Why Big Tobacco Didn't Fail — Transcript

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1. 0:00Two decades ago, big tobacco had its
2. 0:02existential moment. A landmark 1998
3. 0:05settlement with 46 US states opened the
4. 0:08door to more than a hundred billion in
5. 0:10liabilities. Big bankruptcies seemed
6. 0:13imminent. The industry faced a future of
7. 0:16increasing regulation and declining
8. 0:18sales. Investors fled the sector. Turns
9. 0:21out though, things didn't end up nearly
10. 0:23so bad for the tobacco industry.
11. 0:25Revenues in the United States hit 117
12. 0:28billion in 2016, up from 78 billion in
13. 0:322001.
14. 0:34The United States generates more tobacco
15. 0:36profits than any other market in the
16. 0:38world outside China. Americans spent
17. 0:41more than 90 billion at retail stores on
18. 0:43cigarettes last year. Compare that to
19. 0:45about $50 billion on beer and 40 billion
20. 0:49on soda. But smoking rates are dropping.
21. 0:52In 1995, about 25% of Americans smoked.
22. 0:5620 years later, in 2015, only 15% did.
23. 1:00Taxes have significantly increased, and
24. 1:03yet industry profits have gone up. How
25. 1:06can this be? The answer lies in the
26. 1:09strange economics of the industry and
27. 1:11the profound disconnection between the
28. 1:13price it cost to manufacture a pack of
29. 1:15cigarettes and the price at which they
30. 1:17are sold. Last year, the average price
31. 1:20of a pack of Marl Bros in the United
32. 1:22States was $6.31.
33. 1:25Only 18% of that was actual
34. 1:27manufacturing costs, while retail markup
35. 1:29was 17% and the taxes 42%. This leaves
36. 1:33operating profits of around 20%. The
37. 1:37differing tax burdens help account for
38. 1:39the wide disparities in retail prices
39. 1:41around the world. In 2015, the average
40. 1:44pack of cigarettes cost $1.40 40 in
41. 1:47Indonesia, $6.29
42. 1:50in the United States, $10.62
43. 1:53in the United Kingdom, and $17 in
44. 1:56Australia, the most expensive pack in
45. 1:58the world. British American Tobacco says
46. 2:01that it makes the same amount of revenue
47. 2:03selling just two packs of cigarettes in
48. 2:05the United States as it does selling 13
49. 2:07in its developing markets. With every
50. 2:09tax increase, cigarette manufacturers
51. 2:12continue to tack on higher margins for
52. 2:14themselves. In 2001, the average pack in
53. 2:17the United States cost only $3.73.
54. 2:21By 2005, that climbed to $45
55. 2:25to $5.87
56. 2:27in 2010 and an estimated $642
57. 2:32last year. What makes this all possible,
58. 2:35of course, is that cigarettes are
59. 2:36addictive. Prices are determined less by
60. 2:39the traditional laws of supply and
61. 2:41demand than on what consumers are able
62. 2:44to spend and what consumers are willing
63. 2:47to spend based on the intensity of their
64. 2:49cravings.