Tobacco, agreements and concentration of actors

Since the 1990s, the number of players in the tobacco industry has been significantly reduced due to multiple takeovers, leading to a concentration of the sector on a few major operators. In principle competitors, tobacco multinationals are nevertheless increasing the number of agreements to share certain brands on the international market.

The global tobacco products market was estimated at US$782 billion (€719 billion) in 2021[1]. Overall declining for several decades, sales of tobacco products stabilized in 2020 and appear to be increasing again, in value and volume, since 2021.[2].

The number of players in this market has significantly reduced over the past forty years, and is now concentrated mainly among a few multinationals.

An old tendency towards concentration

This concentration phenomenon took place in several stages. It began in the United States in the 1880s when, under the effect of the mechanization of manufacturing processes and the expansion of the cigarette market, hundreds of small producers were quickly absorbed by five large companies which, in 1889, controlled 90 % of this market. They merged in 1890 to form the American Tobacco Company, chaired by James B. Duke, which would dominate the US market and multiply acquisitions until 1911, when the Sherman Act antitrust law was applied to the tobacco industry to stem the concentration of this sector.[3].

The industrial players resulting from this dismantling (Philip Morris, RJ Reynolds, Lorillard, American Tobacco, etc.) have persisted on the US market and have gradually become internationalized over the decades, like those in certain other countries (Imperial in the United Kingdom, Japan Tobacco in Japan). They have also diversified their activity by investing in other sectors (beverages, agri-food, leisure, clothing, etc.) and generally by proceeding through company acquisitions.

The phenomenon of concentration is not limited to the United States, since Imperial Tobacco appeared in the United Kingdom in 1901, when several British tobacco companies merged to face American competition. This competition did not, however, prevent partnerships, since in 1902, Imperial Tobacco and American Tobacco co-founded British American Tobacco (BAT), taking care to share out the markets and limit competition.[4].

Free trade and serial takeovers

During the 1980s, these few transnational companies began to interfere in markets that had previously eluded them. With the fall of the USSR and the liberalization of the economies of Eastern European countries, these markets opened up to foreign investors and Western tobacco brands gradually entered these countries. The establishment on the Japanese market, during the 1980s and 1990s, is itself a textbook case: it initially relied on a concerted strategy by cigarette manufacturers to push the government to open the Japanese market (1982-1987), before establishing itself on this market in a few years (1985-1966) by playing the advertising and promotional card (product placement in films, etc.)[5]China, whose monopoly was long kept intact, had to concede a timid opening of its tobacco market after joining the World Trade Organization (WTO) in 2001.[6].

During the 1990s and 2000s, tobacco multinationals were among the first companies to use free trade agreements to establish themselves in new markets. Their establishment in new countries was often achieved by buying up local cigarette brands and providing them with the communication power of their new parent company.[7]. Brand and company acquisitions have particularly accelerated between 1998 – following the agreement (Master Settlement Agreement/MSA) concluded between the US justice system and four tobacco majors – and the end of the 2000s. Three of these four majors (Philip Morris, RJ Reynolds, Brown & Williamson) then decided to separate their national and international activities in order to shield the latter from US justice, particularly in terms of business secrets. A provision of the MSA in fact requires tobacco manufacturers to publish their internal documents online in the event of a conviction.

The 1990s and 2000s were also marked by the privatization of many still existing state monopolies, most of the time to the benefit of tobacco multinationals. This was the case, for example, of SEITA in 1995, followed by its merger in 1999 with the Spanish monopoly Tabacalera, also privatized, to become Altadis, and finally to be bought by the British group Imperial Tobacco in 2008, which had already, in 2002, acquired the German group Reemtsma.

Consolidations continued throughout the 2000s and 2010s, however. JTI acquired the British group Gallaher in 2007 and the Natural American Spirit brand in 2015 (outside the United States). After purchasing Rothmans in 1999, British American Tobacco bought the Brazilian cigarette maker Souza Cruz in 2015 and in 2017 the remaining shares of RJ Reynolds that the British company did not yet hold, for the sum of $49.4 billion, thus making its return to American soil. RJ Reynolds having acquired Lorillard in 2014 for $25 billion, the latter also falls into the hands of BAT. It should be noted that this last acquisition could only be completed on the condition that Lorillard sell its Winston, Salem and Kool cigarette brands, which were purchased by Imperial Tobacco, which has since become Imperial Brands.

One theory has suggested that the concentration effect of the tobacco sector has been reinforced since 2001, mainly in low- and middle-income countries, by restrictions on tobacco advertising, which would disadvantage small manufacturers and put them at the mercy of multinationals.[8]. This theory, however, overlooks the fact that the massive use of advertising has generally been one of the main sources of development of the tobacco industry in most of its new markets. The financial crisis of 2008 highlighted that the dynamics of the tobacco industry can be independent of overall economic growth: while most companies saw their activity shrink, tobacco multinationals increased their stock market value.[9].

As in other sectors, profits and stock market valuation are the main concerns of tobacco multinationals, with a view to reassuring their investors and attracting new ones. Under the effect of public health policies, the decrease in overall tobacco consumption has weakened this sector, leading tobacco manufacturers to focus on high-growth products, as well as on acquisitions of competing companies. The concentration of the tobacco sector can therefore also be explained by the desire to attract the attention of shareholders through growth in turnover. The acquisition of companies allows the majors to achieve their growth objectives, despite a slowdown in cigarette sales: through productivity increases achieved using economies of scale that such acquisitions or mergers bring, through the cumulative expansion of markets, and finally through the simple mechanism of external growth, with the turnover of the acquired companies being added to that of the acquirer.

This focus on the value of groups translates into a certain economic pragmatism, where commercial interest takes precedence over any other consideration, whether ethics, politics or partnerships already in place. After having bought General Foods in 1985 and Kraft Foods in 1988, then merged these two companies in 1990, Philip Morris thus separated itself without any qualms from this group in 2007. For its part, RJ Reynolds merged with the Nabisco group in 1985 before separating itself from it in 1999 and selling it in 2000 to Philip Morris, which merged it with Kraft Foods.

New products, new acquisitions

From 2010 to today, the policy of corporate buyouts by cigarette companies has continued[10] and has expanded into other industries, particularly healthcare and cannabis/CBD[11]. Faced with the gradual erosion of the tobacco products market, manufacturers have shown a desire to diversify their activities by investing massively in other sectors. Sidelined by international bodies due to the WHO Framework Convention on Tobacco Control (FCTC), they are also taking advantage of this diversification to try to rehabilitate their image and be reintegrated into political decision-making processes. This strategy also allows them to reaffirm the presence on the markets of their combustible products, which continue to constitute their main source of income.

This trend was first expressed by the acquisition of nascent e-cigarette operators. Altria bought a third of Juul Labs shares at great expense in 2018, before selling them at a loss in 2022 as public legal proceedings were filed against Juul.

Other tobacco and nicotine products have also been included in this diversification policy. Snus (tobacco pouches) were introduced to the US market in the 1990s by Altria, under the Skoal Bandit brand. The oral tobacco segment, which was for a long time very localized in Sweden, Norway and the United States, experienced a rebound in the 2010s with the appearance of "pouches" (nicotine pouches resembling snus and often confused with it). In this market dominated by Swedish Match, BAT gradually established itself by launching the Lyft and then Velo brands in 2018. Philip Morris International (PMI) only entered this market late, by acquiring Swedish Match, the world leader in snus, in 2022. Gums (gummies) and nicotine lozenges, already in circulation in the United States, are among the next products that should be distributed in Europe.

This race for innovation gives rise to an escalation in terms of patent filings, which is accompanied by numerous disputes demanding the cancellation of competitors' patents.[12]. BAT has sued PMI over heated tobacco mini-cigarettes, while Reynolds has sued PMI and Altria for copying Vuse e-cigarettes. Oral nicotine products are also giving rise to legal battles.

A sector concentrated on a handful of operators

The concentration phenomenon in the tobacco industry is therefore old and continues today. With the cigarette market having reached maturity in most high-income countries, growth opportunities have long been limited to acquiring competing companies. This is notably what led Japan Tobaco Inc. (JTI) to acquire Gallaher in 2007, while Imperial Brands bought Altadis the following year.

In countries where this industry is highly regulated, however, the conditions for market entry are so restrictive, particularly due to the very strong loyalty of customers to established brands, that they prevent the emergence of new entrants.[13]The reduction in the possibilities of competition through acquisition has thus contributed to directing the offensive attitude of the tobacco majors towards other sectors of activity.

Since 2000, seven transnational companies have dominated and shared the tobacco market: PMI, Altria, BAT, JTI, Imperial Brands and ITC Ltd., to which the China National Tobacco Corporation (CNTC) has more recently joined, having only recently overtaken the Chinese market. The ranking of these companies may, however, differ depending on the search criteria: it is different depending on whether one takes into account the volumes of tobacco produced or sold, turnover, market capitalization or market share.

In terms of sales volumes, the ranking obtained places CNTC in first position. Although mainly focused on the Chinese market, CNTC accounts for nearly half of cigarette sales worldwide. Rapidly evolving, CNTC has been aggressively expanding abroad since 2019 and the establishment of its subsidiary China Tobacco International (CTI)[14]. PMI, which has long dominated the international market, was overtaken by BAT in 2021 in terms of sales volumes.

Top 10 Tobacco Companies in the World by Sales, 2021

1. China National Tobacco Corporation
2. British American Tobacco plc (BAT) Ltd. / Reynolds American Inc.
3. Philip Morris International Inc.
4. Japan Tobacco Inc.
5. Imperial Brands PLC
6. Altria Group Inc.
7. PT Suryaduta Investama (Indonesia)
8. ITC Limited
9. Eastern Co SAE (Egypt)
10. Vietnam National Tobacco Corp (Vietnam)

Source: Global Data, Top 10 Tobacco Companies in the World in 2021 by Sales.

This ranking is slightly different when we take into account turnover. The CNTC, a state company whose accounts are not published, does not appear in this ranking. BAT then comes in first place, ahead of PMI, Altria and JTI. Since PMI's "non-combustible" products mainly consist of IQOS heated tobacco, we can see how profitable the marketing of this type of device can be.

 

Financial results of tobacco companies by revenue, 2021

 

In millions of US dollars. 12-month figures as of December 31, 2021, excluding Imperial Brands (12 months as of September 30, 2021).

Source: Company annual and quarterly reports, Tobacco Company Reports For Full Year 2021 Demonstrates Inconsistent Progress, Foundation for a Smoke-free World, published April 13, 2022, accessed April 20, 2023.

*Excludes 35%'s stake in Juul.

**Does not include JTI's non-combustible products sold outside the Japanese market.

 

A third ranking can also be made by taking into account market capitalization. This ranking also does not include the CNTC, which is not listed on the stock exchange. It then shows PMI in first position, far ahead of its competitors and followed by its historical partner Altria. A clear gap separates the first six operators from the other companies in the sector. Imperial Brands' lower market capitalization places it in a weak position vis-à-vis its competitors, who could be tempted to absorb it to boost their growth.[15].

 

Ranking of tobacco companies by market capitalization

* in billions of US dollars (except 1Q5Q18 and 1Q5Q19, in millions of US dollars), figures as of 04/14/23. Source: Companies Market Cap, Largest tobacco companies market cap.

 

Finally, when we examine the market shares held, the CNTC reappears in the leading position (45.3 % of the world market), with the tobacco multinationals sharing the remaining majority (36.6 %)[16]The world's top six tobacco companies alone share nearly 82,133 million of the market.

Estimated Global Market Share Percentage, 2018 (%)

*Altria is, in the United States, the separate branch of Philip Morris.

Source: IBISWorld Pty Ltd

 

Agreements between cigarette manufacturers

Although fair competition is in principle required for any commercial activity, the tobacco sector is distinguished by a strong tendency towards collusion and collaboration between the main players. These practices not only make it possible to maintain aligned sales prices between the different brands, but also to share market shares according to the countries, and thus limit the effect of competition. This consultation between manufacturers also encourages coordinated action to counter the various public health measures (standardized neutral packaging, ban on flavors, etc.) that harm their interests.[17].

The legal proceedings that tobacco companies faced in the United States in the 1990s, with the obligation to provide their internal documents to the courts, temporarily produced a market redistribution effect among the majors operating in the United States. These proceedings were concluded in 1998 with the Tobacco Master Settlement Agreement between four US majors, Philip Morris, RJ Reynolds, Brown & Williamsons (a subsidiary of BAT), and Lorillard, and 46 US states, with the tobacco companies paying compensation of 206 billion dollars.

Probably in an effort to shield their overseas operations from the reach of American justice, the companies involved split into two and severed ties with their non-American subsidiaries or parent companies. RJ Reynolds sold its international subsidiary, RJ Reynolds International, to Japan Tobacco in 1999, which renamed it Japan Tobacco International. In 2004, British American Tobacco spun off its U.S. subsidiary Brown & Williamson by merging with RJ Reynolds.

Philip Morris Companies Inc., the parent company of the Philip Morris group, changed its name to Altria in 2003. It then sold its stake in its food subsidiary, Kraft Foods, in 2007, and finally separated its international subsidiary, Philip Morris International, which became a separate company in 2008, with its headquarters still in the United States, while its operational headquarters are in Lausanne, Switzerland. This separation notably made it possible to divide the markets for Marlboro cigarettes, the world's best-selling brand, as well as those of other brands common to the two groups (L&M, Chesterfield, Merit).

Following these major maneuvers, tobacco companies with operations on U.S. soil no longer had any activity outside the United States: a "firewall" separated them from their former foreign subsidiaries.

Altria and PMI considered merging again in 2019 with a view to launching the heated tobacco brand IQOS in the United States, but this proposed merger was ultimately not completed so as not to harm PMI's interests.[18]Although partners, these two groups sometimes find themselves in competition on certain markets, such as heated tobacco: after having resold its rights to IQOS to PMI, Altria formed a partnership with JTI to market the Ploom device in the United States, a direct competitor of IQOS.[19].

Partnerships can sometimes concern part of the activity. Partners in the National Tobacco and Match Company of Mali (Sonotam), Imperial Brands provides financing for this group while BAT manages local production and then distributes the products throughout the Africa region[20].

The table below shows the major tobacco companies and their brand portfolios for tobacco and nicotine products. The highlighted brands make it possible to identify some of the partnerships formed between tobacco majors. However, this table is far from exhaustive and only includes the brands mentioned on their sites by the operators, who have much larger portfolios: PMI thus has 130 brands of different products, JTI displays 100 brands, while the CNTC has no fewer than 900. It is interesting to note that the brands of classic cigarettes displayed at the end of December 2022 on the PMI site have – with the exception of rare mentions[21] – almost disappeared from this site in April 2023, PMI today barely mentioning this activity while it still constitutes 70 % of its turnover.

Tobacco and nicotine products, distribution by operators and by markets

This table shows in particular that partnerships between majors are mainly formed in the different segments of traditional cigarettes, while the segments of electronic cigarettes, heated tobacco and oral products suggest more competition. However, Altria shows, through partnerships established on the one hand with PMI and on the other hand with JTI, that agreements are also possible in new markets, such as the highly competitive heated tobacco market.

Currently undergoing major changes, the tobacco and nicotine market is expected to see further developments. Although some tobacco multinationals, particularly PMI and BAT, claim to be moving away from traditional combustible cigarettes and promise “a world without smoke”, the analysis of their annual reports shows that these classic cigarettes still represent the bulk of their sales. This gap between the displayed discourse and real practices is also verified in terms of competition. The latter is in many cases distorted by agreements and partnerships that are encouraged by the concentration of the sector. The foreseeable decline of the market for classic cigarettes should, however, further accentuate the concentration of this industry between a few companies.

Keywords: concentration, competition, agreement, multinationals, tobacco majors

©Generation Without Tobacco

MF

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