You would think smokers quitting would cause tobacco companies to struggle, but the opposite is the case right now.
Smoking rates are plummeting in the US, Canada, UK, and much of Europe. Most of the developed world has kicked the habit, with only 15% of Brits smoking today, compared to 45% in the 70s.
So, people aren’t smoking but big tobacco is doing as well as ever, so what gives? The tobacco companies would tell you that this is because they are moving forward with the times in brilliant fashion. Big tobacco argues that its shift towards healthier alternatives to smoking cigarettes, such as e-cigarettes and vapes, are driving their sales up. While these products are indeed growing in popularity, a closer look reveals that the tobacco companies’ explanations don’t add up.
Big tobacco is currently in a rough spot. Public opinion against smoking and tobacco companies has grown to the point where the companies effectively can’t engage in marketing. A major branding overhaul is underway at big tobacco companies, but sales from the new products offered by them are still monstrously overshadowed by traditional combustion cigarette sales, which make up the vast majority of revenues.
The reason that these companies are doing so amazingly well despite the current efforts against them comes down to a practice called price shifting. When taxes on cigarettes go up, tobacco companies will also increase the prices of their premium cigarettes, while reducing the cost of their cheapest ones. This practice allows them to offer smokers an affordable outlet for their habit. They’re studying what’s going on very carefully, and perhaps the most profitable finding they’ve come to is that price shifting effectively cancels the positive effects of tobacco taxation. Their plan has worked so far, but going forward big tobacco will have to come to terms with a new reality. The young don’t smoke as much anymore, and an entire generation of smokers is expected to die in the coming years, many of them prematurely. The expected effect is an increase in these companies’ efforts to market their alternative products, while also pushing their traditional cigarettes harder in countries like Indonesia, which have high smoking rates and far fewer taxes and regulations on tobacco products.