The Profit Goes Up in Smokes
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.
As a teenager and a young man, he lived tobacco. He planted it, picked it, hung it and stripped the leaves, sweating past sunset spring, summer and fall. Ammerman still works the land in his tractor, still knows every inch of the 70 acres his family plants in tobacco. But he says he’s too old for the physical labor now. Instead, he strides the hardwood floors of the renovated warehouse, supervising 85 employees as they manufacture, pack and head out to sell his cigarettes.
Ammerman doesn’t smoke. Neither does his dad. He has warned his three children not to even try lighting up: “Not while they’re under my roof.” He feels a little bad that his kids get razzed in school during “Just Say No to Drugs” week.
Yet he refuses to express anything but pride as carton after carton of Kentucky’s Best rolls down the line.
“Maybe it sounds hypocritical, doesn’t it? We’re out here making cigarettes but we’re telling our kids ‘Don’t smoke.’ Well, I say, listen, this is a great country. You have the right to do what you want to do as long as you don’t hurt people. We’re making a legal product.”
Slapping his ample stomach, Ammerman says he eats too much ice cream and too much beef. He doesn’t blame cattle ranchers for his weight gain though. And he won’t blame tobacco growers -- or cigarette makers -- for lung cancer. Tobacco was the nation’s first export. It has supported his family for generations.
“I’m not ashamed of any of this,” he said. “We’re selling to adults. If they want to smoke, fine. They’ve been warned of the hazards.”
Making cigarettes, he insisted, was the only way to save his family’s 1,250-acre farm in the face of plunging demand for their top crop. They grow corn and soybeans, but that doesn’t pay the mortgage. Corn might gross $500 an acre. Tobacco, $5,000. “We were just trying to survive. This was a common-sense, logical step,” Ammerman said.
Antismoking activists fail to see the logic.
Big tobacco has pledged $5 billion over the next decade -- above and beyond the payments to states -- to help farmers switch to other crops or new careers. State legislatures are pumping in millions more. “The money is there for them to diversify,” said Amy Barkley, who works with growers on behalf of the Campaign for Tobacco-Free Kids.
Agricultural economists insist that even in Kentucky’s hilly, rocky terrain, some fruits and vegetables can be as lucrative as tobacco. But Bob Ammerman, 63, heard tell of farmers who went broke when their cantaloupe rotted in the field. He won’t risk it.
As for a career change, he and Mike tried selling farm machinery a few years back. They hated it. They longed to be out on the combines, churning through the chill of a golden dawn to bring in the harvest.
“The only thing we know anything about is tobacco. I’m a little old to study computer programming,” Bob Ammerman said.
He buys leaf for Kentucky’s Best -- 6 million pounds a year -- from more than 200 growers who feel much the same: scared, sentimental, hoping to hold onto tobacco just long enough to make it to retirement.
“More or less, I want to try to keep things the way they were. All the changes are happening too fast,” Elwood Myers, 60, said as he unloaded bales of his tobacco in an Ammerman warehouse.
“This used to be a noble profession,” added 61-year-old Teddy Courtney, a tall, spare man who sells 32,000 pounds a year to Kentucky’s Best.
Under the name Farmer’s Tobacco Co., the Ammermans set out in the summer of 1999 to restore, if not the glory days, at least some stability for their fellow growers.
They spent months teaching themselves to use an ancient cigarette-rolling machine purchased in England. It turned out barely 2,100 cigarettes a minute, a tenth the speed of modern equipment. A few years later, they added a second machine, even slower than the first. They recently purchased “modern” equipment -- vintage 1974 -- and now can produce a full line of cigarettes, including full-flavor, light and menthol.
As nonsmokers, the Ammermans had little idea what customers might demand, so they experimented with several varieties of American-grown tobacco, with a few pinches of imported Oriental leaf for aroma. Their first recipes, tested on local smokers, flopped. Then they tried toasting the burley tobacco grown locally and added a hint of chocolate for sweetness.
By March 2001, they were ready to go public.
“We bragged them up just as much as we could,” said Charlie Cooper, a family friend and wholesale distributor. “If we saw a man smoking a Marlboro we’d go up to him and say, ‘Try this cigarette made right here in Kentucky out of good burley tobacco.’ ” To this day, roving salesmen offer to buy a pack of Kentucky’s Best for smokers they spot purchasing other brands.
The strategy seems to work. “They sell like crazy here,” said Sarah Richardson, a clerk at Pit Stop Tobacco in nearby Paris, Ky.
By pledging to limit distribution to the Midwest and Southeast, the Ammermans have been able to keep their costs low and their prices about $1.10 a pack less than Marlboros.
The 1998 tobacco settlement required independent manufacturers to pay into a fund that’s dispersed to the states, just as the Big Four do. They have been able to reduce that financial obligation by selling only in states with small populations.
Lawmakers in several states are working to close that loophole, so limiting distribution will no longer pay. In the next few months, the Ammermans will begin pushing their cigarettes nationwide and making full payments to the state fund ($3.80 per carton sold). They still plan to sell their cigarettes for up to 40% less than premium brands.
R. J. Reynolds and Philip Morris spend heavily for exclusive rights to shelf space in convenience stores and smoke shops, so many vendors must hide Kentucky’s Best behind the counter. Often, however, the Ammermans can set out a small sign with their price -- which may be enough to hook a customer.
“The main factor is money,” said Danny Aills, 58, who smokes two packs a day. “I’m on disability, and the money just doesn’t last the month.”
Aills, who lives in Washington Court, Ohio, said he has tried several discount brands but found them harsh. Kentucky’s Best, which boasts that it has no chemical additives, tastes as good as his favorite Marlboros -- and saves him $70 a month.
“I tell you, I like ‘em. They’re good cigarettes, good American cigarettes,” Aills said. A tobacco farming family in Virginia markets a similar product, Bailey’s, made almost entirely from domestic leaf and also priced below premium brands. Nat Sherman cigarettes, which are slightly more expensive, are also touted as made from U.S. tobacco. But most discount brands rely heavily on foreign leaf.
Haviland, the public-health advocate, suggested that products like Kentucky’s Best, with its wholesome made-on-the-family-farm image, prey on smokers’ fears to attract customers. “People these days are looking for something that seems safer,” she said, “so they jump at brands that say ‘all natural,’ ‘no additives’ or ‘no imported tobacco.’ ”
The Ammermans respond that they’re simply trying to get the best cigarettes they can to 100,000 loyal customers in 17 states. “I don’t really recommend that people smoke,” Bob Ammerman said. “But if they’re going to smoke, why not smoke something good?”
With smoking rates dropping, especially among teens, the Ammermans are not convinced their business has a long future. Yet for as long as they grow tobacco -- and as long as Americans light up -- they plan to keep churning out Kentucky’s Best.
“It may not be a business that my grandchildren can take over. Maybe not even my children. But we’ll be here for maybe 15 or 20 more years,” Mike Ammerman said. “I hope.”
