NCPA - National Center for Policy Analysis

Little Tobacco Discounters Blossom

May 1, 2001

The tobacco settlement of 1998 has had unintended consequences. It has spawned a host of tiny cigarette-making factories across the country.

One of the goals of the anti-tobacco lobbies had been to force big cigarette companies to raise their prices and, thus, discourage smoking. But some of the new small companies sell their brands for as little as $1 a pack -- below price levels existing before the settlement. The average retail price for big-name brands is more than $3 a pack.

  • The small companies have grabbed nearly 4 percent of the U.S. retail cigarette market -- up from just 1 percent in 1997.
  • In another twist, the rise in small-company sales has already triggered provisions of the 1998 settlement that reduced payments the states receive from the major manufacturers -- by amounts that could reach into the billions.
  • So while the new competition is taking revenue away from the major manufacturers, the potential savings on payments to the states cushions their bottom line.
  • The little companies typically don't advertise, have low overhead, and are too small and haven't been around long enough to attract smoking-related lawsuits.

Tobacco foes say they simply failed to anticipate the magnitude of the surge in discount competition. "It didn't occur to us" that newcomers could gain as much market share as they have, says Washington state Attorney General Christine Gregoire, who helped draft the settlement. "It was a surprise to me that it really doesn't take a lot of capital to start a cigarette company."

Source: Gordon Fairclough, "Tobacco Deal Has Unintended Effect: New Discount Smokes," Wall Street Journal, May 1, 2001.

For text (WSJ subscribers)

http://online.wsj.com/articles/SB98866421916518664.htm

 

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