The essay of ECo

Business Outline For Smuggling Tobacco

Where (what states to smuggle from and to)

First we need to determine what states we should potentially smuggle from and to. The top five states with lowest taxes on cigarettes are Missouri, Virgina,Georgia, North Dakota, and South Carolina (in that order). The top five states with highest taxes rates are New York, Connecticut, Rhode Island, Massachusetts, and Hawaii. If you include state, county and local taxes the real price of cigarettes in chicago illinois and its surrounding areas is the highest, followed by new york city. Our business proposes that we smuggle cigarettes from St Patrick, MO to Chicago, IL. This is a 5 hour drive and has a $5.99 tax difference between the two areas (effective 2018). When compared to a 4.5 hour drive from virginia to NYC and only having a $5.55 tax difference. This is and 8% difference in profit margin between the two areas and we believe would justify the extra drive time that smuggling from Missouri warrants.

How (Strategy/ Business model)

We believe that there are two possible methods when scaling our smuggling business. The first would be working directly with producers we do not believe that it is feasible to buy from farmers and process our own raw tobacco and turn them into cigarettes to to the high entry barriers (Capital Intensity) in the industry. This would leave attempting to purchase the finished product “under the table” from Major companies that are highly regulated and dominated by 3 firms (Altria, reynolds, and Imperial Brands). With Cigarettes being a highly inelastic product the majority of the tax incidence falls on consumers, and each company's net income has been growing. With the combination of high regulation, increasing income, and the fact that the tax burden is likely being passed onto consumers; we see little incentive for any major cigarette companies to cooperate with us in any sort of illegal activities. This leaves the second method, buying from retailers in low taxes states and selling in the underground market in high tax states. This method requires no bribery or corruption of business officials to implement. The entire risk falls solely on ourselves as well. There will be minimal overhead cost relative to other models, only requiring transportation and a means of distribution.

In order to execute our retail to distribution plan we would first need to purchase a way to transport our inventory preferably a utility van or some other inconspicuous vehicle to transport large volumes of cigarettes. We plan to buy a reasonable amount of cigarettes ( as to not raise suspicions) at multiple retailers in missouri.After we transport our cargo to chicago we will need to form a distribution network in order to our get reach consumer. We propose either working with “shady” convenient stores or developing a network of individuals who are willing to sell directly to consumers in areas with a high density of smokers (similar to narcotics distribution). If we believe that tobacco users are price takers then we should theoretically be able to sell at close to market value of an individual pack (discounting for the increased risk and opportunity cost that consumers might bear when purchasing in the underground economy).

Risk ( potential risks and how we would avoid them)

Illegal/arrest both durring transportation and distribution

Gaining a coustomer base

laundering

Liquor( comparative analysis of difficulty and profitability)