PURPOSE

This report is the latest in a series on cigarette sales, advertising, and promotion that the Federal Trade Commission (the Commission) has submitted annually to Congress since 1967 pursuant to the Federal Cigarette Labeling and Advertising Act:⁽¹⁾

The Federal Trade Commission shall transmit a report to the Congress . . . concerning (1) the current practices and methods of cigarette advertising and promotion, and (2) such recommendations for legislation as it may deem appropriate.⁽²⁾

INTRODUCTION

The statistical tables appended to this report provide information on domestic sales, consumption, and advertising and promotional activity for U.S. manufactured cigarettes for the years 1963 through 1994. The tables were compiled from raw data contained in special reports submitted to the Commission pursuant to compulsory process by the five major cigarette manufacturers in the United States: Brown & Williamson Tobacco Corporation, Liggett Group Inc., Lorillard Tobacco Company, Philip Morris Incorporated, and R.J. Reynolds Tobacco Company.⁽³⁾

COMMISSION ACTIVITY

On August 11, 1995, the Food and Drug Administration published proposed regulations Restricting the Sale and Distribution of Cigarettes and Smoking Tobacco Products to Protect Children and Adolescents. The FTC submitted a comment that offered general support for FDA's goal of reducing the incidence of underage tobacco use and expressing the Commission's view that the First Amendment gives FDA latitude to impose appropriate advertising restrictions designed to reduce the appeal and use of tobacco products by children and adolescents. The Commission recommended that FDA use the comment period to ensure that its regulations are narrowly tailored to meet First Amendment requirements.

In April 1995, the Commission approved B.A.T Industries' acquisition of The American Tobacco Company after B.A.T agreed to divest itself of certain cigarette brands and a cigarette manufacturing facility. The divestitures must be made to a Commission-approved purchaser, and are intended to preserve the competition that otherwise would have been eliminated by the acquisition. The consent agreement with B.A.T also prohibits B.A.T for a period of ten years from acquiring, without prior Commission approval, interests in any company engaged in the manufacture and sale of cigarettes in the United States. In November 1995, B.A.T requested approval from the Commission to divest certain cigarette brands to Lorillard Tobacco Company. In April 1996, the Commission rejected B.A.T's proposed divestiture, citing concerns that Lorillard would not compete aggressively in the discount market, and that the divestiture in all likelihood would cause a cigarette plant that was part of the proposed divestiture to close. In July 1996, B.A.T applied to divest six of the brands in question and the plant to Commonwealth Brands. As of September 1996, the Commission was evaluating that application.

On July 20, 1994, the Commission asked the National Cancer Institute to convene a consensus conference to address certain issues concerning the FTC cigarette testing methodology and ratings system. NCI, which shortly before had received a similar request from then-House Subcommittee Chairman Henry A. Waxman, convened the conference in December 1994. At the close of the conference, the Ad Hoc Committee of the President's Cancer Panel issued a statement recommending, inter alia, that the information currently provided to consumers be expanded to reflect more accurately the tar, nicotine, and carbon monoxide that smokers actually get from the cigarettes they smoke. The Commission is considering the issues raised by the Committee's findings concerning revisions to the FTC test methodology.

DISCUSSION OF THE DATA

Table 1 displays annual cigarette sales by manufacturers to wholesalers and retailers. In 1994, the major domestic cigarette manufacturers sold 490.2 billion cigarettes domestically, which is 28.8 billion more cigarettes than they sold in 1993. This 6.2 percent rise above the 1993 level is the first increase in sales in the last 10 years, and contrasts with an 8.9 percent decrease in sales in 1993. This recent volatility in cigarette sales by manufacturers is not reflected, however, in the cigarette consumption series produced by the U.S. Department of Agriculture (USDA). The USDA consumption estimates for the years 1992 through 1994 are 500 billion, 485 billion, and 486 billion cigarettes, respectively.⁽⁴⁾ Construed together, the two data sets suggest that some increase in the number of cigarettes actually sold to consumers occurred in 1994, but that the dramatic increase reported to the Commission likely reflects, in large part, changes in inventories rather than actual retail sales.

Table 2 shows U.S. adult per capita cigarette sales per year, and is generated by dividing manufacturers' sales to wholesalers and retailers by the U.S. adult population. Per capita sales increased from 2,414 in 1993, to 2,516 in 1994, an increase of 4.2 percent, or 102 cigarettes per person. Per capita sales had declined 9.8 percent, or 261 cigarettes, from 1992 to 1993. As with Table 1, the changes in per capita sales may reflect changes in wholesalers' and retailers' inventories.

Tables 3 through 3E show the amounts spent on cigarette advertising and promotion for the years 1970, and 1975 through 1994.⁽⁵⁾ These tables break out the amounts spent on the different types of media advertising (e.g., newspapers and magazines) and sales promotion activities (e.g., distribution of cigarette samples and specialty gift items) and also give the percentage of the total amount spent for the various types of advertising and promotion.

Table 3E shows that overall, $4.83 billion was spent on cigarette advertising and promotion in 1994, a decrease of $1.2 billion, or 19.9 percent, from the $6.03 billion spent in 1993. This is the first decrease in spending since 1986, when expenditures declined $94.1 million, or 3.8 percent, from the previous year.

Newspaper advertising expenditures decreased 33.3 percent between 1993 and 1994, from $36.2 million to $24.1 million; this advertising category accounts for one-half of 1 percent of all expenditures. There has been a continuing trend away from newspaper advertising since 1981, when newspaper spending accounted for 23.1 percent of total expenditures.

A total of $251.6 million was spent on magazine advertising in 1994, an increase of 7.0 percent from 1993. As a percentage of total advertising, magazine advertising increased from 3.9 to 5.2 percent. Spending on magazine advertising peaked in 1984, when the cigarette companies reported spending $426 million, or 20.3 percent of total advertising and promotional expenditures, for advertising in magazines.

Spending on outdoor advertising totaled $240.0 million in 1994, a slight increase of $8.5 million from 1993, when $231.5 million was spent. In 1994, outdoor advertising expenditures comprised 5.0 percent of total advertising and promotional spending, down from a high of 15.5 percent in the early 1980's.

Spending on transit advertising decreased from $39.1 million in 1993 to $29.3 million in 1994, a drop of 25.0 percent; however, this category, like newspapers, accounts for only about one-half of 1 percent of all expenditures.

Spending on point-of-sale promotional materials decreased by $58.3 million (14.5 percent) from 1993 ($400.9 million) to 1994 ($342.7 million). As a percentage of total advertising and promotion, point-of-sale advertising has remained near 7 percent since 1988.

Promotional allowances were $1.7 billion in 1994, up 7.8 percent from $1.6 billion in 1993. In 1993, these expenditures accounted for 25.8 percent of the total; they accounted for 34.7 percent of all expenditures for 1994, and for the first time since 1985, this was the largest category of advertising and promotional expenditures.

Money spent giving cigarette samples to the public ("sampling distribution") decreased significantly in 1994. In 1993, $40.2 million was spent on sampling, while in 1994, $7.0 million was spent, a decrease of 82.7 percent. Cigarette sampling distribution accounted for only 0.1 percent of the total spent on advertising and promotion in 1994. Cigarette sampling expenditures reached a high of 7.9 percent of the total spent on advertising and promotion in 1982.

In 1994, $850.8 million was spent on specialty item distribution through the mail, at promotional events, or by any means other than at the point-of-sale with the purchase of cigarettes. This is an increase from 1993 of $95.0 million, and accounted for 17.6 percent of the total advertising and promotional expenditures for 1994. Specialty items distributed along with the purchase of cigarettes were redesignated as retail value added expenses beginning in 1988.⁽⁶⁾

Spending on public entertainment decreased by $3.0 million from 1993 to 1994. With expenditures reported of $81.3 million, public entertainment in 1994 accounted for 1.7 percent of total expenditures.

The cigarette companies reported a total of $31.2 million for direct mail advertising in 1994, virtually no change from the $31.5 million reported in 1993. This category does not include direct mail containing coupons. Coupons sent via direct mail have been reported in the coupon and retail value added category since 1988.

All reporting companies indicated that no money had been spent on endorsements and testimonials for cigarettes in 1994. No expenditures have been reported in this category since 1988.

Coupons and retail value added promotions expenditures were cut in half in 1994, dropping $1.31 billion from an all time high of $2.56 billion in 1993 to $1.25 billion in 1994. This 51.2 percent decrease in what had been the largest advertising category since 1990 accounts for almost all of the 19.9 percent overall drop in expenditures for 1994. This category includes cents-off coupons, multiple pack promotions, and retail value added offers.⁽⁷⁾ The cigarette companies were first asked to report these expenses as a distinct category in 1988, when $874 million was spent.

The Commission collects expenditure information in two categories that do not appear as line items on the charts because they may span several categories. In 1988, the Commission began requiring the cigarette companies to state separately the amount of money spent on sports and sporting events. For 1994, the major domestic cigarette companies reported that they spent $76 million on sports and sporting events.⁽⁸⁾ This is down by $2 million from 1993 and $6 million from the amount spent in 1992.

In 1989, the Commission began requiring the cigarette companies to declare whether any money or other form of compensation had been paid to have any cigarette brand names or tobacco products appear in any motion pictures or television shows. This practice has been reported as unfunded since 1989.

The data on cigarette advertising and promotional expenditures reported in Tables 3 through 3D were not collected in their present form until 1975. Therefore, Tables 4 and 5, which report cigarette advertising expenditures from 1963 through 1974 and 1970 through 1974, respectively, have been retained in the report for comparative purposes.

Tables 6 through 6C give the domestic market share of, and the percentage of total cigarette advertising expenditures devoted to, cigarettes yielding 15 milligrams (mg) or less tar for the years 1967 through 1994. The data are broken down into separate categories according to tar yields of less than 3, 6, 9, 12, and 15 mg (categories are presented cumulatively).

In 1994, 71.2 percent of the domestic cigarette market was cigarettes yielding 15 mg or less of tar. The market share for cigarettes yielding 15 mg tar or less has increased gradually since 1982, when it accounted for 52.2 percent.

Since 1979, the cigarette companies have reported that the majority of advertising and promotional spending has been devoted to cigarettes yielding 15 mg or less tar. For 1994, they reported that 72.2 percent of all advertising and promotion was spent on cigarettes that yield 15 mg tar or less.

As shown in Table 7, filtered cigarettes have dominated the market since the Commission began collecting this information in 1963, rising from 58 percent at that time to 97 percent in 1992. The market share of filtered cigarettes remained constant in 1994 at 97 percent. Table 8 shows that the cigarette companies have reported a close correlation between advertising and promotion expenditures and domestic market share for filter cigarettes in recent years.

Table 9 provides the domestic market share of the various cigarette length categories. The King-size (79-88 mm) category continues to be the biggest seller, with 56 percent of the market. This category is followed by the Long (94-101 mm) group, which holds 41 percent of the market. Regulars (68-72 mm) and Ultra-Longs (110-121 mm) continued to account for 1 percent and 2 percent, respectively, of the market in 1994.

Tables 10 and 10A provide the domestic market share and percentage of total advertising and promotional expenditures devoted to Long and Ultra-Long cigarettes for 1967 through 1981, and 1982 through 1994, respectively. In 1994, the market share for longer cigarettes decreased slightly (44 percent to 43 percent), while the percentage of total advertising and promotional expenditures rose from 41 percent to 43 percent.

Table 11 gives the market share of menthol and non-menthol cigarettes. In 1994, the market share of menthol cigarettes declined from 26 percent to 25 percent of the market, while non-menthols rose from 74 percent to 75 percent.

In 1994, the Commission began requiring the cigarette companies to indicate whether "tar" and nicotine ratings were displayed on cigarette packaging and advertising. Table 12 shows that cigarette varieties that printed tar and nicotine ratings on their packs represented only 6.3 percent of the overall market. Table 12 also shows: (1) the percentage of the overall cigarette market represented by varieties with different tar ratings, and (2) within each tar group, the market share of those varieties that disclose tar and nicotine ratings on their packs.

TABLE 1

DOMESTIC CIGARETTE SALES
(BILLIONS OF CIGARETTES)*

TABLE 2

PER CAPITA DOMESTIC CIGARETTE SALES*

TABLE 3

DOMESTIC CIGARETTE ADVERTISING AND PROMOTIONAL EXPENDITURES
FOR YEARS 1970, 1975-1977
(THOUSANDS OF DOLLARS)

TABLE 3A

DOMESTIC CIGARETTE ADVERTISING AND PROMOTIONAL EXPENDITURES
FOR YEARS 1978-1981
(THOUSANDS OF DOLLARS)

TABLE 3B

DOMESTIC CIGARETTE ADVERTISING AND PROMOTIONAL EXPENDITURES
FOR THE YEARS 1982-1985
(THOUSANDS OF DOLLARS)

TABLE 3C

DOMESTIC CIGARETTE ADVERTISING AND PROMOTIONAL EXPENDITURES
FOR YEARS 1986-1989
(THOUSANDS OF DOLLARS)

TABLE 3D

DOMESTIC CIGARETTE ADVERTISING AND PROMOTIONAL EXPENDITURES
FOR YEARS 1990-1993
(THOUSANDS OF DOLLARS)

TABLE 3E

DOMESTIC CIGARETTE ADVERTISING AND PROMOTIONAL EXPENDITURES
FOR YEAR 1994
(THOUSANDS OF DOLLARS)

TABLE 4

DOMESTIC CIGARETTE ADVERTISING EXPENDITURES
BY MEDIA FOR YEARS 1963 - 1974*
(MILLIONS OF DOLLARS)

TABLE 5

DOMESTIC CIGARETTE ADVERTISING EXPENDITURES
BY MEDIA FOR YEARS 1970 - 1974*
(MILLIONS OF DOLLARS)

TABLE 6

DOMESTIC MARKET SHARE OF AND EXPENDITURES FOR ADVERTISING
AND OTHER PROMOTIONAL ACTIVITIES FOR CIGARETTES YIELDING
FIFTEEN MILLIGRAMS (mg.) OR LESS OF TAR
(1967 - 1981)

TABLE 6A

DOMESTIC MARKET SHARE OF AND EXPENDITURES FOR ADVERTISING
AND OTHER PROMOTIONAL ACTIVITIES FOR CIGARETTES YIELDING
FIFTEEN MILLIGRAMS (mg.) OR LESS OF TAR
(1982 - 1987)

TABLE 6B

DOMESTIC MARKET SHARE OF AND EXPENDITURES FOR ADVERTISING
AND OTHER PROMOTIONAL ACTIVITIES FOR CIGARETTES YIELDING
FIFTEEN MILLIGRAMS (mg.) OR LESS OF TAR
(1988 - 1993)

TABLE 6C

DOMESTIC MARKET SHARE OF AND EXPENDITURES FOR ADVERTISING
AND OTHER PROMOTIONAL ACTIVITIES FOR CIGARETTES YIELDING
FIFTEEN MILLIGRAMS (mg.) OR LESS OF TAR
(1994)

TABLE 7

DOMESTIC MARKET SHARE OF FILTER
AND NON-FILTER CIGARETTES

TABLE 8

DOMESTIC MARKET SHARE OF AND EXPENDITURES
FOR ADVERTISING AND OTHER PROMOTIONAL ACTIVITIES
FOR FILTER CIGARETTES

TABLE 9

DOMESTIC MARKET SHARE OF CIGARETTES
BY LENGTH IN MILLIMETERS (mm)

TABLE 10

DOMESTIC MARKET SHARE OF AND EXPENDITURES FOR ADVERTISING AND
OTHER PROMOTIONAL ACTIVITIES FOR LONGER (94-121 mm)
CIGARETTE VARIETIES
(1967 - 1981)

TABLE 10A

DOMESTIC MARKET SHARE OF AND EXPENDITURES FOR ADVERTISING AND
OTHER PROMOTIONAL ACTIVITIES FOR LONGER (92-121 mm)
CIGARETTE VARIETIES
(1982 - 1994)

TABLE 11

DOMESTIC MARKET SHARE OF MENTHOL
AND NON-MENTHOL CIGARETTES

TABLE 12

DISCLOSURE OF TAR AND NICOTINE RATINGS
ON CIGARETTE PACKS
(1994 DATA)

Overall market share of cigarette varieties that disclose ratings on the cigarette pack: 6.3 percent.

1. Pub. L. No. 89-92, 79 Stat. 282 (1965), as amended by Pub. L. No. 98-474, 98 Stat. 2204 (1984) and by Pub. L. No. 99-92, § 11, 99 Stat. 393, 402-04 (1985), current version at 15 U.S.C. § 1331 (1982 & Supp. IV 1986).

2. 15 U.S.C. § 1337(b) (Supp. IV 1986).

3. In 1995, B.A.T, the parent corporation of Brown & Williamson, acquired The American Tobacco Company.

4. USDA, Tobacco Situation and Outlook Report, TBS-236, June 1996, Table 1, p. 4. Differences between the FTC and USDA series may reflect changes in inventory holdings by cigarette wholesalers and retailers. Shifts in inventories can influence the numbers of cigarettes sold annually by cigarette manufacturers to wholesalers and retailers, which is the statistic reported to the FTC and contained in the annual cigarette reports. In contrast, year-to-year changes in wholesaler inventories are not reflected in the USDA series, which is based on an estimate of the number of cigarettes actually sold to consumers.

5. The reported figures include all advertising, merchandising, and promotional expenditures related to cigarettes, regardless of whether such advertising would constitute "commercial speech" or would be protected from law enforcement action under the First Amendment. The Commission began requiring tobacco companies to include expenditures for such protected speech in 1989.

6. Specialty item advertising is the practice of branding items such as T-shirts, caps, sunglasses, key chains, calendars, lighters and sporting goods with a brand's logo, and then giving them away or selling them to consumers.

7. Multiple pack offers are additional packs of cigarettes that are given free with cigarette purchases, such as "buy one, get one free." Retail value added offers include non-cigarette items, such as key chains or lighters, given away at the point of sale with the purchase of cigarettes.

8. This includes expenditures for: (1) the sponsoring, advertising or promotion of sports or sporting events; support of an individual, group, or sports team; and purchase of or support for equipment, uniforms, sports facilities and/or training facilities; (2) all expenditures for advertising in the name of the cigarette company or any of its brands in a sports facility, on a scoreboard, or in conjunction with the reporting of sports results; and (3) all expenditures for functional promotional items (clothing, hats, etc.) connected with a sporting event.