Big Tobacco is Back!

Let’s review the recessionary wreckage of America’s aging industrial landscape. Can we see a glimmer of progress anywhere on the horizon?

A hint of renewal? A speck of growth? A spark of innovation?

Across the United States, it’s tough to find a blue collar industry that appears well positioned to take on global rivals. In the automobile business, for instance, GM has now delayed the launch of its electric automobile Volt until 2010 while Toyota continues to win awards for its Prius. And energy companies like Exxon continue to Drill Baby Drill for oil in places like Iraq while Chinese firms leap to the forefront of the renewable energy sector.

And yet there is one American industry that is exhibiting signs of stabilization and growth. Ironically, it’s the oldest industry of all, one that traces its roots to the very first colonial settlement in 1612 in Virginia.

That industry, of course, is tobacco.

Rise and Fall

Ever since the native American tribes introduced tobacco to the first American settlers at Jamestown, the leafy product has been a major component of our domestic manufacturing and export base. Pipes, cigars, and cigarettes quickly spread throughout Europe during the ensuing centuries, trailed by the inevitable spread of lung cancer and other respiratory diseases.

American servicemen further carried the flame of the major U.S. cigarette brand Camel when they ventured forth across Europe to fight the first world war. Like Coca Cola, Wrigley, and Hershey, the Marlboro Man became a dominant global brand during the heyday of American industrial might in the 1950s.

But the Surgeon General’s report of ill health effects hurt the industry in 1964. Over the ensuing decades, the government banned cigarette advertisements from broadcast television and radio, slapped punitive taxes on the sale of tobacco products, and even banned smoking outright in airplanes, restaurants, bars, and most other public places.

Phoenix Rising

And yet, like a phoenix rising from the ashes of a pile of cigarette butts, the industry has been finding its way back to stability and growth. Just this past week, the U.S. Centers for Disease Control reported that the percentage of Americans who smoke actually increased to 20% last year. And Reynolds American, proud heir to the Virginia based R.J. Reynolds tobacco empire, is negotiating the purchase of a smoking cessation product manufacturer called Niconovum AB.

It may not be very surprising that tobacco usage is spiking upwards during a period of economic hardship; after all, one would expect financially stressed Americans to reduce expenditures on expensive luxuries and increase them on small and relatively cheap “guilty pleasures.” But a tobacco company investing in a smoking cessation device? Why would a firm invest in an ancillary product that is designed to eliminate the use of its primary one?

At first glance, such a strategy might strike one as product diversification run amok. And yet such hedging strategies often play an important role in many business scenarios.

Both Sides of the Table

A classic example of this strategy was the sale of Sharps military carbines to the Confederate army of the southern states during the American Civil War of the 1860s. This firearm was also popular with the Union army of the northern states, and thus Sharps found itself supplying a pair of military forces that were actively engaged in destroying each other.

The modern manifestation of such domestic civil warfare is the bruising series of political election campaigns that pit Democrats against Republicans on the first Tuesdays of each November. Many American companies and their lobbyists routinely make political donations to candidates in both parties; in fact, they often support opposing candidates for the same political offices! Although candidates today use television advertisements instead of firearms to wage their battles, the results are often equally brutal: after each election, one political career may die while the other survives to fight another day.

This “investing in one’s opponent” strategy may also appear in more subtle ways. Until recently, for instance, Microsoft sold subscriptions to its OneCare antivirus software service; this line of business would inevitably grow whenever nefarious hackers exploited weaknesses in its Windows operating system. And stock market analysts continue to advise their clients to diversify their holdings and purchase industry index funds that invest in firms that compete with each other.

So Reynolds American’s strategy of investing in a smoking cessation product is actually a time tested corporate technique for hedging one’s bets. In fact, by playing both sides of the table in this manner, the tobacco industry may well ensure that it survives to experience its fifth century of existence.

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