Cigarette Prices Likely To Rise Again Next Week

Source from:  Greensboro News & Record 04/11/2018

The price of traditional cigarettes is going up again, this time by 9 cents per pack for at least Philip Morris USA’s brands, a leading tobacco analyst said Thursday.

The increase in Philip Morris’ list prices is expected to go into effect with shipments beginning Sunday, Wells Fargo Securities analyst Bonnie Herzog said.

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

The increase follows Philip Morris’ recent pattern of raising prices every six months or so, which R.J. Reynolds Tobacco Co. and ITG Brands LLC tend to match.

“We expect Reynolds and ITG Brands will follow Philip Morris USA’s lead and increase prices in the next few days, but possibly not as robust of an increase,” Herzog said.

When Reynolds increases its cigarette prices, they typically include all traditional cigarette brands and Natural American Spirit, its super-premium brand of affiliate Santa Fe Natural Tobacco Co.

The manufacturers are again testing the elasticity of their customers’ disposable income.

“We expect tobacco stocks will react favorably to this list price increase since it affirms the industry’s continued strong pricing power,” Herzog said.

In September, Philip Morris and Reynolds raised their list prices by 10 cents. Before September, the list price increases typically had been in the 7- to 8-cent range.

It is the seventh confirmed increase for Philip Morris USA since May 2014, and likely will be the same for Reynolds and ITG.

Analysts say it will help offset the impact of a significant increase — by $2 to $2.87 a pack — in the California tobacco excise tax that went into effect in April 2017.

The California tax is the ninth highest in the country. Herzog said the tax increase would raise the average price per pack there by 9 percent to 10 percent to $6.81 at retail.

“California represents about 7 percent of total U.S. industry volume, making it the second largest state by volume,” Herzog said. “Given California’s size, we estimate the weighted average state excise tax on smokers will increase by 17 cents to $1.77 per pack.”

There also has been an uptick in states and communities raising their minimum age for buying tobacco products to 21.

Herzog said the manufacturers’ ability to have price increases stick “is important given ongoing secular declines in volume, which will likely face even greater pressure under the FDA’s effort to lower nicotine levels in combustible cigarettes.”

The theory behind producing very-low-nicotine cigarettes, which are made by 22nd Century Group Inc. at its Mocksville plant, is that by making them less addictive, smokers would smoke fewer cigarettes.

Herzog said that whatever changes the Food and Drug Administration makes are likely “to be several years away given the complexities of issues ahead.”

“Therefore, we believe pricing will remain a critical driver of revenue and earnings growth, particularly as manufacturers realize almost three times the leverage on earnings from a point of pricing than a point of volume.

In January, the federal Centers for Disease Control and Prevention reported the adult smoking rate inched up to 15.5 percent in 2016. The rate had hit a historic low of 15.1 percent during 2015, down from 16.8 percent in 2014, 17.9 percent in 2013 and 20.9 percent in 2008.

The latest Nielsen tobacco sales report, released March 6, found that Reynolds’ Newport and Natural American Spirit were the only shining lights in February.

As a result, No. 2 Newport continued to chip away at No. 1 Marlboro’s market share, as did electronic cigarettes.

Newport sales were up 0.6 percent, with a 2.5 percent increase in pricing offsetting a 1.9 percent decline in volume.

Herzog said Newport, the top-selling menthol cigarette, continues to gain momentum with millennials through its heightened promotional strategy, although the platinum style is struggling to connect with smokers.

Natural American Spirit, a top-10 U.S. brand, had a 2.9 percent increase.

Meanwhile, Marlboro had a 7.5 percent volume decline, which suggests that brand pressure persists in and outside of California, Herzog said.  Enditem