A Pandemic Smoke Break Bodes Ill for Big Tobacco
(Bloomberg Opinion) -- A year into the pandemic, it’s no secret which companies have been the big winners. Netflix Inc. had its biggest year ever, adding 36.6 million subscribers and ending 2020 with more than 200 million subscribers worldwide. Amazon.com Inc.’s stock rose 76%, cementing Chief Executive Officer Jeff Bezos as the richest man in the world. Peloton Interactive Inc., which went public in September 2019, was a $20 stock when the pandemic took hold in mid-March. Its shares now trade above $100.
Oh, and one other big winner: Altria Group Inc., the maker of Marlboro cigarettes. It turns out that in addition to streaming, shopping online and exercising, a lot of people have spent the pandemic smoking. And not just Marlboros either. British American Tobacco Plc, whose subsidiary, Reynolds American Inc., makes Camel and Newport cigarettes, and Liggett Vector Brands, which sells discount cigarettes, also had strong U.S. sales.
In the tobacco business, of course, “strong” has a different meaning than it does in other industries. As you can see from the chart below, cigarette sales in the U.S. have been declining slowly but steadily for years. The reason is obvious: Americans don’t smoke in the numbers they once did. In 1965, 45% of Americans smoked; now, thankfully, it’s down to 14%, according to the Centers for Disease Control and Prevention. In recent years, some of those who have stopped smoking have turned to vaping — something all the tobacco companies say they encourage because they all make their own devices.
The years 2018 and 2019 were particularly severe for the tobacco industry, with U.S. cigarette volume dropping 4.5% and 5.5% respectively. That the companies have still been able to increase revenue and profits is a testament to their enormous pricing power — or, more bluntly, to having an addicted customer base.
But look at what happened once the pandemic hit: Cigarette sales didn’t decrease in 2020. Yes, they didn’t increase either, but for the tobacco industry, flat cigarette sales constitute a big upside surprise. You can see what a difference that makes just by looking at Altria’s revenue. From 2016 to 2019, the company’s revenue never increased by more than $170 million. But in 2020, Altria added more than $1 billion to the top line, bringing its revenue to $20.8 billion, according to Bloomberg.
Or consider BAT. It makes a lot of money selling cigarettes in duty-free stores, and that business took a big hit when the pandemic halted travel. And international sales were down as well. But its revenue fell by only 100 million pounds — to 25.8 billion pounds ($36 billion) — because its U.S. cigarette business was so strong. “Combustibles are the engine … of the business, and it is in great shape,” Tadeu Marroco, the company’s finance director, said during BAT’s quarterly earnings call last month.
As to why smoking didn’t decline in 2020, there seem to be two reasons. The first is that the pandemic simply made it easier for people to smoke. Staying at home, they could smoke when they wanted instead of having to walk outside the office to grab a few puffs. Because they weren’t shopping as much, smokers had more discretionary income to spend on cigarettes. Stress and boredom can drive people to smoke. In his company’s year-end conference call, Sal Mancuso, Altria’s chief financial officer, noted that while smokers were taking fewer trips to buy cigarettes, “the tobacco expenditures per trip remained elevated versus a year-ago period.”
The second reason, which is more problematic for the future of Big Tobacco, is that vaping — which was all the rage, especially among high school students, just a few years ago — has fallen out of fashion. In 2019, according to the CDC, the percentage of high schoolers who vaped declined for the first time, to 19.6% from 27.5%. That’s a good thing, obviously.
But it also fell among adult smokers, which is not good at all, because e-cigarettes are much safer than combustible tobacco. Many vaping stores were closed during the various citywide lockdowns, but even when they were open, business declined: According to ECigintelligence, which follows the e-cigarette industry, the average vaping store experienced an 18% decline in sales between 2019 and 2020. There is no question about what was happening: People who had taken up vaping were returning to cigarettes.
ECigintelligence conducted a survey of vaping store owners to explore the reason for the decline. Most of them felt that the vaping-related lung injuries that occurred in 2019 were the primary cause. Of course, it later turned out that those lung problems were most likely not caused by legal e-cigarette cartridges but by black market ones that contained THC, the psychoactive ingredient in marijuana, and were diluted with Vitamin E acetate. But the reputational damage had been done by then.
What the pandemic has really shown is how thoroughly demonized vaping has become in the U.S. Sadly, few public health officials will recommend that smokers vape, even though the switch could save their lives. It is hardly surprising, then, that a poll conducted by Reuters in the fall of 2019 showed that 63% of U.S. adults had come to believe that vaping was as harmful as smoking — and only 27% of the respondents thought that vaping was a good way to quit smoking.
The tobacco companies — and their shareholders — like making money, of course, and cigarettes remain a profit machine. But Altria, BAT and Philip Morris International all insist that they want to move customers toward safer alternatives. When they make presentations to analysts, they spend far more time talking about the gains made by their alternative nicotine devices than they do about cigarette sales.
Once life returns to some normalcy and cigarette sales resume their downward trajectory, Big Tobacco will have to confront the vaping problem. The pandemic may have been good for the short-term bottom line, but it also exposed a more serious long-term challenge.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Joe Nocera is a Bloomberg Opinion columnist covering business. He has written business columns for Esquire, GQ and the New York Times, and is the former editorial director of Fortune. His latest project is the Bloomberg-Wondery podcast "The Shrink Next Door."
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