6.2 Types of Sales PromotionsThere are many types of promotional.docx

6.2 Types of Sales Promotions
There are many types of promotional tactics that can be used by
businesses. Each of these tactics is associated with either
consumer promotions, which are directed to the final user, or
trade promotions, which are directed at retailers or wholesalers
instead of consumers. Table 6.2 shows a sampling of major
consumer sales promotions tactics and Table 6.3 shows main
trade promotions. Although many different types of promotional
activities are mentioned, only the main tactics will be discussed
in detail within the chapter.
Table 6.2 Types of consumer promotions
Type
Description
Example
Coupons
A document that can be exchanged for a discount off the price
of a product or service
On many websites, there are printable coupons that can be
redeemed online or in store.
Sampling
A free sample of the product is provided; this may be done at
point-of-sale, or it may be done through the Internet, mail,
attached to a product, or through an advertisement
A company representative cooks sausage at a local market and
gives out free samples to customers in the store.
Cash refunds or rebates
Return, reduction, or refund on the purchase price of a product
or service
Customers buying three boxes of cereal will receive a $2 refund
in the mail if they send a form and proof of purchase to the
manufacturer.
Cents-off
Tagging a product's package with a discount off the regular
price of the product which can be peeled off; many times two

products may be packaged together for the same effect
A person buying a razor may find an attached peel-off coupon
that gives 50 cents off the product.
Premiums
When consumers purchase a set amount of products, they
receive a gift.
Customers receive a free purse if they purchase branded
perfume.
Sweepstakes, games or contests
Sweepstakes are drawings of chance and are free to enter (no
purchase required); contests or games may not be free and
require skill or are based on both chance and skill.
Companies often hold sweepstakes to increase brand recognition
and sales.
Point-of-purchase (POP) display or point-of-sale (POS) display
Specialized sales promotions located in a retail store; they often
hold products and are found near the check-out location.
A store may set up POP display that holds batteries for a
specific brand.
Frequency or loyalty programs
Consumers are rewarded for frequently making purchases of a
business's products.
The airlines often use frequency programs, commonly referred
to as frequent flyer programs.
Free trials
Provides an opportunity for a customer to try a product before
buying.
A customer may receive a free subscription to a magazine for a
short period with the hope that the customer will become a
paying customer.
Warranties and guarantees
Warranties are assurances about a product or service and
guarantees are a promise that the product or service will
perform.
Some Craftsman hand tools (Sears) will be repaired or replaced
free of charge for the lifetime of the tool.

Tie-in promotions
A type of cross promotion in which two or more brands (or
companies) join to develop coupons, refunds, contests, rebates,
etc.
A video game and movie join forces to increase sales of both.
Cross promotions
One brand is used to advertise or promote another
noncompeting product, brand, or service.
A fast food chain promotes a children's movie by providing toys
from the movie in a kid's meal.
Business Outline For Smuggling Tobacco
Where (what states to smuggle from and to)
First we need to determine what states we should potentially
smuggle from and to. The top five states with lowest taxes on
cigarettes are Missouri, Virgina,Georgia, North Dakota, and
South Carolina (in that order). The top five states with highest
taxes rates are New York, Connecticut, Rhode Island,
Massachusetts, and Hawaii. If you include state, county and
local taxes the real price of cigarettes in chicago illinois and its
surrounding areas is the highest, followed by new york city. Our
business proposes that we smuggle cigarettes from St Patrick,
MO to Chicago, IL. This is a 5 hour drive and has a $5.99 tax
difference between the two areas (effective 2018). When
compared to a 4.5 hour drive from virginia to NYC and only
having a $5.55 tax difference. This is and 8% difference in
profit margin between the two areas and we believe would
justify the extra drive time that smuggling from Missouri
warrants.

How (Strategy/ Business model)
We believe that there are two possible methods when scaling
our smuggling business. The first would be working directly
with producers we do not believe that it is feasible to buy from
farmers and process our own raw tobacco and turn them into
cigarettes to to the high entry barriers (Capital Intensity) in the
industry. This would leave attempting to purchase the finished
product “under the table” from Major companies that are highly
regulated and dominated by 3 firms (Altria, reynolds, and
Imperial Brands). With Cigarettes being a highly inelastic
product the majority of the tax incidence falls on consumers,
and each company's net income has been growing. With the
combination of high regulation, increasing income, and the fact
that the tax burden is likely being passed onto consumers; we
see little incentive for any major cigarette companies to
cooperate with us in any sort of illegal activities. This leaves
the second method, buying from retailers in low taxes states and
selling in the underground market in high tax states. This
method requires no bribery or corruption of business officials to
implement. The entire risk falls solely on ourselves as well.
There will be minimal overhead cost relative to other models,
only requiring transportation and a means of distribution.
In order to execute our retail to distribution plan we would first
need to purchase a way to transport our inventory preferably a
utility van or some other inconspicuous vehicle to transport
large volumes of cigarettes. We plan to buy a reasonable
amount of cigarettes ( as to not raise suspicions) at multiple
retailers in missouri.After we transport our cargo to chicago we
will need to form a distribution network in order to our get
reach consumer. We propose either working with “shady”
convenient stores or developing a network of individuals who
are willing to sell directly to consumers in areas with a high
density of smokers (similar to narcotics distribution). If we

believe that tobacco users are price takers then we should
theoretically be able to sell at close to market value of an
individual pack (discounting for the increased risk and
opportunity cost that consumers might bear when purchasing in
the underground economy).
Risk ( potential risks and how we would avoid them)
Illegal/arrest both durring transportation and distribution
Gaining a coustomer base
laundering
Liquor( comparative analysis of difficulty and profitability)
WWW.IBISWORLD.COM Cigarette & Tobacco Manufacturing
in the US August 2016 1
IBISWorld Industry Report 31222
Cigarette & Tobacco
Manufacturing in the US
August 2016 Ibrahim Yucel
Smoke free: Declining cigarette use will shift
industry’s focus to smokeless products
2 About this Industry
2 Industry Definition
2 Main Activities

2 Similar Industries
2 Additional Resources
4 Industry at a Glance
5 Industry Performance
5 Executive Summary
5 Key External Drivers
7 Current Performance
10 Industry Outlook
13 Industry Life Cycle
15 Products & Markets
15 Supply Chains
15 Products & Services
18 Demand Determinants
19 Major Markets
21 International Trade
23 Business Locations
25 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
33 Major Companies
33 Altria Group Inc.
35 Reynolds American Inc.
36 Imperial Brands plc
39 Operating Conditions
39 Capital Intensity
40 Technology & Systems
40 Revenue Volatility
41 Regulation & Policy
43 Industry Assistance
45 Key Statistics
45 Industry Data
45 Annual Change
45 Key Ratios
46 Jargon & Glossary
www.ibisworld.com | 1-800-330-3772 | [email protected]

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
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
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
%
21
15
16
17
18
19
20
2006 08 10 12 14 16 18Year
Percentage of smokers
SOURCE: WWW.IBISWORLD.COM
%
c

ha
ng
e
10
-20
-15
-10
-5
0
5
2208 10 12 14 16 18 20Year
Revenue Employment
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
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
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 45
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
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

%
21
15
16
17
18
19
20
2006 08 10 12 14 16 18Year
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
-30
-15
0
2208 10 12 14 16 18 20Year
Revenue Exports
Revenue vs. exports

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
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.
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.
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
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
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
y
% 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
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

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
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
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.
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.
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
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.
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
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
n
1000
-1500
-1000
-500
0
500
2208 10 12 14 16 18 20Year
Exports Imports Balance
Industry trade balance

Products & Markets
Business Locations 2016
MO
2.0
West
West
West
Rocky
Mountains Plains
Southwest
Southeast
New
England
Great
Lakes

VT
0.0
MA
0.0
RI
0.0
NJ
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
8
3
21
4
9

Mid-
Atlantic
Establishments (%)
Less than 3%
3% to less than 10%
10% to less than 20%
20% or more
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.
%
75

0
15
30
45
60
So
ut
hw
es
t
W
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at
L
ak
es
M
id

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tl
an
ti
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ew
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ng
la
nd
Pl
ai
ns
R
oc
ky
M
ou
nt
ai
ns
So
ut

he
as
t
Establishments
Population
Establishments vs. population
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
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:

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
40
60
Pe
rc
en
ta
ge
o
f
re
ve
nu
e
80
100
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
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.
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.
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
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

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

Industry
Globalization
continued
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
150
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
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%
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

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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