Underground Economy Homework

There are requirement of this homework and suggestion in the instruction. My part is the sales part of tobacco.

1400 I Street NW – Suite 1200 – Washington, DC 20005
Phone (202) 296-5469 · Fax (202) 296-5427 · www.tobaccofreekids.org

Overall All States’ Average: $1.65 per pack
Major Tobacco States’ Average: 48.5 cents per pack

Other States’ Average: $1.80 per pack

State Tax Rank State Tax Rank State Tax Rank
Alabama $0.675 40th Louisiana $1.08 34th Oklahoma $1.03 35th
Alaska $2.00 13th Maine $2.00 13th Oregon $1.32 30th
Arizona $2.00 13th Maryland $2.00 13th Pennsylvania $2.60 10th
Arkansas $1.15 33rd Massachusetts $3.51 4th Rhode Island $3.75 3rd
California $0.87 37th Michigan $2.00 13th South Carolina $0.57 45th
Colorado $0.84 38th Minnesota $3.00 8th South Dakota $1.53 26th
Connecticut $3.90 2nd Mississippi $0.68 39th Tennessee $0.62 42nd
Delaware $1.60 24th Missouri $0.17 51st Texas $1.41 27th
DC $2.50 12th Montana $1.70 21st Utah $1.70 21st
Florida $1.339 29th Nebraska $0.64 41st Vermont $3.08 6th
Georgia $0.37 49th Nevada $1.80 19th Virginia $0.30 50th
Hawaii $3.20 5th New Hampshire $1.78 20th Washington $3.025 7th
Idaho $0.57 45th New Jersey $2.70 9th West Virginia $1.20 32nd
Illinois $1.98 18th New Mexico $1.66 23rd Wisconsin $2.52 11th
Indiana $0.995 36th New York $4.35 1st Wyoming $0.60 43rd
Iowa $1.36 28th North Carolina $0.45 47th Puerto Rico $3.40 NA
Kansas $1.29 31st North Dakota $0.44 48th Guam $3.00 NA
Kentucky $0.60 43rd Ohio $1.60 24th Northern Marianas $1.75 NA

Table shows all cigarette tax rates in effect as of August 1, 2016 (PA effective 8/1/16). Since 2002, 47 states and the District
of Columbia have increased their cigarette tax rates 126 times. The states in bold have not increased their tax for at least 10
years (since 2006 or earlier). Currently, 34 states, DC, Puerto Rico, the Northern Marianas, and Guam have cigarette tax
rates of $1.00 per pack or higher; 16 states, DC, Puerto Rico, and Guam have cigarette tax rates of $2.00 per pack or higher;
eight states, Puerto Rico and Guam have cigarette tax rates of $3.00 per pack or higher; and one state (NY) has a cigarette
tax rate more than $4.00 per pack. Tobacco states are KY, VA, NC, SC, GA, and TN. States’ average includes DC, but not
Puerto Rico, other U.S. territories, or local cigarette taxes. The median tax rate is $1.53 per pack. AK, MI, MN, MS, TX, and
UT also have special taxes or fees on brands of manufacturers not participating in the state tobacco lawsuit settlements
(NPMs).

The highest combined state-local tax rate is $6.16 in Chicago, IL, with New York City second at $5.85 per pack.
Other high state-local rates include Evanston, IL at $5.48 and Juneau, AK at $5.00 per pack. For more on local cigarette
taxes, see: http://tobaccofreekids.org/research/factsheets/pdf/0267 .

Federal cigarette tax is $1.01 per pack. From the beginning of 1998 through 2002, the major cigarette companies
increased the prices they charge by more than $1.25 per pack (but also instituted aggressive retail-level discounting for
competitive purposes and to reduce related consumption declines). In January 2003, Philip Morris instituted a 65-cent per
pack price cut for four of its major brands, to replace its retail-level discounting and fight sales losses to discount brands,
and R.J. Reynolds followed suit. In the last several years, the major cigarette companies have increased their product
prices by almost $1.00 per pack. Nationally, estimated smoking-caused health costs and lost productivity totals
$19.16 per pack.

The weighted average price for a pack of cigarettes nationwide is roughly $6.01 (including statewide sales taxes but not
local cigarette or sales taxes, other than NYC’s $1.50 per pack cigarette tax), with considerable state-to-state differences
because of different state tax rates, and different manufacturer, wholesaler, and retailer pricing and discounting practices.
AK, DE, MT, NH & OR have no state retail sales tax at all; OK has a state sales tax, but does not apply it to cigarettes;
MN & DC apply a per-pack sales tax at the wholesale level; and AL, GA & MO (unlike the rest of the states) do not apply
their state sales tax to that portion of retail cigarette prices that represents the state’s cigarette excise tax.

Campaign for Tobacco-Free Kids, July 14, 2016 / Ann Boonn

For additional information see the Campaign’s website at http://www.tobaccofreekids.org/what_we_do/state_local/taxes/.
Sources: Orzechowski & Walker, Tax Burden on Tobacco, 2014; media reports; state revenue department websites.

STATE CIGARETTE EXCISE TAX RATES & RANKINGS

Cigarette Manufacturing in North Carolina

By Teresa Leonard

tleonard@newsobserver.com

A drive past downtown Durham no longer carries the sweet scent of tobacco, but for many years, it was the city’s hallmark. In 1949, N&O writer Jane Hall gave readers a thorough explanation of modern cigarette manufacturing.

That cigarette you’re about to light – if you smoke – is just one of an estimated 392,000,000,000 made in the United States this year.

Moreover, when you light it, you can do so with patriotic pride, for a large portion of the bright leaf therein was grown in North Carolina soil, it is wrapped in cigarette paper made in North Carolina by the Ecusta Paper Corporation, and the chances are it was manufactured within the borders of this State.

Roughly speaking, 60 per cent of the cigarettes made in the United States are manufactured in North Carolina, which means that over two hundred billions of this year’s estimated total of little white tobacco-filled tubes were made in Tar Heelia.

This torrent of cigarettes, which poured from the State’s borders across America and around the world, had its headwaters in four plants in the State – R. J. Reynolds Tobacco Company, manufacturers of Camels and Cavaliers at Winston-Salem; American Tobacco Company, manufacturers of Lucky Strikes at Reidsville and Durham; and Liggett and Myers, manufacturers of Chesterfields at Durham. Phillip Morris, the fourth ranking manufacturer behind America’s “Big Three,” doesn’t have a plant in North Carolina.

Reynolds is the only company that maintains all its manufacturing plants and main office within the borders of the State.

Its a long and intricate way from the bright leaf in the farmers’ fields of North Carolina to the finished package of cigarettes which eventually finds its way into his and your pocket or handbag. In general, the process is the same for all cigarettes, although the blends of various brands are jealously guarded trade secrets, as are certain developments in the machinery used.

Competing companies sometimes go to strange extremes to guard their so-called “secrets,” but one thing is certain: The actual manufacture of cigarettes is one of the most highly mechanized processes to which any agricultural product is subjected.

Mr. Tobacco Farmer out across North Carolina handles his leaf repeatedly and tenderly through numerous steps from the winter plant bed to late summer warehouse floors – such as weeding, transplanting, suckering, topping, worming, poisoning, priming, handing, looping, barning, stacking, grading, tieing and hauling – but once it reaches the cigarette factory quite the contrary is true. Put through a steam bath and redrying process, the tobacco leaf is turned over to a series of machines that complete the processing with scarcely a hand again touching the leaf until the cigarette is pulled from the pack for lighting. The machines make it a big, big business in which competition is fierce and in which only the smartest survive.

After purchase on the summer-hot auction floors of North Carolina, the Tar Heel and other domestic tobaccos are taken to the companies’ redrying plants where they are passed by conveyor belt through a huge box-like redrying machine. The redrying machine is divided into several compartments, each maintaining a different temperature. Both dry and steam heat are applied, thus preparing the leaf for proper aging.

Next, the tobaccos are pressed by hydraulic pressure into 1,000-pound hogsheads and are taken to the storage warehouses for aging. After many months of aging, the leaf is taken out of storage and given a vapor or steam bath and precisely blended. Machines remove the stems and still other machines shred the leaf.

Simultaneously, the imported tobaccos, which have also under gone careful preparation, are blended in correct proportion with the domestic tobaccos – and the mixture is ready for manufacture into cigarettes. Most U. S. cigarettes are made of a blend of bright leaf, burley, Maryland, and Turkish tobaccos.

Visitors to the Reynolds plant in Winston-Salem are taken into an enormous room that houses one of the company’s numerous cigarette manufacturing departments. The room is immaculate; the air is fragrant with the odor of tobacco; the roar of machinery fills the room. A look at it, and the whole process takes on a tinge of the miraculous, providing support for the saying that “machines are smarter than people.” Cigarette machinery certainly seems to be.

Overhead, around the outer edges of the room, pairs of oblong buckets move along on a chain conveyor. At a regulated speed, the pairs of buckets dip beneath chutes that bring the blended tobaccos from the upper floor. Once under the chute, the electrically operated chute doors automatically open and drop several pounds of tobacco into each pair of buckets. The buckets then move onward and upward to the overhead level.

If the tobacco supply is low in a given cigarette machine, an electric eye notes the fact and, as the buckets pass over the hopper they dump their load. If not, the buckets, still loaded, pass on to the next machine. So around the circuit of the many cigarette machines until, empty, they reach the chutes again.

Meanwhile, on the right rear side of an ingenious cigarette machine, a bobbin, or wheel, of cigarette paper is running through printers that print the name “Camels” at spaced intervals.

The blended tobacco – sliding from the hopper at the top of the machine – passes an electric magnet, which removes any possible foreign matter, and falls onto a belt which carries it directly to the moving ribbon of cigarette paper. Immediately beyond, the moving ribbon of paper passes a paste wheel, and the paper automatically is pasted and folded around the tobacco.

The embryo cigarette then passes an electric heater which seals the top and next passes under a revolving knife which swiftly and automatically cuts the long tube into exactly and precisely the right cigarette length. The finished cigarette is then tossed out onto a divided belt, each side of which holds 600 cigarettes, which moves before the inspector in front of the machine.

Description takes time – in operation, a cigarette machine makes over 1,000 cigarettes a minute. The little white tubes come popping out quicker than the wink of an eye.

As a matter of whimsical speculation, if anything should go wrong with the knife and the machine couldn’t’ be stopped, it would make a Camel three miles long.

As the finished cigarettes come tumbling out onto the moving belt in front, the inspector puts them in a tray capable of holding 4,000 cigarettes. At regular intervals, she checks them for uniformity in weight, swiftly putting a number of cigarettes in a special container and weighing them on a scale at her right. The machine can be adjusted so that the correct amount of tobacco will flow onto the cigarette paper.

When the tray in front of the inspector is full, she puts a top on it and slides it onto a handtruck at her left and in one almost continuous motion slides an empty tray into the space in front of her. She also keeps records as to the number made in her machine. Thus, it is possible for the superintendent to know at nay given time the number of cigarettes made by the machines in the department.

At regular intervals the finished cigarettes are trucked into the packing department. The cigarettes are put into the familiar wrappers in a packing machine. The flat, already printed and properly cut wrapping paper is carried by a chain under a glue roller where it gets the proper amount of glue at the right places. From the top rear of the machine the aluminum foil, stamped at intervals with the number of the machine, moves down until it reaches a point where the paper is folded around the foil in package shape.

Meanwhile, the trays of finished cigarettes are put into another part of the packing machine where they honeycomb down both the right and left sides until they meet an automatic counter which picks up 20 – and only 20 – at a time. Subsequently, they are plunged into a prepared package. The open packs then pass an electrical detector machine which automatically affixes the seven-cent Federal tax stamp. If, by chance, the machine should fail to affix the stamp, a bell rings and the inspector takes off the offending package.

Moving steadily ahead, the packs are laid flat on a conveyor belt and are carried into a cellophane machine. At the top of the machine are two reels – one of colorless cellophane for the package and the other of narrow red cellophane for the tab. In the machine, the cellophane is cut off and folded around the pack, and sealed on each end as it passes an electric heater. It is then sealed on the side, and moves by conveyor until it reaches an inspector who checks the packs and puts them, 10 at a time, into the empty cartons that are moving past on a belt behind her. More than 100 packs a minute are packaged in the packing machine.

The cartons come to the inspector from another part of the plant. Cigarette cartons, previously printed, are put into an intricate machine that automatically folds them into carton shape, pastes them, and tosses them onto a conveyor belt at the rate of more than 50 a minute.

Carton distributors take them off the belt at intervals and put them in a chute, which takes the empty cartons to inspectors.

The belt carries the filled cartons to a carton inspector for a final check, then they move through a machine that seals the cartons. They are then taken by chain elevator to an overhead conveyor that takes them across the room to a case packer. At the end of the conveyor, a case-packer folds the flat, already prepared cases into shape and the machine automatically fills the cases with 60 cartons of cigarettes (12,000 individual cigarettes), and drops them onto another conveyor belt.

As the cases move down the conveyor belt, they pass a register that counts them and then move into a machine that automatically unfolds the top and bottom of the cases, puts glue in the proper places re-folds the ends into place, and sends the cases onto an automatic scale that weighs them. If the weight is not right (perhaps, a missing carton), a bell rings and an inspector come sand takes the case off.

If all is well, the cases move steadily along up to an overhead conveyor and then into the shipping room – and from there North Carolina’s Camels are shipped all over the world.

The whole process is a marvel of mechanical ingenuity and is fascinating to watch. Shades of Sir Walter Raleigh! In his palmiest days, Sir Walter could never have envisioned a modern cigarette-manufacturing plant. The N&O Dec. 11, 1949

Read more here: http://www.newsobserver.com/living/liv-columns-blogs/past-times/article27906262.html#storylink=cpy

1400 I St. NW Suite 1200,· Washington, DC 20005

Phone (202) 296-5469 · Fax (202) 296-5427 · www.tobaccofreekids.org

The 2012 Census of Agriculture provides the most recent count of U.S. tobacco farms: 10,014
tobacco farms in the country using 342,932 acres to grow tobacco. Overall, there were 2.1
million farms of any type in the United States in 2012, using 914 million acres, which means that
tobacco farms accounted for less than half of one percent of both the total number of U.S. farms
and U.S. farm acreage. Tobacco farm revenue totaled $1.5 billion or less than one half of a
percent of total U.S. farm income ($394.6 billion).

Ranked By Number of Tobacco Farms

1. Kentucky 4,530
2. North Carolina 1,682
3. Pennsylvania 1,312
4. Tennessee 935
5. Virginia 558
6. Ohio 224
7. Wisconsin 181
8. Indiana 158
9. South Carolina 136
10. Georgia 102

Ranked By Total Tobacco Acreage

1. North Carolina 167,443
2. Kentucky 87,931
3. Tennessee 23,801
4. Virginia 22,982
5. South Carolina 12,155
6. Georgia 9,882
7. Pennsylvania 9,532
8. Indiana 2,348
9. Connecticut 2,180
10. Ohio 1,864

Source: U.S. Department of Agriculture, 2012 Census of Agriculture, May 2014, and earlier editions
(Census is done every five years), http://www.agcensus.usda.gov/index.asp.

The 2012 Census found fewer tobacco farms and less tobacco acreage than the 2007 Census
of Agriculture.

The role of tobacco farming in the United States economy and in the so-called tobacco states’
economies has been shrinking rapidly for some time.1 While some of that decline has been
caused by reductions in the amount of smoking in the United States, much of the reduced demand
for U.S. tobacco leaf has come from U.S. cigarette companies using more foreign tobacco in the
cigarettes they make and sharply reducing, if not eliminating, their cigarette exports.2

Campaign for Tobacco-Free Kids, September 4, 2014

For more information on tobacco farming, see the Campaign’s website
http://www.tobaccofreekids.org/facts_issues/fact_sheets/misc/farming/.

1 See the Campaign for Tobacco-Free Kids factsheet, The Shrinking Role of Tobacco Farming & Tobacco
Product Manufacturing in the United States’ Economy, and similar factsheets on the role of tobacco
farming and tobacco product manufacturing in each of the major tobacco states, available online at
http://www.tobaccofreekids.org/facts_issues/fact_sheets/misc/farming/.

2 See, e.g., the Campaign factsheet, The Big Cigarette Companies (Not Smoking Declines) Are Hurting
American Tobacco Farmers, http://www.tobaccofreekids.org/research/factsheets/pdf/0112 .

TOBACCO-GROWING STATES IN THE USA

WWW.IBISWORLD.COM Cigarette & Tobacco Manufacturing in the US August 2016

IBISWorld Industry Report 3122

Cigarette & Tobacco
Manufacturing in the US
August 2016 Ibrahim Yucel

Smoke free: Declining cigarette use will shift
industry’s focus to smokeless products

About this Industr

Industry Definitio

2 Main Activities

Similar Industries

Additional Resources

4 Industry at a Glanc

Industry Performance

5 Executive Summary

5 Key External Drivers

7 Current Performance

10 Industry Outlook

13 Industry Life Cycle

Products & Markets

15 Supply Chai

15 Products & Services

18 Demand Determinants

Major Markets

21 International Trade

23 Business Locations

Competitive Landscape

25 Market Share Concentration

25 Key Success Factors

26 Cost Structure Benchmarks

29 Basis of Competition

30 Barriers to Entry

31 Industry Globalization

Major Companies

33 Altria Group Inc.

35 Reynolds American Inc.

36 Imperial Brands pl

Operating Conditions

39 Capital Intensity

40 Technology & Systems

40 Revenue Volatility

41 Regulation & Policy

43 Industry Assistance

45 Key Statistics
45

Industry Data

Annual Change

Key Ratios

Jargon & Glossary

www.ibisworld.com | 1-800-330-3772 | info@ibisworld.com

This report was provided to
Ohio State University – Columbus Campus (OhioNet) (211852729

)

by IBISWorld on 14 September 2016 in accordance with their license agreement with IBISWorld

WWW.IBISWORLD.COM Cigarette & Tobacco Manufacturing in the US August 2016 2

Operators in this industry manufacture
cigarettes, cigars, loose pipe tobacco,
smokeless (i.e. chewing) tobacco and
e-cigarettes. Tobacco manufacturers
acquire raw materials from tobacco

growers, paper and fiber
manufacturers, tobacco stemmers and
tobacco redryers and process these into
ready-to-use products sold to
wholesalers and retailers.

The primary activities of this industry are

Manufacturing cigarettes

Manufacturing cigars

Manufacturing smokeless tobacco

Manufacturing electronic cigarettes and vaporizers for tobacco use

Reconstituting tobacco

11191 Tobacco Growing in the US
This industry farms and sells tobacco to wholesalers to be used in tobacco product manufacturing.

32211 Wood Pulp Mills in the US
This industry produce wood pulp which is used to manufacture filters for cigarettes and tobacco products.

32229b Paper Product Manufacturing in the US
This industry manufactures paper used to wrap tobacco for cigarette production.

42494 Cigarette & Tobacco Products Wholesaling in the US
This industry wholesales tobacco products such as cigarettes, snuff, cigars and pipe tobacco.

Industry Definition

Main Activities

Similar Industries
About this Industry

The major products and services in this industry are

Cigars

E-vapor products

Menthol cigarettes

Regular cigarettes

Smokeless tobacco

Other

Provided to: Ohio State University – Columbus Campus (OhioNet) (211852729) | 14 September 2016

WWW.IBISWORLD.COM Cigarette & Tobacco Manufacturing in the US August 2016

About this Industry

For additional information on this industry

www.ttb.gov
Alcohol and Tobacco Tax and Trade Bureau

www.cdc.gov
Centers for Disease Control and Prevention

www.cigarassociation.org
Cigar Association of America

www.truthinitiative.org
Truth Initiative

www.industrydocumentslibrary.ucsf.edu/tobacco/
Truth Tobacco Industry Documents

www.census.gov
US Census Bureau

Additional Resources

IBISWorld writes over 700 US
industry reports, which are updated
up to four times a year. To see all
reports, go to www.ibisworld.com

Provided to: Ohio State University – Columbus Campus (OhioNet) (211852729) | 14 September 20

WWW.IBISWORLD.COM Cigarette & Tobacco Manufacturing in the US August 2016

2006 08 10 12 14 16 18Year

Percentage of smokers

SOURCE: WWW.IBISWORLD.COM

%
c

ha
ng

–

-10

-5

0
5

2208 10 12 14 16 18 20Year

Revenue Employmen

Revenue vs. employment growth

Products and services segmentation (2016)

51.2%
Regular cigarettes

2.5%
Cigars

26.3%
Menthol cigarettes

11.2%
Smokeless tobacco

4.5%
Other 4.3%

E-vapor products
SOURCE: WWW.IBISWORLD.COM

Key Statistics
Snapshot

Industry at a Glance
Cigarette & Tobacco Manufacturing in

2016

Industry Structure Life Cycle Stage Decline
Revenue Volatility Medium

Capital Intensity High

Industry Assistance Medium

Concentration Level High

Regulation Level Heavy

Technology Change Medium

Barriers to Entry High

Industry Globalization Low

Competition Level High

Revenue

$37.6bn
Profit

$12.1bn
Exports

$422.7m
Businesses

144

Annual Growth 16-21

-2.4%
Annual Growth 11-16

-2.3%

Key External Drivers
Percentage of smokers
Excise tax on
tobacco products
Regulation for the
Cigarette and Tobacco
Production industry
Consumer spending
World price of tobacco

Market Share
Altria Group Inc.
49.1%

Reynolds
American Inc.
32.9%

Imperial Brands
plc 7.0%

p. 33

p. 5

FOR ADDITIONAL STATISTICS AND TIME SERIES SEE THE APPENDIX ON PAGE

SOURCE: WWW.IBISWORLD.COM
Provided to: Ohio State University – Columbus Campus (OhioNet) (211852729) | 14 September 2016

WWW.IBISWORLD.COM Cigarette & Tobacco Manufacturing in the US August 2016 5

Key External Drivers Percentage of smokers
Cigarette consumption has declined
steadily since the early 1980s because of
increasingly unfavorable public attitudes
toward smoking. Information
disseminated by health authorities on the
health consequences of smoking
damaged industry performance as people
purchased fewer cigarettes. Furthermore,
rising excise taxes on tobacco products at

the federal, state and municipal levels
have raised tobacco prices, further
reducing per capita consumption. As the
percentage of smokers declines, demand
for cigarettes and tobacco products
deteriorates, hampering industry revenue
growth. The percentage of smokers is
expected to continue decreasing through
2016, presenting a potential threat to
the industry.

Executive
Summary

Over the past five years, the Cigarette and
Tobacco Manufacturing industry has
persevered despite facing increasingly
challenging operating conditions and
intense scrutiny from both the
government and the public. Federal excise
taxes on cigarettes were raised to historic
highs in 2009, and individual states
increased their own excise taxes on
tobacco several times in the following six
years. Meanwhile, cigarette consumption
continued to decline steadily, further
reducing demand for the industry’s largest
and most profitable product segment.

Nonetheless, sustained demand for
noncigarette industry products, such
as smokeless tobacco, minicigars and
electronic cigarettes (e-cigarettes),
helped mitigate declining sales of
traditional cigarettes. Furthermore,
industry operators raised prices on
cigarettes several times in the past five
years, which has partially offset
declining consumption. Overall,
industry revenue is expected to decline
an annualized 2.3% to $37.6 billion
over the five years to 2016, including a
projected decline of 1.2% in 2016.
Despite rising operating costs,

increased consolidation has helped
boost average profit during the past
five years. In addition, the industry’s
two largest operators, which currently
account for a combined 81.9% of the
market, have successfully raised prices
on tobacco products in line with rising
compliance costs. Overall, average
industry profit is expected to rise to an
estimated 32.7% in 2016.

Over the next five years, fewer
Americans will consume tobacco
because of rising excise taxes, greater
social stigma associated with smoking
and a better understanding of the
health risks associated with tobacco
use. Rising public scrutiny and an
increasingly stringent regulatory
environment, as well as ongoing class
action suits against major tobacco
manufacturers, will continue to tarnish
the image of tobacco, accelerating the
decline of this industry. As cigarette
consumption continues to dwindle,
operators will increasingly focus on
developing and marketing products
perceived to have lower health risks,
such as e-cigarettes, which are
currently subject to a lower tax burden
than cigarettes. In addition, operators
will continue to raise prices on
conventional tobacco products, which
will help partly offset declining unit
sales. Overall, industry revenue is
forecast to decline an annualized 2.4%
to $33.3 billion in the five years to 2021.

Industry Performance
Executive Summary | Key External Drivers | Current Performance
Industry Outlook |

Life Cycle Stage

Demand for industry products such as
smokeless tobacco helped mitigate declining
sales of cigarettes

Provided to: Ohio State University – Columbus Campus (OhioNet) (211852729) | 14 September 2016

WWW.IBISWORLD.COM Cigarette & Tobacco Manufacturing in the US August 2016 6

Industry Performance

Key External Drivers
continued

Excise tax on tobacco products

Cigarettes and other tobacco products are
heavily taxed, forcing manufacturers to raise
their product prices in order to offset
declining sales volume and maintain
profitability. As federal and state
governments raise excise taxes, price-
conscious smokers will naturally demand
fewer industry goods. However, due to the
addictive nature of tobacco products,
demand tends to fall slowly. Furthermore,
rising excise taxes on cigarettes usually
causes heightened demand for other tobacco
products, which partially offsets the effects
on industry revenue of higher taxes. Excise
taxes are expected to increase in 2016.

Regulation for the Cigarette and
Tobacco Production industry
Cigarette and tobacco manufacturing is one
of the most highly regulated industries in
the United States. During the past five years,
the industry has faced increasing scrutiny
from both public and private institutions,
rising compliance costs associated with the
2009 Family Smoking Prevention and
Tobacco Control Act and ongoing costs
associated with the 1998 Master Settlement
Agreement (see Regulation section). The
industry has also faced greater regulatory
scrutiny from state governments, growing

social stigma and increasing litigation from
private parties. The regulatory environment
is expected to remain unfavorable to
industry operators through 2016.

Consumer spending
Consumer spending on new goods,
including cigarettes and tobacco
products, expands as disposable
incomes rise and as the economic
outlook improves. Higher consumer
spending allows smokers to purchase
cigarettes more frequently or trade up
to premium brands, which boosts
industry revenue. Consumer spending
is anticipated to increase in 2016,
which presents a potential opportunity
to the industry.

World price of tobacco
Industry operators source tobacco leaves,
the industry’s main raw material input,
primarily from domestic and some
international farmers to produce
cigarettes and other tobacco products.
When the price of raw tobacco increases,
manufacturers either absorb the higher
cost at the expense of profit or raise their
product prices at the expense of sales.
The world price of tobacco is expected to
increase in 2016.

5
1
2
3
4
2006 08 10 12 14 16 18Year
Excise tax on tobacco products
SOURCE: WWW.IBISWORLD.COM
%
21
15
16
17
18
19
20
2006 08 10 12 14 16 18Year
Percentage of smokers
Provided to: Ohio State University – Columbus Campus (OhioNet) (211852729) | 14 September 2016

WWW.IBISWORLD.COM Cigarette & Tobacco Manufacturing in the US August 2016 7

Industry Performance

Current
Performance

Despite steadily declining smoking
rates since the early 1980s, the
Cigarette and Tobacco Manufacturing
industry continues to adapt to
increasingly challenging operating
conditions. Overall, industry revenue
is anticipated to decline an annualized
2.3% to $37.6 billion over the five
years to 2016. In 2016, industry sales
are expected to decline 1.2% as
continued declines in cigarette
consumption are partly offset by
stronger demand for smokeless
tobacco products. In addition,
operators will continue to pass on
higher excise taxes and compliance
costs to consumers in the form of
higher prices. In turn, price markups
will help offset declining unit sales of

cigarettes, which are expected to
generate 77.5% of industry revenue
in 2016.

Profit expansion and
industry consolidation

Compared with other nondurable goods
manufacturing industries, tobacco
manufacturers have experienced strong
profit growth over the past few years.
Profitability in this industry is a function
of exceptional brand loyalty for most of
its products, as well as the addictive
nature of tobacco products, which
naturally contain nicotine, harmaline and
other addictive chemicals. These factors
have allowed operators to mark up their
products without significantly hindering
demand for tobacco products. Indeed,
raising prices has been a key driver of
this industry’s resilience, despite steadily
declining demand, rising compliance
costs and increasingly challenging
operating conditions.

Despite rising input prices, hikes in
excise taxes and several pending lawsuits
against industry operators, industry
profit has expanded over the past five
years. For instance, the world price of
tobacco, the primary input for producing
cigarettes, rose at an average annual rate
of 2.2% in the five years to 2016. Yet
industry profitability expanded as

operators raised their product prices
aggressively, successfully passing on the
cost increases to their customers. While
profit margins vary widely across
manufacturers, average profit is
estimated to account for 32.7% of
revenue in 2016.

The boost in profit margins was driven
by the industry’s two largest players,
Altria Group and Reynolds American Inc.
(RAI). Altria’s profit margin expanded
significantly through its acquisitions of
cigar manufacturer John Middleton and
US Smokeless Tobacco Company prior to
this five-year period. Moreover, Altria
consolidated its production facilities in
the United States at the end of 2009 to
focus on growing markets abroad. By
reducing the number of workers
employed in the United States and
consolidating its production to one
factory, Altria was able to boost its
operating income significantly. Likewise,
RAI’s margin expanded from a low of
15.3% in 2012 to 20.9% in 2013, driven
by price markups for cigarettes and
increased demand for its iconic and

%
c
ha
ng
e
15

-45

–

-15

0
2208 10 12 14 16 18 20Year

Revenue Exports

Revenue vs. exports

SOURCE: WWW.IBISWORLD.COM
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WWW.IBISWORLD.COM Cigarette & Tobacco Manufacturing in the US August 2016 8

Industry Performance

Profit expansion and
industry consolidation
continued

highly profitable smokeless tobacco
brands, Grizzly and Kodiak. More
recently, the company’s high-profile
merger with Lorillard Inc., which was
previously the third-largest operator in
this industry, further consolidated RAI’s
operations and boosted profit margins
through 2016.

In an effort to sustain previous profit
margins in spite of greater compliance
and input costs, the industry has
consolidated aggressively while trimming
employment. Consequently, industry
employment is expected to decline an
annualized 1.7% to 13,827 workers over

the five years to 2016. At the same time,
Altria’s decision to move its production
for European markets from Cabarrus,
NC, to Europe caused exports to continue
declining. Overall, industry exports are
anticipated to decline an annualized 4.3%
to $422.7 million during the five years to
2016. In contrast, greater domestic
demand for premium, handmade cigars
made in the Caribbean has boosted
imports for tobacco products.
Consequently, IBISWorld estimates
imports to have grown an annualized
8.7% to $1.2 billion during the five-
year period.

Regulatory challenges
and rising public
scrutiny

The tobacco industry as a whole has
been characterized by steadily
declining demand for cigarettes, the
industry’s largest and historically most
profitable product segment. According
to data from the Federal Trade
Commission, total carton sales fell an
annualized 3.3% over the 10-year
period from 2003 to 2013 (latest data
available), while the average excise tax
collected per pack rose significantly
over the same period. According to
retail sales data from Management
Science Associates Inc. and IRI,
cigarette shipments declined a further
annualized 1.4% from 2013 to 2015.

In 2009, Congress enacted the Family
Smoking Prevention and Tobacco Control
Act (Tobacco Control Act), placing more
stringent marketing restrictions on
tobacco products, banning the sale of
flavored cigarettes and prohibiting the
use of terms such as “light” or “mild” on
tobacco packaging. The law also
tightened restrictions on advertising and
marketing. The strict regulations on
advertising have led to lower brand
visibility, placing downward pressure on
industry revenue growth. This law was
followed by the unprecedented April
2009 federal excise tax hike, which raised

the federal tax on cigarettes from $0.39
to $1.01 per pack. During the six years
following the Tobacco Control Act,
state-level excise taxes on tobacco
products were raised more than a
hundred times by almost every state. In
mid-2016, state and local taxes ranged
from just $0.17 per pack in Missouri to
$6.16 per pack in Chicago, according to
the Federation of Tax Administrators.
The large discrepancy between excise
taxes of neighboring states caused
tobacco smuggling and tax evasion to rise
at alarming rates, undermining the
efforts of regulators and tobacco
manufacturers alike.

Nonetheless, declining sales of
cigarettes have been partially offset by
increasing per-pack prices, as well as
unexpectedly strong demand for
noncigarette products such as smokeless
tobacco, machine-made cigars and,
especially, electronic cigarettes during

The growing use of
e-cigarettes has prompted
several new companies to
enter the industry

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Industry Performance

Regulatory challenges
and rising public
scrutiny
continued

the first half of the five-year period. In
response to broadening regulation of
cigarettes and declining consumption
levels, industry operators have
increasingly focused on marketing and
distributing these noncigarette tobacco
products, which are currently taxed at
lower rates and subject to less regulatory
scrutiny than cigarettes. Consequently,
demand for these alternative products
rose considerably over the five years to
2016, somewhat offsetting the decline in
cigarette sales. However, the Food and
Drug Administration (FDA) drafted new
rulings on electronic nicotine delivery
products, which extend the FDA’s
regulatory control to all products that
contain tobacco.

Since then, smokeless tobacco has
gained wider market acceptance,
mirroring the desire for more socially
acceptable tobacco products. Dissolvable
tobacco, another smokeless tobacco
product recently introduced, has become
popular among smokers who prefer to

use tobacco discretely in public areas
where smoking is prohibited.
Furthermore, annual retail sales of
e-cigarettes, which are electronic devices
designed to simulate the act of actual
smoking, grew rapidly from less than
$30.0 million in 2010 to an estimated
$2.0 billion in 2015, according to data
from Altria Group and the Society for
Research on Nicotine and Tobacco.
While claims that e-cigarettes less
harmful than regular cigarettes are
debatable, the growing use of
e-cigarettes among Americans has
prompted dozens of new companies to
enter the industry, though this growth
was partially offset by increased merger
and acquisition activity and reduced
consumer confidence in e-vapor
products since late 2015. Driven
primarily by new entrants into the
e-vapor market, overall industry
participation is expected to increase an
annualized 8.7% to 144 companies over
the five years to 2016.

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Industry Performance

Industry
Outlook

The Cigarette and Tobacco
Manufacturing industry will continue to
face major challenges over the next five
years, including gradual drops in
smoking rates, higher excise taxes and
rising compliance and litigation costs.
Despite its remarkable resilience during
the past several years, the industry is
anticipated to continue shrinking
during the next five years, especially as
demand for all product segments begins
to decline in response to broader
regulatory pressure by the Food and
Drug Administration (FDA), Federal
Trade Commission, Alcohol and
Tobacco Tax and Trade Bureau and
numerous other public and private
institutions. In addition to broader
regulatory scrutiny of tobacco products

and diminishing social acceptance of
smoking, excise taxes at both the
federal and state levels are anticipated
to rise significantly through 2021,
effectively increasing the price of
tobacco products and further
discouraging price-conscious smokers.
Accordingly, industry revenue is
projected to decrease at an annualized
rate of 2.4% to $33.3 billion in the five
years to 2021.

Excise tax at both the
federal and state levels
are anticipated to rise
significantly through 2021

Profit margins
squeezed

Although profitability will remain high in
comparison with other manufacturing
industries, rising compliance costs and
dwindling demand for industry goods
will have a negative effect. These factors
will be slightly offset by falling input
prices. In particular, the world price of
leaf tobacco is forecast to decline an
annualized 1.2% in the five years to 2021.
Nonetheless, ongoing annual payments
through 2025 in accordance with the
Master Settlement Agreement, in
addition to rising litigation expenses

associated with the Engle progeny cases
(see Regulation section) and other class
action suits will increasingly burden the
industry’s largest operators, thereby
constraining overall profit.

Rising compliance costs
and dwindling demand
will have a negative
effect on profit

Diminishing social
acceptance

Despite major efforts to curb smoking
and regulate tobacco over the past few
decades, smoking remains the leading
cause of preventable disease in the
United States, according to a landmark
2012 study by the surgeon general.
Furthermore, while the percentage of
youth who smoke cigarettes has fallen
to less than 15.7%, the share of young
Americans who still experiment with
other tobacco products, especially

e-cigarettes, has remained high.
Accordingly, antismoking organizations
will continue to focus on reducing tobacco
use among younger Americans since they
are more likely to experiment with tobacco
than adults. Negative attitudes toward
smoking are a major factor that will affect
this industry over the five years to 2021,
and continued antismoking campaigns are
likely to lower tobacco consumption
among adults aged 18 to 26.

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Industry Performance

Federal and state excise taxes are
expected to continue increasing through
2021, not only for cigarettes (which have
traditionally been the focus of price-based
regulatory control of tobacco), but also for
smokeless tobacco, e-cigarettes and other
tobacco products. If the current budget
proposal for 2016 is approved, the federal
excise tax on cigarettes could rise to $1.95
per pack, while the tax rate on other tobacco
products, such as moist snuff and
minicigars, would likely rise proportionately.
In addition to federal excise taxes, taxes at
the state level are expected to rise. Since the
beginning of 2016, six states have proposed
or already drafted excise tax hikes on
tobacco products, and this trend is expected
to continue in the coming years. These
excise taxes will adversely affect industry
performance by raising the final price that
consumers pay at retail stores, thereby
driving down demand for industry products.

While regulations that restrict the use
of e-cigarettes were recently proposed at
the federal level by the FDA,
implementing new regulations will
remain a top priority for state and local
authorities. These new regulations and
taxes are anticipated to slow the adoption
of e-cigarettes among consumers, as

existing regulations pertaining to
cigarettes continue to place downward
pressure on demand for traditional
tobacco products. Lastly, antismoking
campaigns are anticipated to further
tarnish the industry’s image and hinder
revenue growth through 2021.

Unfavorable shifts in consumer health
trends, antismoking campaigns and
increased costs have compelled operators
to consolidate in previous years, and this
trend is expected to continue in the
upcoming years. As demand for the
industry’s products continues to fall,
smaller operators that are unable to
compete will exit the market, providing a
window of opportunity for larger
operators to obtain greater market share.
While the four leading manufacturers
already account for almost 92.0% of
industry revenue in 2016, they will
continue to acquire smaller competitors
to further drive up market share
concentration. Consequently, the number
of operators is projected to fall an
annualized 2.5% to 127 companies in the
five years to 2021. As companies
consolidate, employment is forecast to
fall at an annualized rate of 3.4% to
11,634 workers during the same period.

Due to the popularity of e-cigarettes,
leading manufacturers Altria and
Reynolds American Inc. (RAI) have
launched their own e-cigarette brands in
the past two years. In 2014, both of these
companies expanded their distribution of
these products nationwide, helping drive
demand for e-cigarettes. Smokers benefit
from being able to use e-cigarettes where
the use of traditional cigarettes is
banned. Analysts at various investment
banks estimate that sales of e-cigarettes
could surpass sales of traditional
cigarettes in the next decade. Indeed, the
retail market for e-cigarettes has already
surpassed $2.5 billion, according to

estimates from Altria Group, though
sales have decelerated markedly since
late 2015 because of new regulations and
waning consumer confidence in
alternative tobacco products.

To combat the negative associations
encouraged by antismoking
campaigns, industry players are
looking to develop new products with

Operators look to develop
new products with
potentially fewer health
risks or less social stigma

Product innovation

Diminishing social
acceptance continued

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Industry Performance

potentially fewer health risks or less
accompanying social stigma. For example,
Altria Group recently announced plans to
jointly develop and market new e-vapor
products with its global counterpart,
Philip Morris International. Large
manufacturers will also focus more on
marketing secondary products, such as
machine-made cigars and smokeless
tobacco, to counterbalance declining
demand for cigarettes in the next five
years. These products currently face less
regulatory pressure than cigarettes,
although the regulatory environment is

likely to change in coming years.
Nonetheless, rapidly growing demand for
premium, handmade cigars will boost
imports an estimated annualized 2.3% to
$1.3 billion during the five years to 2021.
In contrast, the leading operators are
expected to continue divesting their
foreign operations and focus exclusively
on domestic markets, especially as global
regulation of tobacco increases.
Consequently, industry exports are
anticipated to decline at an annualized
rate of 5.1% to $325.5 million over the
next five years.

Product innovation
continued

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Industry Performance
Antismoking campaigns and strict regulation have gradually
reduced cigarette consumption since the early 1980s

Industry value added and total revenue are expected
to decline over the 10 years to 2021

Industry employment is anticipated to fall
substantially during this 10-year period

Tobacco is one of the most heavily regulated products in the United
States and is likely to face even greater scrutiny in the future

Life Cycle Stage

SOURCE: WWW.IBISWORLD.COM.AU

20
15
10
5
0
-5
-10

%
G

ro
w

th
in

s
ha

re
o

f
ec

on
om

% Growth in number of establishments

-10 -5 0 5 10 15 20

Decline
Shrinking economic
importance

Quality Growth
High growth in economic
importance; weaker companies
close down; developed
technology and markets

Maturity
Company
consolidation;
level of economic
importance stable

Quantity Growth
Many new companies;
minor growth in economic
importance; substantial
technology change

Key Features of a Decline Industry

Revenue grows slower than economy
Falling company numbers; large fi rms dominate
Little technology & process change
Declining per capita consumption of good
Stable & clearly segmented products & brands

Grocery Wholesaling
Seasoning, Sauce and Condiment Production

Wood Pulp Mills

Supermarkets
& Grocery Stores

Cigarette & Tobacco

Manufacturing

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Industry Performance

Industry Life Cycle The Cigarette and Tobacco Product
Manufacturing industry is in the declining
stage of its life cycle. Over the 10 years to
2021, industry value added (IVA), which
measures an industry’s contribution to the
economy, is projected to rise an annualized
0.5%. In comparison, GDP is forecast to
grow at an annualized rate of 2.1% over the
same period. While there was some positive
movement in IVA during the first half of the
period due to higher profit margins, the
industry is expected to continue shrinking
during the second half.

During the next five years, IVA is
anticipated to decline as the number of
smokers in the United States dwindles. The
growing social stigma associated with
smoking, rising excise taxes and rising
health consciousness among Americans
have all contributed to the decline of
cigarette consumption in the United States.
Although demand for noncigarette tobacco
products, such as smokeless tobacco or
electronic cigarettes (e-cigarettes), has
slightly offset declines in cigarette
consumption, this trend is unlikely to
generate further industry expansion during
the next five-year period. Furthermore,
litigation and compliance costs associated
with tobacco-related lawsuits and
regulation have increasingly burdened
industry operators during the five years to
2016, and these costs are likely to increase
through 2021.

Characteristic of most declining
industries, the tobacco industry is also

undergoing significant consolidation. The
industry’s manufacturing facilities are being
restructured to balance supply with falling
demand. In particular, Reynolds American
Inc. (RAI) merged with Lorillard Inc. in
mid-2015, which has significantly boosted
its share of the market. This merger has
further concentrated the industry into the
hands of only a few players, with the two
largest companies alone expected to account
for 81.9% of industry revenue in 2016.

Furthermore, IBISWorld anticipates
stricter regulation of e-cigarettes and
other novel tobacco products during the
five years to 2021, which will burden
smaller operators and is likely to drive
several small e-cigarette manufacturers
to leave the industry or merge with
larger competitors. For example, Altria
Group acquired major e-cigarette
company Green Smoke in early 2014,
while RAI introduced VUSE, a new line
of e-cigarettes that has quickly become
the best-selling brand nationally.
Smaller e-vapor retailers and mixers are
likely to face significantly higher
compliance costs associated with the
recent FDA ruling on electronic nicotine
delivery systems (ENDS), which is also
likely to raise barriers to entry for
potential new entrants. Consequently,
the number of establishments and total
employment are expected to decline
during the latter half of this 10-year
period as operators seeks to sustain
profit margins through consolidation.

This industry
is Declining

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WWW.IBISWORLD.COM Cigarette & Tobacco Manufacturing in the US August 2016 15

Products & Services Cigarettes
Cigarettes constitute the single-largest
class of tobacco products offered by
industry operators, accounting for an
estimated 77.5% of revenue in 2016.
Within this broader category, industry
operators market cigarette brands under
two categories: discount and premium.
According to retail sales data from MSAI/
IRI, premium cigarettes currently
account for 75.2% of total cigarette sales
within the United States. The cigarette
segment can be further divided into two
broad cigarette varieties: regular (non-
mentholated) and mentholated: regular
cigarettes account for an estimated 51.2%
of revenue, while menthol cigarettes

account for the remaining 26.3% of
industry sales. Almost all cigarettes
produced today contain some menthol,
although only those with 0.1% or more
menthol by weight are typically classified
as menthol cigarettes.

There were an estimated 20 million
menthol cigarette smokers in 2010 (latest
data available), according to the
American Legacy Foundation. Menthol,
which is derived from peppermint,
spearmint and other related plants,
provides a natural cooling effect when
inhaled. Since menthol’s cooling effect
helps relieve the throat irritation
sometimes caused by cigarette smoke, it
is particularly appealing to new smokers.

Products & Markets

Supply Chain | Products & Services | Demand Determinants
Major Markets | International Trade | Business Locations

KEY BUYING INDUSTRIES

42441 Grocery Wholesaling in the US
Grocery wholesalers constitute another significant downstream market for industry operators
as they resell cigarettes and other tobacco products to grocery stores, supermarkets and other
retailers.

42494 Cigarette & Tobacco Products Wholesaling in the US
Cigarette and tobacco product wholesalers are the primary downstream market for
manufacturers.

44511 Supermarkets & Grocery Stores in the US
Supermarket and grocery store chains with sufficient purchasing power may buy cigarettes
directly from the sales and distribution branches of manufacturers to resell at their retail
stores.

44512 Convenience Stores in the US
Some major convenience store chains with sufficient purchasing power may purchase tobacco
products directly from manufacturers, although almost all convenience store chains source
tobacco products from intermediary distributors.

KEY SELLING INDUSTRIES

11191 Tobacco Growing in the US
Manufacturers purchase tobacco leaves, the primary ingredient used to produce cigarettes,
from tobacco farmers.

31194 Seasoning, Sauce and Condiment Production in the US
Cigarette and electronic cigarette manufacturers buy flavoring extracts from producers of
seasonings, sauces and condiments to produce menthol cigarettes and flavored electronic
cigarettes.

32211 Wood Pulp Mills in the US
Cigarette manufacturers purchase wood pulp from mills to create filters for tobacco products.

32212 Paper Mills in the US
Manufacturers source rolling paper and packaging material from paper mills.

Supply Chain

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Products & Markets

Products & Services
continued

Accordingly, menthol cigarettes are
disproportionately popular among
younger adults and other inexperienced
smokers. While sales across all cigarette
categories have fallen in recent years,
consumption of menthol cigarettes has
decreased at a slower rate than
consumption of regular cigarettes. As a
result, menthol cigarettes’ share of
industry revenue has increased
marginally over this five-year period.
Furthermore, tobacco-related legislation
has yet to specifically target mentholated
cigarettes, though efforts were made by
the FDA in 2013. Accordingly, the lack of
concrete legislation, coupled with an
enduring public perception that
mentholated cigarettes are less harmful
than conventional cigarettes, will likely
continue to increase the menthol
cigarette segment’s share of revenue in
upcoming years.

The prevalence and public acceptance
of smoking has fallen steadily since the
mid-1960s, which has consequently
shrunk the overall cigarette product
segment’s share of revenue over the past
50 years. More specifically, the
percentage of the population that smokes
has fallen from 42.4% in 1965 to a low of
16.8% in 2014, according to estimates
from the Centers for Disease Control and

Prevention (CDC). In order to remain
profitable in spite of falling consumption,
manufacturers have raised their product
prices several times over the past five
years, thereby passing on higher input
and compliance costs to their
downstream customers. Furthermore,
rising excise taxes at both the federal and
state levels have increased the retail price
of tobacco products, further driving down
demand for cigarettes. Consequently,
cigarettes’ share of industry revenue has
fallen over the five years to 2016.

Smokeless tobacco
Smokeless tobacco products, which
include chewing and spitting tobacco,
snuff and snus, account for an estimated
11.2% of industry revenue. Snuff is a
tobacco product made from finely ground
tobacco leaves, whereas snus is a moist
powdered tobacco consumed by being
placed under the lip. The category also
includes a variety of novel tobacco
products such as dissolvables or lozenges
that contain nicotine. Demand for
smokeless tobacco products has grown in
recent years, because the rising price of
regular cigarettes has made alternative
products more attractive in terms of
price. Secondly, smokeless tobacco
products are currently taxed at lower

Products and services segmentation (2016)

Total $37.6bn

51.2%
Regular cigarettes
2.5%
Cigars
26.3%
Menthol cigarettes
11.2%
Smokeless tobacco
4.5%
Other 4.3%
E-vapor products
SOURCE: WWW.IBISWORLD.COM
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Products & Markets
Products & Services
continued

rates than conventional cigarettes.
Furthermore, the discreet nature of
smokeless products allows consumers to
avoid the negative social stigma of
smoking while still obtaining their
nicotine fix. As the social acceptability of
smoking erodes and the number of
restricted smoking areas increases, more
consumers are expected to turn to
smokeless tobacco products in the
upcoming years. This segment’s share of
revenue is expected to continue expanding
in upcoming years, as more smokers are
expected to switch from cigarettes to
smokeless tobacco alternatives.

Cigars
Domestically produced cigars are
expected to account for 2.5% of industry
revenue in 2016. The term “cigar”
denotes a broad category of smokeable
tobacco products that range from
machine-made little cigars (cigarillos) to
imported, hand-made cigars sold at a
premium. The key distinguishing feature
between cigarettes and cigars is that the
former is wrapped using paper while the
latter is typically wrapped with rolled
tobacco leaf.

The cigar segment has benefited
from the Food and Drug
Administration (FDA) ban of flavored
cigarettes, as younger smokers have
turned to chocolate-, candy- and
fruit-flavored cigars to satisfy their
craving for flavored tobacco products.
According to the CDC, little cigars are
particularly popular among the youth
because aside from the wrapper they
are almost identical to cigarettes.
Furthermore, cigars are typically taxed
at lower rates than cigarettes and can
be sold individually. Despite the

growing awareness of the health risks
associated with tobacco products, the
use of large cigars has increased
233.0% from 2000 to 2011, according
to a study conducted by the CDC
(latest data available). Consequently,
cigars’ share of industry revenue has
increased over the past five years.

Other
Other products are estimated to account
for the remaining 8.8% of revenue. They
include pipe tobacco, tobacco substitutes
(e.g. clove cigarettes or e-cigarettes),
homogenized and reconstituted tobacco,
tobacco extracts and essences. While
sales of tobacco substitutes are growing
in the domestic market, a small
percentage of the population currently
uses these products. Therefore, it
represents a rapidly growing, but small
share, of industry sales. This segment’s
share is anticipated to have increased in
the past five years, primarily driven by
the continued market expansion of
e-cigarettes in the United States.
E-cigarettes and other novel tobacco
products were effectively unregulated by
the FDA for most of the five-year period,
although product-specific regulation
passed in early 2016. The e-cigarette
product group in particular is expected to
continue growing, especially as leading
cigarette manufacturers develop their
own e-cigarette brands or continue to
acquire existing brands. According to
major player Altria Group, annual retail
sales of e-cigarettes and related
accessories doubled every year through
2014 to $2.0 billion, though growth has
decelerated in more recent years due to
new regulations and reduced consumer
confidence in e-vapor products.

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Products & Markets

Demand
Determinants

Demand for cigarettes and other tobacco
products is primarily driven by the social
acceptability of smoking. The association
of smoking with a certain lifestyle became
engrained in American culture through
popular movies in the 1940s. However, as
public awareness of the adverse health
risks associated with smoking became
widespread, the percentage of adults who
smoke began to drop significantly in the
late 1970s. While the number of adults
who smoke continues to decline, the
percentage of teen smokers has declined
more slowly in recent years, as smoking
has come back into fashion among this
age group. In particular, the rising use of
electronic cigarettes, smokeless tobacco
and other novel tobacco products among
millennials has once again boosted
demand from this consumer group,
despite the efforts of anti-tobacco groups
to curb teen smoking in recent years.

While the addictive quality of nicotine
safeguards demand for tobacco products
to a certain extent, demand for cigarettes
is declining due to growing health
concerns and social stigma associated
with smoking in public places.
Consumption of cigarettes has also
declined because of extensive steps taken
by the federal and state governments to
discourage consumption of tobacco
products. These measures include strict
restrictions on advertising and sales
promotion activities, requirements that
health warnings be printed on cigarette
packets, bans on smoking in specified
locations and public antismoking
campaigns funded by annual payments
from the largest tobacco manufacturers
(see Regulation section). For example,
regulations restricting the use of
cigarettes in public areas make smoking

less convenient and cause people to
smoke less frequently when traveling or
at work.

Higher excise taxes enforced by state
and federal authorities have significantly
raised the retail price of tobacco products
over the past several years. In addition,
the rising cost of tobacco leaves has
caused manufacturers to raise their
products, further discouraging smokers
from purchasing cigarettes as frequently
as before. In order to manage their
spending on tobacco products, some
smokers have switched to alternative
tobacco products that are taxed at lower
rates, such as snuff, chewing tobacco or
cigarillos (little cigars).

Lastly, the introduction and quick
adoption of the electronic cigarette
(e-cigarette) has helped drive demand for
industry products over the five years to
2016. This innovative product is
perceived as a less harmful alternative to
traditional cigarettes and is produced in a
variety of flavors that appeal to younger
smokers. Furthermore, e-cigarettes are
currently not subject to the same level of
excise taxes at the federal or state levels,
making this product more affordable
than regular cigarettes. However, recent
uncertainty over the future regulation of
electronic cigarette products has
decelerated growth during the latter half
of the five-year period. In early 2016, the
FDA finalized its ruling on e-vapor
products, stating that innovative tobacco
alternatives would be subject to the same
level of regulatory scrutiny as traditional
tobacco products. Overall, demand for
tobacco products has declined steadily
since the early 1980’s, and is expected to
continue declining unabated in the
coming years.

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Products & Markets
Major Markets

Tobacco product manufacturers typically
sell their products to intermediary
wholesalers who in turn, resell the
products to retail establishments such as
convenience stores, grocery stores,
supermarkets, pharmacies, dollar stores
and smaller street vendors. Some large
supermarket or grocery store chains,
such as Walmart, have the purchasing
power to source tobacco products directly
from the manufacturers, thereby
bypassing the wholesaler. Nonetheless,
the majority of industry products are
distributed to retail channels via the
Cigarette and Tobacco Products
Wholesaling industry (See IBISWorld
report 42494).

Wholesalers
Wholesalers constitute the largest
downstream market for tobacco product
manufacturers, accounting for a
combined 84.0% of industry revenue in
2016. This market segment consists of
two broad types of wholesalers:
consumer packaged foods (e.g. candy and
tobacco) distributors and broadline
grocery distributors.

The first group, which accounts for a
71.4% share of the industry, consists of
national and regional wholesalers that
primarily distribute tobacco products,

snacks and confectioneries to
convenience stores, dollar stores,
pharmacies and other related retail
channels. The two largest operators
within this market are McLane Company,
a subsidiary of Berkshire Hathaway, and
Core-Mark International. McLane
Company is the largest tobacco
wholesaler to major retail chains
Walmart, 7-Eleven and Family Dollar.
Core-Mark International is a major
distributor to convenience store and gas
station chains such as Alimentation
Couche-Tard and Turkey Hill. This
segment’s share of industry revenue is
expected to rise over the next five years as
demand from convenience stores picks up.

The second group, broadline grocery
distributors, is estimated to account for a
12.6% share of the industry in 2014.
Wholesalers within this product segment
distribute a variety of groceries,
foodservice products and other
nondurable goods to supermarkets,
grocery stores and restaurants.
Consequently, tobacco products
represent only a small and incidental
share of these companies’ broad product
portfolios. This segment’s share of total
industry revenue has shrunk over the
past five years and is expected to
continue shrinking as major broadline

Major market segmentation (2016)

Total $37.6bn

71.4%
Candy and tobacco wholesalers

1.1%
Exports

12.6%
Broadline grocery distributors

8.8%
Supermarkets

3.1%
Other major retail chains

(pharmacies, grocery stores)

3.0%
Other

SOURCE: WWW.IBISWORLD.COM
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WWW.IBISWORLD.COM Cigarette & Tobacco Manufacturing in the US August 2016 20

Products & Markets

Major Markets
continued

distributors, such as C&S Wholesale
Grocers, increasingly divest from tobacco
in response to growing public scrutiny of
tobacco use.

The rising prevalence of wholesale
bypass, which has negatively affected
almost all other nondurable product
wholesaling industries, is not a significant
issue for tobacco wholesalers because of
tobacco’s unique regulatory environment.
Although manufacturers are responsible
for paying federal excise taxes, downstream
wholesalers and retailers are responsible
for excise taxes at the state level. Since
these taxes can vary greatly across state
lines and product groups, only specialized
wholesalers that have a well-established
presence in the tobacco industry typically
have the knowledge and resources to
collect and remit the appropriate taxes.
Consequently, IBISWorld expects
wholesalers to remain the industry’s largest
market segment in the near future.

Retailers
Direct sales to retailers, which include
large supermarkets, grocery store and
pharmacy chains and dollar stores,
account for an 11.9% share of revenue in
2016. Typically, only large supermarket
chains with sufficient purchasing power,
such as Walmart or Kroger, are able to
purchase tobacco products in bulk
directly from manufacturers. In practice,
however, even major supermarket chains
typically source tobacco products through
intermediary wholesalers. For example,
Walmart, which is presently the largest
supermarket chain in the United States,
sources the bulk of its regular tobacco
purchases from McLane Company. This
market segment’s share is expected to
shrink slightly in upcoming years as
demand for cigarettes and other tobacco
products from convenience stores (and
ultimately, demand for convenience store
wholesalers) outstrips demand for
tobacco products from traditional grocery
stores, supermarkets and pharmacies.

Exports
Exports have historically accounted for a
small share of industry revenue because
manufacturing is localized due to
extensive domestic and international
regulations. Consequently, exports are
estimated to account for only 1.1% of
industry revenue in 2016, representing a
decline from 1.2% in 2011. Due to an
appreciating dollar, industry exports
became less affordable to consumers in
foreign markets, causing exports to
decline overall during this five-year
period. Additionally, industry leader
Philip Morris moved its production for
the European market from North
Carolina to Europe, further lowering
industry exports. The Master Settlement
Agreement signed in 1998 between the
attorneys general of 46 states and four
largest tobacco companies (see
Regulation section), has also kept
exports of tobacco products low during
the past five years. The vast majority of
US-made tobacco products are
exported to US military bases overseas
or duty-free shops located in
international airport terminals. Sales
to all other foreign retail outlets
account for an insignificant portion of
export volume.

Other
Other markets for tobacco products
account for the remaining 3.0% of
revenue in 2016. These include specialty
outlets such as cigar shops, hookah bars,
duty-free shops at US-based international
airports and other travel hubs, army
bases, online tobacco retailers and other
niche stores. While many hospitality
industries, including hotels, bars and
casinos, buy tobacco products from
wholesalers, some major chains that
operate nationally can purchase directly
from manufacturers. Many niche shops
that offer premium, handmade cigars and
premium pipe tobacco also purchase these
products directly from manufacturers.

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WWW.IBISWORLD.COM Cigarette & Tobacco Manufacturing in the US August 2016 21

Products & Markets

International Trade The Cigarette and Tobacco
Manufacturing industry has a low level of
international trade, primarily due to a
rapidly developing regulatory
environment at the global level that has
discouraged domestic producers from
exporting tobacco products to
international markets.

Imports
Imported cigarettes and tobacco products
are anticipated to account for 3.0% of
domestic demand for industry goods in
2016, representing a significant increase
from 1.8% in 2011. Imports of industry
products have historically been low, as
domestic producers have satisfied
demand for tobacco products among
American smokers. However, imports
have grown over the past five years, as
regulation and the growing price of
domestic products have driven smokers
to purchase imported handmade cigars
from the Caribbean region or imported
snus from European countries such as
Sweden or Denmark. In terms of product
categories, large cigars accounted for
75.1% of total import volume in 2015,
while cigarettes and tobacco extracts (e.g.
used in e-vapor devices) accounted for
17.6% and 2.1% of volume, respectively.

Imports of cigarettes and tobacco
products mainly come from premium
handmade cigar producing countries in
Latin America. Specifically, industry
goods from the Dominican Republic are
anticipated to account for 52.0% of total

imports in 2016. Cigars from this
country, which are ranked as one of the
best in the world, have helped boost
demand for imports. Nicaragua and
Honduras represent the second and third
largest sources of industry imports,
respectively. Cigar imports from
Nicaragua have grown in recent years as
several leading premium cigar producers,
such as Rocky Patel Premium Cigars Inc.,
have established factories in this country.
The majority of premium cigars produced
in Latin America are imported and
distributed domestically by S&K Imports
Inc., the largest cigar and cigarillo
importer in the United States.

Exports
Global tobacco producers have shifted
their focus on growing markets like the
Middle East and Asia, where per capita
smoking rates are rising, by establishing
production facilities in strategic
locations. For instance, industry leader,
Philip Morris, consolidated its domestic
production to one factory and transferred
its production for the European market
to Europe. Likewise, Reynolds American
Inc. (RAI) is effectively a spinoff of global
company British American Tobacco,
which produces iconic cigarette brands
Kent and Pall Mall for distribution in
non-American markets. More recently,
RAI sold the international rights to the
American Spirit brand name to Japan
Tobacco Inc. As a result, the top two
largest tobacco manufacturers, Phillip

Major Markets
continued

Online retailing has grown slightly
due to the convenience of shopping at
home through the internet, although
expansion has been offset by the
constantly changing and unpredictable
regulatory framework surrounding
online tobacco sales. This uncertainty is
exacerbated by concerns of minors
illegally purchasing tobacco online

without providing adequate proof of age,
as well as the possibility of tax evasion if
tobacco products are sold across state
lines without collecting the appropriate
state-level excise tax. Accordingly,
online sales of domestically-produced
tobacco products are expected to
account for less than 1.0% of industry
revenue in 2016.

Level & Trend
Exports in the
industry are Low
and Decreasing

Imports in the
industry are Low
and Increasing

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WWW.IBISWORLD.COM Cigarette & Tobacco Manufacturing in the US August 2016 22

Products & Markets

International Trade
continued

Morris and Reynolds American, are now
almost entirely focused on domestic
operations. Consequently, exports’ share
of industry revenue has declined from
1.2% in 2011 to an estimated 1.1% in
2016. Exports are expected to continue
declining in the coming years, accounting
for an estimated 1.0% share of revenue
by 2021.

Exports of US-made tobacco products
are primarily made to US military bases
and duty-free shops overseas.
Accordingly, Japan represents the largest
export market by a significant margin,
due to the large number of US military
personnel positioned in that country.
However, exports to Japan have declined
moderately in recent years, due to a
strengthening dollar that makes
American cigarettes more expensive and
the declining demand for tobacco
products in Japan. According to Japan
Tobacco Inc.’s annual survey, the
percentage of Japanese adult smokers
hit an all-time low of 20.0% in 2014,

and is expected to continue dropping
through 2016. Exports to Canada,
another important market, have also
decreased over the past five years.
However, exports to the Dominican
Republic and Russia have grown
significantly during this period, helping
offset some of the losses from Japan
and Canada.

Imports From…

Total $1.2bn

6.3%
Honduras

8.7%
South Korea

13.0%
Nicaragua

20.0%
Other Countries

52.0%
Dominican

Republic

Exports To…

Total $422.7m

62.7%
Japan

15.4%
Dominican

Republic

13.8%
Other Countries

5.6%
Canada

2.5%
Russia

Year: 2016
SIZE OF CHARTS DOES NOT REPRESENT ACTUAL DATA SOURCE: USITC

$
m

ill
io

1000

-1

500

-1000

-500

0
500
2208 10 12 14 16 18 20Year

Exports Imports Balance

Industry trade balance

SOURCE: WWW.IBISWORLD.COM
Provided to: Ohio State University – Columbus Campus (OhioNet) (211852729) | 14 September 2016

WWW.IBISWORLD.COM Cigarette & Tobacco Manufacturing in the US August 2016 23

Products & Markets

Business Locations 2016

MO
2.0

West

West
West

Rocky
Mountains Plains

Southwest

Southeast

New
England

Great
Lakes

0.0

MA
0.0

RI
0.0

1.0

DE
0.0

NH
0.0

CT
2.0

MD
0.0

DC
0.0

1
5
3
7
2
6
4

8 9

Additional States (as marked on map)

AZ
2.0

CA
3.0

NV
2.0

OR
0.0

WA
0.0

MT
0.0

NE
0.0

MN
0.0

IA
0.0

OH
0.0

VA
6.9

FL
15.8

KS
0.0

CO
1.0

UT
0.0

ID
0.0

TX
4.0

OK
1.0

NC
18.8

AK
0.0

WY
0.0

TN
5.9

KY
6.9

GA
3.0

IL
1.0

ME
0.0

ND
0.0

WI
0.0 MI

1.0
PA
9.9

WV
1.0

SD
0.0

NM
1.0

AR
0.0

MS
0.0

AL
1.0

SC
1.0

LA
0.0

HI
0.0

IN
1.0

NY
7.9 5

6
7

3
21

4
9
SOURCE: WWW.IBISWORLD.COM

Mid-
Atlantic

Establishments

(%)

Less than 3%
3% to less than 10%
10% to less than 20%
20% or more

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WWW.IBISWORLD.COM Cigarette & Tobacco Manufacturing in the US August 2016 24

Products & Markets

Business Locations The Southeast region of the country,
which accounts for 60.2% of
establishments, dominates the Cigarette
and Tobacco Manufacturing industry.
The region’s share of establishments is
more than double the percentage of the
population that resides in this region. A
majority of manufacturers are established
in this region due to the abundance of
tobacco farms in the area, giving
producers easy access to the key
ingredient for their products. In addition,
industry operators benefit from being
located near sources of key inputs, as the
cost of transporting materials is relatively
low. North Carolina, in particular,
accounts for 18.8% of establishments.
Major players Reynolds American and
Lorillard Inc. are also headquartered in
North Carolina. Finally, Florida is
another major contributor, accounting
for 15.8% of total establishments, with
the majority of these establishments
involved in the e-vapor category.

The Mid-Atlantic is another major
region in this industry with 18.8% of
establishments. New York, New Jersey
and Pennsylvania together hold nearly the
entire share of establishments for the
region, as many tobacco farms are located
in these states. Therefore, easy access to
inputs and low transportation costs make
the region attractive to industry operators.

The Southwest and West account for
8.0% and 5.0% of industry
establishments, respectively. However,
their share of total establishments has
declined due to greater investment in
plants in other regions. In addition, the
Rocky Mountains (1.0%), New England
(2.0%) and Plains (2.0%) regions do not
represent significant operating areas for
this industry. These regions are not
suitable for tobacco farmers so
establishments are less likely to operate in
these areas.

0
15
30
45

So
ut

hw
es

W
es

G
re

at
L

ak
es

M
id

-A
tl

an
ti

N
ew

E
ng

la
nd

Pl
ai

R
oc

ky
M

ou
nt

ai
ns

So
ut

he
as

Establishments
Population

Establishments vs. population

SOURCE: WWW.IBISWORLD.COM
Provided to: Ohio State University – Columbus Campus (OhioNet) (211852729) | 14 September 2016

WWW.IBISWORLD.COM Cigarette & Tobacco Manufacturing in the US August 2016 25

Key Success Factors Economies of scale
Successful companies benefit from the large
scale of operations, which allows them to
spread production costs over a large volume
of output, reducing per-unit costs.

Ability to effectively change
community behavior
The leading producers have introduced
new products, such as electronic cigarettes,
that are viewed as less harmful alternatives
to traditional tobacco products to maintain
demand for industry goods.

Marketing of differentiated products
Tobacco companies are effectively
banned from using conventional
marketing methods (i.e. commercials,

billboards), so manufacturers must
market their products aggressively
through other means to maintain market
share in a highly competitive market.

Ability to pass on cost increases
Due to rising excise taxes and falling
demand for industry products, the
leading producers have increased their
product prices to maintain earnings.

Effective quality control
It has become imperative for operators to
produce high-quality cigarettes due to
extensive media coverage of the negative
health consequences of smoking. Also,
faulty products can lead to product
recalls and taint a brand’s reputation.

Market Share
Concentration

The Cigarette and Tobacco
Manufacturing industry is highly
concentrated. Based on data from IRI
Group and Management Science
Associates Inc., made publicly available
by Altria Group and Reynolds American
Inc. (RAI), Altria’s Marlboro brand alone
accounted for a 44.0% share of the
cigarette market, while RAI’s respective
cigarette brands (which now include
Camel and Newport) accounted for
32.0% of the US retail market in 2015.
These two companies alone are expected
to generate a combined 81.9% of industry
revenue in 2016.

Despite the dominant position that
these producers have held for decades,
market share concentration has further
intensified over the past five years as
these manufacturers engaged in several
acquisitions. For example, Altria Group
acquired US Smokeless Tobacco Co. in
2009 to expand its product portfolio and
grow its market share. In 2012, Lorillard
acquired Blu eCigs, a manufacturer of
electronic cigarettes, for the same
reasons. More recently, RAI completed
its acquisition of Lorillard for an

estimated $27.4 billion. Lorillard was
previously the third-largest operator in
the industry, accounting for an 18.4%
share of the market in 2014. This
acquisition boosted RAI’s share of the
market from 22.3% in 2014 to an
estimated 32.9% in 2016. As a part of this
merger, RAI and Lorillard also agreed to
divest several assets, including certain
brands, a manufacturing facility and over
2,700 employees, to ITG Brands (a
subsidiary of Imperial Brands plc). Due
to this restructuring, ITG Brands’ share
of the tobacco industry also increased
from less than 3.8% in 2014 to an
estimated 7.0% in 2016. Overall, the
combined market share of the top four
tobacco manufacturers has increased to
an estimated 91.6% of industry revenue
in 2016.

Due to rising barriers to entry and an
increasingly stringent regulatory
framework that prevents smaller
companies from entering the industry or
gaining a meaningful share of the market,
IBISWorld anticipates this industry’s
market share concentration to continue
increasing over the next five-year period.

Competitive Landscape
Market Share Concentration | Key Success Factors | Cost Structure Benchmarks
Basis of Competition | Barriers to Entry | Industry Globalization

Level
Concentration in
this industry is High

IBISWorld identifies
250 Key Success
Factors for a
business. The most
important for this
industry are:

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WWW.IBISWORLD.COM Cigarette & Tobacco Manufacturing in the US August 2016 26

Competitive Landscape

Cost Structure
Benchmarks

Due to its unique regulatory environment,
the Cigarette and Tobacco Manufacturing
industry’s cost structure differs substantially
from that of any other manufacturing
industry. Cost structures vary among
industry operators, depending on their size
and scale of production, proximity to
tobacco farms, exposure to litigation claims
and levels of technology and capital
investments. Large manufacturers typically
incur lower per-unit production costs than
smaller competitors because these operators
are able to spread production costs out over
a large volume of output and spend more on
brand development. Consequently, the
industry’s largest operators benefit from
much higher profit margins than niche and
small-batch producers.

Profit
Profit, or earnings before interest and
taxes, is estimated to account for 32.7%
of industry revenue in 2016. Tobacco

companies’ profit margins are relatively
high when compared with other
manufacturing industries because the
naturally addictive nature of tobacco
products in addition to strong brand
loyalty allows manufacturers to charge a
premium for their products without a
significant drop in demand. Additionally,
due to the small package sizes of
cigarettes, packaging material accounts
for a small share of total purchases.
Finally, the price that producers charge
their downstream customers is much
higher than the cost of inputs.

Even though the retail price of tobacco
rose steadily over the past five years,
companies raised their prices at a slightly
faster pace to maintain their profit
margins. Additionally, the consolidation
of industry operators has allowed the
leading producers to reduce costs
through economies of scale. Lastly, the
five years since the ratification of the

Sector vs. Industry Costs

n Profi t
n Wages
n Purchases
n Depreciation
n Marketing
n Rent & Utilities
n Other

Average Costs of
all Industries in
sector (2016)

Industry Costs
(2016)

0
20

Pe
rc

en
ta

ge
o

f
re

ve
nu

100

SOURCE: WWW.IBISWORLD.COM

8.1

32.3

56.7

0.41.81.6
5.0
2.2

19.9

2.1 0.62.6

54.2

12.0

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WWW.IBISWORLD.COM Cigarette & Tobacco Manufacturing in the US August 2016 27

Competitive Landscape

Cost Structure
Benchmarks
continued

2009 Tobacco Control Act (see
Regulation section) have given
manufacturers enough time to adjust
their prices appropriately to sustain
profit margins. Consequently, the
industry’s profitability has risen
significantly since 2011.

Purchases
Purchases, which account for an estimated
5.0% of revenue, include a variety of raw
materials, such as tobacco leaves, paper,
additives, cellulose materials and packaging.
However, the most important and
substantial input for industry producers is
tobacco leaf. According to data sourced from
the World Bank, the world price of tobacco
leaves is anticipated to rise an annualized
2.2% in the five years to 2016. Additionally,
the cost of wood pulp, which is used to
create filters in cigarettes, has risen at an
average annual rate of 0.4%, further
boosting the cost of inputs for
manufacturers. Consequently, purchase
costs have risen as a share of industry
revenue over the past five years.
Nonetheless, fluctuating material costs have
very little impact on the industry’s overall
performance due to the industry’s unique
cost structure and high profit margins.

Wages
Wages are estimated to comprise just
2.2% of industry revenue in 2016,
relatively unchanged as a share of revenue
since 2011. Producers have increased their
reliance on technology and equipment
over the years, boosting production
efficiencies. Additionally, the leading
cigarette producer, Philip Morris USA,
consolidated its US manufacturing
facilities during the past five years,
substantially reducing the number of
industry employees. Industry operators
are likely to keep labor costs low over the
next five-year period as other costs,
including expenses related to regulatory
compliance, excise tax remittance and
litigation, continue to rise.

Marketing
Relevant marketing expenses account for
a combined 1.8% of industry revenue in
2016. As part of the Final Tobacco
Marketing Rule passed in 2010,
tobacco-affiliated businesses are
effectively prohibited from engaging in
traditional methods of advertising,
including outdoor billboards, TV or
radio commercials and attractive
product packaging. These prohibitions
are intended to curb tobacco products’
appeal to youth, who are otherwise
susceptible to traditional forms of
tobacco marketing. Moreover, the
Food and Drug Administration
implemented new rules in 2010 that
ban tobacco companies from
sponsoring sporting and entertainment
events, prohibit free cigarette samples
and giveaways and restrict the use of
self-service displays, among other
restrictions. In 2016, the FDA released
new rulings that expand such
restrictions to electronic cigarettes and
other innovative tobacco products.

Examples of marketing programs
that can still be used by manufacturers
include exclusive consumer
engagement programs, promotional
pricing through discounts and retail
coupons, advertising in certain
magazines and advertising in adult-
only venues. According to the Federal
Trade Commission’s latest reports on
the tobacco industry, operators spent a
total of $9.4 billion on advertising and
promotional activities in 2013 (latest
data available). However, 92.0% of
these expenses was spent on non-
traditional marketing methods such as
price discounts and promotional
allowances, neither of which are
considered relevant marketing
expenses in IBISWorld reports. During
the past five years, spending on
traditional advertising methods fell,
while spending on promotional
allowances has increased.

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WWW.IBISWORLD.COM Cigarette & Tobacco Manufacturing in the US August 2016 28

Competitive Landscape
Cost Structure
Benchmarks
continued

Other
All other costs are estimated to account
for 56.3% of industry revenue in 2016.
This segment includes a number of
expense categories that are unique to
the tobacco industry, including federal
excise taxes, tobacco-related litigation
costs and ongoing payments to the
signatories of the 1998 Master
Settlement Agreement (MSA). For
example, federal excise tax payments
accounted for 25.8% of Altria Group’s
industry-relevant revenue in 2015,
while MSA and FDA user fees
accounted for an additional 18.9% of
net sales in that year. Although
payments associated with the Fair and
Equitable Tobacco Reform Act (FETRA)
were concluded in 2014, these costs
were significant in previous years (see
Regulation section).

Litigation costs and settlement
payouts are unique costs for operators in
the Cigarette and Tobacco
Manufacturing industry and are
estimated to account for a significant
18.6% share across all industry
operators. These costs, which are mostly
associated with annual payments in
accordance with the MSA, are much
higher among the two largest
manufacturers (Philip Morris USA and
Reynolds) than among smaller
operators. For example, Phillip Morris
USA (Altria Group) faced over 62
independent tobacco-related cases at the
end of 2015, in addition to several class
action suits and ongoing costs unrelated
to the MSA. Likewise, Reynolds has paid
over $130.0 million in unfavorable
tobacco-related judgments unrelated to

the MSA in just the past three years.
However, as the number of smokers in
the United States continues to decline in
the near future, the frequency of
lawsuits brought against producers is
anticipated to fall. In particular,
litigation costs unassociated with the
MSA are expected to decline as a greater
number of cases related to the Engle vs.
Liggett decision are settled (see
Regulation section).

Remittance of federal excise taxes
also constitutes another major
expense. Federal excise taxes on
tobacco products are levied exclusively
on the manufacturers, which collect
the appropriate per-unit tax on their
products and pass down the added
expense to wholesalers or retailers in
the form of higher selling prices. Since
excise taxes are usually adjusted to
unit sales volume, declining shipment
levels in recent years have lowered this
expense’s share of industry costs since
2011. Nonetheless, excise tax’s share of
industry costs is likely to increase
considerably over the next five-year
period because the government may
raise tax rates on cigarettes another
$0.94 per pack as part of the proposed
federal budget.

Depreciation is anticipated to constitute
1.6% of industry revenue in 2016. While
capital investments have remained steady
over the past five years, they have declined
in the past decade as operators have
consolidated their manufacturing
facilities. As a result, rent and utilities are
also anticipated to have declined over the
past five years, accounting for just 0.4% of
industry revenue in 2016.

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WWW.IBISWORLD.COM Cigarette & Tobacco Manufacturing in the US August 2016 29

Competitive Landscape

Basis of Competition The level of competition that industry
operators face is very high, with internal
competitors constituting the majority of
competition. Manufacturers primarily
compete based on product price, quality
and differentiation. The high level of
market share concentration and
continued consolidation of industry
operators have heightened the level of
competition in this industry. Finally, the
leading manufacturers have competed to
acquire small producers of niche
products, such as electronic cigarettes
and smokeless tobacco, to expand
market share and reach new consumer
groups in response to declining tobacco
consumption across all demographics.

Internal competition
The perceived quality of a particular
product or brand determines the price
that consumers are willing to pay. While
there are many different products
available in the market, the leading
manufacturers enjoy a high degree of
brand loyalty for their cigarettes and
tobacco products. Qualities including
taste, nicotine strength, smell and length
of burn determine a smoker’s preference
for a specific brand. Producers have also
driven brand loyalty through branding,
advertising and packaging. For instance,
the preeminence of Marlboro is
underpinned by its clean-cut packaging
and the association of the brand with a
certain lifestyle. Indeed, Marlboro,
Newport, Camel and Pall Mall have been
iconic cigarette brands for decades,
having developed a strong association
with a distinctively American culture
during that time. Strong brand loyalty for
cigarettes, along with the addictive
nature of nicotine, hedges producers
against declining demand prompted by
intensifying public scrutiny, social stigma
and more comprehensive regulation.

Falling volume sales of cigarettes
has prompted producers to introduce a
variety of new products to attract

smokers seeking a healthier alternative
to tobacco. Although electronic
cigarettes have not yet been proven to
be less harmful than traditional
cigarettes, many consumers perceive
them to be less harmful to the body
and the environment. In response to
the growing demand for this product,
many small-batch producers have
entered the industry, while large
manufacturers like Reynolds American
Inc. (RAI) have acquired smaller
companies that specialize in electronic
cigarettes. Additionally, industry
leader, Altria Group, introduced its
own electronic cigarette brand,
MarkTen, in 2013. More recently, RAI
rolled out its VUSE brand of
disposable e-cigarettes nationwide,
after a year of strong sales in limited
test geographic regions. According to
IRI retail sales data, VUSE is now the
leading e-cigarette brand sold in
convenience stores.

Despite the addictive quality of
nicotine and strong consumer loyalty
to specific brands, significant price
increases can cause smokers to trade
down to more affordable brands or
purchase a smaller volume of
cigarettes. Consequently, industry
operators compete to offer affordable
product prices at different retail
channels. Larger producers benefit
from possessing substantial market
power and long-term contracts with
suppliers of key industry inputs, as
well as strong relationships with major
downstream tobacco wholesalers
such as McLane Company or Core-
Mark International. Consequently,
the leading manufacturers enjoy
lower input and purchase costs
when compared with smaller
producers, allowing them to give
their downstream customers
promotional allowances or contingent
price discounts to drive demand for
their brands.

Level & Trend
Competition in
this industry is
High and the trend
is Increasing

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WWW.IBISWORLD.COM Cigarette & Tobacco Manufacturing in the US August 2016 30

Competitive Landscape

Barriers to Entry The barriers to entry in the Cigarette and
Tobacco Manufacturing industry are
extremely high. First, industry prospects
must obtain a permit from the Alcohol
and Tobacco Tax and Trade Bureau
(TTB), which operates under the
Department of the Treasury. The
bureau’s process allows companies to
submit an application for permits to
manufacture and import cigarettes,
cigars, chewing tobacco, snuff, pipe
tobacco and roll-your-own tobacco.
Applicants must secure manufacturing
facilities, obtain a bond for compliance,
determine how to address environmental
regulations and pay taxes before
beginning operations. If the TTB
determines that the applicant is eligible,
a tobacco application specialist conducts
an interview for additional screening.
Finally, the Trade Investigations Division
conducts an on-site investigation to
approve or deny the manufacturer’s
application. This lengthy process
presents a significant barrier to entry for

this industry. In recent years, several
operators have entered the industry to
capitalize on the burgeoning electronic
cigarette or vaporizer market, which was
relatively less regulated until early 2016.
However, the FDA’s recent rulings on
electronic nicotine delivery systems
(ENDS) are likely to increase compliance
costs considerably for these smaller
players, in turn raising barriers to entry
(see Regulation section).

Additionally, this industry
necessitates significant initial capital
investments, which represent another
significant barrier to entry. Potential
new entrants must purchase machinery
and equipment to produce and pack
cigarettes. While used cigarette
producing and packing machines are
available, the price of used equipment is
still significant and can lead to greater
maintenance fees in the long term.

The eight leading cigarette and tobacco
product manufacturers effectively control
over 99.0% of industry market share.

Basis of Competition
continued

External competition
The main source of external competition
that cigarette and tobacco
manufacturers face are producers of
smoking cessation products. The
nicotine patch, gum and pill are
designed to help people slowly decrease
their dependence on the nicotine
content of tobacco. As more smokers
reduce their reliance on nicotine
through these products, demand for
cigarettes will fall. However, some firms
are beginning to gain ownership over
these products and services. For
example, major player Reynolds
American acquired a smoking cessation
firm, Niconovum, which sells mouth
sprays and gum to reduce cigarette
cravings. Such acquisitions are an
attempt made by industry operators to
serve as a hedge against declining

demand for traditional cigarettes and
tobacco products.

Industry operators also face external
competition from imported products.
While imports only account for an
estimated 3.0% of domestic demand for
cigarettes in 2016, this represents an
increase from 1.8% in 2011. The majority
of imported tobacco products are
premium handmade cigars from Latin
American countries or premium snus
from Sweden or Denmark. Despite the
higher price of imported tobacco
products, rising disposable income levels
in the United States has allowed more
consumers to purchase premium
imported goods. Furthermore, tobacco
products sourced from Caribbean and
Latin American countries are ranked as
the best in the world due to the quality of
the tobacco grown in this region.

Level & Trend
Barriers to Entry
in this industry
are High and
Increasing

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WWW.IBISWORLD.COM Cigarette & Tobacco Manufacturing in the US August 2016 31

Competitive Landscape

Industry
Globalization

The industry has a low level of
globalization, as most of the leading
producers’ operations are concentrated in
the United States. Production for the
domestic market takes place within the
United States due to the efficiencies and
cost savings of localizing production and
distribution. Furthermore, complex
foreign regulations and tax laws caused
industry leader, Altria Group, to spin-off
its international business in 2007. This
divestiture allowed the parent company
to focus on growing its domestic market
share through its Philip Morris USA and
John Middleton business segments.
Likewise, Reynolds American Inc. is a
US-based spinoff of the global cigarette
conglomerate, British American Tobacco.
In addition, while Imperial Tobacco is
based in the United Kingdom, the
company entered the US market through
its acquisition of Commonwealth Brands
in 2007.

Industry operators engage in very
limited international trade. Most of the
trade for tobacco takes place within the
Tobacco Growing industry (IBISWorld
report 11191). In addition, because
cigarette production is localized,
domestic producers usually satisfy
domestic demand for cigarettes and
tobacco productions. As a result, imports
are expected to account for 3.1% of
domestic demand in 2016, with the
majority of imports consisting of
handmade cigars from the Caribbean.
Likewise, exports are estimated to
account for only 1.1% of industry revenue.
Exports fell over the past five years,
partially driven by the consolidation of
Philip Morris’ US operations and the
expansion of its production facilities
abroad. In contrast, imports have grown
during this period as smokers have taken
a greater interest in premium cigars and
snus made from foreign tobacco leaf.

Barriers to Entry
continued

Furthermore, these large companies have
acquired smaller producers in recent
years to expand their market share,
which has consequently raised entry
barriers. The leading cigarette
manufacturers also benefit from lower
per-unit production costs due to
economies of scale. Consequently, they
are able to lower the prices they charge
their downstream customers to
outperform new entrants. Most
importantly, declining demand for
cigarettes poses the most significant
barrier to entry, as the industry presents
very limited opportunities for growth. In
effect, intensifying competition, the
well-entrenched positions of the top

manufacturers, sinking demand for the
industry’s major products and an
increasingly stringent regulatory
environment make it impractical for
newcomers to enter the industry.

Barriers to Entry checklist

Competition High
Concentration High
Life Cycle Stage Decline
Capital Intensity High
Technology Change Medium
Regulation & Policy Heavy
Industry Assistance Medium

SOURCE: WWW.IBISWORLD.COM

Level & Trend
Globalization in this
industry is Low and
the trend is Steady

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WWW.IBISWORLD.COM Cigarette & Tobacco Manufacturing in the US August 2016 32

Competitive Landscape

Industry
Globalization
continued

SOURCE: WWW.IBISWORLD.COM

Trade Globalization Going Global: Cigarette & Tobacco
Manufacturing 2003-2016

Ex
po

rt
s/

Re
ve

nu
e

Ex
po
rt
s/
Re
ve
nu
e

200

100
50
0
200

150

100
50
0

Imports/Domestic Demand Imports/Domestic Demand
0 040 4080 80120 120160 160

International trade is a
major determinant of
an industry’s level of
globalization.Exports offer
growth opportunities
for fi rms. However there
are legal, economic and
political risks associated
with dealing in foreign
countries.Import
competition can bring a
greater risk for companies
as foreign producers satisfy
domestic demand that
local fi rms would otherwise
supply.

Export ExportGlobal Global

ImportLocal ImportLocal

Cigarette &
Tobacco
Manufacturing 2003

2016
Provided to: Ohio State University – Columbus Campus (OhioNet) (211852729) | 14 September 2016

WWW.IBISWORLD.COM Cigarette & Tobacco Manufacturing in the US August 2016 33

Player Performance Altria Group, formerly known as Philip
Morris Companies Inc., is a Virginia-
based holding company whose
subsidiaries engage in the production
and distribution of cigarettes, cigars, pipe
tobacco, smokeless tobacco products and
wine. While the company was originally
incorporated in 1985, its involvement in
manufacturing tobacco products dates
back to 19th-century London, and the
company’s cigarettes have been sold in
the United States since 1902. The
company has several leading tobacco
product brands: Marlboro (the top-
selling cigarette brand in the United
States since the 1970s), Black and Mild
cigars, Copenhagen and Skoal smokeless
tobacco and smaller cigarette brands
such as Benson & Hedges and Virginia
Slims. As of early 2016, Marlboro alone
had a 44.0% share of the total US
cigarette market, while the Copenhagen
and Skoal brands had a combined 51.3%
share of the smokeless tobacco market,
according to retail sales data from
Management Science Associates Inc. and
IRI. The company as a whole shipped
126.0 billion cigarettes from its domestic
production facilities in 2015, up 0.5%
from 2014.

Altria Group’s wholly owned tobacco
businesses include Philip Morris USA, US
Smokeless Tobacco Company and John
Middleton, which collectively employ
8,800 workers. Altria participates in the
industry through its cigarette, cigar and
smokeless product segments, which
accounted for 97.0% of the company’s
total revenue in 2015. Although the

company does have a global presence, its
tobacco manufacturing and distribution
operations are based almost entirely in
the United States, following the split
from Philip Morris International (PMI)
in 2007. PMI continues to market the
company’s iconic Marlboro brand outside
of the United States. Across all operating
segments, the company generated net
sales of $25.4 billion in 2015.

In 2009, the company acquired US
Smokeless Tobacco Company (USSTC),
producer of the Copenhagen and Skoal
brands of premium smokeless tobacco.
With its core cigarette business in
decline, the USSTC acquisition helped
Altria Group diversify its product
portfolio into faster-growing tobacco
products. In 2012, the company
reorganized its operations to reduce costs
and achieve operational efficiencies by
combining its cigarette and cigar
segments into a single smokeable
products segment. Altria Group now
divides its operations into smokeable
products, smokeless products, wine and
financial services. More recently in
mid-2014, the company entered the
electronic cigarette category by acquiring
the e-vapor segment of Green Smoke Inc.
for $130.0 million. In mid-2015, Altria
group announced plans to collaborate
with its global counterpart, Philip Morris
International, to jointly develop and
market e-vapor products both in the
United States and abroad.

In 1998, Philip Morris and several
other major US tobacco companies
(present-day Reynolds American Inc.)

Major Companies
Altria Group Inc. | Reynolds American Inc.
Imperial Brands plc | Other Companies

11.0%
Other

Altria Group Inc. 49.1%

Reynolds American Inc. 32.9%

Imperial Brands plc 7.0%
SOURCE: WWW.IBISWORLD.COM

Major players
(Market share)

Altria Group Inc.
Market share: 49.1%
Industry Brand Names
Marlboro
Virginia Slims
Cambridge
Lark
Merit
Chesterfield
L&M
Saratoga
Nu Mark
US Smokeless Tobacco
Company

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WWW.IBISWORLD.COM Cigarette & Tobacco Manufacturing in the US August 2016 34

Major Companies

Player Performance
continued

settled litigation under the Tobacco
Master Settlement Agreement, agreeing
to pay $206.0 billion over 25 years in lieu
of continued tobacco-related litigation
arising from 46 states. However, the
company still faces more than 62
individual pending cases as of mid-2016,
ranging from individual health cases and
class action suits to claims related to
marketing “Marlboro Lights” prior to the
2009 Tobacco Control Act (see
Regulation section). In addition, the
company continues to face more than
2,860 cases associated with the Engle vs.
Liggett decision, among others, though
the company resolved roughly 415 of
these cases in 2015.

Financial performance
IBISWorld estimates Altria Group’s
industry-relevant sales to grow an
annualized 2.3% to reach $18.4 billion in
the five years to 2016. Altria has grown
only slightly during this five-year period,
mostly due to stagnating sales of
cigarettes, which have been partially
offset by regular price markups and
increased sales of noncigarette products
such as smokeless tobacco. The primary
drivers of the company’s performance
include its well-established brands,

higher product prices and the
consolidation of its manufacturing
facilities in 2009. While the declining
number of smokers has placed downward
pressure on the company’s volume sales,
it has benefited from brand-loyalty for
products like Marlboro, which has
consistently grown as a share of the total
US cigarette market since 2011.

Despite the hike in federal excise taxes
prior to the current five-year period, as
well as continually rising tobacco-related
litigation costs, the company was able to
pass on increased operating expenses to
consumers, enabling Altria Group to
sustain high and rising profit margins
over this five-year period. Indeed, the
company’s industry-relevant operating
margin has risen from 23.5% in 2011 to
an estimated 34.6% in 2016. Although
currently a small share of total group
revenue, Altria Group’s smokeless
tobacco segment was a key driver of
growth over the past five years due to the
product segment’s lower effective tax rate
and per unit cost relative to cigarettes.
Altria Group is expected to perform well
in 2016, driven primarily by increased
prices on cigarettes and sustained
demand for the company’s smokeless
tobacco brands.

Altria Group (PM USA, USTC and JM operations) – fi nancial performance*

Year
Revenue

($ million) (% change)

Operating Income

($ million) (% change)

2011 16,416.0 -4.0 3,850.0 -4.1

2012 16,436.0 0.1 4,324.0 12.3

2013 16,865.0 2.6 4,785.0 10.7

2014 17,194.0 2.0 5,343.0 11.7

2015 18,115.0 5.4 5,955.0 11.5

2016 18,424.0 1.7 6,376.0 7.1

*Estimates; revenue given is net of excise taxes
SOURCE: ANNUAL REPORT AND IBISWORLD

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WWW.IBISWORLD.COM Cigarette & Tobacco Manufacturing in the US August 2016 35

Major Companies

Player Performance Reynolds American Inc. (RAI) was
founded in August 2004 following the
merger of North Carolina-based RJ
Reynolds Tobacco Company and British
American Tobacco’s US business, Brown
and Williamson. Incorporated in 1875,
RJ Reynolds Tobacco Holdings Inc. was a
publicly traded company until July 30,
2004, when it became a wholly owned
subsidiary of Reynolds American Inc.
RAI is now the second-largest US
manufacturer of cigarette and smokeless
tobacco products. With more than 5,600
employees, RAI produces about 110.0
billion cigarettes per year through its
main manufacturing facilities located in
Winston-Salem, NC.

RAI’s operating segments include RJ
Reynolds Tobacco Company, Santa Fe
Natural Tobacco Company, producer of
super-premium tobacco, and American
Snuff Company (ASC), formerly known
as Conwood Sales Company. While RJ
Reynolds and Santa Fe produce regular
tobacco products, ASC manufactures
smokeless tobacco products under
brands including Grizzly, Kodiak and
Levi Garrett. The company is best known
for its iconic cigarette brands, Camel, Pall
Mall and Salem. In recent years, the
company’s Natural American Spirit
brand has boomed, reaching a record
high of 2.0% of the total cigarette market

in 2016, with volume up 22.1% since last
year. In addition, the company’s
e-cigarette brand, VUSE, quickly became
the best-selling e-vapor product at
convenience stores following the national
rollout in 2015. In 2016, the company
introduced a new subsidiary, RAI
Innovations Company, which will
manage RAI’s e-vapor product portfolio
and fund all new research and
development within the innovative
tobacco products category.

In mid-2015, Reynolds merged with
the third-largest industry operator,
Lorillard Inc., for an estimated $27.4
billion. As a part of this merger, RAI
acquired the Newport brand, which is the
best-selling brand of mentholated
cigarettes in the United States. However,
RAI also divested several assets,
including four cigarette brands and one
e-vapor brand and a large manufacturing
facility as a condition for this merger.
These assets were sold for an estimated
$7.1 billion to competitor Imperial
Brands (ITG Brands), which is now the
third-largest tobacco company in the
United States. Overall, the merger
boosted the company’s share of the
industry from just 22.3% in 2014 to an
estimated 33.0% in 2016. More recently,
the company sold the international
(non-US) marketing rights for its

Reynolds American Inc. – fi nancial performance*

Year
Revenue

($ million) (% change)
Operating Income

($ million) (% change)

2011 8,541.0 -0.1 1,406.0 5.2

2012 8,304.0 -2.8 1,272.0 -9.5

2013 8,236.0 -0.8 1,718.0 35.1

2014 8,471.0 2.9 1,445.0 -15.9

2015 10,675.0 26.0 3,253.0 125.1

2016 12,347.6 15.7 4,494.5 38.2

*Estimates; revenue given is net of excise taxes
SOURCE: ANNUAL REPORT AND IBISWORLD

Reynolds American
Inc.
Market share: 32.9%
Industry Brand Names
Camel
Salem
Winston
American Spirit
Grizzly
Kodiak
Evo Flask
Doral
Kool
GPC

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WWW.IBISWORLD.COM Cigarette & Tobacco Manufacturing in the US August 2016 36

Major Companies

Player Performance Imperial Brands, previously known as
Imperial Tobacco, is a UK-based tobacco
manufacturer that specializes in
cigarettes, fine tobacco, cigars and snus.
With operations located throughout
Europe and the Americas, the company
employs more than 38,000 workers
globally. Imperial Brands entered the
Cigarette and Tobacco Manufacturing
industry in 2007 when it acquired
Commonwealth Brands Inc. Imperial’s
global brands include products under the
L and B, Gitanes and Skruf brand names.
Global revenue from the sale of tobacco
products, including remittance of excise
taxes, totaled $29.0 billion in 2015. The
company segments its operations into
two geographic areas: growth markets
and return markets. US operations were
included in the growth markets segment
for most of the five-year period, until the
company restructured its operations in
late 2015.

With manufacturing facilities in
Reidsville, NC, Commonwealth produces
eight cigarette brands, including USA
Gold, Davidoff and Malibu. Within the
cigarette segment, the USA Gold and

Sonoma brands experienced some
growth over the past five years, though
intense competition from premium
cigarette brand manufacturers have hurt
financial performance. Despite the
competitive nature of the market,
Imperial Tobacco also increased product
prices in the United States and focused
on expanding its USA Gold product line,
which is marketed as an economic brand
of cigarettes in 19 states.

As mentioned above, the company
acquired several assets from RAI and
Lorillard after the two companies’ merger
in mid-2015. These assets include
cigarette brands Maverick, Kool, Salem
and Winston, as well as RAI’s Blu
electronic cigarette brand. Furthermore,
the company acquired one of Lorillard’s
manufacturing facilities, as well as its
national sales force of 2,750 employees.
As a contingency of the merger plan, both
companies agreed to continue
manufacturing each other’s brands until
the transition was finalized, which
occurred in July 2016. Following the
acquisition, Imperial Brands formed a
new holding company, ITG Brands, to

Player Performance
continued

American Spirit brand to Japan Tobacco
Inc., for an estimated $5.0 billion.
However, this divestiture has not affected
the company’s share of the domestic
tobacco industry.

Financial performance
RAI has performed well over the past
five years, driven primarily by its 2015
merger with Lorillard, as well as
sustained demand for the company’s
existing smokeless and innovative
tobacco brands. Following the national
rollout of flavored cartridges, the
company’s VUSE brand quickly gained a
33.6% share of the convenience store
market for e-vapor products. Mirroring
the overall tobacco market during the

five-year period, Reynolds experienced
declining consumption levels for most of
its cigarette brands, although growing
demand for smokeless tobacco products,
as well as increasing pricing on premium
cigarette brands, has helped offset this
negative trend. Like its larger
competitor, RAI’s profit margins have
also improved significantly over the
five-year period, effectively doubling
from 16.5% in 2011 to an estimated
36.4% in 2016 because of the Lorillard
merger and divestiture. Overall, RAI’s
industry-relevant sales are expected to
rise an annualized 7.7% to $12.3 billion
over the five years to 2016, with most of
this growth attributable to the Lorillard
merger in mid-2015.

Imperial Brands plc
Market share: 7.0%
Industry Brand Names
Newport
Kent
True
Old Gold
Maverick

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WWW.IBISWORLD.COM Cigarette & Tobacco Manufacturing in the US August 2016 37

Major Companies

Other Companies Vector Holding (Liggett Group)
Estimated market share: 2.6%
Vector Group participates in the Cigarette
and Tobacco Manufacturing industry
through its two wholly owned subsidiaries,
Liggett Group LLC and Vector Tobacco Inc.
The company also owns New Valley LLC,
an investment company based in Miami.
Vector Group’s industry-specific operations
employed a combined 470 workers and
produced 8.7 billion cigarettes in 2015.

The company is primarily involved in
the discount and deep discount segment

of the cigarette market. Vector Holdings’
discount cigarette brands include Eve,
Grand Prix, Pyramid and Liggett Select.
Vector Group tends to focus on
developing its marketing efforts for these
discount cigarette brands. Since Liggett
Group has historically had a small share
of the US cigarette market, it is not a
signatory to the Master Settlement
Agreement, thereby giving the company a
significantly different cost structure from
its three larger competitors. Nevertheless,
due to lower smoking rates in the United

Player Performance
continued

consolidate its new US operations, as well
as separating its US sales from the broader
growth market into a new business
segment. The company’s premium brand
portfolio now includes Winston and Kool,
and its discount brands include USA Gold
and Maverick. Cigarettes are roughly
85.0% of ITG Brand’s net revenue, with
the remaining 15.0% generated from
machine-made cigar sales. At the
beginning of 2015, ITG brands employed
roughly 2,700 workers, including a
national salesforce of 950 people.

Financial performance
ITG Brands experienced weak
performance during the first half of the

five-year period, as intense
competition from other brand-name
cigarette manufacturers and overall
declines in tobacco consumption led to
reduced sales. However, the company’s
$7.1 billion acquisition of Maverick,
Kool, Salem and Winston from RAI,
coupled with other assets like a
national salesforce and manufacturing
facilities, helped double ITG Brand’s
share of the market in 2015. Overall,
IBISWorld expects industry-relevant
revenue to rise an annualized 12.4% to
$2.6 billion over the five years to 2016,
with most of this growth attributable
to the Lorillard merger/divestiture
deal in mid-2015.

Imperial Brands plc (ITG Brands) – fi nancial performance*

Year
Revenue
($ million) (% change)
Operating Income
($ million) (% change)

2011 1,469.8 6.3 244.3 –

0.6

2012 1,476.6 0.5 225.2 -7.8

2013 1,452.6 -1.6 225.5

0.1

2014 1,437.7 -1.0 388.7 72.4

2015 2,162.9 50.4 573.2 47.5

2016 2,632.6 21.7 719.5 23.8

*Estimates
SOURCE: ANNUAL REPORT AND IBISWORLD

Provided to: Ohio State University – Columbus Campus (OhioNet) (211852729) | 14 September 2016

WWW.IBISWORLD.COM Cigarette & Tobacco Manufacturing in the US August 2016 38

Major Companies

Other Companies
continued

States and intensifying competition from
premium brands such as Marlboro, Camel
or Newport, Vector Group has suffered
from declining volume sales of its brands

over the past five years. Consequently,
revenue from tobacco sales is estimated to
decline an annualized 1.7% to $1.0 billion
over the five years to 2016.

Provided to: Ohio State University – Columbus Campus (OhioNet) (211852729) | 14 September 2016

WWW.IBISWORLD.COM Cigarette & Tobacco Manufacturing in the US August 2016 39

Capital Intensity The Cigarette and Tobacco
Manufacturing industry exhibits a high
level of capital intensity. Using wages to
represent labor costs and depreciation as
a proxy for capital, IBISWorld estimates
that for every dollar spent on labor,
industry operators will spend $0.75 on
capital in 2016. This figure represents a
slight increase from $0.71 in 2011.
Depreciation costs have remained
relatively steady over the past five years,
as few industry operators purchased new
machines to boost production efficiency.
However, wage costs have significantly
declined due to the falling number of
employees in the industry. In particular,
the consolidation of Philip Morris’
manufacturing facilities caused the
number of employees per establishment

to decline drastically in 2010. More
recently, both Reynolds American and
Imperial brands have also consolidated

Operating Conditions
Capital Intensity | Technology & Systems | Revenue Volatility
Regulation & Policy | Industry Assistance

Tools of the Trade: Growth Strategies for Success

SOURCE: WWW.IBISWORLD.COM

La
bo

r
In

te
ns

iv
e

Capital Intensive

Change in Share of the Economy

New Age Economy

Recreation, Personal Services,
Health and Education. Firms
benefi t from personal wealth so
stable macroeconomic conditions
are imperative. Brand awareness
and niche labor skills are key to
product differentiation.

Traditional Service Economy

Wholesale and Retail. Reliant
on labor rather than capital to
sell goods. Functions cannot
be outsourced therefore fi rms
must use new technology
or improve staff training to
increase revenue growth.

Old Economy

Agriculture and Manufacturing.
Traded goods can be produced
using cheap labor abroad.
To expand fi rms must merge
or acquire others to exploit
economies of scale, or specialize
in niche, high-value products.

Investment Economy

Information, Communications,
Mining, Finance and Real
Estate. To increase revenue
fi rms need superior debt
management, a stable
macroeconomic environment
and a sound investment plan.

Tobacco
Growing

Grocery Wholesaling
Seasoning,
Sauce and
Condiment Production

Wood Pulp
Mills

Supermarkets
& Grocery Stores

Cigarette & Tobacco
Manufacturing

Capital intensity

1.0
0.0

0.2

0.4

0.6

0.8

SOURCE: WWW.IBISWORLD.COM
Dotted line shows a high level of capital intensity

Capital units per labor unit

Cigarette &
Tobacco

Manufacturing

ManufacturingEconomy

Level
The level of capital
intensity is High

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Operating Conditions

Revenue Volatility The Cigarette and Tobacco
Manufacturing industry exhibits a low
to moderate level of revenue volatility.
Over the past five years, industry
revenue has declined by as much as
8.9% in 2014 and grew as much as
0.3% in 2012. This industry has
traditionally exhibited very little
revenue volatility because of the
addictive nature of it key products. In
fact, tobacco has colloquially been
known as a “recession-proof” product
because sales are not significantly
impacted by short-term changes in
economic factors such as per capita
disposable income or unemployment.

Unlike sales for most other nondurable
goods, sales of tobacco decreased only

slightly during the recession, and have
endured in spite of major public efforts to
curb smoking among Americans over the
past several decades. For example, the
April 2009 national tax hike on tobacco,
which raised the federal excise tax per
pack of cigarettes from $0.39 to $1.01, is
expected to encourage over one million
smokers nationwide to quit. Even though
this 159.0% spike in cigarette taxes has
moderately reduced per capita cigarette
consumption, according to 2013 figures
from the Centers for Disease Control and
Prevention, it has yet to have a
significantly negative effect on either the
Tobacco Manufacturing or Wholesaling
(IBISWorld report 42494) industries’
sales performance. Although total

Technology & Systems The United States is at the forefront of
developing tobacco manufacturing
technology. Improved manufacturing
processes such as the use of computers to
track production runs and monitor the
moisture content of products have
boosted production efficiencies while
improving product quality. These
developments have allowed industry
operators to rely more on machines and
less on manual labor, which has
decreased wage costs for producers.

In response to rising regulatory
scrutiny and excise tax rates on
conventional tobacco products (i.e.
cigarettes), US producers have also
focused on developing alternative
tobacco products such as electronic
cigarettes (e-cigarettes, snus and other

dissolvables. For example, e-cigarettes
were first invented and produced in
2003 by a Chinese pharmacist and are
now one of the fastest growing product
segments in this industry. E-cigarettes
are battery-powered devices that
simulate tobacco smoking by vaporizing
a liquid solution. Although claims that
e-cigarettes are less harmful alternatives
to conventional cigarettes remain
unsubstantiated, the leading tobacco
producers, including Altria Group and
Reynolds, have already entered this
market. More recently, Philip Morris
USA (Altria Group) announced a
partnership with its global counterpart
Philip Morris International to jointly
develop and market e-vapor products in
the United States.

Capital Intensity
continued

operations at their production facilities
by reducing headcount. Overall, wages as
a share of industry revenue have reached
a low of 2.2% in 2016. Increasing
compliance costs due to an increasingly
stringent regulatory environment, along

with higher excise taxes, will likely force
operators to further cut production labor
costs in upcoming years. Consequently,
IBISWorld anticipates this industry’s
level of capital intensity to continue
rising over the next five-year period.

Level
The level of
Technology Change
is Medium

Level
The level of
Volatility is Medium

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Operating Conditions

Regulation & Policy In terms of compliance costs as a share of
annual revenue, the Cigarette and
Tobacco Manufacturing industry is the
most heavily regulated industry in the
United States. Tobacco companies face
intense regulation from a variety of
federal, state and local governments, as
well as scrutiny from several public and
private anti-tobacco advocacy
organizations. The following sections
briefly describe the regulatory

organizations, laws or events that have
been most relevant to the industry’s
performance over the past five years.

Family Smoking Prevention
and Tobacco Control Act
In 2009, the US Congress approved
legislation that allows the Food and Drug
Administration (FDA) to regulate
cigarettes and other tobacco products in
the United States. Known as the Family

Revenue Volatility
continued

shipments of cigarettes have fallen
steadily over the past five years, tobacco
manufacturers have been able to offset
this decline by increasing the per-unit
price of their products or by focusing
their marketing resources on alternative
tobacco products, such as smokeless
tobacco or e-cigarettes, which continue to
face less regulatory scrutiny than regular
cigarettes despite the recent FDA ruling
on novel tobacco products.

While the addictive quality of nicotine
shields tobacco manufacturers from
drastic declines in demand, rising excise
taxes on cigarettes and higher product
prices continue to reduce demand for
cigarettes, albeit slowly. Growing health
concerns and awareness of the health

consequences of smoking tobacco
products has also placed downward
pressure on demand for industry
products. On the other hand, the
continued innovation of noncigarette
tobacco products such as e-cigarettes
and smokeless tobacco is likely to help
the Cigarette and Tobacco
Manufacturing industry endure in spite
of an increasingly unfavorable
regulatory environment and growing
social stigma against tobacco use.
Consequently, IBISWorld expects this
industry’s level of revenue volatility to
remain low during the five years to 2021,
with continued declines in consumption
and production volume partly offset by
higher per-unit prices.

SOURCE: WWW.IBISWORLD.COM

Volatility vs Growth

Re
ve

nu
e

vo
la

ti
lit

y*
(%

)
1000
100
10
1
0.1

Five-year annualized revenue growth (%)
–30 –10 10 30 50 70

Hazardous

Stagnant

Rollercoaster

Blue Chip

* Axis is in logarithmic scale

A higher level of revenue
volatility implies greater
industry risk. Volatility can
negatively affect long-term
strategic decisions, such as
the time frame for capital
investment.

When a fi rm makes poor
investment decisions it
may face underutilized
capacity if demand
suddenly falls, or capacity
constraints if it rises
quickly.

Cigarette & Tobacco
Manufacturing

Level & Trend
The level of
Regulation is Heavy
and the trend
is Increasing

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Operating Conditions

Regulation & Policy
continued

Smoking Prevention and Tobacco
Control Act, the law bans flavored
cigarettes (excluding menthol
cigarettes), which appeal to younger
people. The FDA also announced plans
to place graphic warnings on cigarette
packages and banned the use of the
term “light” to describe cigarettes
because it can be misleading.
Additionally, the administration now
requires all retailers to sell cigarettes
only through direct, face-to-face
transactions with proof of
identification, thereby making online
cigarette stores a gray market. Later in
April 2014, the FDA proposed further
regulations that would extend its
authority to cover all products that
contain tobacco, including e-cigarettes
and dissolvables; these rulings were
ratified in early 2016.

Alcohol and Tobacco Tax
and Trade Bureau
The US Alcohol and Tobacco Tax and
Trade Bureau (TTB) operates under the
Department of the Treasury and was
established in 2002 under the Homeland
Security Act. The bureau reviews
applications for permits to manufacture
tobacco products, import tobacco products
and operate tobacco export warehouses. In
order to qualify for a permit, an applicant’s
tobacco products must pass a product
analysis conducted by TTB authorities.
Additionally, the TTB ensures that industry
operators comply with tax and trade
regulations. The TTB also investigates
illegal tobacco product trafficking.

Under federal regulations, permits
or bonds are required for any person
who manufactures cigarettes, cigars,
chewing tobacco, snuff, pipe tobacco
and rolling tobacco. Permits are also
needed to manufacture cigarette
papers or tubes. These categories
exclude manufacturing for individual
consumption or use. Any person who
imports tobacco products as a business

or operates an export warehouse for
tobacco products also needs permits.

Labeling and marketing
The Federal Trade Commission enforces the
Federal Comprehensive Smoking Education
Act (1984) and the Federal Comprehensive
Smokeless Tobacco Health Education Act
(1986). These acts require certain warning
labels to be placed on cigarette packages and
smokeless tobacco packages. Under these
acts, manufacturers and importers must
also provide a list of additives used in each
product. In 2001, the Federal Trade
Commission mandated cigar packages to
carry similar warnings. Furthermore, in
2010, the FDA passed the Family Smoking
Prevention and Tobacco Control Act, which
requires larger and more visible warnings
on smokeless tobacco packages and
advertisements. Under the same act,
manufacturers are prohibited from using
the terms “light,” “low” and “mild” as
descriptors for tobacco products, regardless
of the cigarette product’s tar level.

Master Settlement Agreement
The 1998 Tobacco Master Settlement
Agreement (MSA) requires the four
leading tobacco manufacturers to make
annual payments to 46 states for the
recovery of tobacco-related healthcare
costs. In return, the tobacco industry is
indemnified from individual tobacco-
related cases originating from any of the
46 signatory states. Present-day industry
operators that were signatories to this
settlement include Phillip Morris (Altria
Group), Reynolds American Inc. (RAI)
and Lorillard (prior to its merger with
RAI). The fourth party, Brown &
Williamson Tobacco Corporation, was
acquired by RAI in 2004.

These settlement payments change
from year to year based on inflation, sales
volume of cigarettes and each company’s
market share. Annual payments began at
$4.5 billion in 2000 and must total a
minimum of $206.0 billion by 2025. The

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Operating Conditions

Industry Assistance The US government imposes import
quotas and tariffs on tobacco, which
reduce the level of competition that
industry operators face from imported
products. Aside from direct assistance
from the government, producers also
receive limited assistance from a number
of trade organizations suchas the
Tobacco Merchants Association, Tobacco
International, Friends of Tobacco and the
Tobacco Vapor Electronic Cigarette
Association (TVECA).

Tariffs
Tariff rates charged for industry products
depend on a number of factors including

the type of tobacco product, size and
ingredients. For example, cigarettes
containing tobacco and clove incur a
tariff of 41.7 cents per kilogram and an
additional 0.9%. However, cigars
containing tobacco that are valued at less
than $0.15 incur a tariff of $1.89 per
kilogram and an additional 4.7%. Finally,
smoking tobacco, whether it contains
tobacco or tobacco substitutes in any
proportion, which are sold to the end
consumer in the identical form and
package in which it was imported, incurs
a tariff of about $0.33 cents per kilogram.
Overall, these tariffs have helped keep
industry imports low, with imports

Regulation & Policy
continued

agreement also places certain regulations
on these companies. For example, cartoons
cannot be used in advertising or packaging,
and there are bans on certain outdoor
advertising to avoid the exposure of
advertisements to youth. The proceeds of
these settlement payments have been used
to fund anti-tobacco advocacy groups and
campaigns such as the American Legacy
Foundation’s Truth campaign, which aims
to reduce youth smoking. The MSA also
forced the dissolution of three significant
pro-tobacco institutions: The Tobacco
Institute, Council for Tobacco Research
and the Center for Indoor Air Research.

The Engle progeny cases
The Engle progeny lawsuits refer to the
aftermath of the verdict in the Engle vs.
Liggett case, in which the jury sought $145.0
billion in damages associated with tobacco
use in Florida, which is not a signatory state
to the MSA. The tobacco industry appealed
several times and the Supreme Court of
Florida eventually dismissed the lump-sum
verdict in 2006, ruling that individuals
represented in the suit did not meet the
criteria for class action but could seek claims
against the tobacco companies individually.
According to RAI, there are currently over

3,100 cases pending in federal and state
courts by over 4,100 individuals, though 415
of these cases were settled in 2015.
Nonetheless, these cases have and will
continue to present significant litigation
costs for industry operators.

Other regulations
Smoking is banned on all US flights and
locations that provide federally funded
services to children. While these
regulations do not directly affect
operators in the Cigarette and Tobacco
Manufacturing industry, they may reduce
the frequency of smoking while traveling.
Moreover, most states have enacted laws
that ban smoking in public areas such as
restaurants and workplaces while an
increasing number of states or
municipalities are placing further
restrictions on smoking. In mid-2014, for
example, New York City was the first
major city to raise the minimum age to
buy tobacco products from 18 to 21. More
recently, the state of California and
Hawaii have also raised the minimum
age to 21. As of mid-2016, over 170 cities
in over 13 states had drafted legislation
that prohibits sale of tobacco products to
adults under the age of 21.

Level & Trend
The level of Industry
Assistance is
Medium and the
trend is Decreasing

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Operating Conditions

Industry Assistance
continued

estimated to satisfy only 3.0% of
domestic demand for tobacco products
in 2016.

Industry associations
Cigarette and tobacco product
manufacturers also receive some
assistance, albeit very limited, from
independent industry associations. The
Tobacco Merchants Association (TMA)
is a global organization comprised of 138
companies and supporting
organizations. TMA provides
information that pertain to the industry
as well as forums for dialogue on issues
including declining industry revenue,
public sentiment towards the industry
and government regulations. Running
since 1886, Tobacco International is a
trade journal with regular coverage of
the industry’s growing, curing and
wrapping activities. Other relevant trade
associations include the Tobacco Vapor

Electronic Cigarette Association
(TVECA) and the Smoke-Free
Alternatives Trade Association.

The industry currently receives much
less assistance from outside
organizations and institutions than it
has historically. The Master Settlement
Agreement (MSA), reached in 1998
between the top four tobacco product
manufacturers and the attorneys general
of 46 states, disbanded several tobacco
interest groups with historical
significance, including the Tobacco
Institute, Council for Tobacco Research
and Center for Indoor Air Research.
More information about the practices of
these institutions prior to their
dissolution is available from the Legacy
Tobacco Documents Library, a digital
archive maintained by the American
Legacy Foundation (a nonprofit funded
partly by the MSA) and the University of
California, San Francisco (UCSF) Library.

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WWW.IBISWORLD.COM Cigarette & Tobacco Manufacturing in the US August 2016 45

Key Statistics
Revenue

($m)

Industry
Value Added

($m)
Establish-

ments Enterprises Employment
Exports

($m)
Imports

($m)
Wages
($m)

Domestic
Demand

Percentage
of smokers

(People)
2007 45,903.4 19,657.3 109 79 20,135 1,278.9 668.4 1,338.3 45,292.9 509.0
2008 41,945.1 19,496.1 101 71 18,797 920.4 704.3 1,233.7 41,729.0 540.2
2009 40,811.5 20,191.9 103 75 17,093 543.5 699.5 1,156 40,967.5 438.2
2010 42,975.8 19,127.9 119 94 14,096 498.2 734.8 1,031.2 43,212.4 366.3
2011 42,225.3 18,468.0 118 95 15,055 525.7 768.6 991.9 42,468.2 374.7
2012 42,376.1 18,773.4 114 93 14,599 508.9 854.1 962.1 42,721.3 423.1
2013 41,772.0 21,036.2 120 100 14,355 503.8 948.8 898.6 42,217.0 429.7
2014 38,061.3 18,496.8 132 114 13,981 435.8 992.6 820.9 38,618.1 464.6
2015 38,005.9 20,041.1 156 139 13,923 429.1 1,119.1 817.4 38,695.9 460.9
2016 37,553.9 20,909.9 162 144 13,827 422.7 1,165.2 808.0 38,296.4 478.1
2017 36,706.6 20,357.1 162 144 13,415 401.7 1,191.5 790.5 37,496.4 497.2
2018 35,900.2 20,018.1 160 141 13,087 381.8 1,221.6 778.1 36,740.0 512.6
2019 35,064.9 19,811.7 156 138 12,656 362.5 1,249.9 737.4 35,952.3 534.1
2020 34,225.0 19,711.2 151 133 12,099 343.9 1,277.8 732.6 35,158.9 551.8
2021 33,320.3 19,353.6 146 127 11,634 325.5 1,303 716.1 34,297.8 567.9
Sector Rank 49/200 13/200 179/200 172/200 158/200 164/188 150/188 156/200 60/188 N/A
Economy Rank 301/1556 160/1556 1267/1556 1225/1556 973/1556 285/525 225/524 909/1556 73/524 N/A

IVA/

Revenue
(%)

Imports/
Demand

(%)

Exports/
Revenue

(%)

Revenue per
Employee

($’000)
Wages/Revenue

(%)
Employees

per Est.
Average Wage

($)

Share of the
Economy

(%)
2007 42.82 1.48 2.79 2,279.78 2.92 184.72 66,466.35 0.13
2008 46.48 1.69 2.19 2,231.48 2.94 186.11 65,632.81 0.13
2009 49.48 1.71 1.33 2,387.61 2.83 165.95 67,630.02 0.14
2010 44.51 1.70 1.16 3,048.79 2.40 118.45 73,155.51 0.13
2011 43.74 1.81 1.24 2,804.74 2.35 127.58 65,885.09 0.12
2012 44.30 2.00 1.20 2,902.67 2.27 128.06 65,901.77 0.12
2013 50.36 2.25 1.21 2,909.93 2.15 119.63 62,598.40 0.13
2014 48.60 2.57 1.14 2,722.36 2.16 105.92 58,715.40 0.12
2015 52.73 2.89 1.13 2,729.72 2.15 89.25 58,708.61 0.12
2016 55.68 3.04 1.13 2,715.98 2.15 85.35 58,436.39 0.13
2017 55.46 3.18 1.09 2,736.24 2.15 82.81 58,926.57 0.12
2018 55.76 3.32 1.06 2,743.20 2.17 81.79 59,455.95 0.11
2019 56.50 3.48 1.03 2,770.61 2.10 81.13 58,264.85 0.11
2020 57.59 3.63 1.00 2,828.75 2.14 80.13 60,550.46 0.11
2021 58.08 3.80 0.98 2,864.05 2.15 79.68 61,552.35 0.10
Sector Rank 2/200 174/188 183/188 3/200 198/200 43/200 82/200 13/200
Economy Rank 199/1556 464/524 506/525 24/1556 1536/1556 129/1556 573/1556 160/1556

Figures are in inflation-adjusted 2016 dollars. Rank refers to 2016 data.

Revenue
(%)
Industry
Value Added
(%)

Establish-
ments

(%)
Enterprises

(%)
Employment

(%)
Exports

(%)
Imports

(%)
Wages

(%)

Domestic
Demand

(%)
Percentage
of smokers

(%)
2008 -8.6 -0.8 -7.3 -10.1 -6.6 -28.0 5.4 -7.8 -7.9 6.1
2009 -2.7 3.6 2.0 5.6 -9.1 -40.9 -0.7 -6.3 -1.8 -18.9
2010 5.3 -5.3 15.5 25.3 -17.5 -8.3 5.0 -10.8 5.5 -16.4
2011 -1.7 -3.4 -0.8 1.1 6.8 5.5 4.6 -3.8 -1.7 2.3
2012 0.4 1.7 -3.4 -2.1 -3.0 -3.2 11.1 -3.0 0.6 12.9
2013 -1.4 12.1 5.3 7.5 -1.7 -1.0 11.1 -6.6 -1.2 1.6
2014 -8.9 -12.1 10.0 14.0 -2.6 -13.5 4.6 -8.6 -8.5 8.1
2015 -0.1 8.3 18.2 21.9 -0.4 -1.5 12.7 -0.4 0.2 -0.8
2016 -1.2 4.3 3.8 3.6 -0.7 -1.5 4.1 -1.2 -1.0 3.7
2017 -2.3 -2.6 0.0 0.0 -3.0 -5.0 2.3 -2.2 -2.1 4.0
2018 -2.2 -1.7 -1.2 -2.1 -2.4 -5.0 2.5 -1.6 -2.0 3.1
2019 -2.3 -1.0 -2.5 -2.1 -3.3 -5.1 2.3 -5.2 -2.1 4.2
2020 -2.4 -0.5 -3.2 -3.6 -4.4 -5.1 2.2 -0.7 -2.2 3.3
2021 -2.6 -1.8 -3.3 -4.5 -3.8 -5.4 2.0 -2.3 -2.4 2.9
Sector Rank 152/200 24/200 15/200 14/200 120/200 96/188 76/188 135/200 153/188 N/A
Economy Rank 1394/1556 413/1556 255/1556 267/1556 1268/1556 339/525 252/524 1343/1556 449/524 N/A

Annual Change
Key Ratios
Industry Data
SOURCE: WWW.IBISWORLD.COM
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WWW.IBISWORLD.COM Cigarette & Tobacco Manufacturing in the US August 2016 46

Jargon & Glossary

BARRIERS TO ENTRY High barriers to entry mean that
new companies struggle to enter an industry, while low
barriers mean it is easy for new companies to enter an
industry.

CAPITAL INTENSITY Compares the amount of money
spent on capital (plant, machinery and equipment) with
that spent on labor. IBISWorld uses the ratio of
depreciation to wages as a proxy for capital intensity.
High capital intensity is more than $0.333 of capital to
$1 of labor; medium is $0.125 to $0.333 of capital to $1
of labor; low is less than $0.125 of capital for every $1 of
labor.

CONSTANT PRICES The dollar figures in the Key
Statistics table, including forecasts, are adjusted for
inflation using the current year (i.e. year published) as
the base year. This removes the impact of changes in
the purchasing power of the dollar, leaving only the
“real” growth or decline in industry metrics. The inflation
adjustments in IBISWorld’s reports are made using the
US Bureau of Economic Analysis’ implicit GDP price
deflator.

DOMESTIC DEMAND Spending on industry goods and
services within the United States, regardless of their
country of origin. It is derived by adding imports to
industry revenue, and then subtracting exports.

EMPLOYMENT The number of permanent, part-time,
temporary and seasonal employees, working proprietors,
partners, managers and executives within the industry.

ENTERPRISE A division that is separately managed
and keeps management accounts. Each enterprise
consists of one or more establishments that are under
common ownership or control.

ESTABLISHMENT The smallest type of accounting unit
within an enterprise, an establishment is a single
physical location where business is conducted or where
services or industrial operations are performed. Multiple
establishments under common control make up an
enterprise.

EXPORTS Total value of industry goods and services sold
by US companies to customers abroad.

IMPORTS Total value of industry goods and services
brought in from foreign countries to be sold in the
United States.

INDUSTRY CONCENTRATION An indicator of the
dominance of the top four players in an industry.
Concentration is considered high if the top players
account for more than 70% of industry revenue.
Medium is 40% to 70% of industry revenue. Low is less
than 40%.

INDUSTRY REVENUE The total sales of industry goods
and services (exclusive of excise and sales tax); subsidies
on production; all other operating income from outside
the firm (such as commission income, repair and service
income, and rent, leasing and hiring income); and
capital work done by rental or lease. Receipts from
interest royalties, dividends and the sale of fixed
tangible assets are excluded.

INDUSTRY VALUE ADDED (IVA) The market value of
goods and services produced by the industry minus the
cost of goods and services used in production. IVA is
also described as the industry’s contribution to GDP, or
profit plus wages and depreciation.

INTERNATIONAL TRADE The level of international
trade is determined by ratios of exports to revenue and
imports to domestic demand. For exports/revenue: low is
less than 5%, medium is 5% to 20%, and high is more
than 20%. Imports/domestic demand: low is less than
5%, medium is 5% to 35%, and high is more than 35%.

LIFE CYCLE All industries go through periods of growth,
maturity and decline. IBISWorld determines an
industry’s life cycle by considering its growth rate
(measured by IVA) compared with GDP; the growth rate
of the number of establishments; the amount of change
the industry’s products are undergoing; the rate of
technological change; and the level of customer
acceptance of industry products and services.

NONEMPLOYING ESTABLISHMENT Businesses with
no paid employment or payroll, also known as
nonemployers. These are mostly set up by self-employed
individuals.

Industry Jargon

IBISWorld Glossary

CIGARILLO A small and narrow cigar that is often
wrapped in leaf tobacco (not paper)

CURING The process of regulating temperature and
humidity conditions for freshly harvested tobacco
leaves.

E-VAPOR A broad category of electronic nicotine
delivery systems (ENDS) that includes e-cigarettes,
larger vaporizers and their accessories.

ELECTRONIC CIGARETTE Electronic cigarette is a
battery-powered device that contains a nicotine-based
liquid that is vaporized and inhaled, simulating the
experience of smoking a traditional cigarette.

MENTHOL A chemical derived from the peppermint or
spearmint plants. Menthol naturally has a cooling effect,
which can help reduce the harshness of tobacco smoke.

RECONSTITUTED TOBACCO Tobacco made from the
pulp of mashed tobacco stems and other parts of the
tobacco leaf that would otherwise be waste that are
then sprayed with nicotine and other substances lost
during processing.

SNUS A type of moist powder tobacco consumed by
placing it under the lip for extended periods of time.

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WWW.IBISWORLD.COM Cigarette & Tobacco Manufacturing in the US August 2016 47

Jargon & Glossary

PROFIT IBISWorld uses earnings before interest and tax
(EBIT) as an indicator of a company’s profitability. It is
calculated as revenue minus expenses, excluding interest
and tax.

VOLATILITY The level of volatility is determined by
averaging the absolute change in revenue in each of the
past five years. Volatility levels: very high is more than
±20%; high volatility is ±10% to ±20%; moderate
volatility is ±3% to ±10%; and low volatility is less than
±3%.

WAGES The gross total wages and salaries of all
employees in the industry. The cost of benefits is also
included in this figure.

IBISWorld Glossary
continued

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Disclaimer

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Economics 4597.01, Issues of the Underground Economy

William J. White

Spring, 2018

Second Homework Assignment

Suppose that your group decide to put what you are learning in this class to use in an UG economy enterprise – specifically the commercial smuggling of cigarettes from low tax states to high tax states. Your task is to identify the key opportunities and risks in establishing and operating this enterprise. I have uploaded an industry study and a couple of PDF pages that detail excise taxes by state as well as the leading tobacco growing states in the US.

You may also want to consult one of the studies done by the Mackinac Center for Public Policy, most recent study report can be found at: http://www.mackinac.org/20900.

I would like your group to outline a possible business strategy for cigarette smuggling, focusing on the two questions How? and Where? Be sure to discuss your sourcing strategy – from which states and suppliers would you obtain the cigarettes?; your distribution and marketing strategy – in which states would you sell and how would you get the product there?; and your sales strategy – what firms or individuals would you need to involve to sell your product? In addition, please comment on the ways in which you would hope to avoid detection, arrest, and prosecution by the FBI, local police, and other government agents.

Finally, without doing a great deal of additional research (or more likely – Wikipedia surfing), do you believe the same opportunities would be available in smuggling liquor from one state to another? What logistical features of this new ‘opportunity’ might make it more difficult or less profitable than cigarette smuggling?

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