Federal Trade Commission (FTC) Cigarette Report
For 2004 and 2005 

Cigarette sales, advertising and promotion in the United States

(This page contains exerpts from the report, released in Spring 2007. The full report, including all tables and data for years 1963–2005, can be downloaded from the following link on the FTC web site: http://www.ftc.gov/reports/tobacco/2007cigarette2004-2005.pdf)

 
Introduction

This report provides information on domestic sales and advertising and promotional activity for U.S.-manufactured cigarettes. The data were compiled from special reports submitted to the Commission pursuant to compulsory process by the five major cigarette manufacturers in the United States: Altria Group, Inc. (the ultimate parent of Philip Morris); Houchens Industries, Inc. (the ultimate parent of Commonwealth Brands, Inc.); Loews Corp. (the ultimate parent of Lorillard Tobacco Co.); Reynolds American, Inc. (the ultimate parent of R.J. Reynolds Tobacco Co. and Santa Fe Natural Tobacco Company, Inc. and which acquired Brown & Williamson Tobacco Corp. in 2004); and Vector Group Ltd. (the ultimate parent of Liggett Group, Inc. and Vector Tobacco, Inc.).

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Total Cigarette Sales and Advertising and Promotional Expenditures

Advertising and promotional expenditures declined from $15.15 billion in 2003 to $14.15 billion in 2004, and then to $13.11 billion in 2005.

Price discounts paid to cigarette retailers or wholesalers in order to reduce the price of cigarettes to consumers: $10.93 billion (77.3 percent of total advertising and promotional expenditures) in 2004, and $9.78 billion (74.6 percent of all expenditures) in 2005.

The major domestic cigarette manufacturers sold or gave away 363.4 billion cigarettes in 2004, down from 367.6 billion in 2003; in 2005, they sold or gave away 354.6 billion.

Sales rose from 360.5 billion in 2003 to 361.3 billion in 2004, and then declined to 351.6 billion in 2005.

Cigarettes given away decreased from 7.1 billion in 2003 to 2.1 billion in 2004, before rising to 3 billion in 2005.

USDA’s cigarette consumption estimates show a 3.0 percent decrease from 2003 to 2004 (from 400 billion cigarettes to 388 billion), and a 3.1 percent decrease from 2004 to 2005 (376 billion cigarettes).

 
Advertising and Promotional Expenditures by Category

Overall, $14.15 billion was spent on cigarette advertising and promotion in 2004, a decline from the record $15.15 reported by the major cigarette manufacturers in 2003. Spending declined another $1.04 billion, to $13.11 billion from 2004 to 2005.

Newspaper advertising expenditures decreased from $8.3 million in 2003 to $4.9 million in 2004 and then to $1.6 million in 2005, just over 1/100th of one percent of all expenditures. Although newspaper spending accounted for 23.1 percent of total expenditures in 1981, it has accounted for less than one percent of expenditures since 1992.

The manufacturers reported spending $95.7 million on magazine advertising in 2004 – down from $156.4 million in 2003 – and $44.8 million in 2005 (less than one percent of total spending in both years.) In 1984, reported magazine advertising totaled $425.9 million (20.3 percent of total advertising and promotional expenditures).

As they have since 2001, the companies reported that they made no expenditures on transit advertising (i.e., advertising within or on private or public vehicles or any transportation facility) in 2004 or 2005. Transit advertising peaked at $60.2 million in 1991.

Spending on point-of-sale promotional materials (ads posted at the retail location but excluding outdoor ads on retailer property) declined from $165.6 million in 2003 to $163.6 million in 2004, before rising to $182.2 million in 2005. Point-of-sale advertising accounted for 1.2 percent and 1.4 percent of total advertising and promotion in 2004 and 2005, respectively.

Beginning in 2002, the “promotional allowance” category was broken into four new categories: price discounts, promotional allowances paid to retailers, promotional allowances paid to wholesalers, and other promotional allowances. For 2004 and 2005, the largest “promotional allowance” category was price discounts paid to cigarette retailers or wholesalers in order to reduce the price of cigarettes to consumers (e.g., off-invoice discounts, buy downs, and voluntary price reductions). This accounted for expenditures of $10.93 billion in 2004 (up from $10.81 billion in 2003) and $9.78 billion in 2005.

The industry spent $542.2 million in 2004 (down from $1.23 billion in 2003) and $435.8 million in 2005 on promotional allowances paid to cigarette retailers in order to facilitate the sale or placement of cigarettes (e.g., payments for stocking, shelving, displaying, and merchandising brands, volume rebates, and incentive payments).

Promotional allowances paid to cigarette wholesalers (e.g., payments for volume rebates, incentive payments, value-added services, and promotional executions) totaled $387.8 million in 2004 and $410.4 million in 2005.

Finally, $1.3 million was spent in 2004 and $1.5 million in 2005 on promotional allowances paid to anyone else (other than retailers, wholesalers, and full-time company employees) involved in the cigarette distribution and sales process, in order to facilitate the sale or placement of cigarettes.

When these four promotional allowance categories are combined, they total $11.86 billion for 2004 (accounting for 83.8 percent of all spending that year), and $10.62 billion in 2005 (81 percent of total spending). In 2003, the companies reported expenditures of $12.72 billion on these categories (84.0 percent of total spending).

Money spent giving cigarette samples to the public (“sampling distribution”) decreased from $17.9 million in 2003 to $11.6 million in 2004, before rising to $17.2 million in 2005. “Sampling” was redefined in 2002 to include, among other things, when coupons are distributed for free cigarettes and no purchase is required.

In 2002, the specialty item distribution category was broken into two new categories: branded and non-branded.

In 2004, $8 million was spent on branded 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; that figure declined to $5.3 million in 2005. (Specialty items distributed along with the purchase of cigarettes were redesignated as retail-value-added expenses beginning in 1988.)

In 2004 and 2005, respectively, $216.6 million and $225.3 million was spent distributing non-branded, non-cigarette items in connection with the marketing or promotion of cigarettes.

The total of $224.6 million spent on specialty item distribution in 2004 accounts for 1.6 percent of total advertising and promotional expenditures; the 2005 total of $230.5 million represents 1.8 percent of total spending. In 2003, specialty item distribution expenditures were $264.2 million.

In 2004, expenditures for adult-only public entertainment category dropped to $140.1 million, from $150.9 million in 2003; these expenditures then rose to $214.1 million in 2005. This category includes public entertainment events (e.g., sponsorship of bar nights or concerts) that take place in an adult-only facility and that display the name or logo of a company’s cigarettes or otherwise refer to cigarettes. In 2004, another $115,000 was spent on general-audience public entertainment – i.e., events (e.g., sponsorship of a fishing tournament) that do not take place in an adult-only facility and that display the name or logo of a company’s cigarettes or otherwise refer to cigarettes – down from $32.8 million in 2003. General-audience public entertainment spending was $152,000 in 2005.

The companies also reported spending $28.2 million in 2004 and $30.6 million in 2005 on the sponsorship of sports teams or individual athletes. This expenditure category accounted for 0.2 percent of all advertising and promotional expenditures in both years.

All reporting companies indicated that no money had been spent on endorsements and testimonials for cigarettes in either 2004 or 2005.

The cigarette companies reported spending $93.8 million for direct mail advertising in 2004 ($93.8 million had been spent in 2003), and $51.8 million in 2005.

The industry reported spending $751.8 million on coupons in 2004 (an increase from the $650.7 million reported in 2003). In 2005, spending on coupons rose to $870.1 million.

Retail-value-added expenditures are the costs associated with offers such as “buy one, get one free” and “buy three, get a free T-shirt,” where the bonus item is distributed at retail when the cigarettes are purchased. The companies spent $636.2 million in 2004 and $725 million in 2005 on retail-value-added involving free cigarettes. They also spent $14.3 million and $7.5 million in those years on retail-value-added involving free non-cigarette items, down from $20.5 million in 2003. Total retail-value-added expenditures were $650.6 million in 2004 and $732.5 million in 2005.

In 2004, the companies reported spending $1.4 million on advertising on a company Internet website; that figure rose to $2.7 million in 2005. They continued to report no expenditures on any other Internet advertising (e.g., banner ads on third-party sites or direct mail advertising using e-mail).

The companies reported spending $346,000 on telephone advertising in 2004, a figure that declined to $59,000 in 2005. This category includes expenses associated with telemarketing calls or the operation of incoming telephone lines for consumers to participate in promotions or hear prerecorded product messages (but excludes costs associated with customer service representatives for responding to consumer complaints or questions).

In 2001, the Commission began requiring the major cigarette manufacturers to report expenditures on advertisements directed to youth or their parents that are intended to reduce youth smoking. For 2004, the companies reported spending $62.7 million on such advertising, a decrease from the $72.9 million spent in 2003. In 2005, they reported spending $55.5 million. These figures do not include contributions to third parties that engage in such programs.

Cigarette manufacturers reported that they paid no money or other form of compensation in connection with the production or filming of any motion pictures or television shows in either 2004 or 2005, and that they paid no money or other form of compensation to anyone engaged in product placement in motion pictures or television shows. The companies also reported that neither they nor anyone working for them solicited the appearance of any cigarette product in any motion picture or television show, or granted permission for the appearance of any cigarette product in any motion picture or television show.