Banning Menthol Cigarettes Would Create a Multi-Billion Dollar Black Market, Economic Study Concludes

GREENSBORO, N.C., Nov. 18, 2010 /PRNewswire/ -- A ban of menthol cigarettes would create a sizable black market with underground revenues that could easily reach into double digit billions of dollars a year, according to the findings of a new independent economic analysis commissioned by Lorillard, Inc. (NYSE: LO) that will be presented to a Food and Drug Administration committee today.

Drawing on the experience of existing cigarette black markets in New York State and Canada, Compass Lexecon, a Chicago-based economic consulting firm, concluded that banning menthol cigarettes would not reduce overall smoking much if at all.  It found that a large black market would emerge quickly to fill the void by offering consumers a competitively priced supply of contraband menthol cigarettes.  

"Our best estimate is that a complete menthol cigarette ban would not dramatically reduce overall cigarette consumption and could lead to a black market where illicit sales could represent a significant portion of current menthol sales," said Fredrick Flyer, a senior vice president of Compass Lexecon.  "Additionally, there could be large unintended consequences such as a significant growth in organized crime activity and greater youth access to cigarettes.  

Illicit sales would be greater if the black market sets lower prices for contraband cigarettes, the authors concluded.

The study found that a ban on menthol cigarettes would result in:

• A large black market, leading to increased youth access to cigarettes.
• More involvement by organized crime syndicates and more revenue for them.  
• A black market for menthol cigarettes that would be 70 percent of the current market by actual cigarettes sold and 85 percent of the current menthol sales revenue.  Current menthol cigarette retail sales are approximately $26.2 billion.
• Relatively unchanged consumption of cigarettes overall, meaning that there would be little public health benefit.

The Compass Lexecon study is the first analysis of the potential for a contraband market if menthol cigarettes are banned.  Preliminary findings were to be delivered today to the Tobacco Products Scientific Advisory Committee (TPSAC), which has been mandated by Congress to examine the potential for a contraband market as part of its report and recommendation to the Food and Drug Administration on the use of menthol in cigarettes.  

“The conclusions of this study reinforce our belief that a ban on menthol cigarettes cannot be justified,” said Ronald S. Milstein, Senior Vice President, External Affairs for Lorillard.

Compass Lexecon studied contraband markets in New York State and in Canada, two existing markets in which contraband sales rose substantially after tax hikes raised the price of cigarettes.  In Canada, contraband sales in some provinces have reached almost 50 percent of total cigarette sales.  After studying the two black markets and other data, the authors concluded that some menthol smokers would switch to non-menthol but that the vast majority would buy black market menthol cigarettes.  

Following a ban, there would be high financial incentives to enter the market, leading to organized crime activity, the study found.  At the same time a black market would lead to increases in youth access of menthol and non-menthol cigarettes.  

A slide summary of preliminary results from the Compass Lexecon study, "Impact of a Menthol Cigarette Ban; Economic Effects and Unintended Consequences," is available at www.understandingmenthol.com.  The final report will be posted in December.  

About Lorillard, Inc.

Lorillard, Inc. (NYSE: LO) is the third largest manufacturer of cigarettes in the United States.  Founded in 1760, Lorillard is the oldest continuously operating tobacco company in the U.S.  Newport, Lorillard's flagship menthol-flavored premium cigarette brand, is the top selling menthol and second largest selling cigarette in the U.S. In addition to Newport, the Lorillard product line has four additional brand families marketed under the Kent, True, Maverick, and Old Gold brand names. These five brands include 43 different product offerings which vary in price, taste, flavor, length and packaging. Lorillard maintains its headquarters and manufactures all of its products in Greensboro, North Carolina.

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SOURCE Lorillard, Inc.