Max Krangle on how Big Tobacco adapted to restrictions, regulations, taxes and remained profitable

The tobacco industry has adapted to the full-court press of taxes, restrictions, and regulations and emerged more profitable than ever before, says Max Krangle, a consultant and former Big Tobacco in-house counsel.

While he says Canada is the “worldwide leader” in anti-smoking regulations, he adds that in many ways, the regulations intended to curb smoking have been boons for business.

Since the middle of the 20th century, when smoking’s deadly impact was revealed and slowly became widely accepted by the public, smoking rates have been on the decline. According to data from the University of Waterloo, in 1965, around half of Canadians smoked. By 2020, that number had shrunk to around 10 percent.

At the same time, governments have used taxes and other regulations and restrictions to reduce smoking. These include health warnings covering almost the entire packaging, banning smoking in public places, and prohibiting all forms of advertising and sponsorships, to name a few.

The industry has also faced class action lawsuits and other litigation. These include a lawsuit involving all ten provinces to recoup healthcare costs seeking $500 billion. In 2019, the Quebec Court of Appeal also upheld a court ruling on two class actions, which ordered Imperial Tobacco, Rothmans, Benson & Hedges, and JTI-MacDonald to pay $15.6 billion. The companies have sought creditor protection under the Companies’ Creditors Arrangement Act.

In 2022, the journalist Joshua Knelman, founding member of The Walrus, wrote a book about him. “Firebrand: A Tobacco Lawyer’s Journey” came out in 2022, and Krangle says it wrestled with the question: with all the regulations aimed at stubbing it out, how is it possible that the tobacco industry is still in business?

“There are more smokers in the world today than ever before. The industry is making more money than they've ever made in the past. It's a bit of a head-scratcher as to how that's possible.”

The strict regulation has helped make the tobacco industry more profitable in several ways, says Krangle. Manufacturing costs have plummeted because companies can no longer use flavourings in their products, and each brand now has only one or two different kinds of products. Since they are not allowed to advertise, they no longer spend tens of millions every year on marketing and sponsorships, and that money goes directly to the bottom line. The government has also made the display of tobacco products at the point-of-sale illegal, which creates a monopoly and prevents any new market entrants because, since they cannot advertise, customers would have no way of knowing that any new brands are behind the counter.

“Effectively, what you've done is you've frozen all the market shares of the three existing players in the market.”

But the “real kicker,” he says, is that unbeknownst to the consumer, the industry gets to raise prices and increase revenue once or twice a year. The government has repeatedly raised the duty on cigarette packs and increased the excise tax, causing cigarettes to steadily become much more expensive. But Krangle says every time taxes and duties rise, the cigarette companies boost the price a little more because they know smokers will blame the government for the expense. He says they are selling fewer cigarettes, but their margins have increased on each one.

“The industry has adopted a model to work with the regulation and the restrictions and everything else, to make it more profitable.”

Also adding to Big Tobacco's profitability is that, while the smoking population declines in Canada and other Western countries, the population elsewhere in the world, where many anti-smoking regulations have not yet taken root, has expanded significantly, says Krangle.

The World Health Organization estimates that more than eight million people die prematurely from tobacco-related illnesses every year. According to Lung Cancer Canada, 100 Canadians die of a smoking-related illness every day.

The “bottom line,” he says, is that, despite those numbers, “these products are still sold on the shelves of stores that also sell chocolate bars and chewing gum.”

“It's kind of crazy that this industry is still in business. Yet, it is. And it is thriving more than it ever has in the past.”

Max Krangle used his experience as a Big Tobacco in-house legal counsel to build a consultancy business for companies in industries that are heavily regulated and taxed, socially sanctioned, and frequent litigation targets.

Krangle grew up in Toronto but spent most of his career working abroad. He attended law school in the UK at the University of Law after doing a Bachelor of Science at the University of Bristol and working as a journalist briefly at NBC News.

Krangle says he decided to study law largely because of the OJ Simpson trial, which he followed on television during his undergrad.

“I was really transfixed about how the legal system works and how lawyers can really make a difference in the outcome of a trial based upon how they act and how good they are – or, frankly, how bad they are – at defending their clients.”

He began his legal career practising at a media and entertainment firm in London, UK, primarily intellectual property and brand protection. Then, in the late 1990s, he was head-hunted by Big Tobacco. He took a job at the Gallaher Group, the makers of Benson and Hedges cigarettes, eventually working his way up to European general counsel.

In 2007, Japan Tobacco International acquired the Gallaher Group. Krangle left two years after the deal to join RJ Reynolds Tobacco Company, which is based in Winston-Salem, North Carolina, as their international general counsel. He was responsible for all legal and business affairs in Europe and Asia.

Because so few are willing to work for a tobacco company, to entice those who are, the pay, perks, hours, and working conditions are “fantastic,” says Krangle.

In 2010, he left the company, moved back to Toronto, and took what he learned in his legal practice to start a consulting business.

Counsel Strategy is an international legal and business consultancy that advises clients on transactions, acquisitions, and legal issues involving multiple jurisdictions.

“There's no such thing as an international lawyer,” says Krangle. “As a legal consultant, I can advise on many different cross-border and transactional issues, and then use lawyers in various jurisdictions for the groundwork.”

A focus for Counsel Strategy is on companies in, what he calls, “contentious industries.”

In the book Krangle authored, “Contentious Counsel,” he provides a how-to on how businesses can learn from “the world’s most reviled industry” about navigating a “combative, litigious and regulated world.”

Counsel Strategy’s clients have included companies in cannabis, alcohol, porn, online gambling, and magic mushrooms. His client base is companies that face similar challenges with which the tobacco industry has dealt: a combination of shifting public opinion, increased regulation, and litigation.