China is an El Dorado for tobacco may depend on many factors, not the least is how well its economy grows. With its takeover of Hong Kong in the latter part of the this decade, things will change in ways no one can predict at the present time. BACK