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Rise of Discount Cigarette Stores Vexes Health Officials

SPECIAL TO THE TIMES

Bucking nationwide anti-smoking efforts and vexing health officials, outlet stores that sell heavily discounted cigarettes are opening at the rate of one a day throughout California, offering smokers a haven from a world that increasingly disdains them.

Cigarettes Cheaper!, a Benicia, Calif.-based chain, has grown from one store in October 1994 to nearly 130 with plans for 500 by year-end. More than a dozen of its stores have opened recently in the Los Angeles area, mostly in the San Fernando Valley. Other discount chains are popping up as well.

The new stores are embracing cigarettes and the smoking public at a time when the state is cracking down on vending machines, grocery stores are locking cigarettes behind glass, and pharmacies are refusing to sell them.

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The discount outlets, typically housed in mini-mall doughnut shop-type space, are wall-to-wall cigarettes. Clerks smoke on the job and customers are encouraged to light up. At Cigarettes Cheaper!, 10-pack cartons of Marlboros go for $13.99, compared to $17.39 in many grocery stores.

“Nobody can beat it,” said Tarzana resident Risma Gasparians, who stopped by a Cigarettes Cheaper! outlet near her home to pick up a carton of Marlboro Lights. Gasparians described herself as a longtime smoker and added firmly that she intends to remain one. “I used to go to Price Club, but not after I found out this was here.”

“I shop there because the price is low, and the place, I like it,” said Edward Eldar, a watchmaker who used to shop at a liquor store. He even has a Marlboro jacket and a cooler he got through a promotional giveaway.

The discount trend is irksome to public health advocates.

Cheap, generic cigarettes are bad enough, said Dr. Michael Eriksen, director of the Office on Smoking and Health at the U.S. Centers for Disease Control and Prevention in Atlanta. But “cheap Marlboros are the worst.”

That’s because they combine the wide appeal of one of the nation’s most heavily advertised brands with the attractive prices of generic ones, Eriksen said.

Price and consumption are closely tied, he said. For every 10% increase in the price of cigarettes, there is a 4% drop in consumption, the U.S. surgeon general has found. This seems even more true of minors, among whom consumption falls as much as 14% for every 10% increase in price.

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Brenda Bell Caffee, coordinator for African-American Tobacco Education Network, contends that discount cigarettes are aimed at the poor and at minorities. Rates of smoking among African Americans are among the highest of any ethnic group in California, according to the CDC.

“It’s not as if . . . they are making housing affordable. You are taking something that is bound to cause you health problems, and making it affordable,” she said.

Such talk irritates the entrepreneurs leading the discount store charge. Like many in the business, Mark Baldwin, 34, president of Cigarettes Cheaper!, not only resents the regulation of smoking, he opposes government regulation and taxes in general. His stores sell copies of an anti-government book written by Libertarian presidential candidate Harry Browne, and employees get $10 if they read it.

Baldwin is so anti-government that he says he won’t vote for the Libertarian candidate; he doesn’t believe in voting.

A nonsmoker, Baldwin says smokers are “maligned and oppressed. There probably are health risks associated with smoking,” he added. “But everyone who smokes understands the possible trade-offs.”

Baldwin says he is in the process of expanding into Nevada and Illinois. He declined to discuss how the chain is financing its rapid growth. Nor will he say whether the chain is profitable. Instead, he said that although opening so many stores is costly and traffic in some seems slow, the chain is “meeting expectations.”

Another discounter, The Cigarette Stores, owned by Modesto-based jukebox maker Patton Music Co., has nearly doubled in size to 21 stores in five years, said Gene Taylor, district manager in Bakersfield. Patton began opening the stores as its sales of cigarette vending machines declined, he said.

The rise of cigarette specialty shops has not gone unnoticed by tobacco companies.

Although they account for just a tiny portion of the market, discount outlets have grown to about 5% of retail cigarette sales, up from 2% last summer, said Peggy Carter, spokeswoman for R.J. Reynolds Tobacco Co. The leading sellers of tobacco products are still convenience stores, with about 48% of cigarette sales, Carter said.

However, discount stores are becoming common where “there is a larger number of lower-economic folks,” Carter said. “They pop up . . . in places hit by unemployment, shrinking industries, that sort of thing.”

For large tobacco companies, which dominate the country’s $45-billion-a-year cigarette market, discount cigarette stores could offer distinct advantages, said Goldman, Sachs & Co. analyst Marc Cohen.

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In recent years, tobacco firms have moved to block inroads into their market by cheaper generic brands. A price war launched by industry giant Philip Morris Cos. in 1993 succeeded in knocking the generic market share back down to about 30% from a high of nearly 40%, according to Jack Maxwell of the Maxwell Consumer Report in Richmond, Va.

But all that price-cutting on premium brands took a bite out of tobacco companies’ profits. By contrast, discount cigarette stores--which save by cutting out middlemen, selling high volumes and taking smaller profits--might help keep prices low without hurting tobacco companies’ earnings much, Cohen said.

And because discount stores ostensibly cater only to adults, they provide a neat way of sidestepping controversy.

Most discount stores post signs banning minors unaccompanied by adults. Baldwin says Cigarettes Cheaper! adheres to this policy strictly.

But anti-smoking advocate Caffee says the stores still may be “a come-on” to kids. They “glamorize smoking as an adult activity,” she said.

Discount cigarette stores also offer tobacco firms new venues for marketing efforts.

For their efforts, store owners are rewarded with substantial financial breaks from tobacco companies. The breaks are passed on to customers, allowing cigarette stores to undercut the prices of competitors, often by 20% or so.

Cigarettes Cheaper! in particular benefits from a lucrative merchandising contract with Philip Morris, Baldwin confirmed.

Under the terms of this exclusivity contract, Cigarettes Cheaper! stores emphasize Marlboro cigarettes--a Philip Morris product--more than any other brand. All permanent displays and signs in the store must be devoted to Philip Morris products, Baldwin said.

In exchange, Philip Morris gives Cigarettes Cheaper! substantial allowances and promotions, Baldwin said. Because the company is a direct buyer, it qualifies for Philip Morris allowances on both the wholesale and retail level, he said.

That means the chain can afford to sell Marlboro--the No. 1 brand in the country, and ordinarily one of the more expensive--at a deep discount.

“They [Philip Morris] set up a bunch of hoops. I make an effort to jump through more of them than most people,” Baldwin said.

Competing cigarette chains are peeved by this. Cigarettes Cheaper! “scares me sometimes,” said Oscar Ramirez, president of Glendale-based Quick One Corp., which owns three drive-through cigarette booths called “Smokey’s” in the San Fernando Valley. Ramirez has watched with apprehension as Cigarettes Cheaper! stores have surrounded his outlets, but says he was unable to get the same exclusivity contract from Philip Morris.

Philip Morris spokeswoman Karen Daragan said exclusivity contracts like the one Cigarettes Cheaper! has are available to all retail chains that can meet the requirements for “a maximum level of participation” in Philip Morris’ merchandising programs.

Many stores find the requirements too weighty. Taylor, of The Cigarette Stores in Bakersfield, said he declined a similar exclusivity contract with Philip Morris because he wanted to keep displaying competitors’ signs.

The promotional arrangements are another reason to bemoan the trend, said Eriksen, of the CDC. The tobacco companies are trying to “create an image. Not just through billboards and advertising. But with caps and camping equipment,” he said.

Baldwin defends the business as the natural result of smokers’ exclusion from other aspects of public life. Segregated by law from restaurants and workplaces, smokers are now segregating themselves in shopping habits, he said.

Times staff writer Myron Levin contributed to this report.

* NICOTINE FLAP

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