BIG TOBACCO'S MARKET SHARE STABILIZES
Funders of Master Settlement Agreement stop losing
ground to generics
Tobacco companies that provide the lion's share of funding under
the Master Settlement Agreement (MSA) have seen their market share
stabilize over the last year.
Recent second-quarter earnings releases from Altria and Reynolds
American (successor to RJR) have confirmed that the Original Participating
Manufacturers (OPMs) of the MSA have seen their market share remain
at 85% of total domestic cigarette shipments for much of the last
year. This follows a period of erosion to cheaper brands as a result
of higher state excise taxes.
Since the signing of the MSA in 1998, the economic downturn brought
with it record state government deficits. Although the MSA promised
more than $200 billion to the states over the MSA's first 25 years,
budget crises saw states raise tobacco excise taxes to record levels.
Predictably, the rising cost of cigarettes provided incentives
for small startup cigarette producers, counterfeiters, importers,
Internet sellers and other "back channel" lower-cost alternatives.
Many of these Non Participating Manufacturers (NPMs) have not complied
with MSA requirements that they escrow funds with states in a timely
manner.
Manufacturers who do not participate in the MSA must escrow funds
in states where they do business. These funds are equivalent to
their potential MSA payment and serve as collateral against potential
future state health-care claims. By failing to escrow funds, NPMs
are able to price cigarettes significantly below the major brands.
Additionally, many small producers failed to report shipments, as
required by law, and exploited other MSA loopholes that allow rebates
of some escrowed funds to NPMs whose business is heavily concentrated
in a few states.
In all, these loopholes provided pricing advantages for non-participating
manufacturers, which gradually cut into the market share of bigger
cigarette makers.
States take action
States have not stood still. Over the last three years, 149 bills
have passed tightening up enforcement of state laws governing implementation
of the MSA. Much of this legislation sought to level the playing
field between the generic and name-brand cigarette makers to ensure
that the generics don't exploit loopholes to compete on price.
While market share have stabilized for both OPMs and NPMs, statistics
from Management Science Associates, the official data collector
for the MSA, indicate that industry volume for the first half of
2004 was 194.2 billion units, down 2.4% over the same period in
the prior year, and in line with expectations.
Although challenges to enforcement legislation (Freedom Holdings
case) persist, the legal path is likely to be long. We still believe
that such enforcement will continue to be successful and that efforts
to retain unfair loopholes are unlikely to prevail. The good news
is that stepped up enforcement efforts are working, which benefits
MSA participants, states and bondholders alike.
ANALYST CERTIFICATION
SEC Regulation AC
I, Jay H. Abrams, hereby certify that the views expressed in this
research report accurately reflect my personal views about the subject
securities and issuers. I also certify that no part of my compensation
was, is, or will be, directly or indirectly, related to the specific
recommendations or view expressed in this report.
08/06/2004
About Dr. Abrams
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