Ngebray.com,- Two decades ago, big tobacco have its existential moment. A landmark 1998 settlement with 46 US states opened the door to more than $100 billion in liabilities. Big bankruptcy is seemed imminent, the industry faced a future of increasing regulation and declining sales investors fled the sector. It turns out though, things didn’t end up nearly so bad for the tobacco industry.
Revenues in the United States hit a $117 billion in 2016, up from $78 billion in 2001. The United States generates more tobacco profits than any other market in the world outside China. Americans spent more than $90 billion at retail stores on cigarettes last year, compare that to about $50 billion on beer and $40 billion on soda, but smoking rates are dropping. In 1995, about 25% of Americans smoked, 20 years later, in 2015, only 15% did. Taxes have significantly increased, and yet industry profits have gone up. How can this be? The answer lies in the strange economics of the industry, and the profound disconnection between the price it costs to manufacture a pack of cigarettes and the price at which they are sold.
Last year, he average price of a pack of Marlboros in the United States was $6.31, only 18% of that was actual manufacturing costs, our retail markup was 17%, and the taxes 42%, this leaves operating profits of around 20%. The differing tax burdens help account for the wide disparities in retail prices around the world. In 2015, the average pack of cigarettes cost $1.40 in Indonesia, $6.29 in the United States, $10.62 in the United Kingdom, and $17 in Australia, the most expensive pack in the world.
British-American Tobacco says that it makes the same amount of revenue selling just two packs of cigarettes in the United States as it does selling 13 in its developing markets. With every tax increase, cigarette manufacturers continue to tack on higher margins for themselves. In 2001, the average pack in the United States cost only $3.73. By 2005, that climbed to $4.05, to $5.87 in 2010 ad an estimated $6.42 last year. What makes this all possible, of course, is that cigarettes are addictive. Prices are determined less by the traditional laws of supply and demand, then on what consumers are able to spend, and what consumers are willing to spend based on the intensity of their cravings.
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