When Small Cigarette Companies Challenged Big Tobacco

In June 1931, with the U.S. economy in a depression and leaf tobacco prices at 20-year lows, R.J. Reynolds Tobacco Co. decided to increase the price of Camel cigarettes.

This proved a truly bad idea. And the response of consumers and competitors offers a telling example of how the Great Depression was upending industry after industry. Increasing the price of a pack of 20 cigarettes to 15 cents from 14 cents launched a price war that undermined Big Tobacco's hold on a shrinking market.

First, the company's key competitors -- American Tobacco, Philip Morris and Liggett & Myers -- matched the price hike. But by fall, a small Virginia-based tobacco firm, Larus & Brother, had put out a new cigarette brand called White Rolls at just 10 cents a pack.

Tobacco was so cheap two years into the Depression that small firms could undercut the four largest companies' nationally advertised brands and still make money. Brown & Williamson sold Wings cigarettes for 10 cents, and other small operations jumped in. By 1932, the bargain brands held 10 percent of the market, selling on price and doing little advertising.

That summer, the Internal Revenue Service reported that revenue from the 6 cents-a-pack cigarette tax had declined by $41 million from the previous year. Cigarette sales had fallen 11 percent, and the Wall Street Journal predicted an even larger production decline in the year ahead. Meanwhile, the companies selling the cheaper cigarettes were grabbing bigger shares of a shrinking market. As the Wall Street Journal reported:

One of the makers has been turning them out for four months. In that time his sales have been extended into only 11 states. Yet his factory is working 24 hours a day. He is swamped by orders to the extent that buyers are offering cash and a premium for early deliveries.

The "Big Four" cigarette companies circulated ads claiming that the cheaper brands used inferior tobacco leaves, but neither consumers nor investors were impressed. Sales of 10-cent packs continued to soar, and in October, Liggett & Myers shares fell 19 percent, while American Tobacco stock dropped 13 percent.

The media finally caught on. The press had failed to cover the 10-cent cigarette boom “because of a traditional journalistic policy that those who do not advertise and have no intention of advertising are no fit subjects for publicity,” Time magazine wrote. Still, the cigarette price war had become hard to ignore now that the lower-priced cigarettes were “burning up at the rate of about 60 million a day.”

Fortune magazine suggested possible responses for the big companies: buying more tobacco to raise prices; creating special "fighting brands" to sell for 10 cents; circulating negative advertisements; and cutting prices on their leading brands. None of these steps looked attractive, and all would be costly.

Meanwhile, by the end of October, the 10-cent makers commanded 23 percent of the U.S. market, Time reported. Truly, Big Tobacco’s tycoons “were vexed.”

(Philip Scranton is a Board of Governors professor of the history of industry and technology at Rutgers University, Camden, and the editor-in-chief of Enterprise and Society. He writes "This Week in the Great Depression" for the Echoes blog. The opinions expressed are his own.)

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

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