Porter’s Five Forces

Five forces define the competitive intensity in an industry and, therefore, how attractive it may be.  Tobacco ranks very high in all five categories.

Threat of New Entrants

The more money it takes for a new company to enter the business, the less the threat of competition.

Launching a new cigarette brand requires enormous advertising, marketing, and promotion. Existing companies have a real competitive advantage.   A new brand that captures a 1% market share can be very profitable, but with limited promotional avenues, the gamble is hardly worth the risk.  The advertising ban protected existing brands.

Threat of Substitute Products

The more substitute products the consumer has, the less pricing power for a company’s product.

There are few cigarette substitutes. As a “nicotine delivery system,” no other product has satisfied the consumer so well.  Compared to chewing, cigars, pipe, and snuff, cigarettes are by far the most convenient.  (E-cigarettes may be changing this dynamic after one hundred thirty years.)

Bargaining Power of Customers

How much customers are willing to forego the product to reduce demand and bring down prices.

Again, the addictive nature of cigarettes assures that customers will not bargain much on price.  Many continue to smoke with little regard for price.

Bargaining Power of Suppliers

While there may be bargaining power on equipment, labor, and other services related to manufacturing and selling tobacco, the largest cost is the leaf tobacco. And the suppliers have limited bargaining power on the price of their leaf.

Intensity of Competitive Rivalry

Cigarette manufacturers have always monitored the prices of their competitors, and like any oligopoly (with only a handful of competitors in this case), they are not inclined to engage in price wars that destroy profit margins.

Wikipedia. “Porter’s five forces analysis” Last updated May 29, 2020. Accessed June 1, 2020. https://en.wikipedia.org/wiki/Porter%27s_five_forces_analysis.