A smooth-looking sailor winks joyfully while an auburn-haired lovely flicks a Bic and fires up a Camel for the lucky lad. Two lonesome, studly cowboys ride the range at the foot of the snowcapped Rocky Mountains, an iconic picture of the eternally young and eternally immortal Marlboro Man.
From the backs of magazines such as Details, Sports Illustrated and Road & Track, these ads regularly reach young testosterone-charged readers. And, from slick sailors to old cowboys, tobacco ads exert more influence than ever these days, according to marketing experts and psychiatrists. While the percentage of Americans who smoke has decreased in the past 35 years, the percentage of American teens who smoke has risen in the past 10, and skyrocketing smoking rates worldwide show no signs of slowing down.
This appears to contradict the common perception that the Marlboro Man and his ilk are on the ropes. (Even the ad described above shows a very small cowboy figure as compared with the full-page Marlboro Man close-up of yesteryear.) The latest round of legal jousting has forced tobacco companies, previously banned from television and radio, to recuse themselves from billboards and print advertisements in youth markets.
With one marketing arm tied behind their backs, Philip Morris, R.J. Reynolds and the other tobacco merchants have struggled with free-falling stock values and public outcry from anti-smoking advocates. Standard & Poor's downgraded its recommendation on Philip Morris shares from "avoid" to "sell" on Dec. 28 because of the precarious position of the company.
Philip Morris and the other tobacco companies have passed only halfway through a brutal legal meat grinder that could cost them $200 billion or more in payments to the states over the next 25 years. And that could represent only the beginning of an endless litany of payouts that stretches ad infinitum. A Florida court now holds the key to what could be a painful $300 billion class-action payout to infirm smokers in the Citrus State -- the first of what could be many other class-action lawsuits.
The decline of smoking in the United States has been long and slow. Since 1964, the percentage of Americans who smoke has dropped from 65 percent to 25 percent, according to the Center for Advancement of Health. Add to that a marked decline in cigarette purchases over the past year (which most economists say resulted from higher prices caused by legal fees and settlement costs) and the business of addicting citizens to cigarettes seems destined for doom.
Anti-smoking advocates attribute the past year's declines and the long-term trend to more anti-smoking campaigns, rising health concerns and more expensive cigarettes. (The tobacco companies announced a 13-cent wholesale price increase the second week in January, the latest in a series of hikes.) On Jan. 19, virtually all the tobacco companies announced dramatically lower earnings due to declining consumption of the nic sticks in America and stagnant demand worldwide.
So why have a number of stock analysts started to claim that tobacco stocks are underpriced and a great buy? Why are more teens picking up the cancer sticks than in past generations? And why are anti-smoking activists in a huff about the numerous legal loopholes that they claim the tobacco companies are using to keep their business growing apace?
Although killing your customers is generally not a good business practice, the tobacco companies are expert marketers and smart businesspeople. And they appear poised for a solid business run in subsequent decades.
Witness the numbers. After decades of decline, the percentage of adult Americans who smoke is no longer going down, according to an article in the December Journal of the American Medical Association. On top of this, smoking rates outside the United States have skyrocketed and continue to climb, according to the World Health Organization.
"I think the tobacco industry is a very simple business," says Bill Godshall, executive director of SmokeFree Pennsylvania and a leading expert on tobacco industry issues. "These guys can raise the price of cigarettes to 10 or 15 bucks a pack and they could still make a profit. People will pay $150 a day for their heroin or cocaine habits. So at $2 a pack, cigarettes are very underpriced."
Most important for tobacco company shareholders, throughout the 1990s the percentage of U.S. teenagers who smoke has grown. According to the JAMA article, between 1991 and 1997 smoking prevalence among high schoolers increased from about 30 percent to 36.5 percent. These young smokers, in particular, represent the future of the tobacco merchants as dutiful customers who will not die of lung cancer in the near term.
"If the cigarette companies can get kids to start smoking at a young age, because cigarettes are so addictive, you are talking about getting a lifetime customer for your brand. So it is very important for cigarette brands to get a high percentage of the youth market. From an economic standpoint it makes perfect sense," says Michael Siegel, an associate professor of public health at Boston University.
So how do tobacco companies hammer their brands home to the youth? Indirectly and masterfully through the mass media, according to Siegel and others. Siegel and Harvard Business School professor Charles King tracked placement of cigarette ads in 36 magazines between 1986 and 1994. Naturally, tobacco companies do not advertise in true youth publications like Seventeen or Teen People. But of the 36 publications studied, 15 were classified as youth magazines with significant readerships under age 18 (such as Details, Road & Track and Cosmopolitan). The two professors also tracked which brands were advertised where.
Their study discovered that although youth cigarette brands accounted for only 43 percent of the cigarette advertising pages in adult magazines during that time, brands popular with young people (Camel, Marlboro) made up nearly 67 percent of the cigarette advertising pages in the magazines that appealed to youth. Translation? Marlboro Man or Joe Camel is far more likely to show up in the pages of Road &Track or Sports Illustrated than in the pages of Ladies Home Journal. And those ads are more likely to push promo goodies like T-shirts, cigarette lighters and backpacks -- gimmicks that ensnare high schoolers at greater rates than adults.
Furthermore, according to Siegel, those very same ads push specific buttons. "The imagery they use is so attractive to youth. They use images of freedom, independence and control with photos of attractive and sexy models -- things that appeal to the basic core values of adolescents. Cigarette companies have mastered the use of those images," says Siegel.
How powerful are these images? According to multiyear psychological surveys that tracked students through high school undertaken by professor John Pierce of the University of California at San Diego, media images played a major role in the decision to smoke of approximately 34 percent of teenage smokers. "We have shown that before they start smoking, the kids who really liked the advertising start changing their beliefs. They stop believing it's harmful to smoke. And they start believing they can quit when they want to," says Pierce.
For their part, the cigarette companies have vehemently denied that they are targeting youth with these advertisements. Likewise, they have denied that a new crop of vanity publications funded by tobacco companies and put out by old-line magazine houses like Hearst Corp. are aimed at teenagers. These vanity pubs make little mention of where the buck stops but prominently feature ads for cigarette brands like -- no surprise here -- Marlboro and Camel.
While most anti-smoking advocates doubt the veracity of these denials, they freely admit that the tobacco companies are doing a good job marketing. "Our conclusion is that because of the high exposure of youth to cigarette advertising in magazines, it should simply be eliminated. We don't see any other way," says Siegel.
Nor does the market mastery of cigarette czars stop at print. Despite legal stipulations against paid placements of cigarette brands in movies, Hollywood continues to spout smoke. In a study released in November, researchers at the University of California San Francisco found that smoking in the movies has steadily increased in the past decade. (Some activists whisper that this product placement is being paid for but the tobacco companies deny it.)
In films from the 1970s and 1980s, characters smoked once every 10 to 15 minutes. But in movies from the 1990s, characters used tobacco on average every three to five minutes. "As in tobacco advertising, tobacco use in the movies is associated with youthful vigor, good health, good looks, and personal and professional acceptance," wrote the researchers, Stanton A. Glantz and Theresa F. Stockwell. Furthermore, Glantz and Stockwell recorded a rise in smoking among upper-class characters in the movies, something they believe heightens the subtle connection between being rich and lighting up.
Glantz and Stockwell could find no particular reason for the rise in smoking, but other experts have posited that it could be a circuitous logic by which studios make more mass media characters smoke in order to identify with youth, who are smoking more. Regardless, the effect is the same. "In an era in which the tobacco industry is finding traditional advertising media increasingly restricted, the appearance of tobacco use in motion pictures is an important mechanism to promote and reinforce tobacco use, particularly among young people," write Glantz and Stockwell.
Restrictions like those called for by Glantz, Stockwell and Siegel are not in the cards, however. Congress likely shot its wad last year on failed tobacco legislation and hardly anyone, save John McCain (who proposed the tobacco settlement bill that was killed last year), is willing to touch the issue again. Score another point for the tobacco marketers. The legalese of the tobacco settlement with the states signed last year has left many advocates fuming.
"If you read the fine lines in the settlement, it says the tobacco companies cannot do anything to market to kids as long as kids are not their primary marketing target. If kids are only half of their market, that's not marketing to kids legally. That's why they advertise on the back cover of TV Guide or in the swimsuit issue of Sports Illustrated. They are adult magazines but everybody, including kids, reads them," says Godshall.
While their marketing acumen and ability to find loopholes are beyond doubt, the tobacco companies have never been slouches with numbers, either. For example, tobacco industry bellwether Philip Morris has steadily bought back large chunks of its own stock, a possible sign that it believes its stock is undervalued and likely to go up at some point.
Analysts believe that Philip Morris can boost earnings per share from $3.17 in 1998 and $3.30 in 1999 to $3.68 in 2000, according to First Call earnings estimates from late January. Over the past five years, Philip Morris has averaged earnings growth of 14 percent. What's more, despite a seemingly turbulent future, these same analysts believe that Philip Morris will average 13 percent annual growth in earnings over the long haul in spite of impending sanctions. That's growth from an already eye-popping level of $46.7 billion in gross tobacco sales, according to BusinessWeek.
Meanwhile, the tobacco companies have steadily shifted more of their production offshore and out of the clutches of U.S. politics. On foreign soil these factories and marketing operations will run with few of the checks installed against them in the United States. Their move plays to the fastest growing markets for the tobacco companies in the third world and Asia, where the majority of the world's 5 trillion-plus cigarettes produced each year are smoked.
The very resiliency of the tobacco industry rankles the anti-smoking crusaders who want to eliminate all advertising. But the glorious economics of addiction also have their benefits. "The industry can continue paying the costs of litigation and the court awards by merely raising the price of cigarettes. The stockholders can still get their dividends to the same amount and even higher. And less people will smoke. We think the industry can pay and pay and pay," says Godshall.