Upstarts Upset the Tobacco Cart
States, Big Four Are Trying to Stunt Growth of Discount Cigarette Brands
By Jo Becker
Washington Post Staff Writer
Tuesday, January 13, 2004; Page B01
RICHMOND -- When Virginia tobacco farmer Mac L. Bailey started a cigarette manufacturing company 10 years ago, his business consisted of little more than a secret tobacco blend, a couple of hand-held rolling machines and a burning desire to take on the big tobacco companies that paid farmers like him a relative pittance for the lucrative product they grew.
"I saw years when I didn't have enough to pay my expenses," said Bailey, 60. "I looked at what the farmer was getting and what the big manufacturers were getting, and I said, 'That's too much money for the big guys.' "
Today, Bailey owns a private jet, and his company, S&M Brands of Keysville, Va., produces about 1 million cartons a month. The growth of discount cigarette companies such as Bailey's has reshaped the industry -- and led to an odd alliance between big tobacco companies and many of the states that sued them over the public cost of smoking.
Numerous states are considering or have adopted legislation aimed at increasing the price of discount cigarettes and protecting the market share of the "Big Four" tobacco companies -- Philip Morris, Lorillard, Brown & Williamson and R.J. Reynolds. The Big Four are vowing a push this year in the Virginia General Assembly.
Anticipating the legislative onslaught, two small cigarette manufacturers incorporated in Virginia and a third in Oklahoma launched a legal counteroffensive Monday, filing a lawsuit in Louisiana federal district court. The suit charges that the new laws seek to unconstitutionally limit the companies' right to market their product. Bailey is not a party to the suit, but he said he will be following the case closely.
"States are aligning themselves with our competitors and trying to destroy us," said former Virginia attorney general Anthony Troy, who worked on the lawsuit and represents the Council of Independent Tobacco Manufacturers of Virginia. "That is not the American way of doing business."
But states such as Virginia, which is struggling with a budget deficit, have a powerful reason to go along with the Big Four: money.
In a settlement reached six years ago, major tobacco companies agreed to make annual payments to the states estimated at more than $235 billion over 25 years. Those payments are tied to the sales of the participating companies; if they lose market share, the states lose money.
"We need to guarantee a continuing flow of revenue that we use to help balance Virginia's budget and pay for health care and economic development in the tobacco-dependent regions," said Sen. Charles R. Hawkins (R-Pittsylvania), who plans to introduce legislation targeting the independents.
