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Cigarettes withstand the recession in ways that magic books and concert tickets cannot
European union poised to ban e-cigarettes and smokeless tobacco
Posted on May 5, 2011 by jematthe
I’ve blogged twice before about the constricted budgets of consumers prompting them to forgo luxury items during an economic downturn. Unlike high end magic books and concert tickets, however, sinful treats like cigarettes prove themselves recession proof around the world.
In 2008, after the housing market crash brought global markets to their knees, British American Tobacco PLC reported a 15 percent rise in its first half profits. Philip Morris International said its earnings rose 23 percent in the second quarter and raised its earnings forecast for the rest of the year in a proclamation of utter immunity to the inflationary pressures and plunging consumer confidence rattling other consumer product companies.
Despite taking “staycations” and postponing haircuts, struggling consumers still spend money on cigarettes
In mid recession March 2009, Altria, the parent company of Phillip Morris USA who manufactures Marlboro, the largest selling cigarette brand in the U.S., saw the price of its shares rise 3.7 percent. In the first three months of 2009, Altria stocks remained flat overall while the S&P 500 fell 21 percent.
Hargreaves Lansdown analyst Keith Bowman attributes the fortitude of cigarette sales and stocks in times of trouble to “inelastic demand.” People consume cigarettes steadily regardless of higher prices on the packages or fewer bills in their wallets.
London based PSigma Income fund manager Bill Mott goes as far as to wholly remove cigarettes from the luxury category.
“Mobile phones, cigarettes, utilities and food all these things are essential,” said Mott. “No matter how much the consumer is tightening his belt, he will always buy these things.”
Low supply and persistent demand tripled the price of black market cigarettes in prison during the recession, lining the pockets of the people working the “store”
Even in Michigan prisons, where the recession forced stricken families to move out of Detroit and too far away from incarcerated friends and relatives to bring them contraband items, unchecked demand fueled skyrocketing prices of black market cigarettes.
But is there a limit?
As banks and businesses collapsed, retail stores held clearance sales and restaurants shut their doors, Altria did the unthinkable in April 2009 and raised prices between $0.71 and $0.81 per pack, in response to a $0.61 per pack federal tax hike on cigarettes the biggest federal tax increase on cigarettes in history.
While smokers in many states around the country like my home state of Louisiana, where cigarette prices eternally lurk below $5.00 per pack simply absorbed the price jack, smokers in states like Washington, where packs of cigarettes already cost over $7.00, tied up the phones of the Tobacco Quit Line by the droves.
“There’s a certain point where there’s a threshold on price,” said Dr. Patrick Hogan, a Tacoma neurologist who has been working with addicted smokers since the 1980s. “Maybe a year ago they still would have adapted one more time, but with the recession, cost is just that extra motivator. They say, ‘Here’s one tax that I can avoid.'”
Hipsters made saving money ironic during the recession by rolling their own cigarettes
Higher prices may compel some cash strapped smokers to quit others, however, simply resort to smoking in more cost efficient ways, for instance, by rolling their own. Governments tax pure tobacco products much less than prepackaged cigarettes, and smokers save a bundle by switching to loose leaf and papers. The anti establishment vibe of roll ups also adds to their appeal during times of economic duress.
In the end, though, despite the Washingtonians who quit and the hipsters who started rolling their own, cigarettes survived and even thrived during the recession, making them a healthy investment if still a not so healthy pastime.
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