Tobacco industry generates highest net income per employee | Hacker News Reader

Tobacco industry generates highest net income per employee

erikrood.com

84 pointsqwerty202082 comments

One reason for this is because the Tobacco industry benefits enormously from manufacturing economies of scale. Take for example Reynolds American's (mentioned in the article) largest manufacturing facility in Tobaccoville, near their HQ in Winston-Salem. The Tobaccoville plant is capable of producing 110 billion cigarettes a year¹, and employs just ~1,200 people².

Let's say the average revenue per cigarette pack is $5, and there are 20 cigarettes in a pack. That works out to $0.25 revenue per cigarette. The Reynolds Tobaccoville plant is capable of producing $27.5 billion in revenue alone ($0.25 x 110 billion), for a labor cost of roughly 90 million (1,200 x $75,000).

1. http://www.nytimes.com/1987/08/23/business/what-s-new-in-tob... 2. http://www.journalnow.com/business/business_news/local/updat...

They also have giant emerging markets around the world, far more numerous than Canada, the US, and Western Europe. If history is a guided then generations of tobacco execs can strike it rich by killing people, before the gig is up.

Edit: Reply: Indonesia meanwhile...

China controls about 41% of the global market, but Asia Pacific market overall is 64%. That’s... a lot. Then there’s India... Africa...

Still it is true that China is the number 1 in the world in terms of both production and consumption.

Many of hose markets are extremely protected. The tobacco industry in China for example is completely local, growing in Yunnan and driving smoking policy as a bunch of SOEs.

> If history is a guided then generations of tobacco execs can strike it rich by killing people, before the gig is up.

You know, some people like cigarettes, despite the health effects. No one is "killing" you, if you decide to use a product even though you are aware of the risks.

Such people are a minority of smokers around the world, and given how addictive nicotine is, probably fooling themselves. The average smoker is in the Asia Pacific region, India, Indonesia, and Africa, and is impoverished. In those regions as elsewhere, socioeconomic class and education correlate with the lowest numbers of smokers.

> if you decide to use a product even though you are aware of the risks.

vast majority of smokers are not aware of the risks. they have some vague knowledge that smoking is dangerous, bu most smokers don't know, for example, that smoking is a leading cause of erectile dysfunction.

But they do know that some of their parents, friends, uncles, cousins, grandparents smoked and lived happy lives. Instead of diving into obscure statistics finding things to worry about.

Do you have any data to back that assertion up? I suspect most smokers know the health risks, it's just that they are addicted.

Only in developed countries because of years of awareness campaigns. Consider developing countries have NONEof those and you can start to grasp how true that statement is.

Here are a few:

2005: pregnant women know smoking is harmful; many tried to give up; but "awareness and acceptance of specific risks were inadequate."

http://www.tandfonline.com/doi/abs/10.1080/09595239700186321

2005: "Knowledge and perceived risk of cardiovascular, pulmonary, and oral disease was high among current smokers; knowledge and perceived risk of reproductive-related problems, and cancers other than lung cancer was much lower. Smokers recognize that smoking may result in premature death, but are less likely to acknowledge that smoking could result in a disability significantly affecting their quality of life."

https://www.ncbi.nlm.nih.gov/pubmed/15850879

2015: "Only half of current smokers considered themselves at higher risk of lung cancer than the average-risk population, and less than 40% of individuals were aware that the risk of lung cancer never disappears after smoking cessation"

http://www.esmo.org/Conferences/Past-Conferences/ELCC-2015-L...

I think "cognitive dissonance" is the concept you are looking for.

Tobacco is also subsidized, so the government is effectively paying Americans to smoke.

Except for the $5+ tax per pack. What a ridiculous assertion.

A more accurate statement might be that the government is paying people to produce cigarettes.

If buying a pack of cigarettes costs less than it would without the subsidies, then you're effectively getting free money every time you smoke.

It's not even close. If the government didn't do any subsidizing or taxing, cigarettes would be much cheaper. The magnitude would vary depending on state or country.

So, let me get this straight. The government pays people to produce them, then charges people to smoke them?

Basically, yes. But it's not quite that clear cut.

Tobacco growers receive farm subsidies [1], which isn't a tobacco-specific subsidy, but also isn't a "whoops didn't mean those farms" accident [2]. Tobacco products are then (heavily) taxed.

Also, it's actually that the federal government pays people to grow tobacco and the state governments tax people to consume tobacco. And the federal subsidies are much lower than the state taxes.

It's still a weird situation, and subsidies probably shouldn't be paid to farms producing tobacco. But the sort of corruption that makes this nonsense possible is totally legal in America, so.

[1] https://farm.ewg.org/top_recips.php?fips=00000&progcode=toba...

[2] http://thehill.com/blogs/floor-action/senate/301645-senate-r...

Could you tell us how?

http://thehill.com/blogs/floor-action/senate/301645-senate-r...

farm subsidies apply to tobacco companies

Oh, so it wasn't specifically for tobacco. In that case, I think we might as well count schools, roads, and anything that is subsidised.

Those programs are infrastructure, or a nearly universal benefit. Corporate welfare to a specific sector of the economy is totally different. There’s also no reason a farm subsidy couldn’t exclude tobacco.

Apparently the reason is "[tobacco growers] contribute a lot to this country" [1].

You know, as opposed to all of the non-federally-subsidized occupations that contribute literally-anything-other-than-lung-cancer to the country...

I'm assuming the $1.1 million Tobacco spent keeping Richard Burr in office helps him not think too hard about such things [2].

[1] http://thehill.com/blogs/floor-action/senate/301645-senate-r...

[2] http://www.mcclatchydc.com/news/politics-government/article1...

> the Tobacco industry benefits enormously from manufacturing economies of scale.

I was expecting the rest of the comment to be an explanation of why this is so, but I feel that it really just restated, with specific numbers, the claim that they do indeed make a large amount of money (or at least revenue) per employee.

Crayola also has like 1,200 employees manufacturing packs of paper wrapped tubes of product for 5 bucks a pop. What about cigarettes is more beneficial for economies of scale?

A much larger market. Nobody buys crayons or even school supplies every day.

Exactly. And nobody gets addicted to crayons.

marines?

I beg to differ. Still, feeding a crayon addiction is much cheaper, since they’re multi-use.

I'd hazard that the difference is in the demand for the products. The total addressable market for crayons is likely much smaller, and would be more quickly saturated if you were to ramp up production. Cigarettes have killer recurring revenue and the demand for them is highly inelastic.

Cigarettes are literally dried up leaves. Their customers light the product on fire and then buy more the next day. Given that as a viable business model, how do you not make ridiculous quantities of money?

That is true, but I feel obliged to point out that tobacco is an incredibly difficult and labor-intensive crop.

But they don't have to grow it.

But they still have to buy it from people who do, and the difficulty is reflected in raw material prices.

From http://www.nasda.org/File.aspx?id=48147

Types of Tobacco & December 2016 Avg. Price/lb. – Flue Cured $5.12 – Fire Cured $7.25 – Burley $5.09 – Maryland $4.86 – Dark Air Cured $6.54 – Pennsylvania Seedleaf $5.23

For comparison, wheat is around $6 per bushel. A bushel is 56 lbs.

You can get roughly 22 packs of cigarettes from a pound of tobacco. Lets say RJ Reynolds sells those packs for 2.50 wholesale. 22 * 2.50 = 55. 10x the cost of a lb of tobacco doesn't seem too bad.

They’ve also significantly reduced the materials consumed over the years. Cigarettes went from 8.6mm diameter to 8.5, 8.4, 7.9. Introduced slims 7.1, superslims 5.4. They started expanding the cellular structure of the tobacco with co2 to increase its ‘filling capability’. Longer filters, hollow filter tips. Thinner tipping paper. Thinner paperboard, thinner foil, less glue. The list goes on and on. Lots spent on R&D, but small material savings on billions of cigarettes soon adds up.

In low tax states, cigarettes retail for less than $5/pack. Manufacturers are likely only getting $3-4/pack, but your point still stands.

Duty free pricing is about $3.75/pack. I imagine they sell them wholesale for $2.50.

Is the revenue per pack $5? In some jurisdictions, a pack of cigs costs less than that, and in others double or more.

The biggest component in the price of tobacco appears to be sin taxes.

I was thinking governments are probably the largest profiters of tobacco products though taxes.

>Their data estimates that taxes make up 42.5% of the cost of a pack of cigarettes in the US, compared to 82.2% in the United Kingdom, which has the highest cigarette taxes.

https://en.wikipedia.org/wiki/Cigarette_taxes_in_the_United_...

In the short term yes, in the long term governments lose money due to chronic diseases caused by tobacco

> in the long term governments lose money due to chronic diseases caused by tobacco

I don't follow how governments lose money in the long. Could you elaborate?

Smoking tobacco kills taxpayers. Illnesses caused by smoking are expensive to treat.

I think these estimates from the CDC are pretty conservative. In the US, EVERY YEAR:

"Smoking-related illness in the United States costs more than $300 billion each year. Nearly $170 billion for direct medical care for adults More than $156 billion in lost productivity, including $5.6 billion in lost productivity due to secondhand smoke exposure"

https://www.cdc.gov/tobacco/data_statistics/fact_sheets/econ...

OFF-TOPIC

A major way (the only way?) to curb tobacco usage is to simply increase taxes on tobacco usage, but politicians/bureaucracy prefers the short-term tobacco tax revenue.

Cool article about Chinese tobacco tax rev: https://www.bloomberg.com/news/articles/2014-12-12/the-chine...

Thanks for the link. CDC's reference 11 seems particularly relevant[1], although the $170 billion measure is not totally attributable to the government: from Table 3, more like $108.4 bil between Medicare ($45.0 bil), Medicaid ($39.6 bil), and other federal programs ($23.8 bil; e.g. Tricare, VA health benefits, etc.). The paper's data set and method of extrapolating portions of healthcare expenditures attributable to smoking does raise an eyebrow at first glance, but I've admittedly not dived deep enough.

EDIT: > A major way (the only way?) to curb tobacco usage is to simply increase taxes on tobacco usage...

If by curb you mean reducing the number of new adopters proportional to overall population, I agree and would support such a measure. As a former smoker and current smokeless tobacco user myself, I'd say those of us who fell for the trap are fucked six ways from Sunday; as much as I'd like to quit, my mind and body are way too dependent on nicotine to function effectively on a day-to-day basis. I'd need roughly 3 months of leave and a lot of mindless distractions to drop the habit. A significant increase in per-unit cost for no apparent reason (like 2-3x overnight) would probably work too...like a proverbial slap to the face that would incite just enough outrage on the merits to serve as an effective distraction, hopefully for long enough to allow physiological dependencies to permanently fade.

[1] https://sci-hub.cc/10.1016/j.amepre.2014.10.012

I believe this has been debunked.

See https://www.forbes.com/sites/timworstall/2012/03/22/alcohol-...

Admission: I never got the chance to look at the research so I don’t know how reliable it is.

He brings up some interesting points, but he closes his article writing, "Those who die young save health care systems money, not cost."

Yes... if everyone died, including the smokers, governments would effectively cut healthcare costs to 0. Thats not how public health systems work though.

I would not say debunked

The article certainly draws conclusions that the research doesn't. [0]

It seems to be that the obese and smokers do cost a lot more on the healthcare system - however they also die earlier, and so the net cost ends up being less.

> Nevertheless, these findings suggest that although effective obesity prevention reduces the costs of obesity-related diseases, this reduction is offset by the increased costs of diseases unrelated to obesity that occur during the extra years of life gained by slimming down.

However, it doesn't seem like government funding into prevention or research were also tallied into the costs of the illnesses, which are not inconsiderable.

[0] http://journals.plos.org/plosmedicine/article?id=10.1371/jou...

> I believe this has been debunked.

It might be true that it tobacco reduces the overall health care burden because it causes people to die earlier, but it's not relevant. Setting your car on fire might also have the side-effect of lowering the operating cost of that car.

Of course it's relevant to how much governments spend. You can't simply ignore the consequences you dislike.

That doesn't mean it's a good reason not to discourage smoking, but that's because we shouldn't hinge that decision on the financial considerations in the first place.

I think there are a lot of reasons to scoff at the "but death saves money" argument. Most of those reasons have to do with the difficulty of accounting for the value of a life fully lived.

E.g., if a highly educated worker dies ten years before retirement, how much productive labor did the society that educated that person lose out on?

What about the non-paid labor that the elderly/retired often take on? "Free" child care for the grand kids, much higher rates of volunteering in churches/schools/etc., and so on.

Suffice it to say that this is not exactly a trivial computation...

I wouldn't say it's trivial, but it does probably save money overall. Highly educated workers are rare overall, and they smoke at much lower rates, so they barely count to the average. The elderly get an income enough to live off plus usually quite a lot of expensive healthcare for many other conditions - and I'm glad they do! But not for financial reasons.

Usually, there's a medically expensive period before death and the burden may even begin in the productive years. Smoking probably causes higher incidence and severity of common diseases like influenza, additionally resulting in loss of labour, income and associated taxes.

Mostly in countries that have a national healthcare system, as the government has to pay directly for the harm caused by corporations to its population's health. This applies to the coal and oil/car industries, too.

However, one could argue that even countries such as the U.S., which have a private healthcare system are negatively impacted by harmful industries like these, because the citizens pay for healthcare when they could be paying for something else. But the effect is not as direct, and it may not be as big either, as the government can still profit from taxes in the private healthcare industry and so on.

In the short term yes, in the long term governments lose money due to chronic diseases caused by tobacco

Smoking costs the NHS £2Bn/year while tobacco raises £12Bn/year in taxes, and smokers are less of a pension liability too.

Noone wants to talk about what happens when smoking is eradicated and a huge chunk of tax just vanishes overnight...

This fact check gives estimates between 3 and 6 billion a year in direct health costs and possibly 14 billion in wider costs including e.g. missed work days due to illness and responding to more fires.

https://fullfact.org/economy/does-smoking-cost-much-it-makes...

> Smoking costs the NHS £2Bn/year while tobacco raises £12Bn/year in taxes,

If you ask the tobacco industry. They have a lousy track record, so you can understand people who don't believe them.

Also, note this is a dubious claim in the UK with a > 80% tax rate, it's even shakier in countries with a lower tax rate.

Especially in USA...your last year can cost millions of dollars, paid or unpaid. Cancer treatment is expensive.

That's without calculating asthma, missed days of work, productivity loss due to feeling sick etc etc.

Now in third world countries cigarettes might actually save money, maybe. It kills quite a few before getting pensions, and healthcare is limited so you have to accept that your days are over.

I believe Australia charges more than UK.

http://www.dailymail.co.uk/news/article-3572446/Budget-2016-...

Revenue is meaningless in this case. Taxes and taxes and taxes make most of the sale.

It's like someone listing as revenue Boeing jet sales when they only get $1000 for each sale.

It's a shame and a terrible irony that one of the most successful industries on our planet is also one of the leading causes of deaths on Earth.

I believe making munitions is also quite profitable. You might be on to something.

>is also one of the leading causes of deaths on Earth.

The methods of calculating that 400,000 number are highly suspect.

Nearly 60 percent of the deaths occur at age 70 or above; nearly 45 percent at age 75 or above; and almost 17 percent at the grand old age of 85 or above! Nevertheless, without the slightest embarrassment, the public health community persists in characterizing those deaths as “premature.”

tobacco-related deaths occur at an average age of roughly 72, an age at which mortality is not unusual among smokers and non-smokers alike.

https://www.cato.org/publications/commentary/blowing-smoke-a...

I'm not disagreeing that they are harmful, but 400,000 deaths a year is hyperbole. Governments make a lot of money on that hyperbole too.

In Fiscal Year 2010, the federal excise tax on cigarettes (currently $1.01 per pack) brought in $15.5 billion in revenue.

In 2009, states raked in more than $24 billion by taxing cigarettes and $8.8 billion in settlement payments from tobacco companies

http://dailycaller.com/2011/02/28/what-would-an-america-with...

Sure. Imagine how much income the crack industry would produce if they didn't have to waste so much labor avoiding law enforcement.

and marijuana, too.

Just look at Miami in the 80s.

I would be interested in more summary statistics rather than just mean (NIPE), particularly median. What story is actually being told by this data, that tobacco growth and sales are highly automated and they employ relatively few people, or that execs are disproportionately compensated relative to other industries, or what?

Author here -- boxplot distribution is in the article.

Also, any story I could string together would definitely be speculative, so just stuck to the few facts I know for purposes of article. Will speculate here, however :) -- I'm going to guess primary driver is efficient manufacturing coupled with simple product offering. (e.g. this isn't some Tech company employing X% of it's workforce for R&D purposes)

I used to work for Brown & Williamson Tobacco (though I did not receive my $608k per year), and I can absolutely attest that their profits are not as the author suggests "return on talent". I worked at corporate HQ, which is probably very different from the factories where the cigarettes were actually made. The vast majority of people spent the vast majority of their time looking for work to do, because we quite literally had nothing to do. We had something like 20 corporate holidays, plus many other "bonus" holidays announced a day or two ahead of time, and many half-days. One story goes that the CEO was talking to someone about our building and someone on the street asked her "How many people work in that building", and her response was "Oh, about half".

A pack of cigarettes is about 20 gram, or about 2/3 of an ounce. So tobacco used to make a pack, is not free, but pretty close to it. Factories cost money but after the initial investment, they mint cash...

I'm almost certain that Marlboro would sell you a gazillion packs for around $1 each on the black market---complete with e Vegas trip and hookers--if they could. Smuggling, to avoid taxes, was a huge business a while back when getting away with it was much easier.

Taxes and advertising cost a lot.

160kμSv? Why? https://www.youtube.com/watch?v=TRL7o2kPqw0

Without the combustion and rads is nicotine interesting on it's own?

And highest externalities too?

Who would have guessed that addiction sells.

Excellent news for Legal Cannabis.

Tabacco - average of $609k per employee

Oil, Gas, & Consumable fuels - average of $421k per employee

I think top 5 public software companies (GOOG, MSFT, FB, AMZN, AAPL) averages more than Tabacco.

http://www.wolframalpha.com/input/?i=microsoft+net+income+%2...

http://www.wolframalpha.com/input/?dataset=&i=google+net+inc...

Facebook, however: http://www.wolframalpha.com/input/?dataset=&i=facebook+net+i...