Diversification

The giant cigarette makers have invested their tobacco profits in other enterprises for more than twenty years, ranging from soft drinks and cookies to office products, insurance, and real estate. This process has resulted in the ownership by tobacco companies of some widely known consumer-product companies, including Kraft and Nabisco. Although the parent tobacco companies pretend that this phenomenon makes them somehow less involved in tobacco (none now have the word "tobacco" in their corporate name), a thoughtful examination of these businesses reveals the following:

Tobacco products remain by far the most profitable sector of each of these conglomerates; and tobacco products are always responsible for most of the company profits (see Tables 2 and 3).

TABLE 2

1992 Overall Earnings for Six U.S.-Based Tobacco-Product Manufacturers (in Millions of U.S. Dollars)

TABLE 2

1992 Overall Earnings for Six U.S.-Based Tobacco-Product Manufacturers (in Millions of U.S. Dollars)

Company

Tobacco Revenues

Nontobacco Revenues

Tobacco as °/o of Revenue

Tobacco Income

Nontobacco Income (or Loss)

Tobacco as °/o of Income

Philip Morris

25,677

33,454

43

7,203

3,757

66

RJR/Nabisco

9,027

6,707

57

2,687

947

74

American Brands

8,157

6,467

56

1,091

757

59

Loews Corp.

2,185

11,506

16

915

(1,217)

233

(Lorillard)

Brooke Group

606

114

84

53

(59)

211

(Liggett &

Myers

UST

884

163

84

509

14

97

Totals:

46,536

58,411

44

12,458

4,199

75

sources: Corporate annual reports.

sources: Corporate annual reports.

TABLE 3

Profitability of Selling Tobacco Products Compared to Selling Other Goods and Services, 1992

TABLE 3

Profitability of Selling Tobacco Products Compared to Selling Other Goods and Services, 1992

Gross Profit

Gross Profit (or Loss)

Margin on Tobacco

Margin on Sales

Company

Product Sales

Other than Tobacco

Philip Morris

28%

11%

RJR/Nabisco

30

14

American Brands

13

12

Loews Corp

42

(11)

(Lorillard)

Brooke Group

9

(52)

(Liggett &

Myers)

UST

58

9

Overall:

27

7

sources: Corporate annual reports.

Not one of these companies has backed away from any available opportunity to sell tobacco products. Indeed, the strongest companies continue to invest in domestic and overseas ventures that have as their goal the expansion of tobacco consumption.

These companies make ready use of nontobacco subsidiaries to support their tobacco businesses. For example, RJR/ Nabisco fired the ad agency that did their Oreo Cookie advertising after that agency also produced ads promoting an airline offering smoke-free flights. Philip Morris has used one of its Kraft-General Foods warehouses for its coupon-redemption program for the Marlboro Adventure Team.

Tobacco companies do not diversify to get out of the tobacco business. They diversify because tobacco has given them profits, the acquisitions seem sound investments, and the resulting product mix complements the core business in some manner.

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