THE COMPANIES
39 CENTS TAX
Philip Morris remains a highly profitable market leader in a declining business. It has just over a 50% share of the U.S. cigarette trade and earned an average of $4.7 billion (U.S.) operating profit on $18.5 billion (U.S.) in sales in each of the past two years--good for a 25% margin. Still, litigation, settlements and tax costs are a heavy burden: A pack of smokes carries a 39-cent federal tax in the U.S., compared to less than four cents a tin for the moist snuff.
HEALTH EFFECTS
A lit cigarette releases more than 4,000 chemicals, including 60 carcinogens, and can cause cancers of the lung, esophageal and respiratory systems, as well as pulmonary diseases and heart ailments. In Canada, the Federal Tobacco Control Strategy works to reduce smoking, lower exposure of non-smokers to second-hand smoke and educate Canadians on the health risks.
"In a theoretical world, if you get everybody to switch, you'd greatly reduce tobacco-related disease," says Gregory Connolly, a professor with the Harvard School of Public Health in Boston. But while smokeless tobacco users have a lower risk of cancer, they are far from safe. Smokeless tobacco products contain 28 carcinogens and raise the risk of oral, pancreatic and esophageal cancers, mouth lesions and gum disease. Smokeless tobacco packs twice the nicotine punch of a cigarette, even though the effects take longer to reach the brain.
LESS THAN 4%
Few businesses are as profitable as smokeless tobacco. UST dominates the trade in the U.S., with a 73% share of industry revenue and 60% of volume. Its operating profit margin of around 50% is double that of Philip Morris's. Of course, its revenue--estimated to be about $2 billion (U.S.) in 2008--is much smaller. As a result, smokeless tobacco will amount to just 9% of Altria's revenue base once the deal is done. The hope is that smokers will turn to chew when they're unable to light up.
SALES
UP 7%
Chewing tobacco is most popular in parts of the U.S. South and among some native Americans, as well as in Sweden, South Asia, Sudan, South Africa and Venezuela. In Canada, fewer than 1% of males chew tobacco, says Rob Cunningham, senior policy analyst for the Canadian Cancer Society.
But last year, UST's sales rose by 7%, making smokeless tobacco one of the fastest-growing established consumer packaged goods categories.
DOWN 40%
Cigarette usage is declining in many countries, but in Canada, one in five people still smokes. Total U.S. sales volumes fell by 40% from 1987 to 2005, to 351.6 billion cigarettes, while smokeless tobacco sales were essentially unchanged, at 116.2 million pounds.
RULES AND REGULATIONS
Cigarettes can't be advertised or used to sponsor music, sporting or other events in Canada, and packages must display one of 16 graphic health warnings, including pictures of diseased mouths and pregnant women. In most provinces, the product can't be displayed at retail--in fact, Philip Morris doesn't even display any brand logos on its website.
While sales, advertising and display of smokeless tobacco at retail are controlled in Canada, the U.S. does not prohibit the industry's sponsorship of events such as hot-rod racing and bull riding.
In Canada, social conventions are the main constraint on public use (including occasional "no spitting" rules). So far, Yukon, B.C. and Alberta are the only jurisdictions to have banned chew on schoolgrounds.
"The World Health Organization recommended that if you don't have it in your country, don't let it in," says Harvard's Gregory Connolly.
LEGAL ENVIRONMENT
The words "hostile" and "expensive" come to mind. Cigarette maker Philip Morris faces so many lawsuits it divides them into five categories: As of December, 2007, it was named in 105 individual personal-injury cases; 10 class action lawsuits; 17 suits over the sale of "light" cigarettes; three government health care cost-recovery pursuits; and two actions related to tobacco prices. In 1998, U.S. cigarette makers signed a $206-billion (U.S.) master settlement agreement. The cost to Philip Morris over the last two years: $10.5 billion (U.S).
Lawsuits "are not an issue for smokeless tobacco makers in Canada," says Rob Cunningham. Likewise, in the U.S., UST is named in few lawsuits and faced just one health-related proposal from stockholders at its 2008 annual meeting. UST signed a master settlement agreement in 1998, but for just $100 million (U.S.) over 10 years.
Last year, it paid $26.7 million (U.S.) related to the agreement, other state settlements and the Tobacco Reform Act--a drop in the spittoon.
Testifying before Congress in 1994, the heads of major tobacco companies swear under oath: Nicotine is not addictive
