Get Your Foreign Butts Out of Our Convenience Stores!

The calls keep coming in to the Dade County offices of the state Division of Alcoholic Beverages and Tobacco. Those funny-looking packs of cigarettes have been circulating for more than two years, but people still raise an eyebrow when they see a small red sticker on one side of their Marlboros, then unwrap the cellophane and find these words printed on the side: "U.S. Tax Exempt, For Use Outside the U.S."

And as the calls keep coming, ABT agents keep giving the same answer: These cigarettes (not only Marlboro but many other major brands) might look fishy, but as long as they bear a valid state tax stamp on the bottom, they are legal. They are known as "diverted" cigarettes -- butts manufactured in the United States for export, bought by foreign companies, then purchased again by U.S. firms and returned here for domestic sale.

Some South Florida cigarette wholesalers, including Allstate Cigarette Distributors Inc. in Miami and Prestige Storage & Distribution in Fort Lauderdale, sell these repatriated smokes to retailers throughout the state, much to the chagrin of other cigarette wholesalers. The diverted product, it so happens, is far less expensive for wholesalers -- up to four or five dollars per carton less than the domestic stuff, thus giving diverters greater profit margins than their mainstream competitors. "We buy cigarettes on the world market at a competitive price," says John Alexander, an owner of Allstate. "As in any business, it has to be feasible for us to do all the handling and pay all the taxes and duties. If it weren't economically feasible, we wouldn't do it. It's just a question of numbers."

According to industry experts, Florida is a leader in the diverted-cigarette business. "It's nothing new to us," says Michael Sheehan, spokesman for the U.S. Customs Service in Miami. Customs agents inspect the cigarettes when they re-enter the country and collect the federal excise tax that must be paid. "We are well aware of the situation, and we are aware of the fact that the cigarette manufacturers are aware of situation," Sheehan notes. "It falls into what we call 'gray market.' That can cause problems of compliance with regulations, as well as problems with revenue for the manufacturers."

Big Tobacco has adopted a clear strategy for penalizing distributors who create these kinds of revenue problems. When the diversion of foreign-bound cigarettes began in earnest, manufacturers such as Philip Morris, R.J. Reynolds, and Brown & Williamson sent pointed letters to their wholesalers. After listing several reasons why products intended for export are different from those for domestic consumption (health warnings that don't meet U.S. requirements, lack of freshness and quality monitoring, absence of special promotions on the packaging), the letters included ultimatums, such as this from Philip Morris, dated May 1994: "If, following receipt of this letter, any direct customer knowingly acquires and distributes Philip Morris product intended for export, that customer will be removed from direct customer status and will no longer be entitled to purchase product directly from Philip Morris."

Thus shackled by their suppliers, the majority of Florida wholesalers for the past two years have been trying to turn this lucrative loophole into a noose for their wily competitors. The Florida Tobacco and Candy Association, the trade organization for cigarette wholesalers, persuaded State Sen. Roberto Casas (R-Hialeah) and Rep. William Andrews (R-Delray Beach) to sponsor a bill in the last session of the legislature that would effectively eliminate the diverters. Wilson Wright, executive director of the Tobacco and Candy Association, says the proposed legislation got "bogged down" in the relevant House committee this year but will be considered in the session beginning next March.

James Batalini, owner of Prestige Storage & Distribution, which has operated for some five years, is not surprised that his competitors are pushing such a law. "That's their prerogative," he shrugs. "They can try anything if they want to try to legislate their competition out of business."

Purveyors of diverted smokes present devastating price competition. Though they have to pay the same federal and state taxes when they reimport the cigarettes ($3.39 per carton to the state and $2.40 per carton to the feds, which will soon increase by $1.50 per carton), they make their profit on the difference in the wholesale price. Premium brands for U.S. sale as of last week cost wholesalers about $9.50 per carton before taxes; the same brands produced for export vary greatly in price (depending on the country to which they are being sent), but some distributors say the price can be as low as $4.00 per carton.

At least some of this savings is passed on to local retailers. "The dead net cost to any Florida distributor is $15.35 per carton for any premium brand," says Joseph Albury, vice president of Reliable Vending Service Inc. in Key West. "These diverted cigarettes are out there for anywhere from $13.50 to $14.50. So there is an incentive to the retailer. And they don't alter their retail price." According to ABT, Allstate -- which many distributors agree is the largest of South Florida's diverted-cigarette companies -- sold slightly more than seven million standard packs of cigarettes to Dade County retailers between July 1996 and June 1997 (out of a total of 124 million packs sold countywide).

Customers of Allstate and other such distributors are usually small independently owned or franchised operations like gas stations and convenience stores, not major retail chains. Tamara Herrera, manager of a Shell station on Bird Road west of the Palmetto, says the only diverted brand she carries is Marlboro, which costs her "a couple of dollars" less per carton. She also carries domestic Marlboro because many customers demand packs that feature the "Marlboro Miles" promotion.

With all the financial hits the tobacco manufacturers have taken recently -- the federal tax increase, the national $368.5 billion settlement, this month's $11.3 billion settlement with the State of Florida -- the price of domestic cigarettes should soon show a marked rise. The cheaper diverted smokes will likely become even more attractive, and profitable, to retailers and wholesalers.

But are American cigarettes produced for export the same in every way as cigarettes produced for domestic consumption? Apparently not. An informal sampling conducted by New Times revealed that a locally purchased pack of diverted Marlboro contained cigarettes that were considerably milder and two millimeters longer. Representatives of Philip Morris and R.J. Reynolds would not respond to questions regarding differences between their domestic and export products.


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