I’ll tell you why I like the cigarette business. It cost a penny to make. Sell it for a dollar. It’s addictive. And there’s a fantastic brand loyalty. - Warren Buffett
The tobacco industry sells about six trillion cigarettes each year. The industry is highly concentrated with a handful of firms controlling the majority of the global tobacco market. The tobacco market was worth about $614 billion in 2009. China is the biggest market based on total cigarettes consumed. There are some 350 million smokers in China who consume around 2,200 billion cigarettes a year, or about 41% of the global total. However the industry in China is state-owned by the monopolistic China National Tobacco Company.
Outside of China, the four largest publicly-listed international tobacco companies account for about 46% of the global market according to British American Tobacco (BAT). BAT’s estimate of the market shares for 2009 are as follows:
|Company||Global Market Share|
|Phillip Morris International||16%|
|British American Tobacco||13%|
Companies that operate mainly in the domestic markets include Egypt’s Eastern Tobacco, Thailand’s Tobacco Monopoly, Bulgaria’s Bulgartabak, Taiwan’s Tobacco & Liquor Corp and Vietnam’s National Tobacco Corporation. The major American players in the U.S. market are Altria (NYSE:MO), Lorillard (NYSE:LO) and Reynolds American (NYSE:RAI).
Click to enlarge:
Based on the total number of cigarettes sold, the top five global brands are Marlboro, Winston, Mild Seven, L&M and Kent.
After China, the ten countries that consume the largest number of cigarettes are Russia, the U.S., Japan, Indonesia, India, Brazil, Ukraine, Turkey, Korea and Italy. The relationship between volume of cigarettes sold and volume of profits shipped are not consistent across markets. For example, Phillip Morris International’s sales in OECD countries accounts for one-third of total sales but accounts for 46% of total profits. And the tow-third of sales in non-OECD nations account for only 54% of its profits.
Due to their scope and scale of profits, tobacco companies transfer huge amounts of wealth from one region of the world to another. In 2008, around $20 billion was earned by tobacco companies from outside their home territories.
The Top tobacco growing countries are shown in the graphic below: (Click to enlarge)
Phillip Morris International, which was spun off from Altria in 2008 is the world’s largest private tobacco company. Altria sells its products in the U.S. market while PHI sells them overseas. With 75,000 employees Philip Morris owns seven of the leading 15 global brands. In 2008, the company reported revenues of over $64 billion. PM repatriates about $10 billion in profits to the U.S. from global sales.
British American Tobacco is the second largest tobacco company in the world based on unit volume.The company’s 2008 revenue totaled about $50 billion. Some of the top brands owned by BAT include Dunhill, Pall Mall, Lucky Strike, Viceroy and Vogue. BAT also holds substantial stakes in Reynolds American and Indian Tobacco Company (ITC) of India. In terms of ownership, more than two-fifth of the shares are held by just 400 shareholders including the Canada Pension Plan Investment board. BAT repatriates about $6 billion from overseas earnings to U.K. More than three-fourths of the company’s sales are in the fast growing emerging markets.
U.K.-based Imperial Tobacco also sells the majority of cigarettes outside of U.K. The company repatriates about $4 billion in earnings to U.K. from abroad.
Altria, formerly known as Philip Morris, is the largest cigarette maker in the U.S. Reynolds America ranks the second, followed by Lorillard.
Stockholm, Sweden-based Swedish Match (SWMA) is involved in the production and sales of snuff and snus, chewing tobacco, cigars and pipe tobacco.The company does not make cigarettes and the “match” component makes up only 10% of its revenues.
In addition to shareholders, one of the biggest beneficiaries of sales of tobacco are the governments of various countries. Governments worldwide generated over $160 billion in the form of excise taxes, duties, income taxes, etc. from just nine companies in 2008.
Current and Future State of the industry:
Cigarette smoking is declining in the developed world due to unprecedented bans on cigarette usage in public places, restrictions on advertising, extremely high taxes, health warnings, limitations on retail display and other factors. In addition, the percentage of population who are smokers is reducing. As a result consumers in developed countries are switching to lower-priced offerings and alternatives to cigarettes such as smokeless tobacco, snus, etc.
While sales are declining in developed countries they booming in emerging markets. Tobacco makers are aggressively marketing in those markets in order to compensate for the declining sales in rich countries. However even in emerging markets governments are proposing tougher regulations governing the sales and marketing of tobacco products.
From an article in the New York Times:
This year, Philip Morris International sued the government of Uruguay, saying its tobacco regulations were excessive. World Health Organization officials say the suit represents an effort by the industry to intimidate the country, as well as other nations attending the conference, that are considering strict marketing requirements for tobacco.
“They’re using litigation to threaten low- and middle-income countries,” says Dr. Douglas Bettcher, head of the W.H.O.’s Tobacco Free Initiative. Uruguay’s gross domestic profit is half the size of the company’s $66 billion in annual sales.
...Cigarette companies are aggressively recruiting new customers in developing nations, Dr. Bettcher said, to replace those who are quitting or dying in the United States and Europe, where smoking rates have fallen precipitously. Worldwide cigarette sales are rising 2 percent a year.
But the number of countries adopting tougher rules, as well as the global treaty, underscore the breadth of the battleground between tobacco and public health interests in legal and political arenas from Latin America to Africa to Asia.
...The cigarette companies work together to fight some strict policies and go their separate ways on others. For instance, Philip Morris USA, a division of Altria Group, helped negotiate and supported the anti-smoking legislation passed by Congress last year and did not join a lawsuit filed by R. J. Reynolds, Lorillard and other tobacco companies against the Food and Drug Administration. So far, it is not protesting the agency’s new rules, proposed last week, requiring graphic images with health warnings on cigarette packs.
But Philip Morris International, the separate company spun out of Altria in 2008 to expand the company’s presence in foreign markets, has been especially aggressive in fighting new restrictions overseas.
Click to enlarge:
Hence similar to other sectors tobacco multinationals are increasingly dependent on emerging markets to maintain earnings. As income levels and standard of living increases in EM countries, sales of tobacco products may increase further. In some ways a bet on tobacco stocks can be considered as a bet on emerging markets.
Currently Altria Group, Philip Morris International, Lorillard and Imperial Tobacco Group have dividend yields between 4% to 6% while Reynolds American, Swedish Match and British American Tobacco pay between 2% to 3%.
Sources: Euromonitor International, The New York Times, The Wall Street Journal, Company sites, WHO, The Global Tobacco Economy by Physicians for a Smoke-Free Canada.
Disclosure: No positions