NEW YORK -- The renaissance in premium cigarette sales continued into the first quarter of 2016, with RBC Capital Markets tobacco analyst Nik Modi reporting that both Altria Group Inc. and Reynolds American Inc. had “solid quarters” that were “marked by above normal trend cigarette volumes coupled with midsingle-digit pricing.”
Based on Reynolds’ and Altria’s earnings calls, Modi broke down three key themes for the tobacco industry in 2016:
Positive backdrop for tobacco consumers: Like many others, Reynolds and Altria credited an “encouraging consumer backdrop” with positive first-quarter cigarette shipments (up 0.4%) for the third time in the last four quarters. Modi’s own research shows 57% of convenience-store retailers noticed an improvement in traffic and 61% also believe consumer confidence is improving.
“We believe a combination of lower gas prices, improvement in employment levels for low-income consumers, and rising consumer confidence is driving the improved consumer backdrop,” Modi said. “However, we caution investors to assume that the positive benefits we are seeing from these factors will continue to drive flat to positive cigarette volume.”
Specifically, Modi predicted that industry volume declines will moderate as the year progresses, reaching the historic 3% to 4% decline rate by the end of 2016.
Big tobacco’s pricing bower: The No. 1 and No. 2 tobacco manufacturers continued to demonstrate strong pricing power, with Reynolds’ prices up 14% in the first quarter (half of which was driven by Newport) and Altria up 4%.
“Behind the improved consumer backdrop, management commentary and intel from the field, we believe pricing will remain rational in 2016,” Modi said. “It is becoming very clear that the recent changes in the industry (Reynolds acquiring Lorillard and the formation of ITG Brands) has done very little to the overall constructive pricing environment we have seen for the last 10 years.”
More clarity on Reynolds’ portfolio and contracts: This quarter saw Newport gain 0.6% of retail share and 3% volume growth. Additionally, 57% RBC retail survey participants reported an acceleration in Newport sales.
“We expect Newport to remain the key driver of the Reynolds portfolio, noting that general trade up to premium brands in the category weighed on Pall Mall during the quarter, as well as a resurgence of Maverick and share gains from L&M.”
As for Camel, which was down 2.8% and lost 0.2% of share, Modi pointed to the “ongoing drag” due to the FDA-required removal of brands such as Camel Crush Bold, as well as a belief that Reynolds is “scaling back on deep promotions on certain Camel SKUs.”
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