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From a profit perspective, the cigarette business is an exceptionally lucrative business. A cigarette can cost about a penny or two to make, it can be sold at a high profit margin, and most of all, because of addiction, customers will remain loyal whether they want to or not. The business is recession proof, and it is huge. The total retail value of Canadian tobacco sales in 1992 was $9.8 billion.^[89]

In Canada, despite declining sales, tobacco industry profits in 1995 again set an all-time record high. Profit levels surpassed records set in each of the previous 8 years. As Figure 5 illustrates, lower smoking rates clearly have not hurt the industry’s bottom line. High profitability is not new. Imperial Tobacco has shown a profit every year since 1928 (its financial data are not available for earlier years). Imperial was even profitable during the Great Depression.

Here is what one American company executive said about the tobacco industry and its profitability:

I’ll tell you what I like about the business. First, there are no surprises. There is nothing more to be said or discovered about the cigarette business or the industry. And there’s no way to write an article that could do us any more harm than what has already been written. Second, no new company wants to get into the tobacco business. That’s great. Third, we have the best partners in the world: the governments. In a lot of countries, it’s incredibly important to the whole welfare state that we sell our products to

Figure 5. Combined pretax profits of Imperial Tobacco Ltd and Rothmans Inc., 1986–95.^[276,512] Profits for RJR – Macdonald Inc. are not available for all years in this period and thus are not included.

collect taxes. . . . So no matter how you look at the cigarette business, it’s incredibly predictable, it’s extremely secure as an investment vehicle and, therefore, it’s a great business to be in — if you can deal with the fact that some people are not going to like you.[509, p. 41]

The tobacco manufacturing industry in Canada is 99% dominated by an oligopoly of three foreign-controlled, transnational tobacco companies (TTCs). Each is discussed in turn below.

Imperial Tobacco Ltd

Montreal-based Imperial Tobacco Ltd is the dominant player in Canada, with a 67% share of the domestic cigarette market. The company’s performance has consistently improved since 1975, when its market share was 36.7%.^[290] Imperial is 100% owned by Montreal-based Imasco Ltd, which in turn is controlled by British-based tobacco conglomerate B.A.T Industries plc (BAT). BAT owns about 41% of the Imasco shares. Imperial Tobacco’s leading brand families are Player’s and du Maurier, which together account for 59% of Canadian cigarette sales. Imperial also sells Matinée, the company’s third most important brand family, as well as Cameo, Peter Jackson, Avanti, and Medallion cigarettes. In the United States, Imperial’s sister company is Brown and Williamson, a company also controlled by BAT.

Imperial Tobacco’s roots go back to 1895, when the American Cigarette Company moved into Canada and started to manufacture cigarettes in Montreal. Soon afterward, the American Tobacco Company of Canada Ltd was created by a merger of the American Cigarette Company and D. Ritchie & Company, a Montreal firm dating from 1885. Over time, American obtained controlling interest in the Empire Tobacco Company, the B. Houde Company, and the Joliette Tobacco Company. In 1907, the American Tobacco Company obtained a 50% interest in a company later known as the National Tobacco Company, a firm now best known for marketing smokeless tobacco. Imperial Tobacco sold this 50% interest in 1986.^[289] In 1908, Imperial Tobacco was created by a formal merger of the American Tobacco Company of Canada and Empire Tobacco Company. In 1912, the present Imperial Tobacco Ltd was incorporated as a successor to the Imperial Tobacco formed in 1908. At this point, controlling interest in Imperial Tobacco was no longer with the American Tobacco Company but with British – American Tobacco Co.

In subsequent years, Imperial acquired other tobacco companies: in 1921, General Cigar Co., a firm that included another company, S. Davis & Son; in 1930, Tuckett Tobacco Company, which controlled Tobacco Products Company of Canada and Philip Morris Co. Ltd, both Canadian firms; in 1936, Landau & Cormack Ltd; in 1942, L.O. Grothé; and in 1949, Imperial Tobacco Company (Newfoundland) Ltd, just as Newfoundland was entering Confederation. Imperial purchased Canadian rights to certain brands and trademarks from British – American Tobacco (now known as BAT) in 1921 and from US-based Brown and Williamson in 1950.

In 1964, when the smoking and health issue was really heating up, Imperial started to diversify, fearing that tobacco was on the road to disappearance. Imperial obtained interests in Canada Foils Ltd, Growers’ Wine Company Ltd, and Welland Winery Ltd. In 1968, it acquired Simtel Incorporated and Editel Productions, both of Montreal, and in 1969, it acquired S & W Foods Inc. of San Francisco and Uddo & Taormina Corp. of New Jersey. Imperial also purchased Pasquale Bros Limited (later called Unico Foods), a food distributor based in Toronto. Imperial does not own any of these subsidiaries today.

In 1970, the company’s name was changed to Imasco (IMperial and ASsociated COmpanies). Imasco Ltd was the holding company for the various corporate interests. Other companies that Imasco has owned or in which Imasco once had a significant interest include Amco Services (Canada) Ltd (a vending machine company, which subsequently purchased other vending machine companies), Chalet Wines, Grissol Foods, Marché aux Escomptes S & M Ltée (Quebec discount health and beauty aid stores), Collegiate Sports (later Arlington Sports), Red Carpet Coffee Service Ltd, Ski Oberson Boutique Inc., Rancho Francisco, Toltec Foods (tortilla producer), Topmost Foods, Biscuits Montmagny Inc., Henri & Fils, PoP Shoppes of America, Inc., The Outdoor Stores, Lido Biscuit Cie Ltée, Canadian operations of Anco International (a cheese company), La Fromagerie de Comeville Inc., Cavalier China & Gift Shops, Burger Chef Systems, Inc., Flame Oil & Gas Ltd, Ingersoll Cheese, Embassy Cleaners, Tinder Box International (tobacco and gift shops), Peoples Drug Stores (based in the United States), and Canadian Northwest Energy Ltd.^[173,285] In 1995, Imasco sold off its long-standing ownership of United Cigar Stores.

A lot of these investments turned out to be big mistakes. It was the huge cash flow generated by tobacco that made the acquisitions possible in the first place, and it was the cash flow that allowed the company to get away with errant acquisitions. Many of the now discarded Imasco subsidiaries lost money or were simply not generating profits the way Imperial Tobacco was.

Today, in 1996, Imasco has interests in several large companies. Imasco owns Shoppers Drug Mart/Pharmaprix (Canada’s leading pharmacy chain), 98% of Canada Trust (Canada’s biggest financial institution after the big five banks), Hardee’s (the fourth largest hamburger fast-food chain in the United States), and Genstar Development (a land development company). Imasco’s ownership of Shoppers Drug Mart dates to 1978. Since then Shoppers Drug Mart has gobbled up other pharmacies.

In 1993, the conglomerate Imasco was the sixth largest publicly traded company in Canada when ranked by profits. Only Bell Canada, Seagram, and three banks enjoyed greater profitability.^[485] This ranking dropped to 12th in 1994 as other companies with more variable profit than Imasco’s moved ahead.^[486]

Imperial Tobacco is the driving factor behind Imasco’s financial success. Although Imperial’s net revenues only accounted for 16% of Imasco’s system-wide total in 1994, tobacco profits represented 51% of Imasco’s total pretax earnings from operations. This does not include the tobacco profits arising from retail tobacco sales by Shoppers Drug Mart. A study by University of Quebec accounting professor Léo-Paul Lauzon estimated that for the period 1987–93, the total amount of money provided by Imperial Tobacco to Imasco was greater than the total dividends paid out by Imasco.^[355] Not only was Imperial the source of all Imasco dividends, but also it provided money to reinvest in other Imasco ventures.

Imasco has had many influential individuals on its Board of Directors. In 1996, the directors include Bernard Roy, former Principal Secretary to Prime Minister Brian Mulroney and partner at the Montreal law firm of Ogilvy Renault, the same firm at which Mulroney is now a partner. Rob Pritchard, President of Canada’s largest university, the University of Toronto, is a director. Russell Palmer, former Dean of the Wharton Business School at the University of Pennsylvania, is a director. Former directors include Paul Martin, now Minister of Finance; Bill Bennett, one-time premier of British Columbia; and Torrance Wylie, previously a senior official with the Liberal Party of Canada. Claude Castonguay, a former Quebec Minister of Social Affairs and later a Progressive Conservative Senator, was a director in the 1970s. Pauline McGibbon was on the board briefly before she became Lieutenant-Governor of Ontario. McGibbon has also had a long association with the du Maurier Council for the Performing Arts, now known as du Maurier Arts Ltd, a sponsorship-granting body connected with Imperial Tobacco.

Some directors have had simultaneous appointments seemingly at odds with their directorship of a tobacco giant. For example, Nan-Bowles de Gaspé Beaubien, a director since 1987, is also a director of the Terry Fox Humanitarian Award Committee, an award in memory of Canada’s most famous cancer victim and in whose name millions of dollars for cancer research are raised annually. Murray Koffler, the founder of Shoppers Drug Mart, was a director of the Canadian Council on Drug Abuse and a director of Imasco at the same time.

Rothmans, Benson & Hedges Inc.

RBH is Canada’s second largest tobacco company. The company’s brand families include Rothmans, Craven “A”, Benson & Hedges, Number 7, Belvedere, Mark Ten, Viscount, Dunhill, Black Cat, Sportsman, Peter Stuyvesant, Belmont and Canadian Classics.

RBH’s stock is 83% foreign controlled. Forty percent is owned by a subsidiary of Philip Morris, the largest tobacco company in the United States. Philip Morris is the world’s largest consumer products company through sales of not only cigarettes, but also Kraft products, Miller beer, Toblerone chocolate, Post cereals, Maxwell House coffee, Jell-O desserts, Kool-Aid drinks, and Oscar Mayer meats. Philip Morris also owns 20% of Canada’s Molson Breweries. The remaining 60% of RBH stock is owned by Rothmans Inc., a Canadian holding company, which through a series of other holding companies is 71.2% owned by Rothmans International B.V., now based in the Netherlands. Rothmans International is ultimately controlled by the Rupert Family Trusts in South Africa. In 1994, there were 11 corporate levels between RBH and the ultimate South African interest.^[565]

RBH was formed in 1986 with the merger of Rothmans of Pall Mall Limited and Benson and Hedges (Canada) Inc. The former was controlled by Rothmans International, and the latter was a subsidiary of Philip Morris.

RBH’s market-share performance has been steadily eroding. In 1975, the combined cigarette market share of Rothmans and of Benson & Hedges was 43%. That has fallen to 20% and may continue to fall, in part because smokers of its brands are older than smokers of competitors’ brands.

Benson & Hedges started in Britain in 1873, expanded to New York around 1895, and from there expanded to Canada, opening a store in Montreal in 1906. The company was not a major player until Benson & Hedges (Canada) Ltd, along with its New York counterpart, merged with Philip Morris in 1954. In 1961, Benson & Hedges (Canada) Ltd opened a new cigarette factory near Brampton and started to market aggressively. In 1962, Benson & Hedges (Canada) purchased Tabacofina of Canada, the makers of Belvedere.

Rothmans of Pall Mall started operations in Canada in 1957 at a time when its British parent company was expanding throughout the Commonwealth. In 1958, Rothmans’ parent company acquired a controlling interest in Carreras Limited of London, United Kingdom. Carreras had a controlling interest in Canada’s Rock City Tobacco Company, a firm based in Quebec City since being founded in 1899 and best known for its

Craven “A”, Black Cat, and Sportsman brands. In 1963, all outstanding stock of Rock City Tobacco was acquired by Rothmans of Pall Mall Canada Ltd.

In the late 1960s, Rothmans started to diversify. At one time Rothmans has owned Alfred Dunhill of London Ltd (luxury goods and accessories) and Carling O’Keefe Breweries, which in turn has owned Jordan Valley Wines, Star Oil and Gas, the Canadian Football League’s Toronto Argonauts and the National Hockey League’s Quebec Nordiques. Carling O’Keefe was sold in 1987, and the Dunhill subsidiary was sold in 1990. RBH now focuses exclusively on tobacco.

Like Imperial Tobacco, Rothmans has had its share of prominent directors. The Chairman of the Board is Progressive Conservative Senator William Kelly. Kelly was appointed as a director shortly after the Conservatives won the 1984 election. Also on the Board of Directors is Roch Bolduc, a fellow Conservative Senator. Pierre des Marais II is President and Chief Executive Officer (CEO) of Unimédia Inc., a firm that owns several French language newspapers including Le Soleil in Quebec City and Le Droit in Ottawa.

Louis St Laurent, Liberal Prime Minister from 1948 to 1957, was Chairman of the Board of Rothmans during most of the 1960s. For part of the period that St Laurent was Chairman of Rothmans in the early 1960s, he was also President of the Canadian Heart Foundation. Other directors have included John Wettlaufer, former Dean of the business school at the University of Western Ontario; Alistair Gillespie, former Liberal cabinet minister; and Robert Winters, a former Liberal cabinet minister under St Laurent. After being on the Rothmans Board of Directors, Winters returned to politics and became Minister of Trade and Commerce. Winters later ran for the leadership of the Liberal Party but lost to Pierre Trudeau.

Joel Aldred, a high-profile radio and television announcer who recorded hundreds of cigarette commercials during the 1960s and early 1970s, sat on the Board of Directors.^[525] Maurice Sauvé, a former Liberal cabinet minister and husband of Jeanne Sauvé (who became Canada’s first female Governor-General), sat on the Benson & Hedges (Canada) Board of Directors before the company merged with Rothmans. Murray Koffler sat on the Rothmans Board of Directors before he sold the Shoppers Drug Mart chain to Imasco, after which he sat on the Imasco Board of Directors.

RJR–Macdonald Inc.

Canada’s third largest company is RJR – Macdonald Inc., with a 12% market share. A government publication shows the company is 100% owned by its immediate parent firm, RJR Tobacco Consolidated IHC, Inc. of the Bahamas, a Caribbean tax haven.^[565] This Bahamas company is related to US-based RJR – Nabisco Inc. and R.J. Reynolds Tobacco Company. Like Philip Morris, RJR – Nabisco is a huge global conglomerate that sells not only cigarettes but also such brand-name products as Planters peanuts, Life Savers candies, Oreo cookies, Ritz crackers, and Fleischmann’s margarine.

The overwhelming majority of the Canadian subsidiary’s cigarette sales come from the Export “A” brand family. RJR – Macdonald also manufactures Vantage, Macdonald, and Contessa Slims cigarettes and imports small quantities of Camel, Winston, Salem, and More cigarettes made by its US parent.

The company was established as Macdonald Tobacco in Montreal in 1858 by W.C. Macdonald, for decades the dominant man in Canada’s tobacco industry. The company was a family-owned business until it was sold to R.J. Reynolds in 1974 and renamed. There were some moves toward diversification, such as owning the X-Y Textile Company, but today RJR – Macdonald’s business is exclusively tobacco. In the 1990s the company began exporting cigarettes made under contract for its parent company.

Liberal Senator Michael Kirby, a prominent strategist and spokesperson for his party, has been a director of the company for many years. Another past Liberal connection has come through Jeffrey Goodman, who went from Prime Minister Pierre Trudeau’s press office to PR for RJR – Macdonald.

Other companies

All cigarette sales other than by the big three companies constitute less than 1% of the Canadian market. This includes all cigarette imports, as well as a small volume of products made by Bastos du Canada Ltée, based in Louiseville, Quebec. Bastos makes house brands and generic products for grocery store chains and other retailers. There are a number of other very small manufacturers.

There is no smokeless tobacco made in Canada. All such products sold in Canada are imported. Cigar sales, which declined substantially during the 1980s and early 1990s, are made up of both domestic and foreign brands.

Corporate wealth

The worldwide revenues of the tobacco transnationals operating in Canada total CA $168 billion:² Philip Morris has global annual revenues of US $65 billion;^[470] BAT, GB £21 billion;^[32] R.J. Reynolds, US $15 billion;^[491] and Rothmans, GB £7 billion.^[519] This mammoth sum provides enormous economic power. The total is greater than the revenues of any single government in Canada, whether federal or provincial. Moreover, unlike many governments, tobacco companies are not laden with horrific debts and deficits. Most significantly, the $168 billion (US $123 billion) in annual revenues is more than the individual gross domestic products of 180 of the world’s 205 countries.^[599]

The profits allow the industry to pay its Canadian executives handsomely, as indicated by reports filed under securities laws. In 1994, Donald Brown, President of

²Foreign exchange rates used were US $1 = CA $1.37 and GB £1 = CA $2.08.

Imperial Tobacco, earned $758 846 in salary, bonus, and other compensation. As well, he was given options to purchase 10 000 shares at $36.00 any time before 2 May 2004. Because the market price of the shares was $36.00 at the time the options were awarded, Brown gets a risk-free opportunity to take advantage of any increase in share price over a 10-year period. Purdy Crawford, Chairman of Imasco, did even better, earning $2 030 576 in total compensation plus the option to purchase 24 000 shares.^[283] For fiscal year 1995, Joe Heffernan, President and CEO of Rothmans, Benson & Hedges Inc., earned $466 000 in total compensation. As well, he can benefit further under long-term incentive plans.^[517]

Professor Lauzon’s study^[355] of the industry’s financial statements is revealing. He found that over the period 1987–93, the companies earned almost $2 billion in profits, which in his view ridiculed government antitobacco policies. Dividends equivalent to more than 99% of these profits were declared, 58% of which (more than $1 billion) was sent out of the country, thereby substantially reducing the real value of the tobacco industry to the Canadian economy. The 58% does not include a further special dividend of $99 million declared by RBH in early 1994. Each of the companies is generating plenty of cash. In RBH’s case, dividends were actually greater than profits. Lauzon also found that the companies were reinvesting very little of their profits in Canada: 17% for the industry as a whole and as low as 5% for RBH. As a proportion of net sales, only 2.4% was reinvested in Canada.

Annual after-tax return on shareholders’ investment for the industry as a whole over this period was a very high 33.3%.^[355] In 1993, pretax return on capital used was 84% for Imperial, 69% for RBH, 38% for RJR – Macdonald, and 69% for the industry as a whole^[60] — not bad in a year when individuals owning Canada Savings Bonds were earning interest at the pretax rate of 6%.

Why is the tobacco business so profitable in Canada? According to the Five Forces model of Harvard Business School professor Michael Porter,^[479] tobacco can be considered a five-star industry:

1. Buyers have little power relative to that of the industry, including when it comes to manufacturer price increases. The 6.6 million consumers are spread out across the country, and a great many of them are addicted. Consumers thus do not have the clout to prevent price increases. Intermediate buyers, the wholesalers and retailers, are numerous and normally competitive.
2. The industry’s suppliers have little bargaining power because what they supply (tobacco, paper products) are mostly commodities that could be obtained from other suppliers.
3. Few products can directly substitute for cigarettes in the same way that margarine can substitute for butter. Although nicotine gum and the nicotine patch do exist, their sales are small by comparison.
4. Large barriers prevent new competitors from entering the market. Normally, massive returns on investment would entice new entrants, but there have been no new players in Canadian tobacco in almost 40 years. In a business in which trademarks are everything, the biggest barrier is established brand names. With advertising restrictions making it much more difficult to establish new brand names, it becomes almost impossible to break into the Canadian market. As well, there are economies of scale in manufacturing and distribution. Manufacturing is technologically advanced and highly automated, and the equipment is expensive. Distribution requires a trained sales force that must span the country. Instead of there being any new companies in the market, the industry has consolidated from four main companies to three, with more rationalization forecast for the future. In 1989, Patrick Fennell, President of RBH, predicted that Canada’s three manufacturers would eventually shrink to two through the amalgamation of RBH and RJR – Macdonald.^[573,587]
5. Rivalry within the industry is relatively tame. Imperial Tobacco is the leader of the oligopoly. When Imperial raises its prices, the other two companies happily follow suit. There has not been a price war since 1986. Advertising restrictions — when in place — have helped reduce the rivalry, although companies still compete by paying retailers for stocking and prominently displaying various brands.

The high profitability of tobacco companies gives them the cash to pay for high-priced lobbyists, lawyers, PR specialists, advertising agencies, and junk-science researchers. One representative of an advertising agency working for a tobacco company said that the client had “more money than God.” Tobacco’s enormous profit potential provides a tremendous incentive for keeping the industry sales high. When it comes to efforts to combat tobacco control measures, the industry can write a blank cheque at any time. As the next chapter indicates, attempts to control tobacco use are hardly a recent phenomenon.

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