1901, when Queen Victoria – who passionately hated cigarettes – died, her successor, Edward VII, gathered friends in a large drawing room at Buckingham Palace and announced, ‘Gentlemen, you may smoke.’ By royal warrant, he appointed Philip Morris as tobacconist to the King.
Philip Morris had its next seminal moment when RJ Reynolds decided to hike cigarette prices at the start of the Great Depression in 1930, leaving a perfect opening for Philip Morris to counter with low-priced brands, in the process painting Reynolds as greedy and opportunistic.
By the time Duke’s monopoly was disbanded in 1911, Philip Morris was well-established, mainly off the back of brands like Marlboro, which initially targeted women.
Philip Morris embarked on a quest for world domination: buying out not just countless other tobacco companies but also the Miller Brewing Company (then the 7th largest brewery), most of the Seven-Up Company, General Foods and Kraft, a share in Brazil’s leading chocolate company, and Nabisco Holdings Corp for $18,9 billion – making it the world’s second-biggest food company (only trailing Switzerland’s Nestlé).
Aside from expanding its business empire beyond tobacco, PMI also made another strategic move: it began to establish a series of structures aimed at managing the public discourse around tobacco, setting up the Tobacco Research Centre in 1973 and the Tobacco Institute in 1978.
In 2001 Philip Morris decided to split its corporate identity: Altria (predominantly housing Miller Beer and Kraft Foods), and the two cigarette branches, Philip Morris USA and Philip Morris International. (At the time of writing, there were rumours that PMI and Altria are talking about a merger.)
As an aside, this book does not dwell on tobacco in China, because it warrants an entire book by itself. China has its own version of big tobacco, the China National Tobacco Corporation. It’s a state-owned monopoly, producing 2,5 trillion cigarettes a year – 43% of global output. It makes more money than BAT, PMI and Altria combined, and is responsible for somewhere between 7% and 11% of China’s government revenues every year.4
South Africa – where much of this book plays out – has its own tobacco-related rags-to-riches story (which ultimately ends up circling back to Lausanne decades later). In the 1940s a small tobacco farmer, Anton Rupert, noted that even the depression did not seem to decrease people’s consumption of tobacco and liquor, and started manufacturing cigarettes in his garage with an initial investment of £10,5 which he eventually built into the tobacco and industrial conglomerate Rembrandt Group. He has been credited with innovations ranging from king-size filter cigarettes, foil-wrapped packs and menthol filters, and the international hit brand Peter Stuyvesant.
In 1988, Rupert’s Rembrandt group founded the Swiss luxury goods company Richemont, effectively turning his earlier £10 investment into a company with annual net sales of $10 billion. In 1995, Rembrandt and Richemont consolidated their tobacco interests into Rothmans International (at the time controlling 93% of the legal tobacco market in South Africa). Their market share was ultimately ceded to BAT, handing over what was a virtual monopoly,6 and setting BAT up for dominance in the local market for decades to come.
Today, BAT is estimated to control around 74% of the local licit market, followed by JTI with 9% and PMI with 8%. This dominance, combined with the high excise tax on cigarettes, makes BAT one of the largest contributors to the fiscus.7
Whether it’s South Africa or America or mostly anywhere, the story almost always plays out the same way: a man makes some cigarettes; he finds a faster and cheaper way to make more cigarettes; he expands into other products; he gets bought up by a larger company; that big company merges with another conglomerate.
Oligopolies that started in somebody’s garage.
In recent years, a confluence of events has started putting pressure on what was previously a seemingly invincible industry. And industries under pressure bring out the big guns and the dirty tricks.
The first reason why big tobacco has been forced into a defensive posture has to do with simple market dynamics: smaller, local, low-cost manufacturers who are making inroads into its market share.
The second dynamic is a general increase in the awareness of big tobacco’s chequered past, resulting in more efforts around the world to regulate its business practices more effectively (especially in places like Western Europe).
The third is an obligation imposed under an Illicit Trade Protocol in the World Health Organization’s Framework Convention on Tobacco Control8 to introduce a track-and-trace system for cigarettes, so that cigarettes end up where they are supposed to, and packs that do make their way to the black market can be traced back to their manufacturer.
A fourth problem facing the industry is that governments are increasingly being pressured to introduce higher tax rates, as an incentive for people to stop smoking. Quite understandably, this is the last thing the tobacco industry needs.
Make no mistake: Impressive bottom lines notwithstanding, big tobacco is under pressure.
Which perhaps in part explains why it feels the need to take out the competition that is mercilessly chipping away at their market share. While the focus of this book is on big tobacco, it helps to understand the upcoming crop of independent manufacturers who are giving the big boys a run for their money.
2. The competition: ‘Cheap and nasty’
‘The magician must expect the exposure of his tricks sooner or later, and see what it has required long months of study and time to perfect dissolved in an hour. The very best illusions of the best magicians of a few years ago are now the common property of travelling showmen at country fairs.’
– French magician Alexander Herrmann
In the simplest terms, there are three circles in the tobacco manufacturing industry: multinational big tobacco companies with their globally-known big brand names; smaller, independent manufacturers who typically make cheaper – but still legal – cigarettes (sometimes called ‘cheapies’ or value brands); and the guys who manufacture specifically for the contraband market, making counterfeits (addendum 3) or what are called ‘illicit whites’ or ‘cheap whites’ (addendum 4).
In an interview Johann van Loggerenberg, the tax sleuth and author of books like Rogue, Death and Taxes, and Tobacco Wars, describes them as bank robbers, bag snatchers and muggers respectively.1
The big guys, the little guys, the purely criminal guys, they all have three things in common: they all try in some way to minimise their tax liabilities; their products all – to a lesser or greater degree – seem to find their way on to the black market; and they all, in the end, will likely kill half of their customers.2
Increasingly, big tobacco is under material pressure from smaller, local low-cost manufacturers who are making inroads into its market share.3 For instance, South Africa’s Carnilinx sells its value brand for R17 (just over $1 at the time of writing) a pack. BAT’s most popular Peter Stuyvesant packs sell for around R44 (roughly $3).4 How can a Carnilinx pack sell for so much more cheaply than one from BAT does? They could be evading taxes, but not necessarily so: on average, it costs less than R1,50 to make a pack of cigarettes, and these smaller, low-cost companies do not have to send royalty payments, management fees and IT charges to an offshore parent company like BAT has to. And because what you’re allowed to put into cigarettes is reasonably well regulated, their product is at least in some way comparable to what big tobacco makes. For cash-strapped consumers it’s an obvious choice.
As Yusuf Kajee of Amalgamated Tobacco South Africa puts it: ‘It’s like people having a choice between
