Tobacco Ban Begins

Hope you bought your last pack of flavored cigarettes by midnight on Sept. 21…or else you’re out of luck. Thank the newly enacted Family Smoking Prevention and Tobacco Control Act.

I’m OK with state-by-state action. In fact, I couldn’t have bought the last pack of cloves in Maryland at 11:55 p.m. if I had wanted to. Because Maryland was nearly two decades ahead of the curve, mandating: “It is illegal to sell, give or otherwise distribute clove cigarettes to ANY person, even if 18 years old or older.”

I had a friend in Washington, D.C., buy my first and final pack of clove cigarettes last month — as an exercise of freedom. On my regular weekend visits (albeit on a porch in Maryland), we’ve passed a single cig from mouth to mouth on his front porch with whoever happens to be there (all over age 21, in fact). We told neighbors who popped by that this was their last chance.

Jim Nelson warned you about this back in July. But now it’s here. And the law’s been beating down on smokers — with the help of Philip Morris — for years.

A few months earlier, on a misty spring day in Annapolis, my friend wanted just one cigarette for old time’s sake at the local smoke shop. The law says she can’t buy just one. Why? Because the state says that breaking up a pack to sell “loosies” helps hook the youth. The loose logic is that a kid will spend under a buck to try it out, but will draw the line at $8 packs. I call it a state-mandated dare: Betcha can’t smoke just one. Nonetheless, this fine lady did, and as parting gift gave me the balance of the pack. Those lightly minted Nat Shermans she gave me are now contraband. (And I thought I was joking when I told her that I’d ration these dear as the real currency of wartime Berlin, with Russians at the door.)

Have we gotten so that we don’t know what it means to put adult things on a higher shelf? Can a proprietor not just keep the tempting goods under lock and key? Keep making sure to ask for ID? Show me one 12-year-old who asks for a Mocha Dream cigarette.

Over the pond in the House of Lords, its version of Family Smoking Prevention is to cover all cigarettes with a screen behind the register by 2013. So now the number crunchers are hard at work, defending the small mum and dad shop around the corner. Cost of the new display that doesn’t display: £1,850 at best. Ultimate total cost: £252 million. Hasn’t anyone ever heard of a cheap black crepe pall? The pall, from the Latin for “cloak,” is a perfect solution. Or is that, in fact, too cool? Too goth to ensnare the young death-seeking teen for that holy of holy day when he or she is finally old enough to choose risk?

Lighting up Between the Bans

Like the loosie law, we note another hypocrisy: menthols — a whopping 25% of the smokers’ market — fave of black smokers in particular, remain legal when all other flavors are banished for tempting kids to light up.

When my parents were young and poor, they drank Boone’s Farm Strawberry Hill wine. Did they drink it because it tasted like apples or berries? Here’s the reason: It was cheap. In the case of cloves, we’re talking a cost of $2 more per pack on average.

Which brings us to another smoker’s casualty: Marshall McGearty in Chicago. This place did not peddle flavored cigarettes to minors. It was an elite companion to the gentleman’s shop and the cigar bar, with a ventilation system that changed the air every six minutes. In the same way that Starbucks elevated coffee, so would R.J. Reynolds’ bar do for the cigarette. Just like ordering an espresso, you could order a pack of flavored cigarettes, blended and rolled while you waited.

This little mecca was refuge for smokers kicked out of their pleasant bar habitats once Chicago’s first-phase cigarette ban clicked into place.

At the time, the president of the Tobacco Control Resource Center, Richard Daynard, wasn’t worried. He said: “I certainly would be surprised if it’s still in business five years from now. The problem is that their clientele is not this, but mainly working-class and poor people.” Wow, that almost sounds like a belief in free markets!

According to former bartender, Griffith, the pack-a-day crowd really doesn’t go in for flavors. And most smoke emporium owners would agree with him. The typical profile is be a woman, between 22-50 years old, who smokes three a day max, but mostly as an occasional treat. (In other words, me, whom Gary would characterize as a bastion of personal responsibility.) Now the place where Griffith used to work, 1553 N. Milwaukee Ave., is a Steve Madden shoe store.

But Phase 2 of the Chicago ban — not lack of interest — killed Marshall McGearty. Since the place offered smokers wine, beer, coffee, pastries and cheese, the city banned it from allowing any form of smokes.

A ban with no exceptions has the virtue of seeming more convincing. But right now, menthol flavoring skirts any Family Act violations. For how long?

Mixed Message Brought to You By Philip Morris

Menthol — which cools and smooths the taste — has been proven in studies to make the nicotine take even better for the long-term smoking life. You’re encouraged to inhale deeper. (Just ask my friend Jimmy about that.) Take this stat: 44% of smokers between 12-17 choose menthol, yet it gets off today scot-free.

Meanwhile, take cloves. At 0.09% of the total cig-pushing market, they’re no big threat. The thing is, Philip Morris USA has no clove business. And its parent, Altria, made the smart move to split its business into Philip Morris USA and Philip Morris Intl. Back in 1995, Philip Morris also started up what’s known as Project Sunrise. This ultimate focus group worked on ways to stave off the death of Big Tobacco for as long as possible. What better than to join hands with the likes of the Campaign for Tobacco Free-Kids? This bolstered the company image as cancer stick vendors with a heart, and made it champions of what other tobacco companies are calling the “Marlboro Monopoly Act of 2009.” They look about as reformed as George W. Bush to me. But they sure did secure the fastest, cheapest way to knock out free enterprise in new forms of tobacco product.

But one company knew about Philip Morris and the mixed message. It’s been in the tobacco field since 1968. This company, known for hotel chains, cineplexes and beating Mr. Ted Turner to CBS, knew when to buy. And as we all know, investing is not just at what price you buy in, it’s when you sell. And it went all cash on this business just last year.

Why Drop Your $700 Million Per Year Cash Cow?

We think these fellas exited the biz because they knew the government could take it away. (It’s the same reason why Byron King might tell you to avoid a mining stock in Venezuela.) And when your family takes up 25 pages of Federal Election Commission reports, you bet you’re going to be two steps ahead of congressional developments.

But let’s back up a second. When Larry “King of Cash” Tisch bought Lorillard Tobacco with his brother in 1968, they knew they would get plenty of cash to catapult their millionaire-making holding company, Loews, into a billion-dollar business to pass to their sons.

Lorillard is now No. 3 in U.S. tobacco because the Tisches made their mark. The brothers bought the company for $450 million. And they immediately set to work. Turns out the former execs had spent 75% of their time on 5% of the business: candy and cat food.

Today, Lorillard’s Newports make up 35% of the menthol market. And by the company’s count, over half of those smokers are black. Back in the old days, free cigarettes were passed around Congressional Black Caucus meetings. Today, the pro-smoke policy is getting murky, although Altria is the CBC’s largest PAC donor. But the Tisch family saw menthol’s days as numbered.

When the next generation of Tisches spun off Lorillard in 2008, they made a tidy $10 billion if profits — not including nearly 30 years of juicy dividends. Make 22 times your money…and then some? That’s a money-management team I want in my court.

It should not surprise that Warren Buffett and Larry Tisch were tight. But unlike Warren with his Coke, Larry did not smoke. (That’s according to a Tisch family insider interviewed by Marie Brenner for a 1996 Vanity Fair article). For anyone who likes a moral tale — or thinks our cells have a limited functional life span no matter what we inhale — we note that Larry Tisch died of cancer at a very ripe age of 80 in the hospital that bore his family name. This gastroesophageal blight took him away from his life’s work and family on Nov. 15, 2003. His brother, Bob, died of brain cancer exactly two years later on the very same date.

When the heirs of Lorillard cut off its tobacco roots at the stem, they did so because they saw richer opportunity ahead. Cash raked in on Newports went toward something America is even more addicted to: oil and gas. This long-range metamorphosis started in the 1980s when Loews picked up offshore oil rigs aplenty at scrap metal prices. Next came its biggest investment in a decade: Texas Gas in 2003.

In case you’re wondering, the Tisch family didn’t swap their shares for Lorillard stock in the spinoff. James Tisch said it wasn’t about politics, but kindly filled a 163-page prospectus with concerns about fed officials and menthol.

So are menthol’s days numbered? Is the count down to the triple digits? Hard to tell. If you want a sign that Philip Morris will hold menthol’s ground, try its June 2009 introduction of a new menthol: Blend No. 54.

Meanwhile, I’m off to find sponsors for a new FDA study…Which is more harmful to kids (or will cost more in health care spending by 2050): cigarettes or high-fructose corn syrup? Like the fellas at Loews, I want to be ahead of the curve when it comes to “sin” investments and the legislatures that nix ’em.

And if you want to know where the Marlboro Man is lassoing new market share? Try China.

Samantha Buker

October 1, 2009

The Daily Reckoning