Why Tobacco Won't Quit

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As a profit machine, cigarettes are proving as resilient as ever. While the average price per pack has rocketed to $2.95 from $1.74 in 1997, consumption declined just 2% last year. That is no more than the average falloff of much of the past two decades. Addicted smokers simply paid up. R.J. Reynolds reported a 27% rise in net income, to $100 million, in this year's first quarter; Philip Morris logged a 7.7% increase in income, to $1.2 billion, from tobacco sales. Throughout Eastern Europe and Asia, revenues are also rising. And China's 350 million smokers remain the ultimate replacement market.

Profitability is so great that the industry is luring new players. Such upstarts as Alliance Tobacco and CigTec have a competitive advantage: with the big companies saddling consumers with settlement costs of as much as 58[cents] a pack, the independents have been able to price their smokes, like GT One and CT Light, more aggressively. They have focused on the so-called discount segment, and boosted their share of the $12.6 billion retail market for cheap butts from 4% in 1997 to 14%, says analyst Rob Campagnino of Prudential Securities. Sales of Commonwealth Brands, the top private discounter, rose 66%, to $800 million, last year. The company, based in Bowling Green, Ky., barely registered a presence a few years ago.

Tobacco's critics argue that the industry's surge is illusory. Teen smoking is declining as much as 15% a year in states with comprehensive prevention campaigns, says Matthew Myers, president of the Campaign for Tobacco-Free Kids. Rising state taxes will reduce some demand. And while it could be years before any class action survives appeal, it may take only one to crush the industry.

Richard Daynard, head of Northeastern's Tobacco Control Resource Center, agrees that the antismoking campaigns have not made a big difference. "But they make a modest difference," he says. "If you have a 10% drop in people dying from smoking, that's 45,000 fewer deaths per year; that still leaves 90% of deaths on schedule." And paying the tobacco industry handsomely before they go.