C-Store Cigarette Sales Momentum Driven by Moderating Pricing

And e-cigarette sales grew 189.6% in four-week period, says Herzog

NEW YORK -- Total cigarette dollar sales in the U.S. convenience store channel grew 1.2%, compared to 1.0% last period and 1.3% in the prior year) during the four weeks ending July 6, driven by 2.1% increase in average equivalent price, partially offset by 0.9% decline in equivalent unit sales, according to a research note by Bonnie Herzog, managing director of beverage, tobacco and convenience store research at Wells Fargo Securities LLC, New York, citing data from Nielsen.

Unit sales posted their best results--their lowest decline--of the past 12 periods, likely driven by moderating net price realization.

Cigarette net pricing moderated in the recent period to an increase of 2.1%, recovering from the year's low reached in the past period, 2%.

"We believe the recent cigarette list price increase of six cents per pack is now reflected in the c-store channel," wrote Herzog. "Despite somewhat tepid price realization for retailers per the Nielsen data, we expect net price realization for the manufacturers to accelerate to about 4% in full-year 2013, which should offset volume declines, leading to positive dollar sales."

Altria Group Inc. cigarette dollar sales were positive, up 0.6% compared to 0.5% last month as a 2% pricing increase (below the industry average of 2.1%) offset a 1.4% unit decline. Marlboro dollar sales grew 0.4% this period, driving the company's dollar share of 55.1% in the recent four weeks up 0.1 point compared to the last period but down 0.3 points compared to last year.

"Despite weaker-than-industry volume trends for Marlboro, net price realization continues to be solid--better than Camel and in line with Newport," she said.

Reynolds America Inc. cigarette dollar sales increased 0.4% compared to a 0.2% decline last month, driven by Pall Mall, which saw 6.1% unit growth. The company's volume declined 1.8%, offset by a 2.2% pricing increase. Reynolds American has maintained its dollar share of 25.7% for seven periods, said Herzog.

Lorillard Inc. cigarette dollar sales increased 2.7% compared to 2.6% last period on a 1.3% comp increase. Growth in units was up 0.1% and a 2.6% pricing increase exceeded the industry, resulting in a 0.2% share gain year over year. Newport share remains a strong 12%--up from 11.8% last year; this may be driven in part by the new Newport Smooth Select line extension, she said.

Lorillar's blu electronic cigarette maintains the category lead while strong units and pricing continue to drive robust category growth, she added. Wells Fargo now tracks the e-cigarette category in the c-store channel, where dollar sales grew 189.6% in the period ending July 6, driven by 129.5% equivalent-unit unit growth and 26.2% net price realization (average equivalent price per cartomizer was $6.31, compared to $5 last year).

blu retained the No. 1 share position this period, garnering 39% dollar share in the recent period (a 36.2% share point gain year over year) while NJOY followed with 30.1% dollar share (down 0.8% year over year). blu also leads Nielsen's "expanded all outlets combined" (XAOC) channel with 44.5% share in the recent period. Other leading brands in the XAOC channel include FIN (20.6% share), Mistic (11.7% share) and NJOY (10.8% share).

"E-cigarette category dollar sales accelerated to $40 million this period in the c-store channel and $12 million in the XAOC channel, implying $700 million annually in these channels and we believe retail e-cig sales are on track to reach $1 million this year--or $1.7 billion including online sales," Herzog said.