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The Profit Goes Up in Smokes

With major tobacco firms raising prices to meet settlement obligations, a father and son in Kentucky score with cheaper cigarettes.

December 02, 2003|Stephanie Simon | Times Staff Writer

CYNTHIANA, Ky. — This year's U.S. tobacco crop is the smallest since 1874. The big cigarette companies have cut thousands of workers amid slumping sales. Advertising restrictions are so tight, it's illegal to sell so much as a bumper sticker emblazoned with a cigarette brand name.

And smoking is so out of favor that even in Kentucky, the heart of tobacco row, politicians talk about hiking the cigarette tax and banning smoking in restaurants.

This would not seem to be a good time to launch a cigarette company.

But in a banged-up warehouse on the hem of this 200-year-old farm town, tobacco grower Bob Ammerman and his son, Mike, have made the leap. A dozen hulking machines pack their secret blend of dried leaf into rolled paper. The smell of tobacco, at once sweet and acrid, thickens the air. The assembly line chuffs and clanks around the clock.

Every day except Sunday, 12 million cigarettes roll down the conveyor belts to be packed in the red, gold and green boxes labeled Kentucky's Best. At a time when thousands of growers have sworn off tobacco to raise organic vegetables or freshwater shrimp, the Ammermans have invested $10 million in America's nicotine habit.

"To make a consumer product with this much notoriety, well, we looked at it pretty hard," said Mike Ammerman, 40.

"But we're here in central Kentucky. My father grows tobacco. My grandfather grew tobacco. His father grew tobacco. This is what we do. This is what we know."

In the 2 1/2 years the Ammermans have made cigarettes, their annual sales have shot from $2 million to $55 million. They expect sales to more than double next year.

This was, as it turned out, a very good time to launch a cigarette company.

Opportunities for independent cigarette makers have exploded in the five years since the Big Four -- R. J. Reynolds, Philip Morris, Brown & Williamson and Lorillard -- reached a legal settlement requiring them to pay states $246 billion over 25 years for the health-care costs associated with smoking.

To fund that obligation, the tobacco giants raised prices. The cost of Marlboros, for instance, almost doubled to $3.50 a pack or more in high-tax states. Smokers, who are disproportionately low-income, began to look for alternatives.

As Brian Jenkins, a 35-year-old auto mechanic, put it: "I either needed to quit or to find a cheaper brand."

More than 100 small companies, many of them foreign, responded to that demand. Undercutting premium cigarettes by $1 or more a pack, upstart brands such as Roger, Malibu and Wave have taken hold. A decade ago, the independent firms combined had less than 3% of the market. Today, they claim as much as 12%.

To keep their prices competitive in the face of this threat, the Big Four began buying more tobacco overseas, from Brazil, China, Zimbabwe and other nations with low labor costs. The demand for American tobacco plunged by 75% in the space of five years.

On their rolling farm along the South Licking River, the Ammermans reached a decision. If they couldn't sell their crop, they would use it themselves. They would create their own market -- for the 195,000 pounds they produce a year, and a whole lot more besides.

"It was, pardon the pun, a breath of fresh air. It made a lot of us feel better," said Danny McKinney, the director of a farmers' trade group, the Burley Tobacco Growers Cooperative Assn., in Lexington, Ky.

To public health activists, however, the move was alarming. "With the proliferation of companies like Kentucky's Best and other discount brands, the impact is terrible," said Lyndon Haviland, chief operating officer for the Legacy Foundation, an antismoking advocacy group based in Washington, D.C.

Studies show that price makes a real difference to smokers: Every 10% hike in the cost of a pack of cigarettes drops the smoking rate by at least 3%, Haviland said. Discount brands, she added, "just give smokers another excuse not to quit."

That's certainly been true for Jenkins. Kentucky's Best saves him at least $10 a week over Camel Menthols, so he has put off any thought of quitting. He's become so addicted to Kentucky's Best that clerks at the minimart in his home of Warsaw, Ind., know to put aside a carton for him every Friday.

"Their price really works out for us, for the small people," Jenkins said. "I can see how this could take off."

Bouncing his pickup through his fields on a recent afternoon, Mike Ammerman stopped at a century-old barn where the tobacco that launched Kentucky's Best hung thick from the rafters, drying in the bright autumn air. He pulled down a sheaf, six heavy stalks speared on a wooden stake, and fingered the crinkled brown leaves.

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