The tobacco industry has traditionally been one of the most important industries in North Carolina and a backbone of the state's agricultural heritage. Yet as the North Carolina economy continues to transition from an agricultural economy to a manufacturing and, increasingly, service-based economy, the industry faces new challenges, both at home and abroad. Internationally, as barriers to free trade in agricultural products slowly fall away, new competitors have arisen to challenge the North Carolina industry.
In this section we introduce the key sections of the website, including the structure of the industry using a value chain framework, an overview of the industry across multiple areas including the labor market, international trade and policy, and the key trends and dynamics that are shaping this industry now and in the future. In each section the past and present trends in the industry are analyzed from the perspective of North Carolina, the United States and North Carolina’s footprint compared to other states.
Tobacco Value Chain
The tobacco industry can generally be divided into two main sections:
- Farming (Raw Materials) - This includes not only the planting, tending, and harvesting of tobacco leaf, but generally also includes initial processing steps, including curing tobacco to dry out the leaves and stems. Farmers also sort and grade tobacco, based on criteria like color and aroma (7).
- Processing Components & Final Product Manufacturing - This includes both initial processing of tobacco leaf (cleaning and resorting, stemming and redrying, aging) and specific manufacturing processes for a variety of final products, including cigars, cigarettes, and chewing tobacco. Final tobacco product companies tend to be involved in the manufacturing and the distribution and sales segments on the value chain. These firms control the important aspects of the production process and the marketing and branding activities in the value chain.
Every stage of production of the tobacco value chain, from tobacco growing to distribution and sales is located in North Carolina, and this state is one of the centers of the U.S. tobacco industry. Tobacco is a crop that can be grown in a wide range of soil and climate conditions, and 16 states and approximately 120 countries produce it across the world (6). Geographical differences exist in the production of the two main types of tobacco produced in North Carolina: air- and flue-cured tobacco. Air-cured tobacco differs from flue-cured tobacco in a number of ways, including the filling power and pH of the smoke. North Carolina's soil is, in general, more adept at growing flue-cured tobacco, and, thus, smaller amounts of air-cured tobacco are produced in North Carolina.
Overview of the Industry
The introduction of tobacco into North Carolina has a long history. When settlers moved from Virginia to North Carolina around 1663, they struggled to grow any other crop besides tobacco in the dry, sandy soil. During this time, the Europeans viewed tobacco as a luxury and bought it from Spain. The new colonists saw the opportunity in the overseas demand for tobacco and started growing tobacco in North Carolina as a way to gain entry into the European tobacco market (5).
As centuries passed, the tobacco business became an integral part of North Carolina's culture. James B. Duke formed the American Tobacco Company in Durham and, as it expanded around the world, it continued to be based in Durham. Even today, tobacco is an instrumental part of North Carolina, especially because of its role in the employment and the economy of the state. In addition to farmers, the tobacco business employs many workers in processing, manufacturing, wholesale, and retail outlets and related industries.
Employment and establishments have declined steadily in the United States and North Carolina across all segments of the tobacco value chain over the last two decades. In 1992, the U.S. tobacco industry employed over 80,762 people in 2,144 establishments. By 2012 this number dropped to 42,531 workers in 1,955 establishments, a decline of 47.34% and 8.82% respectively over the last two decades (1992-2012).
While significant declines have occurred in North Carolina, the state is still currently the largest overall employer, representing 25.2% of U.S. employment and the largest in the U.S. in terms of the overall number of establishments (17.3% of U.S. establishments). In 1992, North Carolina was the overall largest employer but its relative share of national employment was slightly higher (29.3%), however, its national share in number of establishments was slightly lower (14.4%).
Within the value chain, the distribution segment of the chain (tobacco and tobacco product merchant wholesalers) employs the most U.S. workers and accounts for by far the most establishments; however within North Carolina, the components and final products segment (tobacco manufacturing) is the most important in terms of employment and the raw materials segment (tobacco farming) dominates the number of establishments. Although employment has declined and North Carolina’s share of U.S. employment has fallen by 4.1%, NC has remained the leading employer both in the final products segment and the raw materials segments – while Florida, Texas, Pennsylvania, Ohio, California, and New York have been employment leaders in the distribution segment. Overall wages have increased at a slower rate in NC compared to the U.S. average over the last two decades across all segments (43.91% vs. 48.87%). This was slightly more pronounced in North Carolina’s main segment (tobacco manufacturing) where North Carolina wages increased by 37.28% compared to a U.S. average of 50.1%.
Geographically, the industry is somewhat dispersed across numerous counties in North Carolina, with a general concentration in the more eastern-central counties. One identifiable cluster includes Wilson, Johnston and Nash counties, with Pitt, Wake, Wayne and Sampson counties adding to the eastern-central concentration.
Exports of tobacco products have declined steadily in both the United States and in North Carolina specifically over the last decade. In 2002, the U.S.’s total export value was more than $1.96 billion. By 2012 this number dropped to $526.63, a decline of 372%. On the other hand, during the four year period 2008 to 2012 total U.S. imports of tobacco products have increased by 25.35% (from $650.49 – $871.35 million). However, North Carolina’s total imports have fallen by 36.7%.
While significant export declines have occurred in North Carolina’s tobacco products, the state is still currently the largest overall exporter. In 2002 North Carolina was the second largest exporter of tobacco products with only a 23.5% share of all U.S. exports. Interestingly, amidst its export decline of 30.25% (from $461.83 in 2002 to $332.14 million in 2012), North Carolina became the largest U.S. exporter of tobacco products and increased its total state share to 61.2% in 2012 – a result of even more substantial declines experienced in Virginia and Georgia.
By far the largest export-trading partner for North Carolina has been Japan over the course of the last decade, and in 2012 Japan bought 91.2% of all North Carolina’s exported tobacco products. Other buyers of North Carolina’s tobacco products have been United Arab Emirates, Russia, Turkey, Taiwan and Canada, but none have come close over the decade 2002 to 2012 to Japan in its amount purchased. Export-trading partners for the U.S. as a whole in 2012 largely mirrored that of North Carolina, with Mexico being one key difference – in that Mexico was the second largest buyer of U.S. tobacco products but did not do business with the state of North Carolina.
North Carolina is not a substantial importer of tobacco products, which reflects its competency as a state to procure its own needed inputs for production of tobacco products. As the 9th largest state importer in 2008 with a total value of $18.09 million and 2.8% share of total U.S. imports, it decreased its total amount imported in 2012 to $11.45, and fell to a 1.3% share of total U.S. imports. North Carolina’s largest import-trading partners in 2012 were France ($3.01 million) and Switzerland ($2.68 million). In 2010 North Carolina sourced $9 million and $7.6 million from Dominican Republic and Honduras respectively; however, imports from these countries in 2012 fell to only $883 thousand and $15 thousand. As a nation, in 2012 the U.S.’s largest import-trading partners were Dominican Republic, Nicaragua, Honduras, Canada, South Korea and Turkey.
Over the course of the last two decades, seemingly countless campaigns, bills, and lawsuits have been waged at, against, or in favor of the tobacco industry. While the vast majority of efforts have not led to as substantial of changes as either the anti-tobacco or pro-tobacco sides may have hoped for, a smaller number but no less important policies have been implemented over the last decade and a half. By unpacking and briefly analyzing some of the most relevant and influential policies implemented at the state, national, and international level, this section provides a better understanding for how, and in many cases, why the tobacco industry has and continues to change so much. From this understanding this section critically assesses some of the ways North Carolina has been, and is likely to continue to be affected by each related policy.
Trends & Developments
For the past few decades, the Big Four tobacco companies have dominated the tobacco industry: Philip Morris, RJ Reynolds, Brown & Williamson, and Lorillard. A merger between RJ Reynolds and Brown & Williamson in summer 2004 created Reynolds American. Philip Morris was later acquired by Altria and has recently moved its headquarters from Cabarrus County to Richmond, Virginia; Altria controls about 50% of the U.S. market share. The three major U.S.-based players in North Carolina cigarette manufacturing are: Reynolds American, Lorillard and Liggett. The other two top employers in North Carolina are Alliance One (engaged in tobacco wholesale) and Imperial Tobacco Group, a UK-based tobacco company that acquired Commonwealth Brands (see the Corporations section).
Increasing Legislation on Smoking and Changes in Taxes
Around the turn of the millennium and especially in the mid-2000s, drastic changes have taken place in how the tobacco industry is regulated in the U.S at the state and national levels. The effects of new regulations are far-reaching, and have generated dynamic shifts in how the U.S. tobacco industry operates. In order to remain competitive, it is implicit that industry actors find ways to adjust to and operate within the ever changing policy environment.
At the state level for example, in 2002, zero states had laws banning smoking at the three most commonly frequented public places – worksites, restaurants, and bars. However, by 2010 44 states (including D.C.) had passed state-wide laws banning/restricting smoking at some or all of these locales. In addition to this, costs for cigarettes have gone up drastically across the U.S, from which many analysts have synthesized an inverse relationship between increasing prices and falling demand for cigarettes. In 2000, the average national price of a pack of cigarettes across all states was roughly $3.50. By first quarter 2014, the average price was $5.98. While cigarette manufacturing companies have increased their costs during this time, many states have also drastically increased their imposed excise taxes as evidenced by the growth in the national state average from $0.47 in 2000 to $1.36 in 2014.
From a national regulatory stance, the Food and Drug Administration (FDA) has been granted new and unprecedented oversight of the tobacco industry via the passing of the Family Smoking Prevention and Tobacco Act (Pact Act) in 2009. The Pact Act has been one of the most substantial pieces of national tobacco legislation in recent decades; grating the FDA the authority to standardize amongst other things: marketing and labeling techniques, mandatory research on ingredients included in tobacco products, as well as the ability to monitor and inspect tobacco companies to ensure compliance. These new regulatory controls, while not as stringent as the FDA would ideally prefer, have and will continue to impose stricter guidelines that demand more from an industry already experiencing no shortage of challenges (for more information, see the policy section).
Emergence of E-Cigarettes
Commercial sales of electronic cigarettes (or e-cigarettes) in the U.S. have sky rocketed in a very short amount of time since their 2006-2007 market release in the U.S. Over the five year span from 2008 to 2012, annual sales doubled from $250 million to over $500 million (1). Between 2012 and 2013, sales more than tripled – surpassing the $1.5 billion mark (2). While initial products in the U.S. were designed and marketed by small independent businesses, big tobacco companies such as Lorillard, Altria, and Reynolds have all aggressively entered the industry; acquiring many of the larger brands (such as Lorillard did with Blu ecigs and SKYCIG) and/or have started their own brands (such as Altria’s MarkTen and Reynold’s Vuse). With such success, the e-cigarette market is predicted by some analysts to potentially surpass annual tobacco sales by as early as 2023 (2).
Much of the success of e-cigarettes can be attributed to the perceived reduced harm they have on smokers’ health compared to traditional tobacco cigarettes – a marketing strategy that e-cigarette companies have promoted since their inception. Surprisingly though, little actual data has been conducted on the health effects e-cigarettes have on its users. Moreover, no federal regulation yet exists to monitor and control what ingredients an e-cigarette can and/or should be allowed to contain. While the exclusion of tar and other known toxic and carcinogenic ingredients traditionally found in many tobacco products is seen a positive step to offering a healthier alternative, some studies have discovered the presence of other toxins and known carcinogens in e-cigarette solutions (3). Additionally, many solutions contain equivalent and sometimes even higher nicotine content as cigarettes which have the potential for making them highly addictive.
As health concerns increase in the U.S. amidst a rapidly expanding consumer base – including amongst underage youths (4) – the future growth trajectories of the e-cigarette industry rests largely in the balance of the types of legislative regulations that are imposed on it. For much of 2013 and into 2014 the FDA has publically announced its intention to begin regulation, however, at the time of writing (March 2014) it has yet to reveal how, and in what ways, it intends/has the power to do so. Currently, e-cigarettes are employing a number of different marketing strategies such as the use of magazine ads, sponsoring sporting events, free giveaways, promoting a variety of candy-like flavors, as well as eliciting celebrity endorsements – all of which were notoriously successful strategies used by cigarette companies before legislative actions repealed their ability to do so. Given the high profile traction e-cigarettes are gaining, not least of which stem from investors and venture capitalists, it is almost certain that aggressive lobbying and heated legal disputes will follow any regulations thought to be even slightly disadvantageous to industry interests.
Crop Diversification in North Carolina
As the U.S. tobacco industry has largely been in decline over the last decade, many former tobacco farmers have been forced to, or have chosen to exit tobacco production. Indeed, falling demand for U.S. tobacco exports has been a primary cause of consolidations at the production segment of the tobacco value chain, forcing many smaller farmers out of the industry. Interestingly though, other farmers have chosen to leave or reduce their levels of tobacco production in pursuit of other farming opportunities. A critical driver of this shift has been the dissemination of funds from the 1998 Master Settlement Agreement (MSA) for the purpose of promoting various economic development initiatives, which states like North Carolina have and are continuing use in large part to support a process of crop diversification away from tobacco and into other economically viable avenues.
Two such examples of crop diversification away from tobacco in North Carolina are that of the grape/wine industry and sweet potatoes. The grape/wine industry represents a case of new growth in a wholly underdeveloped industry in North Carolina, funded largely by MSA funds made available to North Carolina tobacco farmers looking to diversify. While sweet potatoes represent a more mature industry that have benefited from increased uptake by former tobacco farmers, helping channel growth through increased production. In an effort to properly distribute MSA funds, North Carolina state legislatures established a private nonprofit entity, Golden LEAF Foundation, to manage a $2 billion fund from which tobacco farmers could access to invest in crop diversification. Relatedly, numerous grants and endowments have and continue to be made at various educational institutions, industry organizations and private businesses to fund detailed research and training programs geared towards helping farmers with the technical and commercial aspects of transitioning into new products – like grapes/wines and sweet potatoes (as well as others). The combination of these efforts have in a very short time seen North Carolina rise non-commercial producer of grapes and wine in 2001 when investments began to the ninth largest U.S. wine producing state in the U.S. in 2013. In addition North Carolina has seen its market share in total U.S. sweet production increase from 44% to over 50% during this same period.
- Esterl, M. (2013, June 9). “E-Cigarettes Fire Up Investors, Regulators” The Wall Street Journal, Retrieved on March 12, 2014.
- McArdle, M. (2014, Feb. 6) “E-Cigarettes: A $1.5 Billion Industry Braces for FDA Regulation.” Bloomberg Businessweek. Retrieved on March 12, 2014.
- The Washington Post (2014, March 7), “What’s in E-Cigarettes, and are they Safe? A Few Issues to Consider Before you ‘Vape’.” Retrieved on March 12, 2014.
- Richtel, M. (2014, March 4). “E-Cigarettes, by Other Names, Lure Young and Worry Experts.” The New York Times. Retrieved on March 12, 2014.
- North Carolina Department of Agriculture and Consumer Services, "North Carolina Tobacco," Last accessed July 27, 2007.
- USDA and the National Agricultural Statistics Service, Agricultural Statistics 2004. Washington, DC: United States Department of Agriculture. pp. II-27 - II-44.
- Wise, W. & Reaves, D. (1997). "Tobacco's Important Role in the Economy of Southside Virginia," Blacksburg, VA: Virginia's Rural Economic Analysis Program 30.