RJR Plans Price Boost

Source from:  Winston-Salem (NC) Journal 03/08/2009

R.J. Reynolds Tobacco Co. said yesterday that it will raise the list price on its cigarette brands in the range of 41 cents to 78 cents a pack for wholesale customers. Camel, Kool, Winston and Salem will go up 44 cents a pack, and Pall Mall, Doral and Capri will go up 41 cents, said David Howard, a spokesman for Reynolds. Its other brands will go up 71 cents to 78 cents a pack, depending on the brand. The increases will start March 16, Analysts projected the sharp price increases before Congress passed the 62-cent increase in the federal excise tax to pay for expansion of the State Children's Health Insurance Program. That tax increase will take effect April 1. Reynolds is not the only manufacturer raising prices. On Monday, Altria Group Inc. is increasing the list price for certain brands that include Marlboro, Virginia Slims and Parliament by $7.10 a carton, and the list price for other brands that include Benson & Hedges, Chesterfield and Merit by $8.07 a carton. Lorillard Tobacco Co. is also increasing its list price by $7.10 a carton, according to Pat Shehan, the owner of Tarheel Tobacco in Winston-Salem. Besides the list-price increase, Reynolds is also reducing its discount rate at retail. "The net result is that we will be aligned with our competitors in terms of pricing," Howard said. Shehan estimated that the federal tax increase will raise the cost of a carton of cigarettes by $6.17. Anti-smoking groups hailed the approval of the SCHIP program in part because analysts estimate that cigarette sales could decline by as much as 8 percent as a result of the federal tax increase. "It is clear that Philip Morris, Reynolds and Lorillard think they can maximize profits by raising their cigarette prices not only to account for the federal cigarette-tax increase prematurely, but also by raising the prices by an extra 10 cents," said Eric Lindblom, the director for policy research for the Campaign for Tobacco-Free Kids. "As far as public health goes, the larger, faster and clearer cigarette-price increases are, the more they will prevent and reduce smoking, save lives and reduce related harms and costs," Lindblom said. Neither Reynolds nor Altria commented on whether the extra amount of the list-price increase is meant to provide additional revenue from each pack to help offset the potential decline in sales. The list-price increase will likely lead to decreased sales, said Charles Norton, the portfolio manager of the USA Mutuals Vice Fund, which specializes in gaming, alcohol, tobacco and defense-industry stocks. "But the companies are profit focused, and this is their best move," Norton said. "Also, the pricing gap between premium and low-priced brands is narrower than it has been in previous years, which leaves room to bump up pricing on premium brands like Marlboro, Camel and Newport." But Shehan said that the list-price increases will accelerate a movement by his customers toward lower-priced cigarettes. "While their prices likely will go up as well, there will be enough of a difference to continue to make the third-tier and fourth-tier cigarette brands more popular," Shehan said. "Brand recognition will become less important as people have less money in their pocket." Enditem