The Economist
October 26, 2025- ONE HUNDRED dollars invested in the tech-heavy Nasdaq index at the beginning of January 2024 would now be worth $154. If you had bought American tobacco companies, you would have made an even bigger return, pocketing $165. The share-price boom in part reflects a strange economic phenomenon. In recent years, the operating margin on a cigarette sold in America has grown from about 50% to about 60%. This year cigarette- and cigar-makers are expected to make $22bn of operating profit in the world’s largest economy.
Not bad for a dying industry. In the past decade the number of American adult smokers has fallen by 20m or so. The number of cigarettes sold has fallen by more than a third. And industry insiders expect the decline over the next decade to be even steeper. Normally, when customers vanish, an industry suffers: just look at Blockbuster or local newspapers. So how is the tobacco industry thriving? It is, in part, because cigarette manufacturers have read their textbooks. They understand price elasticities.
When lots of people smoked, there were many “price-elastic” consumers. In plain English, they were sensitive to increases in the cost of a cigarette. As more people have quit, however, only the most committed smokers are still puffing. Companies have responded by raising prices at an ever-quicker pace. Over time, our analysis of official data shows, tobacco-price inflation in America has increased relative to overall inflation. In 2017 the price of a packet of Marlboros rose only a little more than overall prices (2.9% versus 2.1%). Last year overall inflation was 3%. But Marlboro prices rose by more than 7%.
The companies know exactly what they are doing. “[W]e can continue to take pricing to offset volume declines,” according to Imperial Brands, which produces everything from Davidoff cigarettes to Rizla rolling papers. Philip Morris International talks of “the resilience of our combustible model”. In recent results British American Tobacco, of Lucky Strike fame, said that in America “price/mix more than offset volume decline.” Manufacturers cannot perform this trick indefinitely: at some point even the most determined smokers will die, quit or switch to black-market cigs. For now, though, the industry’s prospects are as rich as a cloud of Davidoff smoke. ■
