Posted on 05/29/2005 11:34:52 PM PDT by El Conservador
KEYSVILLE, Va. - Three years ago, Steven Bailey's tobacco company in rural southern Virginia was growing so fast he could have counted on early retirement. Now, he's fighting for every sale. On July 1, a new Virginia law will force S&M Brands Inc. to raise prices on its Bailey's and Tahoe cigarettes. That's on top of a $2-per-carton increase last year, after other states passed similar laws at the urging of large tobacco companies.
"You're kind of fighting the world," said Bailey, S&M's president, whose family has been in the tobacco business for more than a century.
Many people would have a tough time shedding tears for a cigarette maker — small or large. But Bailey's reversing fortunes show how the states' $206 billion settlement with major tobacco companies over smoking-related Medicaid costs is dramatically altering the industry. Critics say the 1998 Master Settlement Agreement, or MSA, has steered far from some of its original objectives. Small businesses that weren't sued were forced to pay up, while the big players accused of wrongdoing wound up with market protections.
"It's not about health care or safety; it's about market share," said Keith Burdick, chief financial officer of Xcaliber International, a small manufacturer that sued its home state of Oklahoma. "A lot of the attorneys general don't like the MSA. But they don't have a good alternative."
Under the settlement, the big cigarette companies agreed to restrict their marketing, fund smoking-cessation efforts and make annual payments to the states over 25 years.
But attorneys on both sides knew the large tobacco companies would raise cigarette prices to help make their payments, so they agreed to build in protections to prevent companies outside the MSA from taking too much of their sales. They invited other manufacturers to join the settlement, offering favorable deals. Those who did not join had to pay about $4 per carton into escrow accounts, which would be refunded in 25 years if the states didn't sue them over health care costs.
But S&M's owners learned that outsider companies that sold cigarettes in fewer states could get refunds of much of their escrow payments — a huge benefit to a regional player. They also found a bank that provided short-term loans, allowing them to keep prices low while awaiting refunds.
"We outsmarted them," said Bailey.
Once the news got out, it was a market free-for-all. Between 1997 and 2003, the nonparticipating manufacturers' share of the market rose from a fraction of a percent to 8 percent, according to PricewaterhouseCoopers, which audits the MSA. S&M's sales soared from just $25 million in 1997 to $141 million last year.
Alarmed by the shift, the National Association of Attorneys General warned states to expect a large decrease in settlement money and states began shutting off the refunds. More than 40 states have passed legislation locking up escrow payments for the entire 25 years.
The law had an immediate impact. In the 10 states where S&M does business, profits are stagnating.
But Philip Morris USA is pleased. In the first quarter of 2005, the nation's largest cigarette maker saw operating profit rise and its domestic market share grow to 50 percent, up from 48.3 percent two years earlier.
The new escrow laws provided even more opportunities for companies like Liggett Group Inc. and Commonwealth Brands Inc., which joined the MSA on the favorable terms. On average, this group paid less than $2 per carton in 2003, rather than $4.
The settlement has put the states in the awkward position of working side-by-side with large tobacco interests. Letters from tobacco officials and the National Association of Attorneys General show that MSA companies have asked for stricter enforcement of the outsiders.
State officials and the large tobacco companies have said the new laws would help level the playing field. But to do that, the small manufacturers argue, the states should make their contributions tax deductible — like the members' payments — and address inequities that allow big companies to monopolize shelf space.
For more than six years, the MSA looked bulletproof, but that may be changing.
On April 15, Liggett, Commonwealth and other companies withheld about $100 million in funds, reducing this year's total settlement payment to $6.3 billion. They cited a little-known clause in the agreement that allows companies to reduce payments if the states sit back while the little guys grab sales.
More troubling for the states is the prospect that Philip Morris USA and other large companies could begin withholding large sums. Last month, the industry leaders told states they want a review of past payments in light of the increased competition, according to letters obtained by The Associated Press.
Settlement companies could withhold as much as $1.2 billion next year, said Richard Larkin, an analyst with J.B. Hanauer & Co.
Nonparticipating manufacturers have also filed federal lawsuits over the escrow laws and other MSA issues in states including Kentucky, Oklahoma, Tennessee, New York and Arkansas.
The small tobacco companies have won few fights. But last year, a federal appeals court revived an antitrust challenge in New York, and a district judge issued a preliminary injunction against the state's enforcement of the escrow law.
Still, few people believe the deal will vanish anytime soon.
"It's 46 state attorneys general, the 200 or so wealthiest trial lawyers in the world and the six largest tobacco companies against a bunch of very small businesses who are losing money," said Jeremy Bulow, an economics professor at Stanford University.
Iowa Attorney General Tom Miller acknowledges the settlement hasn't turned out the way anyone envisioned. But he says it still forces most companies to pay their fair share, which in turn increases prices and leads to less cigarette consumption.
"If there's less smoking and we're paid less money, that's the best money we never got."
They were wrong.
After this golden goose is killed off, it's the brewers and distillers. It will be, of course, for the children. Law firms are already researching litigation on the liquor industry and junk food. Neither of these have been properly 'softened up' yet by 'consumer watchdog groups'. Once that demonization is complete, the lawyers will move in.
The most annoying aspect is that the huge sums were supposedly to pay for health care for those affected by tobacco marketing (smokers!). Think one smoker benefits from the states being paid these huge sums? I rather doubt it.
I bet the Iowa legislature would rather have the money.
- I bet the Iowa legislature would rather have the money.-
You bet they would, as would every state. Gubmint is clearly taking advantage of smokers' addictions, not having the guts to make tobacco an illegal substance. The funny thing is, they're taking advantage of the "poor", since those below poverty level are more likely to be smokers than those above. I just love it when a sacred cow of the left is eaten up by another sacred cow.
A huge pile of cigarette money here goes to "research" of second-hand smoke - more like the gubmint looking for "justification" to keep bars from allowing smoking and another avenue to gather fines and such. Disgusting.
More correctly, they fleeced smokers, not the big tobacco companies. The attorneys general conspired with big tobacco to pass on the costs of the settlement to smokers and as the story portrays, to have the states squash competition to preserve big tobacco's market share.
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