Big Three Tobacco Manufacturers Increasing Cigarette List Prices by 7 Cents

Source from:  Winston-Salem (NC) Journal  05/16/2016

The Big Three tobacco manufacturers are all priming the pump again for their top revenue driver.

R.J. Reynolds Tobacco Co., ITG Brands LLC and Philip Morris USA all confirmed on Thursday their plans to raise traditional cigarette list prices by 7 cents per pack for a fourth consecutive round.

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

The increase for all Reynolds brands takes effect today, spokesman David Howard said in an email. In addition, Santa Fe Natural Tobacco Co., a Reynolds subsidiary, has announced a list price increase of 7 cents a pack on all styles of Natural American Spirit, effective today.

The ITG increase will take effect by Monday. Philip Morris USA will raise prices on its brands, including top-selling Marlboro, on Sunday.

All three manufacturers raised their prices by 7 cents per pack in May and November 2014 and in November 2015.

The November 2015 increase affected seven Reynolds cigarette brands — Camel, Doral, Kent, Newport, Old Gold, Pall Mall and True — along with Santa Fe's Natural American Spirit brand.

In the previous increases, the manufacturers expressed their confidence in the flexibility of smokers' disposable spending, particularly shifting up from lower-tier discount brands, as they benefit from lower energy costs.

"We expect tobacco stocks will react favorably to this list price increase since it suggests the industry's continued strong pricing power," said Bonnie Herzog, an analyst with Wells Fargo Securities.

"It demonstrates the industry still has very strong pricing power, which is coming on the heels of several quarters of very strong net price realization for the manufacturers."

For example, Reynolds American reported April 26 that it had adjusted net income of $721 million for the first quarter, up 57.8 percent from the year earlier period. Net sales jumped 41.8 percent, to $2.92 billion.

Both totals were impacted by a full quarter's worth of Newport sales compared with the previous year. Reynolds took over Newport, the No. 2 overall traditional cigarette brand, on June 15 as part of its $29.25 billion purchase of Lorillard Inc.

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

"Manufacturers realize almost three times the leverage on earnings from a point of pricing than a point of volume."

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

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 — Kool, Maverick, Salem and Winston. Parent company Imperial Brands Plc spent $7.1 billion to acquire those brands, along with blu eCigs, from Reynolds and Lorillard.

Getting ITG from 4 percent to 10 percent market share was a key factor in federal regulators approving the Reynolds/Lorillard megadeal since Philip Morris USA and Reynolds combined control about 84 percent of the market.

Herzog said that, according to Nielsen data as of April 23, ITG's market share was down to 7.2 percent overall. Imperial said May 4 during its mid-year financial report that ITG's market share was 9.3 percent.

Imperial made Winston a growth brand — one of 10 globally — effective Oct. 1. Those 10 brands receive the bulk of Imperial's marketing and innovation spending.

Winston's market share has held at 2 percent since the deal, leaving it among the Top 10 U.S. brands, despite a major marketing push from ITG. Enditem