LOS ANGELES — Exploiting costly tobacco industry settlements that have boosted brand-name cigarette prices, a Southern California chain of cigarette stores has been selling foreign brands for as much as $10 less a carton than American labels.
Smokers are lighting up with joy, but big U.S. tobacco companies are puffing mad, saying foreign and small manufacturers have taken advantage of the fact that they're exempt from the landmark 1998 settlement.
Big Tobacco must either pass on the cost of the $246 billion, 25-year settlement with the states to its customers or take a hit on the bottom line, company executives say. And with Friday's jury verdict ordering the tobacco industry to pay a record $145 billion in punitive damages to ailing Florida smokers, that's an additional cost that these new competitors don't have.
"The prices of all cigarettes have gone up dramatically since the (1998) agreement," said Mark Smith, spokesman for Louisville-based cigarette manufacturer Brown & Williamson. "For all intents and purposes it's a tax, and these people are not taxed.
"It would seem to be an unfair advantage. The more those cigarettes are purchased, it not only hurts the big four manufacturers, it also hurts the states, because the states are not getting the money from those manufacturers."
Nathan Barankin, spokesman for California Attorney General Bill Lockyer, said the issue wasn't of much concern for the states.
"The market share for the nonparticipating manufacturers is so incredibly minuscule that it's difficult to say that it has any meaningful impact in terms of the settlement," Barankin said.
Companies must pay into the settlement if their cigarettes reach more than a 1 percent share of the market, according to Ann Gurkin, tobacco analyst for Richmond, Virginia-based Davenport & Co.
The four major American cigarette makers sold 420 billion cigarettes in 1999, a 9 percent decrease from 460 billion cigarettes the previous year, Gurkin said.
Part of the decline in market share is due to what Big Tobacco calls "renegade" brands.
At Cheap Cigarettes! stores across the Los Angeles area, owner John Roscoe's smokes — with such names as Revenge, Bandito and Geronimo — sell for $10 a carton cheaper than Marlboro, Camel and other well-known labels.
"World prices are cheaper than domestic cigarettes," Roscoe said.
For example, cartons of Marlboro were selling for $32.99 last week at the store in suburban Reseda, while its erstwhile twin, Geronimo, was going for $22.49. But whether they stick with the big brands or try the copycats, the 1.2 million customers Roscoe says he gets every week all agree they like the prices.
"It's cheaper," said Sanda Stein, 18, while stopping by the Reseda store with a friend, J.P. Dunbar, 18.
Dunbar, a regular Camel smoker who went to buy a carton of Virginia Slims for his grandmother, sampled a Bandito while he was there.
"That's tasty, like Camel," he said, and both marveled at the price — $2.25 a pack compared to the $3.12 to $4.25 they pay for Camels.
"That's like back in the day," Stein said. "Not for like three years have we paid $2.25."
Like retailers of copycat perfumes and colognes, Roscoe features fliers with "If you like (Product X), then try (Product Y)." And he said he's been told that the foreign smokes are as good or better than the domestics.
"I don't smoke, so I don't know," he said.
Cheap Cigarettes! gets its alternative cigarettes mainly from Tabacalera, a 370-year-old Spanish company that holds a monopoly on that country's tobacco industry.
But it's the big four in the U.S. that he's trying to fight. He said the American tobacco companies raise their prices every four months for about a month at a time — like this month, for instance. So now a carton of Marlboros costs about $4.50 more than it did in June. He believes they increase prices so they can boast about lowering them during the other nine months.
"It doesn't make any sense to me. It makes the customers mad as hell three times a year," Roscoe said.
Roscoe started selling the discount foreign cigarettes after the major tobacco producers lowered their prices — starting with Philip Morris dropping the cost of Marlboros — at the same time they raised the prices on the store-brand smokes they were producing, like F&L.
Roscoe said customers then flocked back to the name brands, because they weren't that much more expensive than the cheaper cigarettes.
So in his company's newsletter, he urges smokers to make July "Brand Switching Month."
Smith acknowledged that his company does discount brands in order to stay competitive.
"What you're seeing is price discounting from the manufacturer at certain times," said Smith. "That's nothing new — it's been going on for years and years. The more frequent discounting is reflective of the fact that prices have gone up dramatically."
Roscoe started Cigarettes Cheaper! six years ago, and now has 725 stores in 25 states. About 10 percent of them are in California, and Nevada and Arizona each have about 12 percent.
On July 29, Roscoe said they'll open 43 more stores in 14 states, and plans to open an average of one per day until he controls 20 percent of the nation's cigarette retail business. So far he has about 10 percent of the business in California and 1.5 percent nationwide — though that figure makes Cigarettes Cheaper! the third-largest cigarette retailer in the country.
Roscoe said he was in the grocery business for 40 years in Northern California, and sold a store brand, F&L, that was manufactured by Philip Morris. While on a trip with an executive from that tobacco giant, Roscoe noticed that many cigarette-only retailers were dingy businesses and he decided he could do better.
He sold his stores and in 1994 opened the Cigarettes Cheaper! chain, based in Benicia, in the San Francisco Bay area.
"We thought this was a better business," he said. He said all his cigarette customers are happy, while "you don't find many happy grocery store customers."