ONE HUNDRED dollars invested in the tech-heavy Nasdaq index at the beginning of January 2024 would now be worth $154. If you had bought American tobacco companies, you would have made an even bigger return, pocketing $165. The share-price boom in part reflects a strange economic phenomenon. In recent years, the operating margin on a cigarette sold in America has grown from about 50% to about 60%. This year cigarette- and cigar-makers are expected to make $22bn of operating profit in the world’s largest economy. Not bad for a dying industry.
In the past decade, the number of American adult smokers has fallen by 20m or so, and the number of cigarettes sold has fallen by more than a third. Industry insiders expect the decline over the next decade to be even steeper. However, the tobacco industry is thriving due to their understanding of price elasticities. When many people smoked, there were many ‘price-elastic’ consumers sensitive to price increases. As more people quit, only committed smokers remain, allowing companies to raise prices at a quicker pace. Tobacco-price inflation in America has increased relative to overall inflation, with Marlboro prices rising by more than 7% last year.
The companies are aware of their strategy’s effectiveness. Imperial Brands mentioned they can ‘take pricing to offset volume declines,’ while Philip Morris International talks about ‘the resilience of our combustible model.’ British American Tobacco, known for Lucky Strike, stated that in America ‘price/mix more than offset volume decline.’ Although manufacturers cannot sustain this strategy indefinitely, for now, the industry’s prospects remain strong, despite the inevitable decline in the long run.
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