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18 / 09 / 2022

Oligopoly of Vice - Spotlight on the Global Tobacco Industry

I wanted to start my article with a little preface. This is not meant as a preach piece about the morality of the tobacco industry and nor is this a judgement on those who smoke. I myself do not smoke, and if people choose to smoke that is entirely up to them if they wish to do so in their own private space.

Beyond the very important publicised public health and political significance of the tobacco industry, there are personal finance reasons to want to understand the sector in more detail. Any personal or corporate pension plan will be heavily invested in equities, often in funds that track the major stock indices. In the UK’s leading stock index for example, tobacco companies make up close to 5.2% of the FTSE 100 Index. In fact, the 7th largest company by market capitalisation in that index is British American Tobacco. I would wager that most British savers would be shocked to hear that potentially such a large portion of their savings could well be invested in tobacco.

With an increased focus on ESG (Environmental, Social and Governance) investing approaches in the market today, industries such as the tobacco sector will have the spotlight shone on them much less when it comes to financial analysis. I suspect that economic research on the sector will close to disappear. Larger and institutional investors will choose to avoid the sector completely so as to meet not only increasing regulatory pressures and expectations but also the demands from a newer generation of investors who expect their pensions and savings to be invested in supporting corporations that are perceived to have a positive (or at least neutral) environmental or societal impact.

Note: I will save the discussion on ESG more broadly as a framework for another article.

For the Biggest, it's All Smoke & Mirrors

The global tobacco industry is dominated by a few very large transnational corporations that account for most of the distribution of tobacco products in the world. They are more colloquially named in the industry as the Big 4 or Big Tobacco: Philip Morris International (and Altria), Imperial Brands, British American Tobacco and Japan Tobacco International. What’s interesting is that the largest tobacco company in the world is often left off these lists, because it has historically only focused on its domestic market and very little is publicly known about them. With close to 50% of the global market share 1, the largest tobacco company is the Chinese state-owned China National Tobacco Corporation.

The China National Tobacco Corporation (CNTC) has a total monopoly over the tobacco industry in China from the growing of tobacco, to the manufacture and distribution of cigarettes and for a very long time only kept to the Chinese market. As a state-owned non-public company CNTC has no requirement to publish any information about its business and its profitability, and as such does not. It has been suggested that the company is the fourth largest company in China in terms of profit, contributing up to 11% of China’s tax revenues and employs close to half a million people across the country.2

In 2013 the Chinese “Belt and Road Initiative” was launched where the state looked to influence and invest in infrastructure globally to extend China's reach, and the CNTC was looking to grow internationally as part of that plan. They began to diversify their supply by opening operations in Brazil, the USA and Zimbabwe in order to gain access to higher quality tobacco leaf. Manufacturing and distribution centres have also begun opening globally, with operations opened across Asia and also in Romania to be able to begin selling within the European market.

It is unclear how many cigarettes produced by the CNTC are sold globally because of the total lack of transparency, however, an international arm of the CNTC was listed in 2019 on the Hong Kong stock exchange called China Tobacco International (HK) Company Limited. Within their latest Interim Report published on the 15th September 3, its main geographical market is China followed by smaller exposure to countries across Asia such as Indonesia and the Philippines, a Brazilian operation and very little else. What is important to remember though is this is but a very small part of the much larger CNTC umbrella. A large chunk of the same Interim Report lists the connected parties to China Tobacco International which includes over twenty different other vehicles that all conduct business under CNTC, all responsible for different production and distribution streams in and outside of China, none of which there is any information on.

The sheer size of the company, the backing of the Chinese state and the ability to act under a total lack of transparency will see the CNTC consolidate its position as the largest tobacco company in the world, and will continue its overseas expansion to newer markets challenging the Big 4. This will inevitably lead to price competition, and thus to other operators in the industry such as the Big 4 seeing their operating margins shrink, impacting their profitability in the medium and long term.

The Four Horsemen of the Tobacco-lypse


Besides the CNTC, the rest of the industry is dominated by the Big Four:

Philip Morris International (PMI) & Altria

Both US headquartered companies, PMI was originally a subsidiary of Altria but was spun off in 2008. PMI only focuses on business outside the United States, whereas Altria kept the United States business. Brands owned by the companies include Marlboro, Benson & Hedges and the e-cigarette manufacturer Juul.

Imperial Brands

British-based company selling products across the globe. Brands owned by the company include Davidoff, rolling tobacco Golden Virginia and rolling paper Rizla.

British American Tobacco

British-based company selling products across the globe, predominantly across North and South America. Brands owned by the company include Dunhill, Kent and Lucky Strike.

Japan Tobacco International

The international arm of Japanese company Japan Tobacco which grew internationally via mergers and acquiring existing brands. Brands owned by the company include Winston and Camel.









For the period leading up to the COVID-19 pandemic, tobacco companies were broadly underperforming as a result of global tobacco consumption falling and increased regulation. Tobacco use globally has fallen in the last 20 years, with over 34% of the world population smoking in the year 2000 as compared to 23% in 2019 according to data from the World Health Organisation.4


The story since the outbreak of the COVID-19 pandemic is very different. Share prices in tobacco-producing companies have soared since, despite what you might expect. It would be understandable to expect that the presence of a respiratory disease on the scale of COVID-19 would turn people away from smoking for health concerns. Additionally, store closures and closures of other points of sale such as duty-free in airports saw revenues fall.

One of the reasons for the rally in stock prices is because historically in times of stress, tobacco consumption goes up. During the financial crisis in 2008, sales of cigarettes increased despite the pressures on consumer pay and credit. 5 In the COVID-19 pandemic, despite it being more difficult for consumers to purchase cigarettes, more time spent at home meant more opportunities to smoke, pairing this with the stress consumers were experiencing during the pandemic helped support cigarette demand. Additionally, once lockdowns began to end globally, there was a boom in people socialising, another catalyst for increased tobacco use.

It could be expected also in the current high inflation environment, as a result of initially the supply shocks from the pandemic re-opening and now the energy crisis caused by the Ukraine-Russia conflict, that tobacco sales could continue to consolidate despite again consumer earnings being significantly tightened.

Smoke-Free Future

What is clearest from looking at the recent reporting from the Big Four is their direction for future profitability. A quick scan of any recent report published by them and you will struggle to find any mention of cigarettes, cigars or tobacco unless absolutely necessary. The focus now is on what PMI like to call Risk-Reduced Products (RRP).

Future growth is expected to come from products such as vapes, e-cigarettes and other options such as oral nicotine. Big Tobacco companies are taking great pride in being able to demonstrate how many consumers they have managed to switch from cigarettes to smoke-free options as a result of their marketing efforts. As at end of 2021, PMI estimated they had 21.2 million users of their IQOS range of products and that 72% of these are those that had switched over from being regular cigarette users.

The reasons are multiple as to why these firms are switching their focus to these products. The first obvious reason is that traditional tobacco consumption is falling globally and is becoming increasingly heavier regulated, which would see these companies’ earnings fall if they would continue only to sell cigarettes. Secondly regulation is much more relaxed than for cigarettes and in fact, RRP are taxed considerably less than tobacco products are. The regulatory picture is changing, however.

JUUL is a very popular brand of e-cigarettes that was bought by Altria in 2018 to broaden their product range. In June this year, the Food and Drug Administration (FDA) in the United States banned the sale of JUUL products. 6 This was because of their concerns that their fruit and candy flavoured products were being increasingly bought by teenagers and could be a gateway to teenagers then subsequently buying tobacco-based products.

Some of the businesses are managing their transition to RRP much faster than others. 29% of PMI’s revenues for 2021 were attributable to their IQOS product range, and they expect more than 50% of their revenues to come from RRP by the year 2025. British American Tobacco is much slower to be diversifying for example, with only 8% of revenues from these types of products in 2021, however, revenue for the first half of 2022 for this part of the business is up 45% as compared to the same period the year before.

Through acquisitions and relying on existing tobacco chains of distribution, the Big Four are very confident they can grow these newer generations of business lines extremely quickly, though the supply chains involved in making cigarettes differ significantly from those for RRP. PMI's IQOS brand is not totally tobacco-free by using tobacco rather than liquid to create vapour, as such the company has been able to heavily rely on its existing tobacco supply network to fuel the growth in IQOS. The product is still waiting for full regulatory scrutiny as PMI assures it is much less harmful to health than smoking since the tobacco is not burnt. It is taking other companies who are trying to grow products that are totally tobacco-free longer for them to fully integrate their new supply chains.

The global semiconductor shortage has been a headwind to the production of these tobacco alternatives. The impact of the semiconductor shortage on the auto industry has been highly publicised, 7 however it has also been a significant blocker to growth for tobacco companies when it comes to the production of these new electronic devices. It will likely take a few years for global semiconductor supply to catch up with demand.

The broader trend of tobacco consumption falling and increased regulation will see revenue from traditional tobacco revenue streams fall. This will be somewhat helped in the shorter term despite a broader recession in the global economy and inflationary pressures impacting incomes since we will see increased smoking from stressed consumers.

Brand loyalty, the difficulty to give up smoking and the fact there are a few big companies will mean that in a period of significant stress on operating margins, there will be significant pricing power that prices could be increased if required. As such, these companies who have historically issued significant dividends to shareholders and generated further value via share buybacks will be able to continue to do so at the rate they have been since sales volumes should remain stable thus leading to continued steady cash flow generation.

In the medium and longer term, this pricing power will be lost as the CNTC continues to rapidly expand its international operations and significantly eats into the existing Big Tobacco’s market share. These companies’ successes will ride on how quickly they can expand into their RRP businesses, where PMI seems to be a leader. There is only so long until regulators catch up on this newer generation of business avenues and we see additional bans and higher taxes eroding into their revenues.








Tobacco Companies Share Price
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