[Intl-tobacco] Economist on tobacco price-fixing

[Robert Weissman]

The price is not quite right
Cigarette companies have been accused of all sorts of wrongdoing. Is it
time to add price-fixing to the list?
Source: The Economist, Friday, 7/6/01

Jul 5th 2001

>From The Economist print edition

THE tobacco industry has plenty of fires to fight at the moment. It stands
accused of supporting cigarette smuggling. It has also faced a raft of
claims that it misled smokers about the dangers of cigarettes and marketed
an addictive drug to teenagers. On June 29th, America=92s Supreme Court
refused to hear an appeal brought by Brown & Williamson, a cigarette firm,
opening the way for the first tobacco-related payout to a private
individual.

The industry=92s legal woes have been compounded by the terms of
out-of-court settlements. In settling with the state of Minnesota for $6.6
billion in 1998, a group of companies=97including Philip Morris (PM),
British American Tobacco (BAT) and R.J. Reynolds (RJR)=97agreed to place
company documents unearthed in the litigation into public depositories for
ten years. Researchers have been sifting through these for indications of
further misdemeanours, with some success: some documents, for instance,
raise serious questions about involvement in smuggling, which the firms
deny. Equally important, they point to widespread price-fixing.

The Economist has seen documents that suggest the big tobacco
multinationals colluded to fix prices in as many as 23 countries in
Africa, Asia, the Middle East, Latin America and Europe. All of the
documents come from the archive that BAT, the world=92s most international
tobacco company, set up in Guildford, England, following the Minnesota
settlement. But although they are internal BAT memos, they also suggest
the involvement of its main competitors in price collusion.

Several of the documents make overt reference to price increases
negotiated with rivals. An example is a memo on the Thai market, written
on March 1st 1991, just after a decision by the GATT, the predecessor of
the World Trade Organisation, forced the Thais to open their cigarette
market to foreign firms.  It says: =93PM and RJR want to go in at 40 baht
and continue with transit [industry jargon for smuggling] to supply
demand.=94 It goes on to explain that the rivals are advocating initial
pricing at that level =93to demonstrate that the legal business will be
minimal=94. The companies, it seems, were fixing prices not only to raise
their margins but for a more strategic reason: to lull the Thai
government, one of the developing world=92s more anti-smoking
administrations, into thinking that new foreign cigarette brands would not
fare well, and thus avoid tobacco-control measures.

In another document from 1991, this time on Latin America, a BAT manager
explains to a colleague that Philip Morris =93agreed to raise Marlboro=92s
price above BES [a BAT brand] earlier this year as part of a series of
price increases to restore industry profits after the =91war=92 of 1989.=94=
 A
further memo, from 1992, concerning El Salvador, refers to local BAT
managers consulting a Philip Morris executive on price increases. =93We
continue to negotiate with competition,=94 it concludes.

Perhaps the most extraordinary document shows the minutes of a meeting
between managers from BAT and Philip Morris at Pennyhill Park, a hotel
near London, on August 5th 1992 (see box ). Among those present were Peter
Scheer, then president of Philip Morris=92s Latin American operations, and
Keith Dunt, a BAT executive who went on to become the company=92s chief
financial officer. The minutes reveal that the executives discussed fixing
prices in several Latin American countries, in both the legal market and
the =93DNP=94 market. DNP stands for duty not paid=97ie, smuggled.

These are not isolated cases. In a 1991 document entitled Summary of Group
Marketing Strategies, the third strategy on the list is to =93implement
regular price increases, on an industry basis wherever possible, which at
least cover inflation to secure adequate profitability...=94

Reuters

An expensive drug

Nor do the documents refer merely to straightforward price collusion.
Market share was fixed, too. A note on BAT=92s Zimbabwe strategy, marked
=93secret=94, refers to the lack of profits growth in that market being in
part attributable to =93a 50:50 sharing agreement with Rothmans of the 2.4
billion annual market, thus discouraging any real management dynamics.=94
Rothmans merged with BAT in 1999.

Often in cases of alleged price-fixing, the companies involved claim it
was all the fault of rogue country managers far away. In this case, that
is hard to argue. Although most of the documents seen by The Economist
relate to developing countries far from head office, some of them were
most likely read by senior BAT executives. The Zimbabwe document was
headed =93Note to TEC=94, a reference to the Tobacco Executive Committee,
which consisted of company top brass. A number of other documents were
sent or copied to senior managers at head office. In some cases, the
authors were top executives at BAT=92s export arm, BATUKE.

Another claim made by industry sources is that it would be pointless to
try to fix prices in the developing world, as in most countries the global
players are up against local monopolies that dominate the market; without
their co-operation, it would be impossible to keep prices artificially
high or low.  But this claim is spurious, too. Even in those countries
where the tobacco multinationals have only a modest share of the overall
cigarette market, the market can essentially be divided into two: cheap
local brands, and the so-called =93premium=94 market of international brand=
s
such as Marlboro and Camel.  In this high-margin segment, two or three
multinationals usually dominate=97and can easily manipulate prices if they
collude.

Eric LeGresley, a consultant based in Ottawa, says the documents strongly
suggest that tobacco multinationals have operated as a cartel, with
price-fixing as an integral part of their operations. =93Once you
rationalise that your products will be killing half of your customers,=94 h=
e
argues, =93everything else questionable that you might do must seem rather
pedestrian.=94

BAT declined requests for an interview about the documents. =93These are ol=
d
documents taken out of context,=94 it said. RJR said it could not answer
questions about its international operations, as these were sold to Japan
Tobacco in 1999. Philip Morris said the documents were not new, and that
it abides by the laws of all countries in which it does business.

Leaving a trail

Taken as a whole, the documents strongly suggest that the fixing of prices
and of market share was widespread in the late 1980s and early 1990s.
Clearly, at that time the tobacco companies did not expect that their
internal documents would end up in public archives. Even so, there were
attempts to avoid leaving a paper trail. In one memo, dated March 8th
1990, a manager pleads with a colleague not to name =93interested parties=
=94
and to keep communication oral whenever possible. Another document of
around the same time, entitled =93Low Category Pricing=94, refers to a meet=
ing
with people from RJR, and advises that =93we should stick to the letter of
the agreement=97even though it will be purely oral!=94 It is hard to see wh=
y
agreements would have to be oral, unless they involved something
questionable.

What of BAT=92s dismissal of the documents as old? Certainly, they are all
at least five years old. Even if they were to admit that the documents
referred to actual price-fixing, the companies might argue that they have
changed their ways=97and there is no evidence to suggest that any such thin=
g
is still going on.  If such evidence exists, it would not be found in the
depositories, as they only cover the period up to 1995. It is possible
that none of the price-fixing in the documents was illegal at the
time=97Thailand, for instance, only formally banned price-fixing in
1999=97but, legal or not, it was certainly unethical.

Might the industry have cleaned up its act voluntarily? Perhaps. One thing
seems clear, however. Tobacco firms have always fought tooth and nail
against price rises imposed on them by governments. But price hikes fixed
within the industry? That is a different matter entirely.