US: Cigarette Makers Confirm Price Increases

Source from:  Winston-Salem Journal  06/09/2013

Cigarette prices are rising again, with the three largest tobacco manufacturers expressing confidence that another increase won't deter smokers in a sluggish economy.

R.J. Reynolds Tobacco Co., Lorillard Inc. and Philip Morris USA confirmed Friday that prices for most of their brands are going up. The increase goes into effect Monday for Philip Morris and Wednesday for Reynolds.

Reynolds and Lorillard are raising the list price by 6 cents a pack, or 60 cents a carton. Although the list price is geared toward wholesale and direct-buying customers, such increases are usually passed on to consumers.

Meanwhile, Philip Morris is decreasing its national off-invoice promotional discount to wholesale and direct-buying customers on all Marlboro and L&M styles by 6 cents a pack, effectively raising the price for consumers. The list price is going up by 6 cents a pack for its other cigarette brands.

Reynolds spokesman Bryan Hatchell said the prices are going up on 21 brands, including Pall Mall and Camel, its two most popular. "As always, we cannot speculate on how this will affect price at retail as we do not set the price at retail," Hatchell said.

In some instances, price increases go up quicker for the lower-level brands compared with the most popular.

Pat Shehan, owner of the Tarheel Tobacco retail chain, said the price increase may not affect most smokers who are loyal to a particular brand.

"The pricing is driving some blue-collar smokers more to the deeper discount brands, such as a Marlboro Special Blend and Pall Mall, because each price increase hurts," Shehan said. "It could lead some people to roll their own, filtered cigars and possibly even electronic cigarettes."

Although anti-tobacco advocacy groups typically don't comment when manufacturers raise their list prices or lower their discounts, they say any time cigarette prices go up – whether by these methods or an excise tax increase – consumer demand tends to drop slightly.

Stephen Pope, chief global market strategist with Cantor Fitzgerald Europe, said studies have shown that every 10 percent increase in a pack of cigarettes tends to produce an average 4.8 percent decrease in consumption.

"Any large tobacco company will have a stable of strong brands that should be capable of carrying a price increase, whilst medium and budget brands probably need to veer toward the reduced discount route," Pope said.

Bonnie Herzog, an analyst with Wells Fargo Securities, said Philip Morris tends to be the main beneficiary of price increases if the manufacturers raise the cost by the same or similar amount.

"After speaking with several of our industry trade contacts, a wholesale promotional allowance decrease can be a more effective mechanism for the market leader to increase their margins without the typical price elasticity of demand coming into play," Herzog said. "This is because the eventual retail price is not marked up as much as it moves though the supply chain as it would be with a list price increase."

For example, Herzog said that by the time a list price increase goes from manufacturer through the wholesaler to consumers, the increase tends to be more like 8.5 cents a pack, whereas reducing the discount tends to be a 6-cent decrease.

"Furthermore, for the deep discounter manufacturers, a promotional decrease is likely more difficult to implement versus a list-price increase since they have relatively tighter discount budgets," Herzog said. "Therefore, the gap between Marlboro and deep discount brands should narrow."

Herzog said manufacturers are motivated to keep increasing their list prices as consumption continues to decline in the mid-single digit range annually.

Three Tarheel Tobacco stores, including two in the Triad, have been selling for months the Vuse disposable e-cig brand being made by R.J. Reynolds Vapor Co. Reynolds announced Thursday it will begin distributing rechargeable Vuse kits at retail outlets in Colorado beginning in July. That additional distribution is expected to limit the local supply of Vuse.

"Our e-cig sales are up 40 percent since Lorillard began its advertising campaign for blu eCigs," Shehan said. "People look at blu eCigs as being OK because they are being advertised on television. I would expect a similar reaction when Reynolds begins advertising Vuse in a meaningful way." Enditem