Secrets of a tobacco insider: How crackdowns and high taxes just helped the industry make more money

It's been a decade since the writer first met the lawyer - a chance encounter in a Toronto bar that abruptly informed him how little he knew about the legal consumer product likely to kill him.

So Joshua Knelman, author and smoker, went back to the lawyer, who had just exited a 12-year stint in the tobacco industry, and began the dozens of conversations that culminated in Firebrand: A Tobacco Lawyer's Journey. One of the year's most remarkable books, it brilliantly untangles what Knelman calls the tobacco paradox" - how the tobacco trade thrives as much, if not more, than it ever has - and its many ironies.

Consider the world's ubiquitous No Smoking signs, a symbol of how far we've come in our awareness of tobacco's risks. They condemn the practice while simultaneously providing free advertising for an industry forbidden to promote itself. There is a subconscious message that is as powerful as the conscious one: Smoking is allowed somewhere. Just move a few metres and light up.

The lawyer and his first employer remain anonymous through Firebrand, a literary tactic adopted to keep the focus on his Pilgrim's Progress through the industry. But speaking through the smoke swirling around Knelman's backyard - in yet another irony, of the three people present, only the ex-tobacco lawyer doesn't smoke - Max Krangle is happy to expand on his former job.

A dual Canadian-British citizen who was 26 and practising law in London when he was hired, Krangle was sent everywhere from Kazakhstan to Switzerland by his new bosses. He spent pampered days at Formula One races and long hours near Belfast observing the (now shuttered) production lines at one of the U.K.'s last cigarette-manufacturing plants.

He was paid well -$500,000 a year by the time he quit - to ensure his firm's corner of the world's most scrutinized industry stayed on the right side of the law. There were no slow days," Krangle recalls, in any cigarette-maker's legal department in the early 21st century, as tobacco regulation evolved at an uneven pace around the world. There was always something going on, always something that I had to fix."

He spent a lot of time in Spanish resort areas where the local economy ran on catering to Northern European tourists. In Spain, Krangle's company, still able to utilize marketing and advertising tactics banned in the U.K. - buy four cartons and get a free bottle of vodka! - was engaged in a fierce competition to instil brand loyalty for British visitors to take home. (The locals were of less interest, presumably being loyal to Spanish cigarettes already.)

U.K.-level tax increases had not yet been imposed in Spain, and British cigarettes were a third of the price charged in Britain, the same tax differential that currently sends Toronto smokers - faced with $150 per carton prices for popular brands in local convenience stores - on day trips to First Nation reserves, where similar cigarettes go for $51 a carton. Facing no customs limit on tobacco for personal use, Britons frequently returned with dozens of cartons. Some, taking advantage of cheap airfares, went to Spain and back the same day, just for the cigarettes.

The inevitability of border hopping - and outright smuggling - when tax regimes vary to such an extent is only a small part of the tobacco paradox, one dwarfed by the elephant in the room. How, after almost six decades of sustained assault by physicians and governments, has the tobacco industry managed not only to keep on store shelves the deadliest consumer product ever made, to be sold alongside bubble gum and chocolate bars no less, but also to remain so profitable?

The answer is the essence of the paradox. As the tobacco companies themselves have come to recognize after years of panic-stricken adaptation to changing laws and mores, Krangle argues, the restrictions imposed by the world's governments have showered them with blessings.

I don't know of any other industry in the world that can take manufacturers' price increases once a year, sometimes twice a year, and get away with it by blaming it on a third party," says Krangle. Meaning governments and their taxes? Yes. That's exactly what's happened, in Canada and many other countries. You've gone from a dollar a pack to $18 a pack over 40 years mostly through tax increases, but every time the tax goes up, the manufacturer gets a few pennies more" by piggybacking on the tax increase.

Compounding the benefits of the reputational free ride provided by the state, adds Knelman, is the industry's steep savings in costs in recent decades. Most companies with popular products have to spend a certain amount every year advertising to customers," he says, but cigarette companies, even though they can charge more and more, aren't allowed to spend on advertising."

Manufacturing costs too, says Krangle, have gone way down because of government regulations.

Manufacturers can no longer use flavourings or high-end gold-leaf paper inside packs or product descriptors like light" or mild" or ultra." That means fewer costs tied to producing and packaging distinct varieties. Twenty years ago, there were probably 10 SKU (stock keeping units) of du Maurier or Player's. Right now there's far fewer."

The SKUs - unique alphanumerical tags assigned to each variety of a product - played a vital role in keeping as many as possible of a manufacturer's different" products consumer-facing at the point of retail. But that is no longer legal. No one can advertise or even see any product at the point of sale - good news for health-minded regulators, bad news for existing cigarette makers, and terrible news for anybody trying to break into the business.

That's the best part of all," sums up Krangle, the greatest business partner in the world not only raises your prices for you and takes the heat, it also guarantees your market share. So you don't have any competition. There are no new market entrants - nobody's coming in."

That's why even having lost two-thirds of its customers over two generations hasn't dented the industry's profits in the developed world. If it did, in fact, lose that much business, even in the face of health warnings and alternative nicotine delivery systems (vaping). Knelman and Krangle are somewhat wary of the official Canadian numbers. According to Statistics Canada's latest data, collected between Dec. 8, 2020 and Jan. 16, 2021, 10 per cent of Canadian adults smoke daily. The self-reported nature of that information is part of their skepticism, given survey respondents' well-known aversion to admitting frowned-upon behaviour.

More germane, however, is what has happened in the world since the survey. Human behaviour is as much a matter of opportunity as inclination, and pandemic lockdowns sent tens of thousands of smokers worldwide from smoke-free offices to their own (presumably) smoky homes. An April Lancet meta-analysis - 31 studies examining lockdown smoking patterns among 269,164 participants across 24 countries - found mixed news for both health advocates and tobacco company shareholders. The proportion of people smoking continued its generations-long slide during the pandemic, but among smokers 27 per cent smoked more, 21 per cent smoked less, and half reported no change. And tobacco company stocks have risen during the COVID era, as they historically do during hard times, if only because stressed-out smokers tend to smoke more.

During his tobacco days, Krangle found real, cutthroat competition between industry players in so-called emerging markets like Kazakhstan, but he also learned that those markets are not the industry's profit centres.

Sure, there is less tobacco regulation, but the margins are $1.50 to $2 per thousand sticks' sold because a pack is only 30, 40, cents." Compare that to Canada, where the industry probably makes $150 per thousand sticks," and sells more than 20 billion a year. In the older, more heavily regulated markets where they've lost tons of customers but have adapted their business models to work with the regulations, rather than against them, tobacco firms are making so much more. And it's brilliant for them."

But the tobacco paradox, that guarantee of stability and profit, is reaching a crisis point, perhaps more in Canada than anywhere else. Lawsuits against the main Canadian tobacco distributors have meandered through the courts for decades. In 2015 the Quebec Superior Court ruled against the companies and ordered them to pay $15.6 billion in moral and punitive damages, a judgment upheld in 2019 after appeal. At which point the judgment was stayed, as interested parties work out what to do next.

And that's no simple matter.

It could end up in bankruptcy," Krangle says, and those companies going the way of the dodo. But consider the situation. The government is responsible for the price of the product and takes 80 per cent of the profit. That doesn't sound like an equal stakeholder to me. That sounds like a crown corporation that's taking everything, with the tobacco companies as fall guys paid to keep their mouths shut. So really what has happened in Quebec? The government has sued itself. How many other civil cases do you know that get stayed like that after the appeal? And it was stayed because the government knows essentially, crazy as it sounds, that it's shot itself in the foot. Take this industry out and you have to find another way to get billions of dollars into the treasury every year."

And, added the smokers in the yard, cope with three million deprived nicotine addicts of voting age.

Brian Bethune has written extensively about books, ideas, religion, culture and business for Maclean's magazine and other publications. He earned his PhD in medieval studies from the University of Toronto.