Big 3 Manufacturers Increasing Cigarette Prices By 7 Cents A Pack

Source from:  Winston-salem Journal 11/16/2015

The Big Three tobacco manufacturers are expressing confidence again in the flexibility of smokers' disposable spending by raising traditional cigarette prices by 7 cents per pack for a third consecutive round.

R.J. Reynolds Tobacco Co. confirmed that effective Friday it has raised the list price on seven cigarette brands - Camel, Doral, Kent, Newport, Old Gold, Pall Mall and True.

The same price increase is being taken by Santa Fe Natural Tobacco Co. for its Natural American Spirit brand.

The list price is what wholesalers pay manufacturers for their products. The increases typically are passed on to customers.

"The stronger tobacco consumer continues to favorably impact the category as consumers up-trade to premium brands," Wells Fargo Securities analyst Bonnie Herzog said, citing Camel, Newport and Philip Morris USA's Marlboro brands as examples.

"Given that underlying cigarette industry consumption will likely revert toward its long-term trend of declining, pricing remains a critical driver of revenue and earnings growth."

On Thursday, the federal Centers for Disease Control and Prevention reported that the adult smoking rate was at an historic low of 16.8 percent during 2014, down from 17.9 percent in 2013 and 20.9 percent in 2008.

ITG Brands LLC confirmed its price increase, effective Friday, for Kool, Maverick, Salem and Winston. Those are the four cigarette brands parent company Imperial Tobacco Group Plc acquired in its $7.1 billion deal with Reynolds American Inc. that was completed June 12.

Philip Morris USA is raising the price on all its cigarette brands, effective with shipments beginning Sunday.

The manufacturers also raised their prices by 7 cents per pack in May and November 2014.

"We expect this continued pricing power to help drive momentum in tobacco stocks," Herzog said.

Altria Group Inc. and Reynolds said in their respective third-quarter earnings reports that their revenue rose in part because of higher cigarette prices and consumers having more disposable income from lower energy and gas costs.

"These announcements support our thesis of continued strong pricing power for the tobacco industry, which is crucial since manufacturers get three times the earnings leverage from a point of pricing than a point of volume," Herzog said.

Herzog and other tobacco analysts say it is pivotal, if not critical, that the price hikes stick for ITG, considering its struggles to gain traction with its four new brands.

Citing Nielsen industry data, Herzog said ITG sales in October were down 5.1 percent year over year and down 1.9 percent from September. Winston sales were off 0.7 percent.

Herzog said ITG is expected to provide greater pricing discounts as part of a major marketing push to reestablish Winston as a major U.S. brand, as well as possibly Kool. ITG Brands came out of the Reynolds-Lorillard Inc. megadeal with a 10 percent U.S. market share.

"Based on dialogue with industry retailer contacts, most believe that ITG has an uphill battle given the brands it acquired and given Reynolds new Every Day Low Price retailer contract."

Newport sales are projected to increase further with Monday's end of Reynolds' agreement with federal regulators to delay adding Newport to its every-day-low-price strategy for six months. The delay gave ITG an opportunity to establish its versions of Kool, Maverick, Salem and Winston at retail.

The program is a voluntary retailer contract that Herzog said has a 60 percent participation rate currently. Retailers that elect to participate must agree that Pall Mall is the lowest-priced cigarette in their stores.

(That program) will make it more difficult for ITG to price aggressively and to secure shelf space," Herzog said.

"We anticipate ITG could drive accelerated profitability as it strikes a balance between stabilizing Winston's share and milking its other brands." Enditem