The tobacco industry consists of many competitors trying to satisfy a specific customer need. Companies such as Philip Morris, RJ Reynolds, Brown and Williamson, and Lorillard hold almost the entire market share in the tobacco industry. While each company has different advertising and marketing techniques, they all target the same customer group. Tobacco companies try their best to generate interest in their particular brand or brands.
Companies market a number of attributes that usually include, but are not limited to: taste, flavor, strength, size and image in order to distinguish themselves from competitors (Business Week 179, November 29, 1999). However, all tobacco companies are satisfying the same needs. Many long-time smokers are addicted to the nicotine in cigarettes. They smoke because the nicotine is needed to help them feel normal (Focus group). Many addicts go through withdraw without nicotine. All tobacco companies have nicotine in their cigarettes, which fulfills the need of long-time smokers.
Other smokers depend on cigarettes in social settings. Many smoke to look sophisticated and mature. Tobacco companies make many kinds of cigarettes that target different groups. Social smokers may perceive certain brands as more sophisticated, and therefore they shy away from other lesser-known brands. For example, a person who smoked generic cigarettes at the bar may be perceived as uncultured. On the other hand, the smoker with the Marlboro Lights may be more socially accepted because they have a brand name product (Focus group).
Many types of cigarettes cater to the many markets of smokers who want to portray a certain image in social settings. Tobacco companies do not create the need to smoke, but try to generate interest in their particular brand (Hays, New York Times, November 24, 1999). Overall, the tobacco companies satisfy consumer demand for the millions of adult Americans who choose to use tobacco by providing differentiated products to different target markets of smokers. Industry Concept The tobacco industry has developed a rather large array of products.
Companies such as Philip Morris, Lorillard, RJ Reynolds, and Brown and Williamson, as well as the other smaller competitors, all provide the same product- cigarettes. The tobacco industry is filled with fierce competitors. But underneath the brand names and images, the product is relatively the same. All tobacco companies produce an inhalant that is made with tobacco, tar, and nicotine. These materials are rolled in a special kind of slow-burning paper for longer smoking time. The cigarettes are approximately three to four inches long and come in packs of twenty to twenty-five.
With so many similarities, one would think that the market would resemble that of a commodity. However, through brand marketing and promotions, each cigarette is uniquely different in the mind of the customer. Boundaries The tobacco industry can be broadly or narrowly defined. Many products use tobacco as the main material. We chose to define the market by focusing on the tobacco and the way it is smoked. Companies such as Philip Morris, Lorillard, RJ Reynolds, and Brown and Williamson are the main competitors in the tobacco industry (Pollack, Advertising Age, August 30, 1999).
They produce cigarettes, which are lit and the smoke is inhaled to the lungs. Tobacco products such as cigars, snuff, and chew are considered close substitutes to cigarettes. Cigar smoke is just taken into the mouth, but not inhaled like cigarettes. Snuff and chew do not even contain smoke, but are put on the skin for nicotine absorption. Companies such as Imperial Tobacco, which produce a wide array of chew and snuff products, would be considered a company that provides substitutes to cigarettes. They would not fall in the cigarette industry itself.
The tobacco industry has a very low threat of entry. A few powerful firms, such as Philip Morris, RJ Reynolds, Lorillard, and Brown and Williamson, control most of the industry (Pollack, Advertising Age, August 30, 1999). Any new entrants would be sure to receive heavy retaliation from the other companies fighting to keep their share of the lucrative industry. For example, Philip Morris is by far the industry leader with estimated tobacco sales of $46. 7 billion is 1999 (Business Week 179, November 29, 1999). They have a huge base of resources with which to attack other competitor entrants.
They could easily start promotions such as “buy one, get one free” or offer coupons at certain times during the year to discourage entrants to the industry. Many small companies will not be able to compete with the capital requirements in the tobacco industry. The barriers to entering the tobacco industry are numerous. First, the high volume of cigarette sales gives existing firms economies of scale, which would be a disadvantage for newcomers to the market. The products currently on the market are differentiated somewhat in their design, but mostly through the large advertising budgets that are used to promote them.
Tobacco companies now pour $4 billion a year into promotions and advertising- nine times what they spent in 1971 (Elliot, New York Times, September 22, 1999). These firms have finely tuned distribution channels, which include legions of sales representatives that vie for shelf space. One of the biggest obstacles to a new entrant would be finding a decent place of the shelf with such heavy-handed competition already occupying that space. Store managers may be reticent to give away prime slots for fear of losing discounts or other offers from major players.
Government policy is another possible deterrent to enter the market. Large settlements against the tobacco companies have been the norm in the past several years. Although gigantic companies like Philip Morris are able to handle the charges because of their extensive monetary resources, it is difficult to imagine how a small startup company would be able to burden the expense. Switching costs are very high in the tobacco industry. Many smokers are still smoking the same brand they first started smoking (Focus group).
Even if the price of their brand is raised, they would not consider switching to another brand (Focus group). Many companies who would want to come into the industry would not easily take away market share, due to high brand loyalty. The tobacco industry is a very competitive market. As mentioned above, about four very large corporations control the entire market. Philip Morris is the biggest company in the industry, but others such as Lorillard and growing in brand name (Pollack, Advertising Age, August 30, 1999). All companies battle for market share through heavy advertising budgets and slotting deals.
The cigarette market is well into the maturity stage of the PLC, and some might even argue that given the recent anti-smoking campaigns and lawsuits the industry is nearing the decline phase. However, sales show that decline has not yet been reached. As mentioned before, Philip Morris has estimated tobacco sales of $46. 7 billion (Business Week 179, November 29, 1999). Apparently, brand loyalty still exists. Buyers Retailers. The stores that sell tobacco products have a moderate influence on the market. Retailers have some power over manufacturers who need prime slotting to ensure strong sales.
However, manufacturers have leveraged quite a bit of power by offering retailers special incentives for giving their products good placement or for installing certain numbers of brand advertisements around the store. To some stores, such as gas stations, losing a major cigarette brand would mean large loss of revenues from customers who would rather go to another gas station to locate their favorite brand. Also, companies are trying to develop closer relationships with bars and coffeehouses. Tobacco companies offer ashtrays, napkins, and matches, saving each buyer thousands of dollars in supply costs (Heuslein, Forbes, January 11, 1999).
Retailers now are marketing the brand on coasters and napkins for the company. Consumers. The end-users in the industry also have moderate power. Brand loyalty is very high, and it has been shown that smokers generally chose a brand in their teen year and continue to smoke that brand the rest of their lives (Focus group). However, in the face of a dramatic price hike, consumers have been quick to notice that brands are interchangeable and then go for the lowest price. But the dearth of substitutes for tobacco products makes it difficult for the industry to lose customers all together.
Suppliers The suppliers in the tobacco industry have a low level of influence, even though there is no close substitutes that the industry can use in place of tobacco. Tobacco is purchased from farmers, who essentially have to take the market-determined price for their crops. Tobacco is a commodity, so it makes no difference from which supplier a firm buys its materials. The large number of individual farms that supply the industry makes it almost impossible for anyone to raise the price. There is not a threat of forward integration from suppliers because they have none of the tools necessary to manufacture or market tobacco products.
The farmers have only the land and equipment necessary to grow the leaf. If they were to try to produce cigarettes, they would probably not be able to compete with the many large companies that have economies of scale (from Threat of Entry section). The affect of substitutes on profits is also low. Nicotine can be found in cigarettes, as well as cigars, chew, and snuff. But most people will not switch over to chew and snuff if the price of cigarettes rises. Chew and snuff do not substitute for the needs of a cigarette. Cigarettes are smoked for the nicotine and for social acceptance.
Chew and snuff are not acceptable substitutes for most smokers; the nicotine is not inhaled but put on the skin for absorption. “Why are tobacco executives still smiling? Simple: They continue to rake in the huge profits from the category despite a decade-long stagnation in dollar and unit sales growth. ” (Arrizza, Discount Merchandiser, p 97) Indeed, the tobacco industry has faced much opposition during recent years but still remains profitable. To be specific, there are two main reasons that the industry has continued to be prosperous: addiction and management practices.
Government influence and lobbying have also played a smaller role. First, the strong addiction of tobacco has allowed for a very loyal following in the tobacco industry. In fact, most tobacco users are very brand-loyal and therefore less price sensitive than most would think. Not only does this bring in revenue for the companies themselves but for the wholesalers and retailers as well. “The average smoker still smokes 1. 2 packs per day, which means strong profits for the industry as a whole” (Heuslin, Forbes, p 160). Buyer power is lower because the smokers depend on the cigarettes to fulfill their addictions.
On average, the industry’s profit on cigarette sales is about 23 cents a pack. When the average store sells around 25 packs per day, the industry is bound to make substantial profits (Sullum, Reason, p 18). The loyalty of customers in tobacco has allowed for a successful forecast of future profits in the industry. The management practices of the tobacco industry have also contributed to the industry’s success. For example, The “Retail Masters” program has allowed for strong profits. “Retail Masters is a multi-level program of promoting brands in the retail environment.
This program has the potential to increase a store’s cigarette sales by 11 percent” (Arrizza, Discount Merchandiser, p 99). Simply by getting better displays and shelf space, for instance, the tobacco industry could become more profitable. Buyer influence increases because they have the power to delegate displays and shelf space. Overall, if the industry were to constantly maintain better displays and shelf space, tobacco companies as a whole would have a better chance of achieving greater profits. Also, most tobacco companies are introducing new products in order to keep high profit margins.
RJ Reynolds, for example, is in the final phase of conducting market studies on its latest product, Eclipse. The company claims the new product reduces second-hand smoke by nearly 90 percent, ridding itself of ash and odors ( Arrizza, Discount Merchandiser, p 98). Tobacco companies are also trying to get a better public image by producing public service announcements such as the “Be Smart, Don’t Start” campaign. And although the industry has been under close scrutiny as of late, their customers are impressed with the message.
Again, the marketing management practices behind the tobacco industry bring a promise of strong future profits. As already stated, the profits of the industry look to be good, but there are a lot of changing conditions that might affect the future of the industry. For example, the new product inventions mentioned above could either help or harm the industry depending on how well they do. For example, the new Eclipse cigarette will more than likely be imitated by other competitors, who will also have to invest a great deal of capital to get the product on the market.
And finally, tobacco companies are having to pay more and more money for court settlements. Profits can be decreased greatly if money the money is spent defending the company. The government is also a very limiting factor to tobacco. Just over the past decade, the government has passed so many laws that it has forced the tobacco companies to double their prices on cigarette packs. Although the customers still seem to be buying as they have in the past, there is certainly a price ceiling that a customer will not be willing to pay above.
It is highly unlikely that the same customers who are currently paying less than three dollars a pack, will pay ten dollars for a single pack of cigarettes. However, if the government keeps increasing excise tax and still allots money to the prosecution during tobacco lawsuits, the industry will be severely handicapped. Overall, as the restrictions of the government increase and lawsuits are lost, the profits of the industry are bound to decrease. Industry Environment The tobacco industry is an environment with many strong competitors that have many opportunities in the market.
There are also many threats, mostly imposed by the government. The tobacco companies play off each other for market share and innovate marketing strategies to fight back and keep the smoking demand. The tobacco industry has limited media coverage due to government restrictions placed over the past two decades. The tobacco companies have been prohibited from advertising on television and radio, and even more recently from billboards and outdoor posters because of the harmful side effects their products may cause.
Since so many channels of marketing are closed for the tobacco industry, magazines are the most common method of advertising (Elliot, New York Times, September 22, 1999). Even with magazines and other legal forms of advertising, tobacco makers are still running into restrictions. In each magazine advertisement, a Surgeon General’s warning is required to appear with information about tobacco-related health risks that the product may lead toward. Companies have also been required to create advertisements solely about the harmful consequences of using tobacco products.
These ads were a result of an advertising war between the tobacco industry and anti-tobacco campaigns. The tobacco companies were mocking the ads and celebrating those who continued to use tobacco. The government intervened and required the “tobacco warning advertisements” for all tobacco companies (Fairclough, Wall Street Journal, B12, 1999). The government has also intervened with tobacco marketing by altering the slogans and gimmicks the companies use. The government wants the companies to avoid targeting vulnerable markets, such as young children and teenagers under the legal smoking age of 18 years.
Since government regulations have become such a threat to the tobacco industry, companies are coming up with creative ways to advertise and appeal to consumers. Some companies are developing “smoker’s lifestyle magalogs”, a combination of a magazine and catalog. The issues come out monthly and contain articles about travel, cooking, and shopping. The magalogs do not contain articles about smoking and do not have pictures of people smoking, but they do advertise tobacco products and accessories.
The idea of the magalogs is to portray an image that a smoker’s lifestyle is fun and exciting (Wyatt, New York Times, C5, November, 24, 1999). Tobacco companies are hoping these magalogs will persuade the existing smokers to purchase more. In the past consumers have been proven to remain loyal to one company throughout their lives, but as tobacco prices have steadily increased several times, more brand switching from the premium brands to the lower priced one is occurring. The price increases are decreasing the demand for tobacco products as well.
Figures show the number of smokers has decreased 10% in 1999 (Heuslein, Forbes, January 11, 1999). One of the main reasons for the price increases in the tobacco industry is that companies are trying to keep shareholders happy by paying them high dividends. Another reason is that companies need to cover the higher costs that they have incurred from legal settlements with state governments. The premium brand companies are also spending more money on advertising as the prices increase to keep their customers from switching to the lower-cost brands (Fairclough, Wall Street Journal, B12, 1999).
The tobacco industry has many strong competitors with varied portions of market share. As of now, the price leader is Philip Morris. When they increase prices, other brands will follow the lead to avoid price wars. Any attempt to take away market share from the leader will result in more harm than good for the lower companies with less share. If a price war were to be started, Philip Morris, with its extensive capital, could easily outprice all other brands (Porter). The smaller tobacco companies could not compete and would soon go out of business. This type of competitive rivalry causes threats to all competitors.
The companies with less market share want to follow the trends to avoid losing share no matter how high costs are, and they are trying to gain new consumers as well. The competitors have to watch the price leader carefully to make a competitive strategy. The price leader controls the industry and sets the “rules of the game”. But the opportunities of the leader and the other companies can be dampened by government regulations. As more restrictions are being placed in the tobacco industry, all companies will lose consumers if they do not find successful alternatives to marketing their products.
Once the tobacco gain market share, it is somewhat easy to keep it. The addictive substances in tobacco products give the industry opportunities to keep consumers brand loyal and trying their new products. The environment of the tobacco industry is constantly changing with all of the threats and opportunities. Tobacco makers rely on the key success factor of image in all that they do. The new magalogs are another attempt to create a wanted tobacco user’s lifestyle, and they will continue to find alternatives around regulations to keep their image up as they fight hard in the competitive environment.