 "What America is smoking: Customers fall by 20 mn, cigarette companies' profits surge by 60%")
The American tobacco companies are thriving like never before, if you are the one who has invested in the US tobacco company then a bigger return amounting to $165 is assured. Interestingly, if we look at the numbers then there has been a decline of cigarette and cigar consumers by almost 20 million, but the operating margin has seen making profits from 50 per cent to about 60 per cent.
If we look at the stats, then according to The Economist, this year tobacco-makers are expected to make $22 billion of operating profit in the world’s largest economy. The numbers are growing for a dying industry.
The number of cigarettes sold has fallen by more than a third. When we look at this from a wider perspective, when the company has less consumers it loses its importance and starts vanishing, but the case has been reversed. What could be the reason that the tobacco industry has been flourishing and proving profit to the manufacturers?
Chain-smokers never resist
It is important to understand the demand and supply of any industry. Most smokers or consumers of cigarettes are responsive to price changes. In simpler terms, when there is change in the cost of the material which leads to quitting the particular product. But when the majority quit, the chain-smokers are the ones who are still taking a drag. This results in companies explicitly increasing the prices at a higher pace.
Analysis conducted by The Economic Times shows that the tobacco-price inflation in America has increased relative to overall inflation. In 2017 the price of a packet of Marlboros rose only a little more than overall prices (2.9 per cent versus 2.1 per cent). Last year overall inflation was 3 per cent. But Marlboro prices rose by more than 7 per cent.
Companies now know the marketing strategies and consumer habits, which results in playful tactics and low consumer rate leads to higher prices.
The Imperial Brands, which produces everything from Davidoff cigarettes to Rizla rolling papers said “We can continue to take pricing to offset volume declines.” Market experts have a clear mindset which varies from manufacturers who indefinitely think that smokers eventually die due to higher prices.
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